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FINALS COVERAGE taxes and expenses for the relocation Survey. (must be qualified)
February 3, 2016
Transcribed by: Ray Mark C. Gingco
All right lets make the most of our time and proceed to our next topic.
So a Real Estate Mortgage we all know that it is a real security it is a
real contract whereby the debtor secures to the creditor the fulfillment
of the principal obligation specially subjecting to such security
immovable property or real rights over an immovable property which
obligation shall be satisfied with the proceeds of the sale of the said
property or rights in case the said obligation is not complied with at
the time stipulated.
Obviously one of the characteristics of a real estate mortgage is that
it is an accessory contract its existence depends upon the existence
of a principal obligation. If it does not have a different cause or
consideration then its consideration will be the same as that of the
principal contract from which it receives life, without which it cannot
exist as an independent contract. It will be valid if the principal
obligation is valid and it cannot be avoided on the ground of lack of
consideration.
Now we have here the case of DBP vs CA…
DEVELOPMENT BANK OF THE PHILIPPINES VS. COURT OF
APPEALS, CELEBRADA MANGUBAT AND ABNER MANGUBAT
(G.R. No. 110053, October 16, 1995)
FACTS: On April 27, 1965, PacificoChica mortgaged the land to DBP
to secure a loan of P6,000.00. However, he defaulted in the payment
of the loan, hence DBP caused the extrajudicial foreclosure of the
mortgage.
The parties further agreed that payment was to be made within six
months thereafter for it to be considered as cash payment. On July
20, 1981, the deed of absolute sale, which is now being assailed
herein, was executed by DBP in favor of respondent spouses. Said
document contained a waiver of the seller's warranty against eviction.
Thereafter, respondent spouses applied for an industrial tree planting
loan with DBP. The latter required the former to submit a certification
from the Bureau of Forest Development that the land is alienable and
disposable. However, on October 29, 1981, said office issued a
certificate attesting to the fact that the said property was classified as
timberland, hence not subject to disposition. The loan application of
respondent spouses was nevertheless eventually approved by DBP
in the sum of P140,000.00, despite the aforesaid certification of the
bureau, on the understanding of the parties that DBP would work for
the release of the land by the former Ministry of Natural Resources.
To secure payment of the loan, respondent spouses executed a real
estate mortgage over the land on March 17, 1982, which document
was registered in the Registry of Deeds pursuant to Act No. 3344.
However, DBP did not release the entire amount of the loan
ostensibly because the release of the land from the then Ministry of
Natural Resources had not been obtained. On July 7, 1983,
respondent spouses, as plaintiffs, filed a complaint against DBP in
the trial court seeking the annulment of the subject deed of absolute
sale on the ground that it belongs to the lands of the public domain.
ISSUE: [Main issues in this case]
(1) WON private respondent spouses Celebrada and
AbnerMangubat should be ordered to pay petitioner DBP their loan
obligation due under the mortgage contract executed between them
and DBP. YES.
(2) WON petitioner should reimburse respondent spouses the
purchase price of the property and the amount of P11,980.00 for
DBP should reimburse the spouses for the purchase price but not for
taxes and expenses for recolaction.
HELD 1:
Considering that neither party questioned the legality and
correctness of the judgment of the court a quo, as affirmed by
respondent court, ordering the annulment of the deed of absolute
sale, such decreed nullification of the document has already
achieved finality.
Turning now to the issue of whether or not private respondents
should be made to pay petitioner their loan obligation amounting to
P118,540.00, we answer in the affirmative.
In its legal context, the contract of loan executed between the parties
is entirely different and discrete from the deed of sale they entered
into. The annulment of the sale will not have an effect on the
existence and demandability of the loan. One who has received
money as a loan is bound to pay to the creditor an equal amount of
the same kind and quality.
The fact that the annulment of the sale will also result in the invalidity
of the mortgage does not have an effect on the validity and efficacy
of the principal obligation, for even an obligation that is unsupported
by any security of the debtor may also be enforced by means of an
ordinary action. Where a mortgage is not valid, as where it is
executed by one who is not the owner of the property, or the
consideration of the contract is simulated or false, the principal
obligation which it guarantees is not thereby rendered null and void.
That obligation matures and becomes demandable in accordance
with the stipulations pertaining to it.
Under the foregoing circumstances, what is lost is only the right to
foreclose the mortgage as a special remedy for satisfying or settling
the indebtedness which is the principal obligation. In case of nullity,
the mortgage deed remains as evidence or proof of a personal
obligation of the debtor, and the amount due to the creditor may be
enforced in an ordinary personal action.
HELD 2:
A contract which the law denounces as void is necessarily no
contract whatever, and the acts of the parties in an effort to create
one can in no wise bring about a change of their legal status. The
parties and the subject matter of the contract remain in all particulars
just as they did before any act was performed in relation thereto.
An action for money had and received lies to recover back money
paid on a contract, the consideration of which has failed. As a
general rule, if one buys the land of another, to which the latter is
supposed to have a good title, and, in consequence of facts unknown
alike to both parties, he has no title at all, equity will cancel the
transaction and cause the purchase money to be restored to the
buyer, putting both parties in status quo.
Q1: So what if it’s a timberland? What is the effect of that sale of
timberland?
A1: It is invalid.
Q2: Why would it be invalid?
A2: It is inalienable therefore it is not valid subject matter of sale.
Q3: Whether or not the annulment of the sale would affect the
mortgage?

A3: No. (But actually Yes… please see case digest ruling part…
bolded texts)
Q4: What’s the basis? Why can you say that the mortgage can be
held as valid but the principal obligation of loan is still valid and
subsisting?
So here, there was no valid sale of the land because it was
timberland not a valid subject matter in a contract of sale so if there
was no valid contract of sale in favor of the private respondents then
the private respondents could not be considered as the owner
thereof and not being the owner thereof there could be no valid
mortgage. Because one of the requirements under 2085 is that the
mortgagor must be the absolute owner of the property mortgaged.
Article 2085. The following requisites are essential to the contracts of
pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal
obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing
pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the
free disposal of their property, and in the absence
thereof, that they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation may
secure the latter by pledging or mortgaging their own property.
While it is true that the annulment of the sale also results to the
invalidity of the mortgage it will not have an effect on the validity and
efficacy of the principal obligation for even an obligation that is
unsupported of any security may also be enforced by means of
ordinary action. The invalidity of the accessory contract of mortgage
will not necessarily affect the principal obligation. When a mortgage
is not valid as where it is executed by one who is not the owner of the
property or the consideration is simulated or false
The principal obligation, which it guarantees, is not rendered null and
void under the foregoing circumstances. What is lost is only the right
to foreclose the mortgage as a special remedy for satisfying or
settling the indebtedness which is the principal obligation however
the mortgage can still be considered as an evidence of indebtedness
or proof of the personal obligation of the debtor as well as the
amount due to the creditor may be enforced in an ordinary personal
action.
Now also take note of that a real estate mortgage is subsidiary in
nature and also unilateral because the obligation is only on the part
of the creditor who must free the property from the encumbrance
once the obligation is fulfilled What are the different kinds of
mortgages we have:
1. Voluntary mortgage – agreed between the parties or
constituted by the will of the owner of the property on which
it is created;
2. Legal mortage – As required by law to be executed in favor
of certain persons; and
3. We also have equitable mortgage…As we have discussed
for most of you under the Law on Sales under Article 1602
which although it lacks the formality or proper formalities or
requisites of a mortgage as required by law it nevertheless
reveals the intention of the parties burdened a real property
as a security for a debt and it contains nothing impossible
or contrary to law.
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What are the valid objects in a real estate mortgage?
Article 2124. Only the following property may be the object of a
contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws, imposed upon
immovables.
Nevertheless, movables may be the object of a chattel mortgage.
In the case of Soriano vsGalit what were the objects of the Real
Estate Mortgage (REM)?Alright, what happened here…
MARCELO R. SORIANO vs. SPOUSES RICARDO and ROSALINA
GALIT
(G.R. No. 156295, September 23, 2003)
FACTS: Respondent Ricardo Galit contracted a loan from petitioner
Marcelo Soriano amounting to P480,000.00. This loan was secured
by a REM over a parcel of land covered by OCT. No. 569. When
respondent defaulted in his obligation, Soriano filed a complaint for
sum of money against him with the RTC of Balanga City.
Upon failure of the respondent spouses Galit to file their answer, the
trial court declared the spouses in default and it thereafter rendered
judgment in favor of petitioner Soriano ordering the respondents to
pay. The judgment became final and executory. Accordingly, the trial
court issued a writ of execution in due course, by virtue of which,
Deputy Sheriff Renato E. Robles levied on the following real
properties of the Galit spouses: (1) A parcel of land covered by OCT
No. T-569 (Homestead Patent No. 14692) situated in the Bo.
ofTapulac, Orani, Bataan; (2)STORE/HOUSE – CONSTRUCTED on
Lot No. 1103 made of strong materials G.I. roofing situated at Centro
I, Orani, Bataan; and (3)BODEGA – constructed on Lot 1103, made
of strong materials, G.I. roofing, situated in Centro I, Orani, Bataan.
On December 23, 1998, petitioner emerged as the highest and only
bidder with a bid price of P483,000.00.
Ten months from the time the Certificate of Sale on Execution was
registered with the Registry of Deeds, petitioner moved for the
issuance of a writ of possession which was granted by the RTC. This
was, however, subsequently nullified by the Court of Appeals
because it included a parcel of land (OCT No. T-40785) which was
not among those explicitly enumerated in the Certificate of Sale
issued by the Deputy Sheriff, but on which stand the immovables (the
BODEGA and STORE/HOUSE) covered by the said Certificate.
Petitioner contends that the sale of these immovables necessarily
encompasses the land on which they stand.
ISSUES:
(1) WON the land on which the buildings levied upon in
execution is necessarily included. NO.
HELD:
(1) Art. 415 of the Civil Code enumerates land and buildings
separately. This can only mean that a building is, by itself,
considered immovable. Thus, it has been held that while it is true that
a mortgage of land necessarily includes,in the absence of stipulation
of the improvements thereon,buildings, still a building by itself may
be mortgaged apart from the land on which it has been built. Such
mortgage would be still a real estate mortgage for the building would
still be considered immovable property even if dealt with separately
and apart from the land.
In this case, considering that what was sold by virtue of the writ of
execution issued by the trial court was merely the storehouse and

bodega constructed on the parcel of land covered by Transfer
Certificate of Title No. T-40785, which by themselves are real
properties of respondents spouses, the same should be regarded as
separate and distinct from the conveyance of the lot on which they
stand.
ART. 415. The following are immovable property:
(1) Land, buildings, roads and constructions of all kinds adhered to
the soil.
xxxxxx
(3) Everything attached to an immovable in a fixed manner, in such a
way that it cannot be separated therefrom without breaking them
material or deterioration of the object;
(4) Statues, reliefs, paintings or other objects for use or
ornamentation, placed in buildings or on lands by the owner of the
immovable in such a manner that it reveals the intention to attach
them permanently to the tenements;
(5) Machinery, receptacles, instruments or implements intended by
the owner of the tenement for an industry or works which may be
carried on in a building or on a piece of land, and which tend directly
to meet the needs of the said industry or works;
(6) Animal houses, pigeon houses, beehives, fish ponds or breeding
places of similar nature, in case their owner has placed them or
preserves them with the intention to have them permanently attached
to the land, and forming a permanent part of it; the animals in these
places are also included;
xxxxxx
(9) Docks and structures which, though floating, are intended by their
nature and object to remain at a fixed place on a river, lake or for
documentation purposes is being contested.
We have abuilding subject of a REM without including the land on
which it stands.
Q1: So that is what happened in here noh, the store house and the
bodega were subjected to REM but it did not include the land So
what was the ruling here of the court?
So here there is an issue, there was no, there is a valid REM over a
parcel of land that was sold covered by OCT No. 569 plus the
storehouse and the bodega which stood on a different parcel of land
however when the certificate of sale was issued It also included TCT
No. 340785 where the storehouse and the bodega stood so that is
issue whether there was a valid sale of that parcel of land Now
please remember that when it comes to Extra-judicial foreclosure you
have to comply with the requirements an explicit enumeration and
correct description of what properties are to be sold must be stated
correctly in the notice.
An incorrect title number together with the correct technical
description of the property to be sold and vice versa is deemed a
substantial and fatal error, which results in the invalidation of the
sale. Now here subsequently including properties in this case TCT
No. 340785 which has not been explicitly mentioned therein for
registration purposes under suspicious circumstances (?) or fraud…
sinaliangdapathindikasali.
Q2: Now what if there was a building on that parcel of land and the
land was subject to mortgage is it necessary to put the improvement
the building?
A2: Yes.
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If you look at Article 415 enumeration of what are considered
immovable a building is enumerated separate and distinct from the
land so a building in itself is considered an immovable. While it is true
that the mortgage of land necessarily includes in the absence of
stipulation to the improvements thereon still a building, a building by
itself may be mortgaged apart from land on which it has been built
such mortgage is still a valid REM for the building will still be
considered an immovable property even if dealt with separately and
apart from the land.
What was sold by virtue of the writ of execution issued by the trial
court was merely the storehouse and bodega constructed on a parcel
of land covered by TCT 340785 and the same should be regarded as
separate and distinct from the conveyance of the land on which it
stands. So here immovables are valid objects of REM as enumerated
in 2124.
Also notice in Art. 2124 you have the word there only…so what does
that mean so the list under 2124 is exclusive object of pledge and
chattel mortgage are movable or personal property.
Now if you recall 2085 a future property cannot be the object of REM
as a general rule but a stipulation subjecting to mortgage lien
properties or improvements which the mortgagor may subsequently
acquire or use in connection with real property already in mortgage
belonging to the mortgagor is valid.
Mendoza vs CA…
DANILO D. MENDOZA, also doing business under the name and
style of ATLANTIC EXCHANGE PHILIPPINES, vs. COURT OF
APPEALS, PHILIPPINE NATIONAL BANK,FERNANDO MARAMAG,
JR., RICARDO G. DECEPIDA andBAYANI A. BAUTISTA
(G.R. No. 116710, June 25, 2001).
FACTS: Petitioner Danilo D. Mendoza was granted by respondent
Philippine National Bank (PNB) a 500,000.00 credit line and a
1,000,000.00 Letter of Credit/Trust Receipt (LC/TR) line.
As security for the credit accommodations and for those which may
thereinafter be granted, petitioner mortgaged to respondent PNB the
following: 1) three (3) parcels of land with improvements 2) his house
and lot and 3) several pieces of machinery and equipment in his
Pasig cocochemical plant.
PNB Mandaluyong replied on behalf of the respondent bank and
required petitioner to submit documents its:
1) Audited Financial Statements for 1979 and 1980;
2) Projected cash flow (cash in - cash out) for five (5) years detailed
yearly; and
3) List of additional machinery and equipment and proof of ownership
thereof.
Fernando Maramag, PNB Executive Vice-President, disapproved the
proposed release of the mortgaged properties and reduced the
proposed new LC/TR line to One Million Pesos (P1,000,000.00).
Petitioner claimed he was forced to agree to these changes and that
he was required to submit a new formal proposal and to sign two (2)
blank promissory notes.
According to petitioner, respondent PNB approved his proposal. He
further claimed that he and his wife were asked to sign two (2) blank
promissory note forms. According to petitioner, they were made to
believe that the blank promissory notes were to be filled out by
respondent PNB to conform with the 5-year restructuring plan
allegedly agreed upon.
Petitioner testified that respondent PNB allegedly contravened their
verbal agreement by 1) affixing dates on the two (2) subject

promissory notes to make them mature in two (2) years instead of
five (5) years as supposedly agreed upon.
Upon their failure to make good of the said loans Respondent PNB
extra-judicially foreclosed the real and chattel mortgages, and the
mortgaged properties were sold at public auction to respondent PNB,
as highest bidder, for a total of Three Million Seven Hundred Ninety
Eight Thousand Seven Hundred Nineteen Pesos and Fifty Centavos
(P3,798,719.50).
ISSUE: WON the foreclosure sale was proper.
HELD: (The court found out that PNB did not categoricallyagree to
petitioner’s proposal to extend the credit line to five years.)To the
substantive issue of mortgate. Petitioner prays for the release of
some of his movables being withheld by respondent PNB, alleging
that they were not included among the chattels he mortgaged to
respondent bank. However, petitioner did not present any proof as to
when he acquired the subject movables and hence it is not to be
believe that the same were "after acquired" chattels not covered by
the chattel and real estate mortgages.
In asserting its rights over the subject movables, respondent PNB
relies on a common provision in the two (2) subject Promissory Notes
Nos. 127/82 and 128/82 which states:
In the event that this note is not paid at maturity or when the same
becomes due under any of the provisions hereof, we hereby
authorized the BANK at its option and without notice, to apply to the
payment of this note, any and all moneys, securities and things of
value which may be in its hands on deposit or otherwise belonging to
me/us and for this purpose. We hereby, jointly and severally,
irrevocably constitute and appoint the BANK to be our true Attorney-
in-Fact with full power and authority for us in our name and behalf
and without prior notice to negotiate, sell and transfer any moneys
securities and things of value which it may hold, by public or private
sale and apply the proceeds thereof to the payment of this note.
It is clear, however, from the above-quoted provision of the said
promissory notes that respondent bank is authorized, in case of
default, to sell "things of value" belonging to the mortgagor "which
may be on its hands for deposit or otherwise belonging to me/us and
for this purpose." Besides, the petitioner executed not only a chattel
mortgage but also a real estate mortgage to secure his loan
obligations to respondent bank.
A stipulation in the mortgage, extending its scope and effect to after-
acquired property is valid and binding where the after-acquired
property is in renewal of, or in substitution for, goods on hand when
the mortgage was executed, or is purchased with the proceeds of the
sale of such goods. More importantly, respondent bank makes a
valid argument for the retention of the subject movables. Respondent
PNB asserts that those movables were in fact "immovables by
destination" under Art. 415 (5) of the Civil Code. It is an established
rule that a mortgage constituted on an immovable includes not only
the land but also the buildings, machinery and accessories installed
at the time the mortgage was constituted as well as the buildings,
machinery and accessories belonging to the mortgagor, installed
after the constitution thereof.
Q1: What are covered in those REMs?
A1: Machineries.
Q2: So are the machineries deemed as valid objects in REM?
A2: Yes.
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Q3: When do you consider a movable an immovable by destination?
A3: Article 415. The following are immovable property:
xxx
(5) Machinery, receptacles, instruments or implements intended by
the owner of the tenement for an industry or works
which may be carried on in a building or on a piece of land, and
which tend directly to meet the needs of the said
industry or works;
xxx
Q4: So as long as it is essential in the industry it is already an
immovable by destination?
So what do you have here there are several REM and Chattel
Mortgages executed to secure the loan obligation in favor of the
bank. Now the mortgage here contained the stipulation extending its
scope and effect to what we call after (?) we discuss these parts as
we move along and such stipulation is valid and binding where the
after acquired property is (?) in renewal of or in substitution for goods
on hand with the mortgage is executed or is purchased with the
proceeds of the sale of such goods. Now here it was contended that
the machineries were not a valid object of the REM.
The bank however made a valid argument for the retention of the
subject movables machineries and equipment. PNB asserted that
these movables were in fact movables by destination as defined
under Article 415 (5) of the Civil Code. So what does that mean
immovable by destination. Kung baga it is treated as immovable but
when you vaulted it in a specific place without any intention of
transferring its location then that is what you call an immovable by
destination.
Example: Aquarium…vaulted movable man yang aquarium but it is
considered as an immovable by destination I think the case is one of
your case I think in Property noh…
That is what happened here with regard to the machineries and
equipment. They were treated as immovable by destination therefore
a valid object in a REM. Further a mortgage constituted on an
immovable in this case the land includes not only the land but also
the buildings, machineries and accessories installed at the time the
mortgage was constituted as well as the buildings, machineries and
accessories belonging to the mortgagor installed after the
constitution thereof.
A REM is very different from a contract of pledge while you have
provision that they are applicable both to this contracts they also
differ:
Pledge REM
Personal, movables Subject Matter Real Property,
Immovables or Real
rights
The Pledgee Possession There is no
requirement that the
mortgagee be in
possession of the
property
The Pledgee has Fruits The mortgagee has
the right to receive no right to receive
the fruits the fruits
Extra-judicially Foreclosure Judicial or Extra-
judicial

So the first distinction, the most obvious distinction is with regard to
its subject matter. Second, actual delivery takes place in pledge
unless constructive delivery is required under the circumstances but
in REM there is no delivery to the mortgagee for its validity. If a
parcel of land is mortgaged to secure a debt there is no requirement
that the land be placed in the mortgagee’s possession. Once status
as a mortgagee is not effected or it cannot be based on possession.
As a general rule the mortgagor retains possession of the property
mortgaged as security for the sum borrowed from the creditor despite
the mortgage the debtor merely subjects the property to a lien but of
course ownership is not parted with. It is not an essential requisite of
a REM that the property remains in the possession of the mortgagor
by agreement the mortgagor can deliver to the mortgagee but such
delivery of possession is not part of the validity of a mortgage.
Now we have here the case of Spouses Viola…
SPOUSES VIOLA vs EQUITABLE (2008)
FACTS: March 31, 1997 Spouses Leopoldo and Mercedita Viola of
Leo-Mers Commercial, Inc. obtained a loan through a credit line
facility in the maximum amount of P 4,700,000.00 from Equitable PCI
Bank, Inc.
The Credit Line Agreement stipulated that the loan would bear
interest at the "prevailing PCI Bank lending rate" per annum on the
principal obligation and a "penalty fee of three percent (3%) per
month on the outstanding amount."
To secure the payment of the loan, a ―Real Estate Mortgage over
their 2 parcels of land in favor of PCI Bank was executed. Spouses
Viola made partial payments which totaled P 3,669,210.67; PCI Bank
contends however, that Spouses Viola made no further payments
since Nov. 24, 2000 despite demand they failed to pay their
outstanding obligation which as of September 30, 2002.
Thus, PCI Bank extrajudicially foreclosed the mortgage before the
Regional Trial Court (RTC) and that the mortgaged properties were
sold at a public auction.
Respondent denied petitioners’ assertions, contending, inter alia, that
the absence of stipulation in the mortgage contract securing the
payment of 15% interest per annum on the principal loan, as well as
the 3% penalty fee per month on the outstanding amount, is
immaterial since the mortgage contract is "a mere accessory contract
which must take its bearings from the principal Credit Line
Agreement."
the petition for lack of merit.
ISSUE: WON the mortgage contract also secured the penalty fee per
month on the outstanding amount as stipulated in the Credit Line
Agreement? NO
HELD: A mortgage must "sufficiently describe the debt sought to be
secured, which description must not be such as to mislead or
deceive, and an obligation is not secured by a mortgage unless it
comes fairly within the terms of the mortgage.
In the case at bar, the parties executed two separate documents on
March 31, 1997 – the Credit Line Agreement granting the Client a
loan through a credit facility in the maximum amount of
P4,700,000.00, and the Real Estate Mortgage contract securing the
payment thereof. Undisputedly, both contracts were prepared by
respondent and written in fine print, single space.
The Real Estate Mortgage contract states its coverage, thus:
That for and in consideration of certain loans, credit and other
banking facilities obtained x xx from the Mortgagee, the principal
amount of which is PESOS FOUR MILLION SEVEN HUNDERED
THOUSAND ONLY (P4,700,000.00) Philippine Currency, and for the
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purpose of securing the payment thereof, including the interest and
bank charges accruing thereon, xxx
The immediately-quoted provision of the mortgage contract does not
specifically mention that, aside from the principal loan obligation, it
also secures the payment of "a penalty fee of three percent (3%) per
month of the outstanding amount to be computed from the day
deficiency is incurred up to the date of full payment thereon," which
penalty as the above-quoted portion of the Credit Line Agreement
expressly stipulates.
Since an action to foreclose "must be limited to the amount
mentioned in the mortgage" and the penalty fee of 3% per month of
the outstanding obligation is not mentioned in the mortgage, it must
be excluded from the computation of the amount secured by the
mortgage.
Regarding CA decision that the phrase "including the interest and
bank charges" in the mortgage contract "refers to the penalty
charges stipulated in the Credit Line Agreement" is unavailing.
"Penalty fee" is entirely different from "bank charges." The phrase
"bank charges" is normally understood to refer to compensation for
services. A "penalty fee" is likened to a compensation for damages in
case of breach of the obligation. Being penal in nature, such fee must
be specific and fixed by the contracting parties, unlike in the present
case which slaps a 3% penalty fee per month of the outstanding
amount of the obligation.
Moreover, the "penalty fee" does not belong to the species of
obligation enumerated in the mortgage contract, namely: "loans,
credit and other banking facilities obtained x xx from the Mortgagee, .
. . including the interest and bank charges, . . . the costs of collecting
the same and of taking possession of and keeping the mortgaged
properties, and all other expenses to which the Mortgagee may be
put in connection with or as an incident to this mortgage . . ."
In Philippine Bank of Communications v. Court of Appeals which
raised a similar issue, this Court held:
The sole issue in this case is whether, in the foreclosure of a real
estate mortgage, the penalties stipulated in two promissory notes
secured by the mortgage may be charged against the mortgagors as
part of the sums secured, although the mortgage contract does not
mention the said penalties.
The court held, Indeed, a mortgage must sufficiently describe the
debt sought to be secured, which description must not be such as to
mislead or deceive, and an obligation is not secured by a mortgage
unless it comes fairly within the terms of the mortgage. Under the
rule of ejusdem generis, where a description of things of a particular
class or kind is "accompanied by words of a generic character, the
generic words will usually be limited to things of a kindred nature with
those particularly enumerated . . . " A penalty charge does not belong
to the species of obligations enumerated in the mortgage, hence, the
said contract cannot be understood to secure the penalty.
Regarding Respondent’s contention that absence of stipulation for
the penalty fee in the mortgage contract is of no consequence as the
deed of mortgage is merely an “accessory contract” that "must take
its bearings from the principal Credit Line Agreement,".
Such absence is significant as it creates an ambiguity between the
two contracts, which ambiguity must be resolved in favor of
petitioners and against respondent who drafted the contracts. Again,
as stressed by the Court in Philippine Bank of Communications:
A mortgage and a note secured by it are deemed parts of one
transaction and are construed together, thus, an ambiguity is created
when the notes provide for the payment of a penalty but the
mortgage contract does not. Construing the ambiguity against the
petitioner, it follows that no penalty was intended to be covered by
 |2-Manresa CredTrans TSN |6

the mortgage. Plainly, the petitioner can be as specific as it wants to Article 2124. Only the following property may be the object of a
be, yet it simply did not specify nor even allude to, that the penalty in contract of mortgage:
the promissory notes would be secured by the mortgage. This can
then only be interpreted to mean that the petitioner had no design of (1) Immovables;
including the penalty in the amount secured.
(2) Alienable real rights in accordance with the laws, imposed upon
RTC decisionAFFIRMEDwithMODIFICATION in that the "penalty fee" immovables.
per month of the outstanding obligation is excluded in the
Nevertheless, movables may be the object of a chattel mortgage.
computation of the amount secured by the Real Estate Mortgage
(1874a)
executed by petitioners in respondent’s favor.
Article 2124 is clear. By the word “only”, it means that the list in the
POLICY:A mortgage must sufficiently describe the debt sought to be
said article is exclusive.
secured, which description must not be such as to mislead or
deceive. An obligation is not secured by a mortgage unless it comes Likewise, we have emphasized last time the importance determining
fairly within the terms of the mortgage. whether your property is an immovable or not. The building in itself is
an immovable and in fact can be subject of a real estate mortgage
separate from the land on which it stands.
Q1: What was the basis in questioning the validity of the foreclosure? PLEDGE REAL ESTATE MORTGAGE
Involves personal property Involves real property
A1: The penalty agreement.
Real Contract- there is a transfer It is not necessary that a
or cession mortgagee must be in
possession of the property
Qs 2 and 3: Whether the mortgage should include the penalty? mortgaged for the validity of the
said accessory contract
Why was there a need to distinguish penalty fee from bank charges? The pledgee has the right to No such right exists unless
receive the fruits otherwise stipulated
A3: Please see digest. Extrajudicial in nature Judicial or Extrajudicial
Must be in a public instrument Must be registered in the
indicating the date of the Registry of Property in order to
mortgage and a description of the bind third persons
Q4: Does the bank charge include the penalty fee?
thing pledged in order to bind
A4: No. third persons (registration not
needed)

Take note of the credit line agreement provision, which includes the
three percent per month penalty the REM is for the purpose of
securing the payment of the loan including the interest and bank
charges. This provision of the mortgage does not specifically mention
that the apart from the principal loan it also secure the payment of
the three percent per month penalty fee to be computed from the day
deficiency is incurred up to the date of full payment thereon. While it
is true that petitioners here are liable for the 3% per month penalty
fee that shall not be included in the computation for the REM. Since
an action to foreclose must be limited to the amount mentioned in the
REM and the penalty fee of 3% per month is not mentioned in the
mortgage therefore what is the effect it must be excluded
nakalagaydiyan it must be excluded in the computation from the
amount secured by the REM.
It is not required that the mortgagee be in possession of the
mortgaged property. Ones status as a mortgagee cannot be the
basis of possession. As a basic rule, the mortgagor retains
possession of the property mortgaged as a security for the payment
of the sum borrowed from the mortgagee-creditor because by the
mortgage, the debtor merely subjects the property to a lien but
ownership is not parted with.
It is not an essential requisite that the mortgaged property remains in
the possession of the mortgagor. Therefore, it is possible by
agreement between the parties that the possession of the property
be transferred to the mortgagee without altering the nature of the
contract. But again, such transfer of possession is not necessary for
the perfection of the mortgage.

Therefore hindikasamaang penalty…ang penalty fee should be
excluded in the computation for the foreclosure of the REM…
Article 2125. In addition to the requisites stated in article 2085, it is
indispensable, in order that a mortgage may be validly constituted,
that the document in which it appears be recorded in the Registry of
Property. If the instrument is not recorded, the mortgage is
nevertheless binding between the parties.

February 4, 2016 (1st Hour) The persons in whose favor the law establishes a mortgage have no
other right than to demand the execution and the recording of the
Transcribed by: Robelen Callanta document in which the mortgage is formalized. (1875a)

Take note of the different kinds of Mortgages:

1. Voluntary or Conventional Mortgage

2. Legal Mortgage Article 2085. The following requisites are essential to the contracts of
3. Equitable Mortgage (Article 1602) pledge and mortgage:

Objects of Real Estate Mortgage: (1) That they be constituted to secure the fulfillment of a principal
obligation;
1. Immovables
2. Alienable Real Rights

(2) That the pledgor or mortgagor be the absolute owner of the thing
pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the
free disposal of their property, and in the absence thereof, that they
be legally authorized for the purpose.
Third persons who are not parties to the principal obligation may
secure the latter by pledging or mortgaging their own property.
(1857)
Notice here that Article 2125 requires that the Deed of Real Estate
Mortgage or document be registered in the Registry of Property.
What is the effect is the Real Estate Mortgage is not registered?
What happened in Tan vs Valdehueza?
LUCIA TAN vs ARADOR VALDEHUEZA and REDICULO
VALDEHUEZA
Facts: The parcel of land described in the first cause of action was
the subject matter of the public auction sale held on May 6, 1955
wherein Tan was the highest bidder and as such a Certificate of Sale
was executed in favor of LUCIA TAN. Due to the failure of defendant
AradorValdehueza to redeem the said land within the period of one
year as being provided by law, the Sheriff executed an ABSOLUTE
DEED OF SALE in favor of the plaintiff LUCIA TAN.
ARADOR VALDEHUEZA and REDICULO VALDEHUEZA have
executed two documents of DEED OF PACTO DE RETRO SALE in
favor of LUCIA TAN of two portions of a parcel of land.
From the execution of the Deed of Sale with right to repurchase,
AradorValdehueza and RediculoValdehueza remained in the
possession of the land and land taxes to the said land were paid by
them.
The Deed of Pacto de Retro (dated August 5, 1955) was not
registered in the Registry of Deeds, while the Deed of Pacto de Retro
referred to as "Annex E" (dated March 15, 1955) was registered
ISSUE: Was there a valid mortgage? (YES)
HELD: The trial court treated the registered deed of pacto de retro as
an equitable mortgage but considered the unregistered deed of
pacto de retro "as a mere case of simple loan, secured by the
property thus sold under pacto de retro," on the ground that no suit
lies to foreclose an unregistered mortgage. It would appear that the
trial judge had not updated himself on law and jurisprudence; he
cited, in support of his ruling, article 1875 of the old Civil Code and
decisions of this Court circa 1910 and 1912.
Under article 1875 of the Civil Code of 1889, registration was a
necessary requisite for the validity of a mortgage even as between
the parties, but under article 2125 of the new Civil Code (in effect
since August 30,1950), this is no longer so. 4 If the instrument is not
recorded, the mortgage is nonetheless binding between the parties.
(Article 2125, 2nd sentence).  Article 2125. In addition to the requisites stated in article 2085, it is
The Valdehuezas having remained in possession of the land and the
realty taxes having been paid by them, the contracts which purported
to be pacto de retro transactions are presumed to be equitable
mortgages, 5 whether registered or not, there being no third parties
involved.
Here, the parties executed two documents of pacto de retro sale.
However, it appears that the defendants remained in possession of
the land and the taxes were paid by them. The intention of these
documents was to secure the obligation of Valdehuezas, having
remained in possession of the land and the realty taxes having been
paid by them. These transactions purported to be pacto de retro sale
are presumed to be equitable mortgages, applying Article 1602 of the
|2-Manresa CredTrans TSN |7
Civil Code. Regardless of its registration, again, we have an
equitable mortgage here. We have a valid mortgage even if it is not
registered, there being no third parties involved.
In the Old Civil Code, registration is necessary for the validity of the
mortgage. However, it is already clear under Article 2125 that even if
the instrument is not recorded, the mortgage is nonetheless binding
between the parties. The fact that the mortgage is annotated or is
registered is only to affect third persons. In the absence of such
annotation or registration, third persons dealing with the property are
not bound by the mortgage because under the Torrens System, third
parties are only charged with the knowledge of those encumbrances
placed on the title as well as their actual knowledge.
Again, mortgage here can be binding between the parties but in the
absence of registration, it is not binding against third persons. Notice
that it is one of the differences or distinctions between a real estate
mortgage and a pledge. The requirement in pledge in order to bind
third persons is that it must be in a public instrument indicating the
date of the pledge and the description of the thing pledged. On the
other hand, in a real estate mortgage, the requirement is that it must
be duly registered with the Registry of Deeds to bind third persons.
With regard to the last paragraph of Article 2125, this applies to legal
or equitable mortgages.
Article 2125. x xx
The persons in whose favor the law establishes a mortgage have no
other right than to demand the execution and the recording of the
document in which the mortgage is formalized. (1875a)
Here, for example, in a pacto de retro sale which is actually an
equitable mortgage, the mortgagor can seek the execution and the
recording of the instrument to formalize the mortgage. Considering
that the intention of the parties is to have the property mortgaged, the
mortgagee cannot appropriate the thing subject of the mortgage.
What he has is the right to have the execution and recording thereof.
He can also file an action to have the mortgage registered.
With regard to the perfection of a real estate mortgage, you may
notice that in the first part of the discussion of De Leon, the
characteristics that was mentioned of a mortgage is that it is real,
accessory and subsidiary. When you real it means that the contract
is perfected by delivery. But in a contract of mortgage under Article
2125, delivery is not necessary for its perfection. So dalawanalang,
either consensual or formal/solemn contract. If you remember the
case of Hechanova vs Adil, it was stated therein that no valid
mortgage is constituted where the deed of mortgage is a mere
private document and therefore, not registered. However, if you also
look at the same case as well as the provision under Article 2125,
even if that case held that the mortgage is void, there is a discussion
that the mortgagee may demand the reduction of the mortgage in a
public instrument. So, if you say it is really void, diba if a contract is
void, no rights can arise. Take a look again at Article 2125.
indispensable, in order that a mortgage may be validly constituted,
that the document in which it appears be recorded in the Registry of
Property. If the instrument is not recorded, the mortgage is
nevertheless binding between the parties.
x xx
So as long as there is an instrument, then you have a perfected
contract of mortgage.
At the most, what we could say is that it is a FORMAL CONTRACT;
that it must be, at the very least, in writing in order to bind the parties.
However, again, if you try to take a look at the cases or at the
discussion or the provisions under the Civil Code, there is no express

provision or ruling that would really indicate that for a valid mortgage,
it must be in writing or it must be perfected by consent or there must
be delivery.
Trying to summarize everything that we have discussed, we could
say that at the very least, it must be in an instrument, in writing to
bind the mortgagor and the mortgagee.
Why is it that there was not much emphasis on this one? First, we
have the right between the parties to demand execution and
recording of the document. This is relevant because in the absence
of the proper document or recording it or duly executing it before the
notary public and recording it with the Registry of Deeds, hindimorin
ma-foreclose. If it is made orally or verbally, you cannot foreclose it.
You must have some document that would establish your right to
demand execution and the proper recording of the document to
formalize the mortgage.
Mortgage, again, is necessary in the sense that it is a security to the
principal obligation. You need this mortgage so that in case there is
default on the part of the debtor, you can foreclose it. Yun
namanyung enddito, di ba? Foreclosing. You can foreclose it after
the proper registration of the document.
Just take note of that as we go further with our discussions.
If the mortgage is not registered but it is in a public instrument, it is
binding between the parties because again, registration only
operates as a notice of the mortgage to others but it does not add
any validity nor does it convert an invalid mortgage into a valid
mortgage between the parties.
STATE INVESTMENT vs CA (1996)
FACTS: A contract to sell was executed by Spouses Oreta, and the
Solid Homes, Inc. (SOLID), involving a parcel of land.
SOLID executed several real estate mortgage contracts in favor of
State Investment over its subdivided parcels of land, one of which is
the subject lot. For failure of SOLID to comply with its mortgage
obligations contract, STATE extrajudicially foreclosed the mortgaged
properties including the subject lot.
SOLID thru a MOA negotiated for the deferment of consolidation of
ownership over the foreclosed properties by committing to redeem
the properties from STATE. Thereafter, the spouses filed a complaint
before the HLURB, against SOLID and STATE for failure on the part
of SOLID to execute the necessary absolute deed of sale as well as
to deliver the title to said property despite full payment of purchase
price.
STATE averred that unless SOLID pays the redemption price of P
125,195.00, it has a “right to hold on and not release the foreclosed
properties.”
ISSUE: Who between the Spouses Oreta and STATE have better
right over the subject lot? (SPOUSES ORETA)
HELD:STATE's registered mortgage right over the property is inferior
to that of respondents-spouses' unregistered right. The unrecorded
sale between respondents-spouses and SOLID is preferred for the
reason that if the original owner (SOLID) had parted with his
ownership of the thing sold then he no longer had ownership and free
disposal of that thing so as to be able to mortgage it
again. Registration of the mortgage is of no moment since it is
understood to be without prejudice to the better right of third parties.   indicate any vice or cloud in the ownership of the property or any
In this case, petitioner was well aware that it was dealing with SOLID,
a business entity engaged in the business of selling subdivision lots.
We take judicial notice of the uniform practice of financing institutions
to investigate, examine and assess the real property offered as
|2-Manresa CredTrans TSN |8
security for any loan application especially where, as in this case, the
subject property is a subdivision lot located at Quezon City, M.M. It is
a settled rule that a purchaser or mortgagee cannot close its eyes to
facts which should put a reasonable man upon his guard, and 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
knowledge of the defect in the title of the subject property, or lack of
such knowledge due to its negligence, takes the place of registration
of the rights of respondents-spouses.
Q1: Is the mortgage in favor of State Investment registered?
A1: Yes. However the Supreme Court held here that the registration
of the mortgage is of no moment since it is understood to be without
prejudice to the better right of third parties.
Q2: What do you mean by that?
A2: (?)
Q3: Was there a valid mortgage between Solid and State
Investment?
A3: No.
Q4: Are all the requisites present for a valid real estate mortgage?
A4: No. There was no absolute ownership and free disposal of the
thing mortgaged.
Q5: So what is the effect of the registration?
A5: The registration did not bind third persons.
Q6: Can State Investment be considered as a mortgagee in good
faith considering that the sale in favor of SpsOreta was not
registered?
A6: No. Since they are involved in the business of investment, they
must take necessary precautions to ascertain if there was any flaw in
the title of the mortgage.
Notice here that State’s mortgage was registered. Nevertheless, the
Supreme Court held that its registered mortgage is inferior to that of
respondent spouses’ unregistered right. It was submitted here that if
the original owner SOLID has parted with the ownership of the thing
sold, then he no longer has ownership.
Take note, the contract executed between Spouses Orbeta and
SOLID was a contract to sell. In a contract to sell, ownership is not
yet transferred – it is subject to a condition which is the full payment
of the purchase price. In fact, in this case, Solid was demanded by
the spouses to execute the necessary absolute deed of sale. Looking
at the facts, ownership was not yet transferred. Nevertheless, it is still
not a valid mortgage because there is a failure to comply with the
third requisite: FREE DISPOSAL.
Here, even if we assume that Solid remains the owner of the subject
property, it had no free disposal of the thing so as to be able to
mortgage it again. Registration of the mortgage is of no moment (no
effect; it will not cure the invalidity of the mortgage) since it is
understood to be without prejudice to the better right of third parties.  
General Rule: When there is nothing in the Certificate of Title to
encumbrance thereon, the purchaser is not required to explore
further than what the Torrens Title upon its face indicates in quest for
any legal defect or inchoate right that may subsequently defeat his
right thereto.

Here, when State entered into a mortgage with Solid, nothing was
indicated in the title.
Exception: When the purchaser or mortgagee has knowledge of the
defect or lack of title in the vendor or he was aware of sufficient facts
that would induce a reasonably prudent man to inquire into the status
of the property in litigation.
State investment was well aware that it was dealing with SOLID, a
business entity engaged in the business of selling subdivision lots. In
fact, at the time the lot was mortgaged, respondent State Investment
House Inc., had been aware of the lot's location and that the said lot
formed part of Capital Park/Homes Subdivision.
State investment, being a financing institution, it cannot simply rely
on an examination of a Torrens certificate to determine what the
subject property looks like as its condition is not apparent in the
document. The land might be in a depressed area. There might be
squatters on it. It might be easily inundated. It might be an interior lot,
without convenient access. These and other similar factors determine
the value of the property and so should be of practical concern to the
petitioner.
State Investment therefore cannot be considered a mortgagee in
good faith.
It is a settled rule that a purchaser or mortgagee cannot close its
eyes to facts which should put a reasonable man upon his guard,
and 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 knowledge of the defect in the title of the subject
property, or lack of such knowledge due to its negligence, takes the
place of registration of the rights of respondents-spouses.
Respondent Court thus correctly ruled that petitioner was not a
purchaser or mortgagee in good faith.
What do you mean by “mortgagee in good faith?” What happened in
the case of PNB vs Corpuz?
PHILIPPINE NATIONAL BANK, AS THE ATTORNEY-IN-FACT OF
OPAL PORTFOLIO INVESTMENTS (SPV-AMC), INC.
vs.MERCEDES CORPUZ, REPRESENTED BY HER ATTORNEY-
IN-FACT VALENTINA CORPUZ
FACTS: Corpuz delivered her owner’s duplicate copy of Transfer
Certificate of Title toDagupan City Rural Bank as security against
any liability she might incur as its cashier. She later left her job and
went to the United States.
On October 24, 1994 the rural bank where she worked cancelled its
lien on Corpuz’s title. Without Corpuz’s knowledge and consent,
however, Natividad Alano, the rural bank’s manager, turned over
Corpuz’s title to Julita Camacho and Amparo Callejo.
Alano, Camacho, and Callejo prepared a falsified deed of sale,
making it appear that on February 23, 1995 Corpuz sold her land to
one "Mary Bondoc" for P50,000.00. They caused the registration of
the deed of sale, resulting in the the issuance of TCT in Bondoc’s
name. About a month later or on March 27, 1995 the trio executed
another fictitious deed of sale with "Mary Bondoc" selling the property
to the spouses Rufo and Teresa Palaganas for only P15,000.00. This
sale resulted in the issuance of TCT 63466 in favor of the
Palaganases.
Nine days later or on April 5, 1995 the Palaganases executed a deed
of sale in favor of spouses Virgilio and Elena Songcuan
for P50,000.00, resulting in the issuance of TCT 63528. Finally, four
months later or on August 10, 1995 the Songcuans took out a loan
of P1.1 million from petitioner Philippine National Bank (PNB) and, to
secure payment, they executed a real estate mortgage on their title.
|2-Manresa CredTrans TSN |9
Before granting the loan, the PNB had the title verified and the
property inspected.
ISSUE: Whether or not petitioner PNB is a mortgagee in good faith,
entitling it to its lien on the title to the property in dispute. No.
RULING: As a rule, the Court would not expect a mortgagee to
conduct an exhaustive investigation of the history of the mortgagor’s
title before he extends a loan. But petitioner PNB is not an ordinary
mortgagee; it is a bank.Banks are expected to be more cautious than
ordinary individuals in dealing with lands, even registered ones, since
the business of banks is imbued with public interest. It is of judicial
notice that the standard practice for banks before approving a loan is
to send a staff to the property offered as collateral and verify the
genuineness of the title to determine the real owner or owners.
Q1: Is PNB a mortgagee in good faith or not?
A1: No.
Q2: What is the effect if it is not a mortgagee in good faith?
A2: The mortgage will be void.
So notice here that we have a mortgagee which is a bank. Banks are
expected to be more cautious than ordinary individuals in dealing
with lands, even registered ones, since the business of banks is
imbued with public interest. It is of judicial notice that the standard
practice for banks before approving a loan is to send a staff to the
property offered as collateral and verify the genuineness of the title to
determine the real owner or owners.
Here, PNB was informed of the previous TCTs covering the subject
property. It is evident from the faces of those titles that the ownership
of the land changed from Corpuz to Bondoc, from Bondoc to the
Palaganases, and from the Palaganases to the Songcuans in less
than three months and mortgaged to PNB within four months of the
last transfer.
Here, it appears that they were able to issue three different titles in a
matter of three months. That should have led PNB to be suspicious
of this transaction. In fact, it was even aware that the previous sales
were only for Php 15,000 or Php50,000, but PNB appraised the value
of the property at around 700,000. The discrepancy in the value
should have alerted PNB. Anyone who deliberately ignores this
significant fact that would create suspicion in an otherwise
reasonable person cannot be considered a mortgagee for value.
OSMUNDO S. CANLAS and ANGELINA CANLAS vs. COURT OF
APPEALS, ASIAN SAVINGS BANK, MAXIMO C. CONTRARES and
VICENTE MAÑOSCA
Facts: Osmundo Canlas executed a Special Power of Attorney
authorizing the MAÑOSCA to mortgage two parcels of land
registered in the name of his wife Angelina Canlas.
Subsequently, Osmundo Canlas agreed to sell the said parcels of
land to Vicente Mañosca, for and in consideration of P850,000.00,
Subsequently, Vicente Mañosca was granted a loan by the
respondent Asian Savings Bank (ASB . When the loan it extended
was not paid, respondent bank extrajudicially foreclosed the
mortgage.
Issue: Whether or not ASB is considered a mortgagee in good faith.
No.

The degree of diligence required of banks is more than that of a good
father of a family; in keeping with their responsibility to exercise the
necessary care and prudence in dealing even on a registered or titled
property.
In the case under consideration, the respondent bank did not
observe the requisite diligence in ascertaining or verifying the real
identity of the couple who introduced themselves as the spouses
Osmundo Canlas and Angelina Canlas. It is worthy to note that not
even a single identification card was exhibited by the said impostors
to show their true identity; and yet, the bank acted on their
representations simply on the basis of the residence certificates
bearing signatures which tended to match the signatures affixed on a
previous deed of mortgage.
Q1: Was the Bank a mortgagee in good faith?
A1: No. The SC ruled that the bank was not a mortgagee in good
faith because according to the records presented in the case, the
degree of investigation done by the bank was not enough. It failed to
ask the impostors sufficient information which will verify their identity.
They merely inquired into their identity by obtaining residence and
community tax certificates which only contained their name and
signature which was similar to the actual signature of the Spouses
Canlas.
Q2: What is the Doctrine of Last Clear Chance?
A2: it means that where both parties are negligent but the negligent
act of one is appreciably later in point of time than that of the other,
or where it is impossible to determine whose fault or negligence
brought about the occurrence of the incident, the one who had the
last clear opportunity to avoid the impending harm but failed to do so,
is chargeable with the consequences arising therefrom. Stated
differently, the rule is that the antecedent negligence of a person
does not preclude recovery of damages caused by the supervening
negligence of the latter, who had the last fair chance to prevent the
impending harm by the exercise of due diligence.
Q3: Who were the 2 parties referred here as being negligent?
A3: Spouses Canlas and Asian Savings Bank.
Q4: Why were the Spouses Canlas deemed negligent?
A4: They were negligent in giving Vicente Mañosca the opportunity to
perpetrate the fraud, by entrusting to latter the owner's copy of the
transfer certificates of title of subject parcels of land despite the fact
that they were not yet paid.
Nevertheless, it was the bank that had the last opportunity or the last
clear chance for this not to happen and therefore, the mortgage was
not considered as valid.
The degree of diligence required for banks is more than that of a
good father of a family. Respondent bank did not observe the
requisite diligence in ascertaining or verifying the real identity of the
couple who introduced themselves as the spouses Canlas. Not even
a single identification card was exhibited by the said impostors to
show their true identity; and yet, the bank acted on their
representations simply on the basis of the residence certificates
bearing signatures. The bank did not require them to submit
additional proof of their true identity.
In this case, the Doctrine of last clear chance was applied where the
bank must suffer the resulting loss. Under this doctrine, that where
both parties are negligent but the negligent act of one is appreciably
later in point of time than that of the other, or where it is impossible to
determine whose fault or negligence brought about the occurrence of
|2-Manresa CredTrans TSN |10
the incident, the one who had the last clear opportunity to avoid the
impending harm but failed to do so, is chargeable with the
consequences arising therefrom. Stated differently, the rule is that
the antecedent negligence of a person does not preclude recovery of
damages caused by the supervening negligence of the latter, who
had the last fair chance to prevent the impending harm by the
exercise of due diligence. It Cnnot be denied that the bank had the
last clear chance to prevent the fraud, by the simple expedient of
faithfully complying with the requirements for banks to ascertain the
identity of the persons transacting with them.
Under the facts of this case, although Osmundo Canlas was
negligent, it is the bank who should bear the loss.
In this case, Osmundo Canlas was undoubtedly negligent, which
negligence made them undeserving of an award of attorney's fees.
Settled is the rule that a contract of mortgage must be constituted
only by the absolute owner on the property mortgaged; a mortgage,
constituted by an impostor is void.
Take note of this doctrine of a mortgagee in good faith wherein a
mortgagee has the right to rely in good faith on the certificate of title
of the mortgagor of the property even as security. In the absence of
any finding that may arise a suspicion, he has no obligation to make
further investigation.
All persons dealing with property covered with a Torrens Certificate
of Title, as buyers or mortgagees, are not required to go beyond what
is on the face of the title. However, this does not apply when the title
is still in the name of the rightfull owner and the mortgaor is another
person pretending to be the owner.
Exceptions to the Doctrine of Motgagee in Good Faith:
1. When the purchaser or mortgagee has knowledge of a
defect of lack in the title of the vendor; or
2. When the mortgagee does not directly deal with the
registered owner of real property;
3. When the purchaser or mortgagee was aware of sufficient
facts that must induce a reasonable prudent man to inquire
into the status of the property in litigation.
4. When the purchaser or mortgagee is a bank or a financing
institution, it is required to look further from what appears
on the Certificate of Title as it is required to observe greater
degree of diligence and prudence. If it fails to exercise this
degree of diligence, it cannot acquire the status of a bona
fide mortgagee in good faith.
February 4, 2016 (2nd Hour)
Transcribed by: Kelvin Du
Recap:
The doctrine of mortgagee in good faith states that the mortgagee
has the right to rely in good faith on the certificate of title of the
mortgagor of the property given as security and in the absence of
any sign that might arouse suspicion. Such mortgagee has no
obligation to undertake further investigation. All persons dealing with
property covered by a Torrens certificate of title as buyers or
mortgagees are not required to go beyond what appears on the face
of the title.

However, take note of the exceptions:
1. Where the purchaser or mortgagee has knowledge of the
defect or lack of title in the vendors (even if the title is clean
but there is actual knowledge, you do not have a
mortgagee in good faith)
2. Where the mortgagee does not directly deal with the
registered owner of the real property
3. When the mortgagee was aware of sufficient facts to
induce a reasonably prudent man to inquire into the status
of aproperty in litigation
Where the purchaser or mortgagee is a bank or financing institution,
it is required to look further than what appears on the face of the
title.It is expected to exercise greater care and prudence, not just
ordinary diligence. If it fails to observe due diligence, it cannot be
accorded the status of a confident mortgagee.
Once a mortgage has been signed in due form, then the mortgagee
is entitled to its registration as a matter of right.
Q: What does “registration as a matter of right” mean?
A: It means that registration does not pass upon the validity or
invalidity of a mortgage but its purpose is to affect third persons.
Agricultural vs. Yusay
Facts:Yulo executed in favor of Agricultural a mortgage.
Agricultural demanded that the ODCT be surrendered and that
the mortgage be annotated on the back of the certificate. Yusay,
being a part owner of the property, opposed the petition for such
annotation of the mortgage since such registration will affect his
rights.
Issue: WON the registration will pass upon the validity of the said
mortgage
Ruling: The registration of the mortgage is not a declaration that
such instrument is a valid or subsisting interest in land.It is merely
a declaration that the record of the title appears to be burdened
with the lease or mortgage of the land described. In this case, as
the mortgage is admittedly an act of the registered owner, all that
the judge of the lower court can do is to order its registration and
annotation.
Q: In this case, it was emphasized that registration is deemed to be a
mere ministerial act. What do you mean by that?
A: When we say ministerial, the person accepting the order of
registration does not have the discretion to identify if such application
is valid or not. All he can do is register the mortgage without question
if it is valid or not.
Registration is a mere ministerial act by which a deed, contract or
instrument is sought to be inscribed in the records of the office of the
ROD and annotated at the back of the certificate of title covering the
land subject of the deed, contract or instrument. In other words, the
ROD does not exercise discretion when a document, such as a
mortgage, is submitted to her office for registration. All she has to do
is check whether the requirements have been complied with: if the
document has been duly notarized, and the properties were paid.
Butshe could not refuse to have the property registered just because
another party is questioning the said mortgage. The proper action is
to file in court a case for the nullity of the mortgage document and the
cancellation ofthe annotation in the title with the ROD.
The registration of a lease or mortgage, or the entry of a memorial of
a lease or mortgage on the register, is not a declaration by the state
that such an instrument is a valid and subsisting interest in land; it is
merely a declaration that the record of the title appears to be
burdened with the lease or mortgage described, according to the
priority set forth in the certificate.
|2-Manresa CredTrans TSN |11
The mere fact that a lease or mortgage was registered does not stop
any party to it from setting up that it now has no force or effect.
The court here did not pass on its invalidity or effect when it ordered
the registration and annotation of the mortgage. As the mortgage is
admittedly an act of the registered owner, all that the judge below did
and could do, as a registration court, is to order its registration and
annotation on the certificate of title covering the land mortgaged. By
said order the court did not pass upon the effect or validity of the
mortgage.
Recall the case of State Investment, we said that the mortgage is
ripe or the mortgage therein was registered but nevertheless, such
registered mortgage was considered inferior to the buyer’s
unregistered right for the reason that there was no compliance with
Article 2085; there was no free disposal. Registration is of no
moment since it is understood to be without prejudice to the right of
third parties.
Q: With regard to conjugal properties or properties subject to the
absolute community of spouses, what is the requirement for the valid
mortgage of these properties?
A: It will depend if the marriage was celebrated before or after the
institution of the Family Code. If it is before, and there was no
consent obtained and there was mortgage, it will be considered
merely voidable. But after the FC, it is considered void.
Ros vs. PNB
Facts: The husband obtained a loan from PNB and mortgaged
their land as security. The spouses sought the annulment of the
mortgage claiming that the signature of the wife was forged and
that she has no knowledge of the mortgage of the said property.
Issue: WON the mortgage is still considered valid
Ruling: Yes. What is applicable here is the provisions of the Civil
Code. Under it, a mortgage or encumbrance of the property
without the consent of the wife is merely voidable and not void.
Q: Was there really forgery?
A: No it was not proven that there was forgery. What is executed
hereisa notarized document and so it enjoys the presumption of
regularity. It needs clear and convincing evidence in order to
overcome it; here no evidence was provided at all.
Q: Assuming there was no consent on the part of the wife, what is
the effect as to the mortgage?
A: The marriage was celebrated before the FC so the court applied
Article 173 of the Old Civil Code which holds that the mortgage is
merely voidable. Hence, it is upheld still as valid unless annulled.
Article 166. Unless the wife has been declared a non compos
mentis or a spendthrift, or is under civil interdiction or is confined
in a leprosarium, the husband cannot alienate or encumber any
real property of the conjugal partnership without the wife’s
consent. If she refuses unreasonably to give her consent, the
court may compel her to grant the same.
Article 173. The wife may, during the marriage, and within ten
years from the transaction questioned, ask the courts for the
annulment of any contract of the husband entered into without her
consent, when such consent is required, or any act or contract of
the husband which tends to defraud her or impair her interest in
the conjugal partnership property. Should the wife fail to exercise
this right, she or her heirs after the dissolution of the marriage
may demand the value of the property fraudulently alienated by
the husband.
Take note of the provisions of the FC and the CC. What is covered
therein is the need of consent of the other spouse for the “disposition

or encumbrance”. This refers not only to sale but also to mortgage as
it is covered within the term encumbrance.
If it is covered by the Family Code, what is provided is:
Article 96. The administration and enjoyment of the community
property shall belong to both spouses jointly. In case of
disagreement, the husband's decision shall prevail, subject to
recourse to the court by the wife for proper remedy, which must
be availed of within five years from the date of the contract
implementing such decision.
In the event that one spouse is incapacitated or otherwise unable
to participate in the administration of the common properties, the
other spouse may assume sole powers of administration. These
powers do not include disposition or encumbrance without
authority of the court or the written consent of the other spouse. In
the absence of such authority or consent, the disposition or
encumbrance shall be void. However, the transaction shall be
construed as a continuing offer on the part of the consenting
spouse and the third person, and may be perfected as a binding
contract upon the acceptance by the other spouse or
authorization by the court before the offer is withdrawn by either
or both offerors.
Article 124. The administration and enjoyment of the conjugal
partnership shall belong to both spouses jointly. In case of
disagreement, the husband's decision shall prevail, subject to
recourse to the court by the wife for proper remedy, which must
be availed of within five years from the date of the contract
implementing such decision.
In the event that one spouse is incapacitated or otherwise unable
to participate in the administration of the conjugal properties, the
other spouse may assume sole powers of administration. These
powers do not include disposition or encumbrance without
authority of the court or the written consent of the other spouse . In
the absence of such authority or consent, the disposition or
encumbrance shall be void. However, the transaction shall be
construed as a continuing offer on the part of the consenting
spouse and the third person, and may be perfected as a binding
contract upon the acceptance by the other spouse or
authorization by the court before the offer is withdrawn by either
or both offerors.
Under the facts of this case, it was the Civil Code which was
applicable at the time of the mortgage wherein the husband cannot
alienate or encumber any conjugal real property without the consent,
express or implied, of the wife. Should the husband do so, then the
contract is voidable, meaning valid until annulled. Annulment will be
declared only upon a finding that the wife did not give her consent.
The documents were acknowledged before a notary public. Being
public documents, they have the prima facie presumption of a valid
execution thereof. It cannot be disproved by the mere denial of the
alleged signer.
The husband cannot bring an action against PNB, for no one can
come before the court with unclean hands, being a party to the said
contract. In their memorandum, the petitioners themselves admitted
that it was the husband who forged the signature.
In relation to whether it redounded to the benefit of the family, the SC
held that the husband was engaged in the business of buy and sell of
garlic and tobacco; that was the purpose of the loan, for additional
working capital of the business.
The wife claimed that she was unaware whether it prospered but was
aware of the loans contracted but did not know where he used or
wasted the money.
Debts contracted by the husband for and in the exercise of the
industry or profession by which he contributes to the support of the
family cannot be deemed to be his exclusive and private debts.
|2-Manresa CredTrans TSN |12
If the mortgage is found to be void under theFC because the wife did
not give her consent, what is considered void is merely the mortgage
and not the principal obligation. Where a mortgage is not valid, the
principal obligation which it guarantees is not necessarily rendered
null and void as what is lost is only the right to foreclose the
mortgage and the mortgage still remains as an evidence of a
personal obligation.
Article 2126. The mortgage directly and immediately subjects the
property upon which it is imposed, whoever the possessor may
be, to the fulfillment of the obligation for whose security it was
constituted.
Remember, a registered mortgage creates a real right as
distinguished from a personal right.
Real right – a right in rem inseparable to the party and enforceable
against the whole world
The mortgage is attached to the property itself and the mortgage
follows the property wherever it goes. It subsists notwithstanding the
changes of ownership, wherein the personality of the owner is merely
disregarded.
Whoever subsequently acquires the property carries with him the
obligation to observe the mortgage if the mortgage is registered.
Since the mortgage is merely a lien or encumbrance of the property,
the owner still has the right to alienate and sell the subject property.
But for the mortgagee to have a better right than the subsequent
purchaser, he must have registered his mortgage.
Even if it will be sold to another person, if the debtor fails to pay his
obligation, the property canstill be foreclosed, as all subsequent
purchasers of the property must respect the mortgage as long as the
mortgage is registered or if not, the subsequent buyer must know of
its existence.
What is the effect if the debtor fails to pay and the mortgagor sold the
property to a third person?
If you have registered the mortgage, you can still foreclose it. The
subsequent buyer, now the present owner, cannot say that you
cannot foreclose it anymore since he is now the owner, because your
right as a mortgagee is a real right; it attaches to the property, not to
the debtor or mortgagor.
The fact that the ownership has been transferred will not preclude the
foreclosure of the mortgage.
However, take note that the subsequent purchaser will not be liable
for any deficiency. For him, mortgagee will have a better right as to
his ownership. But he is not a party to the principal obligation or to
the mortgage.In case thereis a deficiency, the subsequent purchaser
cannot be held liable.
It is the principal debtor who must be held liable, unless the
subsequent buyer gave his consent and there is a novation, wherein
he assumed the obligation of the principal debtor, or entered into a
contract of guaranty or suretyship, wherein he himself guaranteed
the personal obligation of the debtor.
Otherwise, the rightthat is available to the mortgagee is to foreclose
the mortgage and as sold in a public auction, to satisfy the
indebtedness.
Article 2127. The mortgage extends to the natural accessions, to
the improvements, growing fruits, and the rents or income not yet
received when the obligation becomes due, and to the amount of
the indemnity granted or owing to the proprietor from the insurers
of the property mortgaged, or in virtue of expropriation for public
use, with the declarations, amplifications and limitations
established by law, whether the estate remains in the possession
of the mortgagor, or it passes into the hands of a third person.

This is another provision in the Civil Code which shows that the
mortgage is inseparable from the property. Article 2127 explains to
what is the extent of the mortgage. Remember that upon the time the
obligation becomes due and after demand is made and the debtor
still fails to pay, the property may now be foreclosed.
The mortgage extends to all the accessions, improvements, growing
fruits and rents or income, as wellas to the proceeds of insurance,
should the property be destroyed, or should the property be
expropriated, to the extent of the value or the just compensation.
If the fruits were already harvested before, these will not be part of
the mortgage.
If they are still attached to the property when the obligation becomes
due, they form part of the mortgage.
These refer to the provisions under Property law.
If it is expropriated, the mortgage continues upon the just
compensation.
If you want to exclude these accessions, improvements or growing
fruits, then you agree, the mortgagor and mortgagee must expressly
stipulate.
Otherwise, the following will bedeemed included:
a. New plantings
b. Fruits, except those collected before the obligation falls
due, and those removed and stored when it falls due
c. Accrued and unpaid rents, as well as those which should
have to be paid while the credit remains wholly unsatisfied
d. Buildings, machinery and accessories belonging to the
mortgage debtor installed on a mortgaged sugar central
e. All objects permanently attached to a mortgaged land or
building although they may have been placed there after
the execution of the mortgage
f. A more costly building erected in place of the building
which was torn down by the debtor
Also take note of these after-acquired properties. If there is a
stipulation that the mortgage should cover after-acquired properties,
the stipulationis valid and common, including those that are
perishable or subject to wear-and-tear, and they will be subsequently
replaced with another.Such stipulation is not unlawful or immoral.
Example: Mortgage a grocery store including the inventory therein;
but remember that you should replenish it. Even if at the time the
obligation fell due, the stocks are already different, it would still be
covered, if what was agreed upon by the parties is to include these
after-acquired properties.
Q: What is the dragnet or blanket mortgage clause?
A: It is one which would subsume all debts of past and future origin.
According to the SC, this clause is carefully scrutinized and strictly
construed.
Producers Bank vs. Excelsa
Facts: Excelsaapplied for a credit advance with Producers which
was supported by a letter of credit issued by Kwang Ju Bank.
Producers later approved the credit line. Prior to this, Excelsahad
already obtained a loan with Produces secured by a real estate
mortgage over the properties of Excelsa.
Thereafter, Excelsa presented to Producers drafts drawn under
the letter or credit from Kwang Ju. Producer purchased the drafts
and export documents.
Producers demanded for the payment for the equivalent of the
export documents they have already purchased. Excelsa was not
able to pay so Producers extrajudicially foreclosed the mortgaged
real properties.
Excelsa argues that the REM over their properties was merely to
secure the existing debts and not their future debts they have
|2-Manresa CredTrans TSN |13
accumulated.
Issue: WON the real estate mortgage also served as security for
the drafts from Kwang Ju Bank, or future debts
Ruling: Yes, there was a dragnet clause.
Q: What part is considered as the dragnet clause?
A: “For and in consideration of those certain loans, overdraft and/or
other credit accommodations on this date obtained from the
MORTGAGEE, and to secure the payment of the same, the principal
of all of which is hereby fixed at FIVE HUNDRED THOUSAND
PESOS ONLY (P500,000.00) Pesos, Philippine Currency, as well as
those that the MORTGAGEE may hereafter extend to the
MORTGAGOR, including interest and expenses or any other
obligation owing to the MORTGAGEE...”
Q: What is the effect of that clause to the obligation of the debtor
here?
A: The REM would also secure the future debts which Excelsa would
incur, which in this case was the drafts they obtained, which
Producers have already paid to Kwang Ju.
GR: An action to foreclose a mortgage must be limited to the amount
mentioned in the mortgage
Exception: Dragnet clause
Amounts deemed as consideration in a contract of mortgage do not
limit the amount for which the mortgage may stand as security as
long as that is the intention, to secure future loans or advancements
and other indebtedness.
Here, mortgages given to secure future advancements are valid and
legal contracts and the amounts named as consideration in said
contracts do not limit the amount for which the mortgage may stand
as security if from the four corners of the instrument the intent to
secure future and other indebtedness can be gathered.
In this case, the amount is Php500,000 but the mortgage is not
limited to that because of the phrase: “as well as those that the
mortgagee may hereafter extend to the mortgagor, including interest
and expenses or any other obligation owing to the mortgagee.”
Remember that a dragnet clause is one which is specifically phrased
to subsume all debts of past and future origins.
A dragnet clauseor blanket mortgage clause operates as a
convenience and accommodation to the borrowers as it makes
available additional funds without their having to execute additional
security documents, thereby saving time, travel, loan closing costs,
costs of extra legal services, recording fees, etc.
This is similar to a continuing guaranty or a continuing suretyship but
in a REM it is specific as to the properties.
In this case, petitioner was not precluded from seeking the
foreclosure of the REM based on the unpaid drafts drawn by
respondent.
The notice of sheriff’s sale here was sent by registered mail and this
was provided as a requirement in the REM. But the requirement here
was for the petitioner merely to furnish respondent with the notice
and does not oblige petitioner to ensure that respondent actually
receives the notice. On this score, petitioner has performed its
obligation under paragraph 12 of the real estate mortgage.
Q: In the case of PCSO, is there a dragnet clause?
A: None.
PCSO vs. New Dagupan

Facts:Purita Peralta is a registered owner of a parcel of land. To
secure payment for lottery tickets, she mortgaged the land. There
was a stipulation that it cannot be sold during the lifetime of the
mortgage.
However, Peralta sold her property to New Dagupan. When
PCSO found out about this, it caused the annotation of the
mortgaged lien on the TCT of the property. It also applied for
extrajudicial foreclosure over the land and obtained a certification
that the land belonged to it.
New Dagupan filed for the annulment of TCT in the name of
PCSO and contended that it was a buyer in good faith.
PCSO argues that it had the authority to foreclose the property in
lieu of the unpaid tickets obtained by Galang.
Issue: WON there was a dragnet clause in the REM
Ruling: No. It is clear in the mortgage executed that it only
covered the Php450,000 amount of the tickets obtained by
Galang. It was found in the records that this was already paid by
Galang, as supported also by testimonies of the PCSO officers.
This means that the mortgaged property no longer covers as
security for future debts that may incurred by Galang.
Q: Is there a guaranty or a mortgage?
A: A mortgage.
Q: But is it a mortgage with a dragnet clause?
A: No, the SC held that the mortgage constituted only pertained to
secure the payment of the tickets which is Php450,000 and not to
future tickets to be obtained by Galang.
Q: Who is the debtor here?
A: Galang.
Q: And the mortgagor?
A: Peralta.
So this is an instance where we have a third person mortgagor.
Q: Can New Dagupan be considered as a purchaser in good faith?
A: Yes.
Q: But wasn’t the mortgage in favor of PCSO already registered?
A: Yes, howeverthe registration of the mortgage lien occurred after
New Dagupan purchased the property. There was also no showing
that Peralta told New Dagupan that it mortgaged the property to
PCSO.
You have here a REM but take note that in this case there is no
dragnet clause because what is covered by the mortgage is only the
principal amount of Php450,000 representing the balance of the
ticket accountabilities for all draws of the principal debtor Galang.
Here, there was really no dragnet clause to cover subsequent
purchases of Galang from PCSO.
Therefore, since the subject mortgage is not in the nature of a
continuing guaranty, or as we have discussed, does not include a
dragnet or blanket mortgage clause, and given the automatic
termination thereof, PCSO cannot claim that Galang’s ticket
purchases in 1992 are also secured. From the time the amount of
P450,000.00 was fully settled, the subject mortgage had already
been cancelled such that Galang’s subsequent ticket purchases are
unsecured. Therefore, simply put, PCSO had nothing to register,
much less, foreclose.
Consequently, PCSO’s registration of its non-existent mortgage lien
and subsequent foreclosure of a mortgage that was no longer extant
cannot defeat New Dagupan’s title over the subject property.
As to third persons, a property registered under the Torrens system
is, for all legal purposes, unencumbered or remains to be the
property of the person in whose name it is registered,
|2-Manresa CredTrans TSN |14
notwithstanding the execution of any conveyance, mortgage, lease,
lien, order or judgment unless the corresponding deed is registered.
It is undisputed that it was only on May 20, 1992 that PCSO
registered its mortgage lien. By that time, New Dagupan had already
purchased the subject property, albeit under a conditional sale.
New Dagupan was considered as a purchaser in good faith and for
value and not bound by PCSO’s mortgage lien, even assuming that
the mortgage is considered as containing dragnet clause because it
was not registered.
That is one thing you should also consider. Some mortgagees are
lenient to register their mortgage to the title because sometimes they
already feel secure that the title is in their possession. But there are
also times when the mortgagor-owner connives and surreptitiously
files a petition for lost title and then sells it to another person. If you
look at the title, it only says that it is issued in lieu of a lost title. But
also, that already serves as an additional warning on the part of the
purchaser. Under Land Titles, the land jurisdiction of the court usually
with titles is not actually lost.
What you should also consider is whether or not there is a purchaser
in good faith. In this case, it was clear the New Dagupan was a
purchaser in good faith.PCSO did not present any evidence that New
Dagupan had knowledge of the mortgage in its favor, even if it was
not registered.
Q: What is this reliance on the security test?
A: It is a test wherein an inquiry is made whether the second loan
was made in reliance on the original security containing a dragnet
clause.
Q: What does that mean? If you have a first mortgage with a dragnet
clause and another mortgage covering this obligation, which among
these will be preferred? The second mortgage or the mortgage with
the dragnet clause? With regard to that specific obligation.
Prudential Bank vs. Alviar
Facts: Spouses Alviar are the registered owners of a piece of land
and they executed a REM in favor of Prudential to secure the
payment of a loan worth Php250,000. For this, they executed a
promissory note secured by a REM containing a dragnet clause.
Alviar executed another promissory note signifying that it was
secured by a hold-out agreement. Another one was executed by
the spouses with a clean face-out deed of assignment.
The spouses paid the first loan for Php250,000 covering the first
security which was secured by the REM. The bank then moved for
the extrajudicial foreclosure of the property since according to
them, the spouses had a total obligation of Php1M for their
obligations covered under the 3 promissory notes executed by the
spouses.
Spouses Alviar filed for a writ of preliminary injunction claiming
that they have already paid the principal loan of Php250,000 and
thus the foreclosure was invalid.
The bank maintains that because of the dragnet clause in the
REM, it expressly covers not only the Php250,000 but also the 2
other promissory notes.
Issue: WON the dragnet clause applies even in the subsequent
advancement for which other securities were intended
Ruling:The dragnet clause will not be applied using the reliance
on security test.The parties having conformed to the blanket
mortgage clause or dragnet clause, it is reasonable to conclude
that they also agreed to an implied understanding that subsequent
loans need 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 component of the
dragnet clause. But of course, there is no prohibition, as in the

mortgage contract in issue, against contractually requiring other
securities for the subsequent loans. Thus, when the mortgagor
takes another loan for which another security was given it could
not be inferred that such loan was made in reliance solely on the
original security with the dragnet clause, but rather, on the new
security given.
Q: Do you have a REM here?
A: Yes.
Q: Do you have a valid blanket mortgage clause?
A: Yes. There is a valid blanker mortgage clause but the SC held that
in the absence of clear, supportive evidence of a contrary intention, a
mortgage containing a dragnet clause will not be extended to cover
future advances unless the document evidencing the subsequent
advance refers to the mortgage as providing security therefor.
The bank improperly foreclosed the mortgaged property just because
of the nonpayment of the 3 promissory notes. While there was the
existence of the dragnet clause, it cannot be denied that there was
already payment of the Php250,000.
Q: How about the subsequent loans that are covered by the REM
with the dragnet clause, wouldn’t they also be covered?
A: The other promissory notes had their own security which were
executed by the spouses.
Q: What shall the mortgagee do if the subsequent obligations were
secured by separate mortgages and at the same time there was a
REM with a dragnet clause?
A: The mortgagee should foreclose the security on the different
mortgages executed. While there is a valid dragnet clause, it does
not mean that it will affect all the subsequent transactions made by
the mortgagor.
With regard to the Php250,000 loan, there was a blanket mortgage
clause. Take a look at the provisions:
“…and to secure the payment of the same and those that may
hereafter be obtained, the principal or all of which is hereby fixed at
Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine
Currency, as well as those that the Mortgagee may extend to the
Mortgagor and/or DEBTOR, including interest and expenses or any
other obligation owing to the Mortgagee…”
Notice the last phrase in the paragraph:
“…together with all the buildings and improvements now existing or
which may hereafter be erected or constructed thereon…”
It also covered after-acquired properties.
In this case, there was a valid REM containing a blanker mortgage or
dragnet clause. However it must be emphasized that with regard to
the subsequent loans, they were secured by different contracts or
agreements. The REM not only secured the Php250,000 but also the
future credit facilities, as in this case the subsequent loans that were
obtained by the respondents.
However these subsequent loans were secured by other securities;
there was a hold-out on one of the promissory notes and another one
was secured by a clean face-out deed of assignment as well; there
was also a chattel mortgage.
The SC here discussed two schools of thought with regard to this
kind of arrangement.You have a REM with a dragnet clause so it
covers future obligations and you have these subsequent obligations
which are covered by specific securities, whether mortgage or other
forms of collaterals as what happened in this case.
Here, the SC applied the reliance on security test. There is an
implied understanding that subsequent loans need not be secured by
other securities, especially if what you have is a REM with a dragnet
clause, as the subsequent loans will be secured by the first
mortgage. However, when the mortgagor takes another loan for
which another security was given it could not be inferred that such
|2-Manresa CredTrans TSN |15
loan was made in reliance solely on the original security with the
dragnet clause, but rather, on the new security given.
In case there is default on the subsequent loan, which one will you
go after first? The specific security with regard to that. If there is a
chattel mortgage, foreclose it first. If there is a hold-out agreement,
meaning the mortgagor is involved, go after it first.
If that is still not sufficient, that is the time that you can now go after
or apply and foreclose the properties that were covered by thefirst
REM with a dragnet clause.
Two schools of thought were discussed but the SC emphasized and
preferred the second school of thought applying the reliance on
security test.
February 17, 2016
Transcribed by: Kamille Buhay
Let’s continue with Real Estate Mortgage…
So, we’re already done with Article 2127 and in relation
thereto we have emphasized the nature of a DRAGNET CLAUSE,
also known as a MORTGAGE CLAUSE. It’s a clause that appears in
a mortgage which provides continuous dealings between the
mortgagor-debtor and creditor and avoids the additional expense and
inconvenience in executing a new security on each new transaction
specifically phrased to subsume all debts of past and future origins.
As we have also discussed last time, such dragnet clause
is strictly construed and carefully scrutinized especially if it is a
contract of adhesion prepared by one party which is usually the
mortgagee. Also last time we have emphasized in the case of
Prudential the RELIANCE ON SECURITY TEST, which is also
discussed in the case of Asia Trust Development Bank.
ASIA TRUST V. CARMELO TUBLE
FACTS:Carmelo Tube, who served as the vice-
president of Asiatrust Development Bank,
availedhimself of the car incentive plan and loan
privileges offered by the bank. The arrangement was
made to appear as a lease agreement requiringonly the
payment of monthly rentals. Accordingly, the
lease would be terminated in case of employee’s
resignation or retirement prior to full payment of the
price. 
Meanwhile, as for theloans, he obtained 3 separate
loans.The first loan involved a real estate mortgage loan
evidenced by a promissory note 0142. The second loan
was a consumption loan (P/N 0143) and the third loan a
salary loan. When he resigned, he was given the option
to either return the vehicle without any furtherobligation
or retain the unit and pay its remaining book value. His
obligations, aside from thepurchase or return of the
vehicle, are the Php100,000.00 as consumption loan,
Php421,800.00 asreal estate loan and Php16,250 as
salary loan. On the other hand, the petitioner owed
Tuble hispro-rata share in the DIP, which was to be
issued after the bank had given theresigned
employee’sclearance,and Php25,797.35 representing
his final salary and corresponding 13thmonth pay.
Tuble claimed that since he and the bank were debtors
and creditors of each other, theoffsetting of loans could
legally take place. However, the bank sent him a
demand letter obliginghim to pay his debts and to
return the vehicle. As for the real estate loan, a petition
for extra- judicial foreclosure was filed but was
redeemed by Tuble for Php1,318,401.91. 

After payment of such amount, Tuble questioned how
the foreclosure basis of Php421,800.00 ballooned to
Php1,318,401.91 in a matter of 1 year.  whereby the debtor is forced by a judicial proceeding to comply with
ISSUE/S:
1. W/N Asiatrust should recover the other obligations of
Tuble to the real estate mortgage.
2. W/N Asiatrust is justified in reposing the 18% annual
interest of the redemption price by way of the dragnet
clause.
HELD:In Spouses Romero v. Court of Appeals, SC held
that the mortgage indebtedness was extinguished with
the foreclosure and sale of the mortgaged property, and
that what remained was the right of redemption granted
by law.
Consequently, since the Real Estate Mortgage Contract
is already extinguished, petitioner can no longer rely on
it or invoke its provisions, including the dragnet clause
stipulated therein. It follows that the bank cannot refer to
the 18% annual interest charged in Promissory Note No.
0143, an obligation allegedly covered by the terms of
the Contract.  do so and it cannot be allowed to use the same security to collect on
Neither can the bank use the consummated contract to
collect on the rest of the obligations, which were not
included when it earlier instituted the foreclosure
proceedings. It cannot be allowed to use the same
security to collect on the other loans. To do so would be
akin to foreclosing an already foreclosed property.
Q: Is there a dragnet clause?
A: Yes.
Okay. There was a dragnet clause but it should not include the other
liabilities after the mortgage has already been foreclosed.
Q: Now, why is it that the “Reliance on Security Test” was mentioned
in this case?
A: It was mentioned in order to prove or show that indeed the 18%
annual interest in the consumption loan covered by P/N 0143 was
covered by the dragnet clause. In answering such the SC held that
the 18% annual interest rate was not covered because first: the
consumption loan made no reference to the earlier loan with the
REM and second: the facts did not allege that it relied on the security
on the REM in issuing the consumption loan.
So in this case, actually, we can already have an overview
of what is the effect or what takes place when the property subject of
a REM is foreclosed. The general law to be applied is Act 3135, and
we have special laws that will be applied depending on the
circumstances of the case.
Now in this case the SC held that it is the General Banking
Act which is applicable, amending Section 6 of Act No. 3135in so far
as the redemption price is concerned. The amount to be paid in
redeeming the property is therefore determined by this General
Banking Act,since the mortgagee is a bank, and not by the Rules of
Court in Relation to Act 3135.
Now take note that the property here subject of the
mortgage was foreclosed and the mortgage was a security in relation
to that P/N No. 0142 to which there was a remaining obligation of
Php421,800.00
Now, what is the effect if a property is foreclosed; property
subject of a mortgage? The mortgaged property is subjected to the
|2-Manresa CredTrans TSN |16
proceedings for the satisfaction of the principal obligation in relation
to that REM and as a result, payment is effected by abnormal means
the presentation or to pay indemnity.
Now, once the proceeds from the sale of the property are
applied to the payment of the obligation, the obligation is actually
already extinguished. The mortgage indebtedness was extinguished
with the foreclosure and sale of the mortgaged property, and what
remains is the right to redeem or right of redemption.
Since the REM is already extinguished, the bank in this
case can no longer rely on or invoke its provisions, including the
dragnet clause. While it is true that the REM contained a valid
dragnet clause, it cannot be used anymore to answer the other
obligations of Tuble in this case. Why? Because it was already
foreclosed for that Php421, 800.00 obligation. It also follows that the
bank cannot also refer to 18% annual interest charge in a separate
P/N; in a separate principal obligation. Neither can the bank use the
consummated contract to collect on the rest of the obligations, which
were not included when it earlier instituted the foreclosure
proceedings. Sana sinama na nila doon sa foreclosure proceedings
considering that there was a dragnet clause. However, they did not
the other loans. To do so would be akin to foreclosure an already
foreclosed property. Rather than relying on an expired contract, the
bank should have collected (since na-foreclose na yung mortgage)
on the other loans by filing the proper actions in court for recovery of
sums of money. The bank should have run after Tuble separately,
instead of hostaging (sinama sa redemption price) yung property to
cover all of his liabilities.
Now remember here that Tuble had the right to redeem the
security by paying the redemption price. Such right to redeem is
granted by law since it is a statutory privilege he enjoyed.
Redemption is by force of law, and the purchaser (the bank) is bound
to accept it.
The bank cannot alter that right by imposing additional
charges and including other loans.
Remember here that the SC made mention of Sec. 47 of
the General Banking Law in relation to redemption. The freedom to
stipulate the terms and conditions of an agreement is limited by law
and in this case, the General Banking Law.
The power to decidewhether or not to foreclose is the
prerogative of the mortgagee. So in this case, Asiatrust exercised its
right to foreclose the property. But once it has made a decision by
filing a petition for foreclosure with the sheriff, the acts of the sheriff
shall be governed by the provisions of the mortgage laws, and not by
the instructions of the mortgagee; whereby the bank included
numerous charges and loans wherein the redemption price now
ballooned to approx. 1.3 Million including the 18% annual interest.
The dragnet clause while valid in the REM contract, does
not justify the imposition of an 18% annual interest on the redemption
price. A REM contract may exceptionally secure future loans or
advancements in a dragnet clause but an obligation is not secured by
a mortgage unless that mortgage comes well within the terms by the
mortgage contract.
Now in this case, there was no mention of any specific
interest to be added in case of default of redemption. The said
contract does not state that the interest to be charged in case of
redemption should be as what is specified in the P/N.
Now with regard to the Reliance on Security Test, when is
it put into consideration? If you have a dragnet clause and there are
subsequent obligations. The question is, “Will a subsequent
obligation also be secured by the dragnet clause in a previously
executed in a REM contract?” So we apply this Reliance on Security
Test. When these subsequent obligations were granted or entered

into where the creditor-mortgagee relied on the security that was
covered in a REM contract in a dragnet clause. The SC in this case
reiterated what was mentioned in the case of Prudential as well as I
think the Philippine Bank of Communications. In which the Court
adopted the Reliance on Security Test in the following instances:
A mortgage with a "dragnet clause" is again, an "offer" by the
mortgagor to the bank to provide the security of the mortgage for
advances of and when they were made. Thus, it was concluded that
the "offer" was not accepted by the bank when a subsequent
advance was made because (1) the second note was secured by a
chattel mortgage on certain vehicles, and the clause stated that the
note was secured by such chattel mortgage.
In other words, the principal obligation in that scenario did
not rely on the security in the previously executed REM contract with
a dragnet clause. Another scenario: (2) no reference in the second
note or chattel mortgage indicating a connection between the real
estate mortgage and the advance. Another instance: (3) the
mortgagor signed the real estate mortgage by her name alone,
whereas the second note (the second obligation) and chattel
mortgage were signed by the mortgagor doing business under an
assumed name; and when (4) there was no allegation by the bank –
or the creditor, and apparently no proof, that the creditor-mortgagee
relied on the security of the real estate mortgage in making the
advance.
In this instance there was, as to the subsequent advances
or P/N’s executed, there was nothing shown that it relied on the
security covered by the dragnet clause in the first P/N.
So here with the dragnet clause, it did not extend to the
consumption loan. No liability for the 18% interest and therefore the
redemption price should not be 1.3 M but just that amount of
Php421,800.00 plus the applicable fees to the court. ‘Yun lang yun.
And then let’s have Article 2128.
Article 2128. The mortgage credit may be alienated or
assigned to a third person, in whole or in part, with the
formalities required by law.
Again take note, mortgage credit is a real right. The right
here of the mortgagee is attached to the property itself. And the right
of the mortgagee itself maybe alienated or assigned by the
mortgagee to a third person in whole or in part. So what happens
when a mortgagee assigns his right as a mortgagee to a third
person? It is valid even if it is not registered. And what is the effect if
it is assigned (the mortgagee’s right in a REM)? The assignee will
now have the right to foreclose the mortgaged property if the debtor
fails to pay his obligation.
This alienation or assignment of the rights of a mortgagee
is valid even if it is not registered. Now the mortgaged property, can it
be alienated by the mortgagor himself? Also, yes. We’ll see this in
the succeeding articles; that in a mortgage there is no transfer of
ownership. In fact, any stipulation which prohibits the mortgagor or
owner from selling the property is considered as void as it is contrary
to what is provided under the law.
Now, we also have this case of Vega v. SSS
VEGA v SSS
FACTS:Magdalena Reyes owned a piece of titled land.
On August 17, 1979, she got a housing loan from SSS
for which she mortgaged her land. Late 1979, Reyes
asked the Sps. Vega to assume the loan and buy her
house and lot since she was to emigrate.
An employee at SSS said, however, that SSS did not
approve of members transferring their mortgaged
|2-Manresa CredTrans TSN |17
homes. But the Sps Vega (Vegas) could make a private
arrangement with Reyes provided that they pay the
monthly amortizations on time. Vegas agreed for Reyes
to execute in their favor a deed of assignment of real
property with assumption of mortgage and paid Reyes
P20,000 after she undertook to update the
amortizations before leaving the country.
The Vegas took possession of the house in January
1981.
Reyes did not execute the deed of assignment. She left
the country and left her sister (Julieta Ofilada) a special
power of attorney to convey ownership of property.
Sometime between 1983 and 1984, Ofilada executed
the deed of assignment in favor of the Vegas, kept the
original and gave the Vegas two copies, one to be given
to the Home Development Mortgage Fund and kept the
other. A storm in 1984 resulted in flood and destroyed
their personal copy.
ISSUE/S:Whether Reyes validly sold her SSS-
mortgaged property to the Vegas given a provision in
the mortgage agreement that she could not do so
without the written consent of SSS.
HELD: Yes. The Vegas were able to present adequate
proof of Reye’s sale of the property to them. The Vegas
proved the loss of the deed of assignment in their favor
and what it contained, they offered strong corroboration
of the fact of Reyes’ sale of the property to them. They
took possession of the house and lot after they bought
it. They also paid for the amortizations to the SSS. And
when SSS wanted to foreclose the property, the Vegas
sent a manager’s check for the balance of the loan.
Article 1237 of the Civil Code cannot apply in this case
since the debtor (Reyes) consented to the transfer of
ownership of the mortgaged property to the Vegas.
Although Paragraph 4 of the mortgage agreement which
states that Reyes must secure the consent of SSS
before selling the property, is valid and binding in the
sense that SSS cannot be compelled to recognize the
sale before the loan is completely paid, it does not
absolutely forbid her, as owner, from selling the property
while the loan remained unpaid. Such stipulation is
against public policy, being an undue impediment or
interference on the transmission of property.
Article 2129 of the Civil Code gives SSS the option of
collecting from the third person in possession of the
mortgaged property.
And in fact, previously, there was a notice of that claim of
Vega. They want to pay the obligation in favor of SSS.
This usually happens with PAG-IBIG and SSS, wherein a
person who borrow money from these institutions and then subject
the property to a mortgage. And what would happen is that they
could not afford anymore to pay the amortizations so they will sell the
property. It’s a deed of sale with assumption of mortgage or a deed
of assignment or a deed of assignment of rights as the owner of that
property as well as a mortgagor with assumption of mortgage.
Now, usually, these institutions or financial institutions
would not recognize these agreement of assignment or sale with
assumption of mortgage. In their record or files, kung sino ‘yung
nagpirma sa REM, ‘yun yung nire-recogtnize nila. So what would
happen here is that for example, in this case, the mortgage executed
in favor of SSS is duly annotated therein. In the records of SSS, the
owner thereof remains the same mortgagor. But what would happen
is that the assignee of the mortgage will be the one who will pay the
obligation. Now in practice, what would usually be done is that in the
execution of that deed of assignment with assumption of mortgage,
the mortgagor will also execute a Special Power of Attorney in favor

of the assignee so that any transactions or dealings with the
mortgagee, pwede siya ang magfollow-up, magtransact, and upon
full payment, pwede siya ang maghingi sa title. So ‘yun ‘yung pwede
mong iclaim as a mortgagee.
Now, if there’s a failure to pay, of course the mortgagee
can foreclose the property notwithstanding that there has been a sale
and assumption of mortgage. Kasi hindi nabayaran ‘yung obligation.
But the mortgagee has the obligation or can be compelled to accept
payment from the assignee. Why? Because again there has already
been an assumption of mortgage. Second, there was an interest in
the obligation. Diba, one of the parties who can compel the creditor
to accept payment
Now, it just so happened that in this case is that the
assignment was not annotated. Notice that it was not registered in
the title. Nevertheless, take note that with regards to SSS, it’s act of
foreclosing the property was not valid because there was a valid
payment already for and on behalf of the mortgagor so with that, the
SSS now is compelled to release the property in favor of the Sps
Vega.
Now, also take note here that with regard to the highest
bidder PDC, it cannot be considered as a buyer in good faith since it
had notice of the Vegas claim on the property prior to such sale.
Now, even with this case, do take note that it is still ___
that with any subsequent deed of sale or assignment or assumption
of mortgage, you make sure that you annotate it doon sa title.
Otherwise, if it will be subsequently sold (even if you have, let us say
fully paid the obligation sa SSS and the SSS will cancel the
mortgage, pero example may ibang utang pa pala yung registered
owner and nakita doon “Uy, nacancel naman itong mortgage: yung
assumption of mortgage in your favor and deed of sale and
assignment wala doon, and then nadefault na yung utang na
collection for sum of money na case), what would be the effect?
Kapag makita ‘yan nila sa Register Of Deeds, pwede yan
maforeclose ng sheriff. And then that 3 rd person-creditor, separate
creditor na, can be considered as an innocent purchaser for value.
Why? Because your deed of sale or deed of assignment with
assumption of mortgage is not annotated in the title. You cannot say
to that person, “Ako man ang nagbayad ng utang sa SSS. Ako man
ang nagfollow-up doon sa SSS.” Malay ba nung other creditor.
Why? Because it’s not annotated. Pag tingin nila doon, uy, SSS lang
man ang merong utang. And then pagcheck nila sa SSS, bayad na.
Sabihin man yan ng SSS na merong full payment. Eh, malay nila
kung sino ang nagabayad..
So take note, the effect if there is no registration. Although
the registration and annotation is not required for validity, again take
note of the effect if what you really have is an innocent purchaser for
value.
Now, Article 2129
Article 2129. The creditor may claim from a third person
in possession of the mortgaged property, the payment
of the part of the credit secured by the property which
said third person possesses, in the terms and with the
formalities which the law establishes.  So if you noticed the discussion in SSS, although sabi it is
Okay, so again, what is the scenario here? A mortgaged
property is in possession of a 3rd person (not the mortgagor or not the
mortgagee). Again, we already know that delivery of possession to
the mortgagee is not necessary for the validity of the mortgage
contract. However, the parties themselves can agree that pending
the full payment of the obligation, a possession may be transferred to
the mortgagee. There’s nothing that prohibits the parties from turning
over the possession of the property to the creditor-mortgagee,
although it is not required for the validity of the said mortgage.
|2-Manresa CredTrans TSN |18
But what about if the property is in possession of a 3 rd
person? Not the mortgagor, not the mortgagee? And the obligation
has already become due and demandable but the principal debtor
fails to pay his obligation? Article 2129 states that a creditor may
claim from a 3rd person in possession of the mortgaged property.
However, take note of the requirement here that the mortgage must
be registered because that registration is going to bind 3 rd persons.
Now, even if it is already in the possession of a 3 rd person,
again, it may still be proceeded against by the creditor as payment of
the obligation. But do take note that to apply Article 2129, before you
can proceed against the 3rd person in relation to the possession of
the property, a prior demand must be made against the principal
debtor. Before you proceed against the 3 rd person and get from him
the possession of the property to be foreclosed, you must first
demand from the debtor. So after demand, and debtor still fails to
pay, you can now foreclose the property even if it is still in the
possession of a 3rd person.
Now, what happens if in the foreclosure sale, the proceeds
are not sufficient to pay the whole obligation? The person in
possession of the property cannot be held liable for the deficiency. Of
course, the remedy here of the creditor is to go after the principal
debtor with regard to the deficiency, unless of course there is a
notation wherein the 3rd person in possession of the property will
assume the obligation of the principal debtor.
Also take note of the restriction that we havein the
discussion of De Leon under 2129. The scenario there:
A mortgaged his land worth 500K in favor of B to secure the debt of
A of 600K. A then sold the land to C. C is in possession. Upon due
date, B demands payment from A. A fails to pay. B may now
foreclose the mortgage and he has the right to claim from C the
payment of 500K. Why does he have the right to pay? Para pwede
niya nang hindi i-foreclose. Remember, even C himself can
voluntarily pay A. “Ako nalang magbayad pero portion land sa
property.” Why can he do that? Because he has an interest in the
obligation. B has a right to claim but only to the extent of the
obligation and not the value of the property.
The one in possession of the property is not liable for any
deficiency in the absence of a contrary stipulation. However, this
person C can proceed against A because in the end, it is still A who
is the principal debtor; the party who is ultimately liable as to the
obligation.
Now, the one we mentioned earlier, the stipulation
prohibiting the owner from alienating the immovable mortgaged
property shall be void. That is under Article 2130.
Article 2130. A stipulation forbidding the owner from
alienating the immovable mortgaged shall be void. 
In fact, if it is stated, “There must be consent of the
mortgagee, otherwise, there could be no valid sale,” that will be
considered as a contravention of Article 2130.
valid and binding, only in the sense that SSS cannot be compelled
while the loan was still unpaid. But it does not mean that the sale or
that the deed of assignment of Sps Vega and Reyes is not valid
because it did not get the consent of SSS.
Again, in Mortgage, what is involved is merely a debt or an
encumbrance. There is no transfer of ownership, as the owner has
the rights, one of which is to dispose and sell the property.
Now, aside from that; aside from selling the property, and
assigning the property without the consent of the creditor-mortgagee,
pwede ‘yon. Pwede mo rin siya i-subsequently mortgage. What do
you mean by that? You enter into a second mortgage. Is that
possible? Yes. More often, what will happen is only a portion of the

property can answer for a debt kasi let us say yung principal
obligation hindi ganoon ka laki. So, you can enter into a second
mortgage as to the remaining portion.
Now, what is the effect of that second mortgage? What are
the rights of the second mortgagee? Of course, his rights will be
subordinate to the rights of the first mortgagee in which if the debtor
fails to pay his obligation in the first mortgage, then the first
mortgagee is preferred. He (1 st mortgagee) can foreclose the
property kahit merong 2nd mortgage. However, the 2nd mortgagee is
given the right, having an interest in the obligation, to pay the
obligation of the principal debtor. I-compel niya ang 1 st mortgagee to
accept his payment because he has an interest in the obligation and
to which the first mortgage will now be discharged and released. And
what is the effect? Si 2nd mortgagee will now be the 1st mortgagee
entitled and preferred to the rights over the property.
Now what if foreclosure takes place upon the 1 st
mortgagee? First, the proceeds will be paid to the first obligation, and
any excess will now go to the 2nd mortgagee. So again take note,
pwede yun siya. However, do take note that if you enter into a 2 nd
mortgage, make sure that you properly represent to the mortgagee
that there is already a 1st mortgage entered into. Otherwise, if you
represented that it is free from liens or encumbrance and you enter
into a 2nd mortgage, you can be held liable for estafa.
Also possible in mortgage is the Right of First Refusal
(ROFR). For those who had Sales, you already know what happens
in a ROFR: If the owner decides to sell his property, he must first
offer it to the mortgagee who is given that right of first refusal. Such
ROFR is perfectly valid and is not contrary to 2130 because it’s not a
prohibition of selling the property. So pwede. If you want to sell it,
offer it first to the mortgagee. If he does not want to purchase it, then
sell it to other persons. But make sure, for it to be considered not in
violation of the ROFR, it must be under the same terms and
condition. Otherwise, any sale made in violation of the mortgagee’s
contractual ROFR can be rescinded.
Also take note in relation to the latter illustration and as we
have mentioned before, a mortgage to be valid as against 3 rd persons
must be registered. Such registration serves as a constructive notice
to the whole world that the property is encumbered. Any person
dealing with the property has the obligation to look at the title, and
see for himself w/n the property is encumbered. As a general rule, he
is not obliged to look beyond the title. If there are other liens or
encumbrances not appearing on the title, the person dealing with
such property is not bound by such liens and
encumbrances.However, it is possible that a 3rd person may be
bound by that mortgage even if it is not registered when such person
has actual knowledge of the said lien or encumbrance. It is either
actual knowledge or registration. So let us take a look at what
happened in Pineda v CA.
PINEDA V. CA
FACTS: On January 4, 1982, the Souses Benitez
mortgaged a house and lot covered by TCT 8361in
favor of herein petitioners Pineda and Sayoc to secure
the loan obtained by the former from thepetitioners.
Pineda and Sayoc did not register the real estate
mortgage. The owners duplicate ofTCT 8361 was
however delivered by the Spouses Benitez to Pineda.
On November 9, 1983, the Spouses Benitez, after
obtaining the consent of petitioners, soldthe house to
Olivia Mojica who there and then filed a petition for the
issuance of a second owner’sduplicate of TCT 8361
alleging that the owner’s duplicate of the same was lost.
The court grantedMojica’s petition and ordered the
Register of Deeds to issue the second owner’s duplicate
copy ofTCT 8361 in the name of the Spouses Benitez.
On December 7 of the same year, the Spouses Benitez
sold the lot covered by TCT 8361 toMojica who
|2-Manresa CredTrans TSN |19
immediately registered the Deed of Sale. As a
consequence of which, TCT 8361 wascancelled and
TCT 13138 was issued in the name of Mojica.
On December 12, Mojica mortgaged the same
property to Teresita Gonzales who
immediately registered with the Register of Deeds the
deed of mortgage.
On May 8, 1985, herein petitioners filed a complaint
praying for the cancellation of the second
owner’s duplicate of TCT 8361 against the Spouses
Benitez and Mojica.
During the pendency of the case, Pineda caused the
annotation on 18 August 1986 of a
notice of lis pendens on the original of TCT 8361 with
the Register of Deeds.
No. 4654 since the second paragraph of Section 108 of
Presidential Decree No. 1529 16 ("PD 1529")
requires the filing of such separate petition.
ISSUE/S:
1. Did the notice of lis pendens bind the subsequent
purchaser of the property to theoutcome of the pending
case?
2. Were TCT 13138 and TCT 16084, being derived from
the void second owner's duplicateof TCT 8361, also
void?
3. Was the title to the property also void since the
Certificate was void?
4. Was Gonzales an innocent purchaser for value?
HELD:
1. NO. The notice of lis pendens could not defeat
Gonzales' rights over the Property for two
reasons.
2. YES. Mojica filed a petition for reconstitution of the
owner's duplicate of TCT 8361 claimingthat this owner's
duplicate was lost. However, contrary to Mojica's claims,
the owner's duplicate ofTCT 8361 was not lost but in
Pineda's possession. Since the owner's duplicate of
TCT 8361 was infact not lost or destroyed, there was
obviously nothing to reconstitute or replace. Therefore,
the trialcourt correctly ruled that the reconstitution
proceedings and the second owner's duplicate of TCT
8361 are void.
3. NO. Mojica was not a purchaser in good faith.
Mojica alleged that the Spouses Benitezgave her the
owner's duplicate of TCT 8361 on 9 November 1983,
the day the Spouses Benitez soldto her the house.
However, in her petition for reconstitution, which she
also filed on the same day, 9November 1983, Mojica
claimed that the owner's duplicate of TCT 8361 was
lost. In effect, Mojica
claimed that she received the owner's duplicate of TCT
8361 from the Spouses Benitez, lost thesame, and filed
the petition for reconstitution, all on the same day, 9
November 1983.
In her petition for reconstitution, Mojica also claimed
that she "purchased a parcel of land"
when in fact she only purchased on 9 November 1983
the house, and not the lot covered by TCT
8361.
4. YES. The prior mortgage of the Property by the
Spouses Benitez to Pineda and Sayoc didnot prevent
the Spouses Benitez, as owners of the Property, from
selling the Property to Mojica. Amortgage is merely an
encumbrance on the property and does not extinguish
the title of the debtorwho does not lose his principal
attribute as owner to dispose of the property.
Q: Was there a transfer of ownership in favor of Mojica?

A: Yes.
Gonzales had no knowledge that the property was
previously mortgaged in favor of Pineda and Sayoc. Because it was
not registered and there was no evidence that he was informed of
such mortgage. So you have here Gonzales as a mortgagee in good
faith, and therefore when the property was foreclosed, he has a right
over the said property.
So in this case of Pineda v CA, again, in relation to your
Land Titles, take note if the title itself is not lost and a petition is filed
to which a new title was issued, when it was not actually lost, the
court had actually no jurisdiction over the case; over the issuance of
the new title and that new title is void.
Now, however, take note that what is void is only the TCT;
the title. But not the sale, not the transfer of ownership over the
property. Title refers to the ownership of the property covered by the
TCT while the TCT merely evidences that ownership. So the
certificate of title is not equivalent to title. So for those who had
Sales, we had to make a distinction as to the title itself.
So what happened here? Mortgage is valid in favor of
Pineda and Sayoc. Title was in possession of Pineda and Sayoc but
they did not register their mortgage. Now, Benitez, being still the
owner of the property, can validly sell it to other persons. And in this
case, he sold it in favor of Mojica. Although it is true that Mojica had
knowledge of the previous mortgage, the sale in favor of Mojica is
still considered as valid. There was a valid transfer of ownership
because they executed a deed of sale (constructive delivery). Now,
ito namang si Moijica, in bad faith, filed a petition for a lost title and to
which a new title was issued in his name, to which he mortgaged the
same property when he borrowed money from Gonzales. Now,
Gonzales here had no knowledge of the mortgage in favor of Pineda
and Sayoc. Again, while it is true that a mortgage is attached to the
property itself, it will only bind 3 rd persons if the same is registered.
Pero dito, hindi registered. Wala ring actual knowledge si Gonzales
of the said mortgage.
Now, while it is true that there was a notice of lis pendens
filed by Pineda, in relation to his subsequent titles, kelan yun
nangyari? After the sale in favor of Gonzales. So still, Gonzales is
considered as a mortgagee in good faith. So what does that mean?
The title was validly transferred from Mojica and subsequently to
Gonzales.
What is the remedy here of Pineda and Sayoc? Obviously,
they cannot foreclose the property anymore because of their
negligence for having failed to register the property. But they can still
file a collection for sum of money as against Benitez with regard to
his or their remaining obligations.
So again, take note na perfectly valid ang sale even if the
property is mortgaged and take note when a mortgagee or
subsequent purchaser can be considered in good faith. Consider if it
is registered, or if there is actual knowledge of the sale.
February 18, 2016
Transcribed by: Jodivie Malnegro
Review
...an encumbrance of the property but there is no transfer of
ownership to the mortgagee. As such the right of the owner still
exists or the right of the mortgagor over the property still exists to
which he can decide whether to sell the property to other persons. In
fact, we also discussed that the right of first refusal is a valid
provision in a Real Estate Mortgage and it’s not in contravention of
Art. 2130. A right of first refusal does not prohibit the mortgagor from
|2-Manresa CredTrans TSN |20
selling the property to other persons. It’s just that once he sells it, he
should first offer the sale to the mortgagee.
Also, we have discussed last night the effect of absence of
registration or actual knowledge of the mortgage. Now, what if we
have what happened first was a contract of sale. The sale was
already notarized but it was not registered. So, the seller remains as
the registered owner of the property. Now let’s say the seller, since
he is still the registered owner of the property, misrepresented
himself as still the owner thereof and entered in a REM and wherein
the mortgage is registered and it was annotated in the title. Now, if
the registered owner fails to pay his obligation. Who will have a
better right? Can we say that the mortgagee has a better right over
the property having registered the same or will the subsequent
purchaser of the property have a better title considering that there
was already a contract of sale entered into in his favour? There was
already a transfer of ownership prior to the mortgage. So, the sale is
registered but the mortgage is not. The buyer of the property can
oppose the foreclosure proceedings. Why? Because, he can allege
that the mortgagor was not the owner at the time of the mortgage. In
other words, there is no valid mortgage to speak of. The mortgage by
the registered owner who is not the real owner already can be
considered as null and void because at the time he executed the
REM, he was not the in fact the actual owner already of the property.
Do remember that registration is not among the mode of acquiring
ownership. It is delivery whether actual or constructive.
Also take note in our previous discussion we have
mentioned that after-acquired properties as a general rule cannot be
a valid subject of a REM. Why? Because at the time REM was
executed, these after-acquired properties were not yet in existence
and therefore the mortgagor cannot claim that he is already the
absolute owner thereof. However as an exception, you have these
after-acquired properties in certain inventories that are replenished in
the ordinary course of business. So you have appliances or grocery
items (incomprehensible). Now at the time of the mortgage iba yung
part ng inventory at the time of foreclosure iba na kasi napalitan na
yung previous properties or inventory. In that instance, you have
after-acquired properties which could be valid subject of a mortgage
and foreclose, notwithstanding that at the time of the execution of the
REM; they were not yet in existence. Again, that is an exception.
Rule on After-Acquired properties as subject of REM:
General Rule: not allowed
Exception: inventories replenished in the ordinary course of business
Now we had a case before, mga installed properties
subsequent to the execution of the REM can be considered as well
as after-acquired property. But take note that it must be clear in the
REM that it covers these kinds of after-acquired properties.
Lecture
Article 2131. The form, extent and consequences of a mortgage,
both as to its constitution, modification and extinguishment, and as to
other matters not included in this Chapter, shall be governed by the
provisions of the Mortgage Law and of the Land Registration Law.
(1880a)
OK, so if you take a look at the provision here sa REM,
konti lang yung articles but if you take a look at our outline, marami
tayong cases. Why? Because we have here Act No. 3135: The
Rules on Extrajudicial Foreclosure. I think it’s in the annex of De
Leon (book) and we also have the General Banking Law of 2000 as
we have discussed in some of the cases already. We also apply
Land Registration Law (PD 1529).
Now, in all of these laws, what is clear is that including the
Civil Code is that: if the debtor fails to pay his obligation, the creditor
has 2 rights: (1) file an action for collection for sum of money; or (2)
foreclose the property subject of the mortgage. So, if he decides to
file a collection case, he abandons the mortgage. Or, he can
foreclose the mortgage itself. However, he cannot exercise both
remedies as these remedies are alternative in nature. If he files two
actions what is the effect under your CivPro, you can file a motion to
dismiss because of splitting the cause of action (to avoid multiplicity
of suits).
Now, if you decide to file an action for collection, you
abandon the property that’s subject of mortgage. However, in a

collection for sum of money, you can have the property mortgaged
attached pending the case or after due trial there is already an order
making the debtor liable. The property subject of the mortgage can
be sold in the form of execution sale, not foreclosure of the
mortgage. Wherein the property may be sold and the proceeds will
be applied to the obligations of the principal debtor. Of course aside
from that property mortgage, if the principal action filed is a collection
for sum of money, you can also go after the other properties of the
debtor.
We take into consideration this procedure known as
foreclosure. As we have noticed, foreclosure is a remedy available to
the mortgagee wherein he subjects the mortgaged property to the
satisfaction of the obligation to secure which the mortgage was
given. The mortgage can be foreclosed only when the principal
obligation or the debt remains unpaid at the time it is already due.
Foreclosure proceedings have in their favour the presumption of
regularity and the burden of evidence to rebut the same is on the
party who seeks to challenge the proceedings.
We have 2 kinds of foreclosures:
1. Judicial – file an action before the court & apply Rule 68 of
the Rules of Court; equity of redemption
2. Extrajudicial – covered by Act No. 3135; foreclosure is
done w/ out the aid of court, although technically w/ the aid
of court pero you only file an application for foreclosure
before the sheriff and it will be the executive judge who will
issue order (incomprehensible) thereto; right of redemption
What is important here in judicial foreclosure is equity of redemption
w/c was discussed in the case of Sps Rosales.
Sps Rosales v Sps Suba
GR No. 137792 (August 12, 2003)
Facts: RTC rendered a decision
1. Declaring the Deed of Sale as an equitable mortgage
2. Declaring Sps Rosales w/in 90 days from the finality of decision to
deposit in the Clerk of Court the sum of P65k to Sps Jiao
3. Directing Macaspac and Jiao to execute a deed of reconveyance
4. For non-compliance by Sibug and Rosales of the directive in
paragraph (2) of this dispositive portion, let the property be sold in
public auction
RTC decision became final & executory; and Sps Rosales
as judgment debtors failed to comply with No. 2 of the decision. This
prompted Macaspac and Jiao to file a motion for execution &
subsequently there was a public auction of the property wherein Sps
Rosales participated and Sps Suba were the highest bidders.
Thereafter, respondents filed a motion for a writ of possession
contending that the confirmation of the foreclosure sale effectively cut
off petitioners’ equity of redemption. RTC rendered a decision in
favour of Sps Suba and the CA affirmed such decision.
Issue: WON Sps Rosales can still redeem the property. NO.
Ruling: In a judicial foreclosure of mortgage, there is no right of
redemption as compared to extrajudicial. However, there is an
exception, ONLY exception is that where the mortgagee is PNB or a
banking institution. Since the mortgagee in this case is not the
exception mentioned, there is no right of redemption that exists in
favour of petitioner.
Q1: So what do we have here, a judicial or extrajudicial foreclosure?
A1: We have a judicial foreclosure Maam.
Q2: It was based on the decision of the court who decided for the
foreclosure of the property based on the finding that what we have
here is an equitable mortgage. So there’s no right of redemption, only
equity of redemption. So, what do we mean by equity of redemption?
A2: According to Rule 68 of the Rules of Court, it simply means the
right of the defendant mortgagor to extinguish the mortgage and
retain ownership of the property by paying the secured debt within
the 90-day period after the judgment becomes final, or even after the
foreclosure sale but prior to its confirmation. However in this case,
Sps Rosales failed to exercise this equity of redemption since there
was already a confirmation of the foreclosure sale. And instead of
exercising this right, they chose to delay the proceedings by filing
|2-Manresa CredTrans TSN |21
several manifestations with the trial court. Thus, they only have
themselves to blame for the consequent loss of their property.
Do take note here that SC found that while there was a
deed of sale executed in this case, what we have here is really an
equitable mortgage which we have already discussed for those who
had Sales. And in this case it was emphasized that an equitable
mortgage is one which lacks the formalities or requisites demanded
by the statute for a valid mortgage but nevertheless it is the intention
of the parties to charge the real property as a security for the debt.
An equitable mortgage is not different from REM. So, in this case
what happened was that, it was the court that ordered the foreclosure
of the property for failure to pay the obligation. The foreclosure which
took place here was in the form of a judicial foreclosure governed by
Rule 68 of Rules of Court.
JUDICIAL FORECLOSURE
Take note:
General Rule: EQUITY of Redemption. Right of redemption is not
recognized in a judicial foreclosure
Exception: Mortgagee is the PNB, a bank or a banking institution
What happens in this equity of redemption? The right of the
defendant mortgagor to extinguish the mortgage and retain
ownership of the property by paying the secured debt
1. within the 90-day period after the judgment becomes final or
2. Even after the foreclosure sale but prior to its confirmation
When we talk about equity of redemption: within not less
than 90 days but not more than 120 days from the entry of judgment,
wherein the mortgagor is ordered to pay. However, even if Rule 68
provides not more than 120 days, you can still exercise this equity of
redemption as long as the sale has not yet been confirmed. What do
you mean by that? The certification of sale issued by the court is
annotated in the title. So no confirmation of sale, you can still
exercise this equity of redemption. How is it different from right of
redemption? Right of redemption is 1-year from the date of the
confirmation of the sale.
With regard to judicial foreclosure, again, what we have is
an equity of redemption, no right of redemption. After the
confirmation of sale, the mortgagor cannot anymore redeem the
property. However, there is a right of redemption and it is provided in
the General Banking Law wherein if the mortgagee is a banking
institution, it has a right of redemption.
Section 47 of General Banking Law. Right of redemption is within 1
year from the sale of real estate whether or not it is a judicial
foreclosure, as long as the mortgagee is a banking institution.
When we say from the date of sale of the real estate, it
means from the time it was confirmed. Confirmation of the sale,
meaning annotated or registered in the Registry of Deeds. Just a
quick overview of judicial foreclosure as we will discuss this when we
go to special civil actions. What happens?
Judicial Foreclosure Sale.You file an action before the court which
has jurisdiction over the subject matter-the location of the subject
matter. Then the court shall order payment of the obligation between
90-120 days from the entry of judgment and within this period, the
mortgagor can exercise this equity of redemption until there is a
confirmation of the sale. If not payment, the court orders the sale of
the subject matter and it will be sold to the highest bidder in the
public auction. Thereafter, the court will now confirm the sale. After it
has been confirmed, you cannot anymore exercise the equity of
redemption. The judgment will be executed. The proceeds will be
applied and then the registration of the copy of the final order of the
court confirming the sale. You have here the Hearing where the
parties will appear and the mortgagor will try to do his best to assail
the validity of the auction. So again, yung equity of redemption even
after the sale, you can still exercise this equity of redemption as long
as there is no confirmation of the sale yet. In the exercise of equity of
redemption before the confirmation of the sale, you must pay the
amount of the obligation, not the purchase price . So, that is why
Equity of redemption – anytime before the sale is confirmed upon the
discretion of the court.

Right of redemption – 1 year from the registration of the order
confirming the sale of the property.
And right of redemption for those instances where you
have a bank/ banking institution as your mortgagee.
Under the rules of Court, who can redeem? Who can
exercise this equity of redemption?
1. The mortgagor or one who’s in privity of title with the mortgagor
2. his successors-in-interest,
3. to whom he has transferred the right (over the subject matter),
4. to whom he has conveyed his interest of the subject matter,
5. the one who has succeeded his interest ,
6. to one or more joint-debtors who are considered joint-owners of
the subject matter,
7. the wife with regards to a husband’s homestead,
8. compulsory heirs
What if there’s a deficiency in a judicial foreclosure? The
property was sold but still there was a deficiency?
In case of deficiency, the mortgagee can still recover within
10 years from the time the right of action accrues. He may recover
even during the period of redemption, wherein the deficiency
judgment may be incorporated in the judicial foreclosure.
How about EXTRAJUDICIAL FORECLOSURE?
That’s under Act 3135. The first thing that you should take
note of when will there be an extrajudicial foreclosure? Or, when is
there an extrajudicial foreclosure? When you take a look at the REM
and it provides an authority given by the mortgagor to the mortgagee
to have the property foreclosed. There must be an authorization
given to the mortgagee to extrajudicially foreclose the property in the
deed of REM for it to be considered to be under the extrajudicial
foreclosure proceedings. In the absence of that authorization, judicial
foreclosure takes place. On the part of the mortgagee, extrajudicial
foreclosure is preferred. Why? Mas mabilis kasi hindi na sya case
talaga sa court, hindi na yung may trial o may hearing. Mag-apply ka,
the sheriff will sell the property in a public auction after the
requirement of notice has been complied with.
If there’s no clause, no provision of authorization in the
deed of REM, you cannot extrajudicially foreclose the property. The
remedy available is judicial foreclosure or you file an action for
collection for sum of money. Again, filing an action for judicial
foreclosure of the property, of course, will be more expensive. It will
take longer than extrajudicial foreclosure proceeding. Do take note
however that if there is an authorization in the deed of REM for
extrajudicial foreclosure proceedings, even if the mortgagor dies, the
authorization remains valid. Why we have to emphasize that?
Because in the rules of agency, if the principal dies, automatic wala
ng power yung agency or yung authorization. But it’s different here
because although it is a contract of agency, (even w/) the death of
the mortgagor, the agency is not extinguished because what we have
here is for purposes of extrajudicial foreclosure. No such
extinguishment because the power given to the mortgagee is for his
(mortgagee) benefit or interest. It is not for the interest of the
mortgagor but of the mortgagee. So, notwithstanding the death of the
mortgagor, the mortgagee can still extrajudicially foreclose the
property as long as you have that authorization in the REM. If you
had agency, you will know that this can be an agency coupled with
an interest, so therefore not extinguished by the death of the
mortgagor as the principal. You will also notice in the cases that we
will discuss, and the succeeding discussion, (in) a sale publication is
mandatory. Publication requirements for purposes of extrajudicial
foreclosure must be strictly complied with. The description of the
property must be very specific. I think we already have 1 case before
that even if you have the same description of the property but the title
number, yung nagkabaliktad yung numbers pagtype sa publication,
the sale can be considered as invalid or void. Because again, the
publication required here is mandatory and must be strictly complied
with. Although for purposes of extrajudicial foreclosure Section 3 Act
No, 3135 of the Law does not require that the mortgagor must
personally be notified. For as long as nacomply yung publication,
hindi kailangan na personally i-notify ang mortgagor. Unless the REM
|2-Manresa CredTrans TSN |22
contract provides that the mortgagor must be notified of the
foreclosure proceeding, but under Act No. 3135, the rule is that
publication of notice in a newspaper is more than sufficient
compliance. How about redemption? When it comes to extrajudicial
foreclosure as the General Rule: right of redemption (equity of
redemption does not exist). Within the redemption period, you can
exercise the right
to buy back the property wherein he pays the amount of the
purchase price plus expenses and interest incurred. What’s the
redemption period year? 1-year from the date of sale. Yan ang
nakalagay sa Act 3135. One (1) year from the date of sale, but it
should be construed as from the date of the confirmation of the sale.
The 1-year period will begin to run from the date of the confirmation
of the sale. If after the foreclosure sale, if wala pa sya naconfirm,
hindi pa magtakbo yung 1-year redemption period. If the sale is not
confirmed by the sheriff, the title does not pass to the buyer.
When is there a confirmation of the sale? From the
registration of the sale. (1) year from the registration of the
confirmation of the sale.
Sps Landrito v CA
G.R. No. 133079. August 9, 2005
Facts: In 1990, Sps Landrito obtained a loan of P350,000 from
Carmencita San Diego. To secure such loan, they executed a REM
in favour of San Diego. Sometime thereafter, substantial payment
was made. A subsequent loan was made by Sps Landrito this time
amounting to P1,000,000. To secure the payment of the loan, they
executed an Amended REM stipulates that that the loan shall be paid
within six (6) months from 16 September 1991, and if not paid within
said period, the mortgagee shall have the right to declare the
mortgage due and may immediately foreclose the same judicially or
extrajudicially, in accordance with law.
It appears that Sps Landrito defaulted in the payment of the
loan and despite notice sent by San Diego, they still failed to pay
which prompted San Diego to send a final notice of demand. This
time, the obligation already amounted to P1.9M. Still the Sps paid to
pay the obligation. Thus Carmencita filed for an extrajudicial
foreclosure of the property. Subsequently, the sheriff sent several
notices to the parties announcing the Sheriff’s sale to be conducted
on August 11, 1993. Notices were also posted on conspicuous
places within the jurisdiction of the sheriff.
On August 11, 1993, Sps Landrito did not attend the
foreclosure sale and a certificate of sale was given to San Diego
being the highest bidder for P2M. On October 29, 1993, San Diego
registered the certificate of sale. 1 year after that or within the 1 year
redemption period, Sps Landrito failed to redeem the property.
Instead, on Nov. 9, 1994, or 1 yr after the redemption period, the sps
sought for the annulment of the foreclosure sale alleging (1) that it is
null & void for failure to comply w/ the requirement of Act 3135 of
publication and notice, (2) it was illegal because the foreclosure
should have been limited to the amount in the REM w/c in this case
is only P1M but during the foreclosure sale it already amounted to
P1.95M, (3) the husband of San Diego gave them an extension
which allowed them to pay the obligation until Nov. 11, 1994.
Sps San Diego sought for the dismissal of the case, w/c
was granted by the RTC and upheld by CA.
Issue: May the Sps Landrito redeem the property? No.
Ruling: As found by the CA, even if the amount of the foreclosure
sale should be limited to the amount in the REM w/c is P1M, because
despite several notices sent to them and publication; they failed to
raise a question or attend the foreclosure sale. So, they were guilty of
laches or they slept on their right to question the validity of the sale.
Also, SC said that RA 3135 as amended by RA 4118, it is
clear in Section 6 thereof that the debtor has 1 year to redeem the
property beginning from the date of registration of sheriff’s certificate
of the sale.
Q1: In this case when was that?
A1: In this case, it is undisputed that such registration happened on
Oct. 29, 1993. Therefore applying the 1yr period of the civil code, it is
computed until Oct 29, 1994. And since it falls on a Saturday, the
next working day w/c is Oct 31, 1994,

However, Sps Landrito never exercised their right of
redemption. Even assuming that Mr San Diego extended their
redemption period, there was no evidence of such extension. Also,
the legal redemption of Sps Landrito may be converted to a
conventional redemption wherein the parties may voluntarily agree
for themselves the extension of the redemption period. However for a
conventional period to be valid there should be an offer by the debtor
to pay the redemption price w/c the Sps failed to do so. There was
not even an attempt from their side to offer the payment of the
redemption price & even assuming that P1.95M was not the proper
amount, they did not even offer to pay the P1M w/c they claim should
have been the redemption price. Therefore, there is no more remedy
for the sps to redeem their property w/in the 1 year redemption
period.
Q2: Can we consider that this 1-year redemption period as a
prescriptive period?
A2: SC held that the 1-yr period is not a prescriptive period; rather it
is a condition precedent wherein within that 1-year period to exercise
their right to offer to redeem the property. In this case, Sps Landrito
did not even bother to offer to pay w/in that period. Therefore they
are barred from redeeming their property.
When the principal obligation is already due &
demandable, however it was not paid; the mortgagee already has the
right to foreclose the mortgage and have the mortgaged property
seized and sold in view of applying the proceeds to the payment of
the obligation. Do take note that what we have here is an
extrajudicial foreclosure proceeding. So, we apply the right of
redemption which is 1-year counted from the time of registration of
the certificate of the sale. In this case, the sale was registered on Oct
29, 1993 & therefore the period they may redeem was up to Oct 29,
1994. Remember the 1-yr redemption period is not counted from the
date of the foreclosure sale but from the time the certificate of sale is
registered. Here, the action for annulment of the extrajudicial
foreclosure and auction was filed 11 days after the redemption period
has already expired. They merely harped on the alleged increase of
the redemption price but they chose not despite notice in appearing
in the foreclosure proceedings. At no time did the petitioners made a
valid offer to redeem coupled w/ a tender of redemption price. Take
note that there was no extension here. There was no extension here
granted because it is only where there is voluntary agreement of the
parties consisting of extensions of the period followed by the
commitment of the debtor to pay the redemption price at a fixed rate
will the concept of legal redemption (right of redemption) be
converted to conventional redemption. Or a redemption voluntarily
agreed by the parties. Do take note here that the period of
redemption is not a prescriptive period but a condition precedent
provided by law to restrict the right of the person exercising
redemption. If the redemption period is allowed to lapse before the
right of redemption is exercised, then the action to enforce
redemption will not prosper, even if the action is brought within the
ordinary prescriptive period. The period within which to redeem the
property sold at a sheriff’s sale is not suspended by the institution of
an action to annul the foreclosure sale. So even if the petitioners
here filed the action for annulment before Oct 29, 1994; the 1 yr
period will still continue to run. Petitioners have lost any right or
interest over the subject property primarily because of their failure to
redeem the same in the manner and within the period prescribed by
law.
This is very relevant because in a right of redemption, you
can compel the mortgagee or the highest bidder for you to redeem
the property. Once naglampas na yung redemption period, you
cannot compel the highest bidder to sell it back to you. That’s why if
meron mang agreement for repurchase or redemption, you can treat
that as a conventional redemption as agreed by the parties. But
under the facts of this case, there was even no conventional
agreement entered into by the parties.
We have mentioned under the General Banking Law that
when the mortgagee is bank or a banking institution, redemption is 1-
yr from the date of the registration of the sale. In the same General
Banking Law however, if we have a juridical person such as a
partnership or a corporation; the 1-yr (redemption) period does not
|2-Manresa CredTrans TSN |23
apply. This as an exception to the right of redemption for purposes of
extrajudicial foreclosure.
Section 47, General Banking Law. Juridical persons whose
properties are being sold can redeem until the registration of the
certificate of foreclosure or 90 days or 3-months after the foreclosure,
whichever is earlier.
In other words, it will not apply here:
If the mortgagor is a juridical person, wherein the period of
redemption is not 1-yr but they can redeem w/ in 3-months after the
foreclosure sale (90d ays) or until the registration of foreclosure but
here take note, whichever is earlier. Take note of the exceptions for
right of redemption and the exception for equity of redemption under
a judicial foreclosure.
Test-taking Tip (as taught by Maam Sagmit to Maam Jazzie): As a
General Rule do not combine E w/ the other E. So, pag E sya right
talaga sya, di mo masabing equity of redemption.
Of course, however, take note of the exception that
whenever we have a juridical person as a mortgagor, whichever is
earlier. Registration of the sale or 3 months after foreclosure. So,
until the registration of the certificate of foreclosure or 3 months after
the foreclosure, the sale will be registered but the right of redemption
of the juridical person will be up to the time when foreclosure sale is
registered or even less than 3 months kasi nga whichever is earlier.
So if the foreclosure sale is registered after 1 month, what is the
effect? You cannot redeem anymore for the mortgagor who is a
juridical person. But, if the foreclosure sale was registered 4months
from the date of sale, the right of redemption is only w/ in 3 months
from the time of sale. So, whichever is earlier. As an overview of the
extrajudicial foreclosure proceeding, you do not file a case.
Extrajudicial Foreclosure Sale You apply w/ the Executive Judge
who has jurisdiction over the property through the Clerk of Court.
Posting of Notice of Sale, or publication of notice of sale once a week
for at least 3 consecutive weeks in a newspaper of general
circulation. Thereafter the clerk of court will issue a receipt or
certificate of payment. Application is raffled among the sheriffs,
wherein it will now be auctioned. The sale must have at least 2
bidders; if not the sale will be postponed. If still no other bidders then
kung sino yung highest bidder which is normally the mortgagee, then
you take the next step wherein a certificate of sale will now be
approved by the executive judge or the vice-executive judge in the
former’s absence. And the certificate of sale will be issued to the
winning bidder. Wherein the registration thereof will have the effect of
the beginning of the running of the 1 yr redemption period, or the
three months after sale or until the registration as an exception to
juridical persons as mortgagor. If the redemption period expires, the
clerk can now archive the records.
So redemption in extrajudicial foreclosure,
1. If the mortgagor is not a juridical entity (natural persons) > right of
redemption w/in 1 yr from the date of registration of the sale.
2. If the mortgagor is a juridical entity > you also call this equity of
redemption, until but not after the registration of certificate of
foreclosure sale which shall not be more than 3 months after
foreclosure, whichever is earlier
Goldenway v Equitable PCI Bank
G.R. No. 195540 March 13, 2013
Facts: Golden Merchandising executed a REM in favour of Equitable
PCI Bank for P2M over its properties in Valenzuela, Bulacan. When
Goldenway failed to pay its obligations, Equitable extrajudicially
foreclosed the mortgage on Dec. 13, 2000. During the public auction,
Equitable was the highest bidder and thus obtained ownership over
the said properties. However in a letter dated March 8, 2001, counsel
of Goldenway offered to redeem the foreclosed properties. However
Goldenway was told that it was no longer possible for them to
redeem the properties because the certificate of sale has already
been registered and therefore the redemption period has already
ended. Goldenway here contends that the 1 yr redemption period
under RA 3135 should apply and not the shorter period under the
General Banking Law w/c took effect in 2000.

Issue: WON Goldenway has a right to redeem the property. NO.
Ruling: Goldenway has no more right to redeem the said property as
the period for redemption has already ended.
Q1: So what is the period here? Do we apply the right of redemption
or equity of redemption? Do we apply the 1yr period?
A1: No Maam.
SC ruled that under the General Banking Law, juridical
persons w/c in this case is a corporation; only have a specific or a
shorter period of time in order to redeem foreclosed properties w/c is
3 months after the foreclosure sale (actual sale) or the date of
registration, whichever is earlier.
Q2: How about the issue here that that provision under the General
Banking Law is unconstitutional?
A2: It was not unconstitutional. Goldenway said here that it was
unconstitutional because it only targeted juridical persons and in
effect has a retroactive effect because even if the contract was
entered into before the effectivity of the General Banking Law. SC
said that it was in the very nature of the juridical person and the
properties that they have and their dealings with banks... It is in the
nature of the properties that the bank has and forecloses that allows
them to have a shorter period as the bank should be more liquid than
other persons or juridical persons because if banks have more
properties then they will have a hard time to roll out their properties in
order to supply other persons.
And on the issue that there was a retroactive effect, SC
held that there was no retroactive effect because the foreclosure sale
actually happened after the General Banking Act is already in effect.
In doesn’t matter whether the contract was executed before the
effectivity of the General Banking Law as long as the foreclosure sale
after it was in effect.
General Rule: Act 3135 should govern extrajudicial foreclosure of
mortgages and to w/c the 1 yr redemption period is counted from the
date of registration of the certificate of sale
Exception: However when the General Banking Law was enacted in
2000, RA 8971, it provided for foreclosure of properties of juridical
persons as mortgagors, the redemption is now until but not after the
registration of the certificate of foreclosure sale in no case more than
3 months after the foreclosure sale, whichever comes first.
Goldenway questions that this provision under the General
Banking Law is unconstitutional. The SC held that NO. (1) There was
no violation of the non-impairment clause of the constitution. The
non-impairment clause is only to protect or not prejudice the parties
who entered into a contract from or prior to the enactment of the law.
Contracts cannot be tampered w. subsequent laws that can change
or modify the rights and obligations of the parties in the contract.
There is impairment if the subsequent law changes the terms of the
contract between the parties. But Section 47 of the General Banking
Law did not divest juridical persons of their right to redeem their
foreclosed properties but only modified the exercise of such right by
reducing the redemption period w/c commences from the date of
foreclosure sale and expires after the registration of the sale or
3months after the foreclosure sale, whichever is earlier. And also
take note that the foreclosure proceeding here took place when the
General Banking Law already took effect. So, applicable talaga sya.
Also, (2) no violation sa equal protection clause. Again the scenario
here is different w/ regard to bank as mortgagee and mortgagors are
juridical persons. Also, (3) no retroactive application of the new
redemption period because Section 47 exempts those properties w/c
were already foreclosed prior to the effectivity (of the law). The right
of redemption being statutory must be exercised in the manner
prescribed by the statute and within the prescribed time limit to make
it effective. Take note that as an exception to this extrajudicial
foreclosure for mortgagors are juridical persons, the law that is
applied is the General Banking Law in w/c the mortgagee in this case
is a banking institution. Mortgagee is a banking institution, mortgagor
is a juridical person: 3 months from foreclosure sale or registration of
the sale whichever is earlier. Take note of the general rule and the
exceptions.
|2-Manresa CredTrans TSN |24
February 24, 2015
Transcribed by: Jing Lomondot
So let’s continue with extrajudicial foreclosure.
 What happens in an extrajudicial foreclosure proceeding?
Rather than filing a case in court, what is filed is an application for
extrajudicial foreclosure and you file this with the Executive Judge
who has jurisdiction over the propertywith the Clerk of Court. So iba
talaga ‘yong process niya as compared to judicial foreclosure. In
judicial foreclosure, case siya and it will be raffled off to the proper
courts. But this one,
1. You file it with the executive judge, the
application.
2. And there’s a requirement for the posting of
notice of sale or publication of the notice of sale
once a week for at least three consecutive weeks
in a newspaper of general circulation.
3. The clerk of court thereafter issues a receipt and
certificate of payment.
4. The application is raffled among the sheriff.
5. It is the sheriff who will conduct the public auction.
6. In the public auction sale, the sale must have at
least two bidders. Normally kasama na rin diyan
ang creditor.
7. If ‘yong creditor lang magbid sa property in the
first auction sale, then the sale will be scheduled
to another date.
8. If in the second sale there are no other bidders,
other than the creditor, then it will proceed
wherein the creditor-mortgagee will be considered
as the highest bidder.
9. And thereafter the certificate of sale will be
approved by the Executive Judge or Vice-
Executive Judge in the former’s absence. And
the certificate is issued to the winning bidder.
10. This certificate of sale will be registered in the
Registry of Deeds and that is the time wherein the
one year right of redemption period will begin to
run, from the date of the registration of sale.
However take note under Section 47 of the General Banking Law, if
the mortgagor is a juridical entity what you have is not a right of
redemption but a period wherein until but not after the registration of
certificate of foreclosure sale which shall not be more than three
months after the foreclosure. So the mortgagor can redeem until but
not after the registraton of sale but not more than three months after
foreclosure, whichever is earlier. Now this three-month period is also
considered as an equity of redemption. If the redemption period
expires then the term will now _ the record.
 How to validly redeem?
You must pay within the redemption period as provided under the
law. You pay the purchase price plus one percent (1%) interest per
month and taxes from date of registration of sale until date of
redemption. One percent because this was the previous _ legal
interest rate. But with the new interest, six percent (6%), legal
interest rate effective July 1, 2013, then you apply the appropriate
interest rate effective from that date.
Payment is made to the redemptioner sale officer. The written
official redemption must be served on the officer who made the sale
and a duplicate with the Register of Deeds.
 What’s the rule here with regard to deficiency and excess
of the proceeds?
o If there is a deficiency, the property was sold for less than
the obligation, what happens to the deficiency? Can the
mortgagee still recover from the mortgagor?

If what you had is a judicial foreclosure proceeding, the mortgagee
can recover the deficiency that is part of the order given by the judge.
In other words, there is a deficiency judgment. In case there is a
deficiency, the mortgagee may still proceed against the mortgagor for
the deficiency as such is provided in the judgment.
How about in an extrajudicial foreclosure proceeding? Did you take
at look at the law itself, Act No. 3135, and the Civil Code provisions?
There is no express provision which states that the mortgagee can
recover the deficiency from the mortgagor. However, it is implied
that the mortgagee can recover the deficiency and in fact several
cases decided by the Supreme Court, the fact that the law does not
expressly state the mortgagee is entitled to the deficiency, it does not
prevent. The absence thereof under the law does not prevent the
mortgagee from recovering the deficiency. Because also the law
does not state na hindi siya pwede makarecover , silent lang siya. But
here as already been held by the Supreme Court in several cases na
pwede makademand ng deficiency.
o What about if the proceeds are more than the obligation
plus expenses and interest? What happens to the excess?
The excess will be returned to the mortgagor whether what you had
is a judicial foreclosure or extrajudicial foreclosure proceeding. So
regardless, excess should be returned to the mortgagor. Notice this
is different from what we have learned sa contract of pledge.
 How about the price? The price during the sale is grossly
inadequate. Do we say the sale would be nullified or
annulled based on the gross inadequacy of the price?
Recall your Law on Sales. What’s the rule there? Gross inadequacy
of the price will not invalidate the sale which is the same principle
that was also mentioned when we discussed contracts. Mere
inadequacy of the price will not invalidate the sale. However, do take
note that under contracts, there are instances wherein inadequacy
may be a ground for the rescission of the sale such as when there is
lesion.
 How about here sa foreclosure proceedings? What is the
effect if what we have is a grossly inadequate price?
If there is a right of redemption or equity of redemption, the gross
inadequacy of price will not justify its rescission. What is the effect
here? If the price was inadequate or even grossly inadequate, it
would be easier for the mortgagor to redeem the property. So with
regard to foreclosure proceedings, mere inadequacy would not justify
its rescission or nullity of the foreclosure proceedings as it would be
in favor of the mortgagor, it would be easier for him to redeem the
property.
However, if you can show proof that the proceeding itself was
irregular and biased talaga ‘yong sheriff like for example, malayo
talaga ‘yong disparity sa value ng price sa obligation and sa
foreclosure price, you can use it but that is really an exception.
Again, the rule is in favor of the mortgagor ‘yong inadequacy of the
price.
With regard to inadequacy, you could also relate what we had
discussed for those who had Sales under the equitable mortgage in
Article 1602, wherein a deed of sale or a deed of sale with right to
repurchase or an absolute sale could be deemed as an equitable
mortgage. One of the instances provided in Article 1602 is when the
price of the sale with the right to repurchase is unusually inadequate.
So no sale but what we have is an equitable mortgage. So again
that would be in favor of the owner of the property because it would
only be subject to a lien and thereafter we could seek for the
reformation. Reformation is the remedy here if what was executed
was a deed of sale but the intention was to have that property secure
the principal obligation. So the owner of the property can seek for
|2-Manresa CredTrans TSN |25
reformation of the said contract. Why? There was an agreement but
not deed of sale, only a mortgage.
 But what if the mortgagee, based on that pacto de retro
sale or deed of absolute sale, will file an action for recovery
of possession against the owner of the property?
That would be the time that the owner of the property can raise the
defense that what they had was not a deed of sale or a deed of
absolute sale or a pacto de retro sale but rather an equitable
mortgage by showing that there was a principal obligation and any of
the circumstances in Article 1602 are present. But with that defense
and if it is duly proven, the owner of the property would still continue
in possession of that property and the mortgagee would not be
entitled thereto but he will be entitled to foreclose the property if there
is failure to pay the obligation.
 What happens after the foreclosure proceeding? The
selling price or the bid price was already paid by the
highest bidder. What would now take effect thereafter
during the redemption or after the redemption period?
If the property was not redeemed during the period provided under
the law, the right of the mortgagee or the right of the highest bidder
will become absolute. To which he would be entitled to consolidate
the title in his name.
So we have here the case of Union Bank.
UNION BANK vs. CA
Facts: Leopoldo Dario obtained a property owned by his
parents and had the title reconsituted under his name without
their consent. He mortgaged the same to Unionbank to secure
a 3M loan which he thereafter failed to pay. Unionbank
extrajudicially foreclosed the property and became the highest
bidder at the public auction. One week before the one-year
redemption period expired, Leopoldo’s parents, Fermina and
Reynaldo Dario, sought the annulment of said sale and
mortgage with reconveyance. A notice of lis pendens was
annotated on the title. On October 10, 1994, RTC issued a
TRO which enjoined the consolidation under Unionbank’s
name. However, Unionbank consolidated its title over the
foreclosed property on October 24, 1994 without notice to
plaintiffs and a new TCT was subsequently issued in its stead.
Issue: Whether or not the consolidation of title in Unionbank’s
name was proper?
Ruling: YES. The TRO halted the redemption period but it
expired on October 17, 1994, the date when plaintiffs
complaint was dismissed for failure to append a certification of
non-forum shopping. A TRO cannot stand independent of the
main proceeding. Hence the redemption period recommenced
and eventually expired 7 days thereafter or on October 24,
1994, the date of the disputed consolidation.
Consolidation took place as a matter of right since there was
no redemption of the foreclosed property and the TRO expired
upon the dismissal of the complaint. Notice to the mortgagors
and more reason to the plaintiffs, who are not even parties to
the mortgage contract nor to the extrajudicial sale, is not
necessary.
However, the consolidation of the property in favor of
Unionbank will not cause irreparable injury to plaintiffs and will
not render the pending main action for reconvenyance
ineffectual since Unionbank is only substituted to and acquires
the right, title, interest and claim of the judgment debtors or
mortgagors to the property at the time of levy. Also, the notice
of lis pendens which remained annotated on Unionbank’s title
subject to the outcome of the litigation, sufficiently protected
plaintiffs’ interest over the property.
Q1: Who was the mortgagor here?

A1: Spouses Leopoldo and Jessica Dario
Q2:How are they related to the private respondents? Isn’t it that the
private respondents are also Spouses Dario?
A2: The private respondents are Fermina and Reynaldo Dario.
Q3: How are they related? Why was it Spouses Dario were able to
mortgage the property in favor of Union Bank?
A3:Leopoldo is Fermina’s son.
It’s just between families, the son took advantage of his position in
obtaining the property and had the title reconstituted under his name
Q4: What happened to the complaint of the private respondents in
this case?
A4:At first it was dismissed. Then the private respondents filed a
motion for reconsideration and while the MR was heard before the
RTC, the Union Bank consolidated the title of the subject properties
in their names.
Q5: Was that proper? The act of Union Bank consolidating the title of
the property valid?
A5:The SC said it was valid because after the expiration of the
redemption period, the person who was the highest bidder already
has the right to consolidate the title of the property in their names.
The SC said that it is not even necessary for them to notify the
mortgagors, all the more is it not necessary for them to notify the
private respondents who were not even a party to the mortgage
contract.
Q6: How about the allegation of the private respondents Dario, the
date? There would have been no valid mortgage in favor of Union
Bank because in the first place Leopoldo Dario was not the
mortgagor. In other words, he was not the absolute owner of the
property? How would that affect the consolidation of the title in favor
of Union Bank?
A6:The SC said that matter could be adjudicated in the action for
reconveyance and that they are still protected because in the
certificate of title, there was a notice of lis pendens that was
annotated and this annotation was carried over to the consolidated
title.
Discussion: Once you are the highest bidder, the buyer in
foreclosure sale, you’ll become the absolute owner thereof if the
property is not redeemed during the period provided under the law.
In this case, one year after the registration of the sale.
When we say consolidation, transfer of title under the name of the
highest purchaser. This consolidation takes place as a matter of
right. Why? Because there was no redemption during the period as
required under the law and there was no TRO executed or remained
valid up to that time. In this case, the TRO expired upon the
dismissal of the complaint.
With regard to notice, the mortgagee need not have informed private
respondent, petitioner’s parents Dario, that it was consolidating its
title over the property. In fact in an extrajudicial foreclosure
proceeding, notice to the mortgagors of the extrajudicial foreclosure
proceeding together with the prayer for the consolidation of the title(is
not needed), with more reason to the private respondents in this case
who are not parties to the mortgage contract nor to the extrajudicial
sale is not necessary.
The mortgagee has the right to foreclose the mortgage and to have
the property seized and sold with a view of applying the proceeds to
the payment of the principal obligation.
In an extrajudicial foreclosure proceeding, one year within which you
redeem the property from and after registration of the sale. Upon
failure to redeem the foreclosed property during the said period,
consolidation of title becomes a matter of right on the part of the
auction buyer and the issuance of title in favor of the purchaser
becomes ministerial upon the Register of Deeds.
The consolidation here was valid notwithstanding any complaint
questioning the validity of sale. Pwede ‘yon siya validity of the
|2-Manresa CredTrans TSN |26
mortgage in the subsequent foreclosure sale, that can proceed. But
again what would happen is that in the meantime that wala pang
decision regarding that complaint or no action yet with regard to that
complaint for the annulment of the mortgage and extrajudicial
foreclosure sale, ‘yong consolidation becomes as a matter of right on
the part of the highest purchaser. It’s just that eventually the
foreclosure would be deemed not valid, then you can ask the court
for the cancellation of the title in favor of the mortgagee.
Also a protection is the notice of lis pendens that would be annotated
in the title and this will be sufficient protection on the part of the
parties who will question the validity of the mortgage. Once a notice
of lis pendens has been duly registered, any cancellation or issuance
of the title of the land involved as well as any subsequent transaction
affecting the sale would have be subjected to the outcome of the
litigation.
How about in the case of Cu lai Chu? What happened in that case?
CU LAI CHU vs. LAQUI
Facts: Petitioners obtained a loan from PBCOM and
mortgaged its land to the latter as security of the loan.
The former failed to pay the full amount of the loan.
PBCOM applied for extrajudicial foreclosure of the real
estate mortgage and upon receipt of notice thereof,
petitioners filed a petition for its annulment in the RTC.
PBCOM emerged as the highest bidder at the
foreclosure sale and a certificate of sale was executed in
its favor.
After the lapse of the one-year redemption period,
PBCOM sought to consolidate the property and
subsequently ROD issued a new TCT in its name.
PBCOM applied for the issuance of a writ of possession
of the property which was opposed by petitioners. RTC
granted PBCOM’s motion to declare petitioners in
default and allowed it to present evidence ex parte.
Issue: Whether or not the writ of possession was
properly issued despite the pendency of the case
questioning the validity of the extrajudicial foreclosure
sale?
Ruling: YES. Petitioners cannot oppose or appeal the
court’s order granting the writ of possession in an ex
parte proceeding. The remedy of petitioner is to have
the sale set aside and the writ of possession cancelled
in accordance with Section 8 of Act No. 3135, as
amended, to wit:
“The debtor may, in the proceedings in which
possession was requested, but not later than thirty days
after the purchaser was given possession, petition that
the sale be set aside and the writ of possession
cancelled, specifying the damages suffered by him,
because the mortgage was violated or the sale was not
made in accordance with the provisions hereoff xxx”
Further, the right of possesion of a purchase at an
extrajudicial foreclosure is not affected by a pending
case questioning the validity of the foreclosure
proceeding. The latter is not a bar to the former. Even
pending such latter proceeding, the purchaser at a
foreclosure sale is entitled to the possession of the
foreclosed property.
Q1: What is the basis for the issuance of the writ of possession? Is it
required that before the highest purchaser be entitled to the
possession of the property, he must file a bond to the court?
A1:Not necessarily, it is required only if he wants to possess the
property during the redemption period.
Q2: What happens after the redemption period? Is he absolutely
entitled to the possession of the property, is it a matter of right?

A2: If the period of redemption had already expired, the highest
bidder already has an absolute right for the consolidation of title over
the foreclosed property.
Q3: What about if there’s a pending action questioning the mortgage
and subsequently questioning the validity of the foreclosure
proceeding, would that be a ground to deny any prayer for the
issuance of writ of possession?
A3:No.
Discussion: So same thing with the consolidation. Purchaser at an
extrajudicial foreclosure sale has a right to the possession of the
property. Generally, what would happen is that the title would be
consolidated in his name and thereafter he can now (apply for the)
issuance of the writ of possession so he would possess the subject
property.
However, consolidation of the title in the name of the
purchaser would only take place after the redemption period has
already expired. However, Section 7 of Act 3135 clearly provides
that even if within the redemption period the highest bidder could still
be entitled to the possession of the property provided there was a
bond.
Section 7. In any sale made under the provisions of this
Act, the purchase may petition the Court of First Instance
[or in this case the Regional Trial Court ] of the province or
place where the property or any part thereof is situated, to
give him possession thereof during the redemption period,
furnishing bond in an amount equivalent to the use of the
property for a period of twelve months, [that’s the
redemption period] to indemnify the debtor in case it be
shown that the sale was made without violating the
mortgage or without complying with the requirements of
this Act. Such petition shall be made under oath and filed
in form of an ex parte motion xxx and the court shall, upon
approval of the bond, [again the bond is only required if
possession is being asked during the redemption period ]
order that a writ of possession issue, addressed to the
sheriff of the province in which the property is situated, who
shall execute the said order immediately.
Since in this case, the foreclosed property was not redeemed within
one year from registration of the sale, private respondent therefore
had acquired an absolute right as purchaser to the writ of
possession. It had become the ministerial duty of the court to issue
the writ of possession as provided under Section 7 of Act 3135.
Moreover, once ownership has been consolidated, the issuance of
the writ of possession becomes a ministerial duty of the court.
In this case, when private respondent applied for a writ of
possession, ano ‘yong basis ng kanyang right dito? Presented a new
transfer certificate of title in his name. And also with that, no need to
file a bond because the redemption period has already expired.
The application for the issuance of a writ of possession is in the form
of an ex parte motion. It issues as a matter of course once the
requirements are fulfilled and no discretion is left to the courts. This
motion is filed still with the court to which you filed the application for
the extrajudicial foreclosure.
Petitioners cannot oppose or appeal the court’s order granting the
writ of possession in an ex parte proceeding. Remedy here is to
have the sale set aside and then subsequently it is found to be not
valid, the writ of possession can be cancelled.
The right to possession of a purchaser at an extrajudicial foreclosure
sale is not affected by a pending case questioning the validity of the
foreclosure proceeding. It is a matter of right. The latter is not a bar
to the former even pending such latter proceeding, the purchaser at a
foreclosure sale is entitled to the possession of the foreclosed
property.
Under Act 3135, a writ of possession is issued ex parte as a matter
of course upon compliance with the requirements, is not a judgment
on the merits that then amount to res judicata, one of the essential
|2-Manresa CredTrans TSN |27
elements in forum shopping. So even if there is a separate action
questioning the validity of the mortgage and sale, you can still
proceed with the motion for the issuance of the writ of possession
because it is not a judgment on the merits which would give rise to
res judicata.
How about in the case of Mallari?
MALLARI vs. GSIS
Facts: Mallari obtained two loans from GSIS. He
mortgaged his two parcels of land to secure the 34M
loan. He paid GSIS about ten years after contracting the
obligations. GSIS commenced extrajudicial foreclosure
proceedings and this caused Mallari to sue GSIS and the
Sheriff in the RTC seeking to nullify the extrajudicial
foreclosure and auction sale. RTC decided in favor of
Mallari but CA reversed the same and rendered
unassailable both the extrajudicial foreclosure and
auction sale and also the issuance of a new TCT in the
name of GSIS.
GSIS filed an ex parte motion for execution. RTC granted
the motion and issued a writ of execution cum writ of
possesson in favor of GSIS. Mallari filed a motion for
reconsideration and/or to quash the writ of execution
claiming he was not notified of the such motion filed by
GSIS. RTC directed the Clerk of Court to cause the re-
emplementation of the writ of execution cum writ of
possession. CA sustained such order.
Issue: Whether or not the issuance of the writ of
execution cum writ of possession in favor of GSIS by the
RTC was proper?
Ruling: YES. As defaulting mortgagor, Mallari is not
entitled under Act 3135, as amended, to any prior notice
of the application for the issuance of the writ of
possession. The proceeding upon an application for a
writ of possession is ex parte and summary in nature,
brought for the benefit of one party only and without
notice to any person adverse in interest.
GSIS became the absolute owner of the property when
Mallari failed to redeem the same. GSIS is no longer
required to file a bond required under Section 7 of Act
3135, as amended, considering that the possession of
the land becomes his absolute right as the land’s
confirmed owner. Issuance of the writ of possession to
GSIS became a matter of right upon the consolidation of
title in its name.
As a non-redeeming mortgagor, Mallari had no more right
to challenge the issuance of the writ of execution cum
writ of possession. He could not also impugn the
extrajudicial foreclosure and consolidation in GSIS since
it was already irreversible. His moves against such writ
were tainted by bad faith.
Q1: When was the application for extrajudicial foreclosure filed by
GSIS?
A1:1984.
Q2: How about the action filed by Mallari for the issuance of the
injunction, when was it filed?
A2: 1986.
Q3: What happened in this action? Was it granted by the court?
A3:The RTC decided in Mallari’s favor and nullified the extrajudicial
foreclosure sale. CA reversed the decision of the RTC.
Q4: Was there a petition that was filed before the SC regarding the
decision of the CA?
A4:Yes. The SC denied the petition.
Q5: So in other words, was the extrajudicial foreclosure proper? Was
it upheld by the SC?

A5:Yes. Then Mallari asked for an extension of time to vacate the
property to which GSIS acceded. However, Mallari did not voluntarily
vacate the property but instead filed again for a motion for
reconsideration and/or to quash the writ of execution and to hold
GSIS in contempt for painting the fence of the properties during the
pendency of his motion.
Q6: Is GSIS entitled to the issuance of a writ of possession over the
property?
A6:Yes.
Q7: What is the nature of the issuance of the writ of possession?
A7:It is a ministerial duty.
Q8: How is it different from a discretionary act on the part of the
court, tribunal or officer?
A8:In a ministerial act, the public officer has no choice but to perform
the act. Whereas in a discretionary act, the public officer has a
discretion whether or not to perform such act.
Q9: Can a non-redeeming mortgagor still question the issuance of a
writ of possession?
A9:No.
Discussion: Take note of the instances wherein a writ of possession
is issued:
1. In land registration proceedings;
2. Under judicial foreclosure proceedings, so that’s
covered under special civil actions;
3. Extrajudicial foreclosure as provided under Act 3135;
4. Execution sales as covered in Rule 39 of the Rules of
Court.
It is emphasized here, with regard to extrajudicial
foreclosure that it is the debtor, his successor-in-interest or any
judicial creditor or judgment creditor of said debtor, or any person
having a lien on the properties subsequent to the mortgage of deed
of trust under which the property is sold, has the right to redeem the
property at any time within term of one year from the registration of
the sale.
Take a look at Act No. 3135, ang nakalagay diyan ‘after the
date of sale’, it should be construed as from the date of registration of
sale and not from and after the date of sale. Construction was due to
the fact that sheriff’s sale of registered and unregistered lands did not
take effect as a conveyance or did not bind the land until the sale
was registered in the Registry of Deeds.
As in the previous cases, the mortgagor or his successor-in-interest
must redeem the foreclosed property within one year from the
registration of the sale with Registry of Deeds in order to avoid the
title from consolidating in the purchaser. When failing to redeem, the
mortgagor will now lose all interest over the foreclosed property and
the purchaser has a right of possession that extends beyond the
expiration of the redemption period as he now becomes the absolute
owner of the property when no redemption is made. That it is no
longer necessary for the purchaser to file the bond as required under
Act No. 3135.
The consolidation of ownership in the purchaser’s name and the
issuance to him of a new title entitles him to demand possession of
the property at any time. And therefore, the issuance of a writ of
possession becomes a matter of right upon consolidation of title in
his name. The court can neither halt nor hesitate to issue the writ of
possession, it cannot exercise any discretion to determine whether or
not to issue the writ. For the issuance of such writ becomes a
ministerial action.
Take note of the distinction of a ministerial and discretionary act.
MINISTERIAL ACT DISCRETIONARY ACT
That an officer performs in a If the law imposes the duty
given state of facts in a upon a public officer, it
|2-Manresa CredTrans TSN |28
prescribed manner, in gives him the right, how and
obedience to the mandate when the duty shall be
of a legal authority without performed then such duty is
regard to or the exercise of discretionary,not ministerial.
any judgment or discretion
whether it is proper or
improper.
The duty is ministerial only
when its discharge requires
the exercise of official
discretion nor the exercise
of judgment.
In this case, the proceeding upon an application for a writ of
possession is again ex parte and summary in nature. It renders the
application for the issuance of a writ of possession as a non-litigous
proceeding.
A non-redeeming mortgagor had no more right to challenge the
issuance of a writ of execution from writ of possession upon the ex
parte applicartion of GSIS. Petitioner Mallari cannot impugn
anymore the extrajudicial foreclosure and could not undo the
consolidation in GSIS of the ownership of the properties.
Take note here, Mallari was a lawyer and he was also, aside from the
fact that his petition was denied, he was guilty of misconduct as a
lawyer. So this is one of the instances, actually the scenario that is
contemplated by financing institutions why they hesitate to grant
loans or why they require stricter measures in granting loans in favor
of lawyers. Imagine, the loan was perfected 1968, unpaid 1979,
that’s more than ten years. Demand was made, no choice,
eventually it filed an extrajudicial foreclosure in 1984. In 1986 nag-
petition for injunction even if the validity of the mortgage was already
upheld by the court and it already became final and executory. A
motion for execution was issued and subsequently the application for
the writ of possession was filed, it was still questioned by Mallari. So
the case continued until this judgment in 2010.
If you’d like to consider it, 1984 gi-file ang extrajudicial foreclosure,
GSIS only had probably possession thereof through this period.
Mallari continued in possession of the property pending this petition
before the court. He had the liberty to do so. Why? Mas dali lang
man sa iyaha kay wala man siyay attorney’s fee na bayaran . So he
could really question it because wala siyay concern as the case
would go along. But again, this is the reason you cannot blame
financial institutions being strict in granting loans to lawyers.
The court also took into consideration that Mallari, being his own
lawyer, already knows, or it should have known that all these
proceedings was not necessary anymore. There are consequences
of his non-redemption within the period provided by law. So petition
denied and he was guilty of misconduct as a lawyer.
While the rule is, Judicial Foreclosure,
General rule: Equity of redemption
Exception: Right of redemption available when the bank is a
mortgagee.
In an Extrajudicial Foreclosure,
General rule: One year redemption period
Exception: Under the General Banking Act where the mortgagor is a
juridical personality. So once the _ of sale has been registered or
three months from the foreclosure sale whichever is earlier,
redemption is not available anymore.
However, there are instances wherein the law provides for a different
redemption period like for example, homestead laws. If the property
subject in a homestead patent is sold it can still be redeemed but
instead of the one year period, five years from the registration of the
certificate of sale.
How about with regard to lands subject to tenancy laws? What
happened in the case of PhilBancor.

PHILBANCOR vs. CA
Facts:Private respondents are tenants of petitioner
Vicent Hizon, Jr. over his landholdings which the latter
mortgaged to petitioner corporation. The properties
were later foreclosed by the corporation and a
certificate of sale was issued and registered. Private
respondents sought to redeem the properties through
the filing of a complaint with the PARAB which
rendered a decision favorable to private respondents.
DARAB affirmed said decision.
Issue: Whether or not private respondents could still
exercise their right of redemption?
Ruling: NO. The redemption period has already
elapsed. Under Section 12 of RA 3844, which
provides:
“In case the landholding is sold to a third person
without the knowlede of the agricultural lessee, the
latter shall have the right to redeem the same at a
reasonable price and consideration. Provided, that the
entire landholding sold must be redeemed. Provided
further, that where there are two or more agricultural
lessees, each shall be entitled to said right of
redemption only to the extent of the area actually
cultivated by him. The right of redemption under this
section may be exercised within two years from the
registration of the sale and shall have priority over any
other right of legal redemption.”
The certificate of sale in favor of Philbancor was
registerd on July 31, 1985 with the ROD. The two-
year redemption period thus expired on July 31, 1987.
The complaint for redemption was filed by private
respondents only on July 14, 1992, five years after the
expiration of the redemtion period prescribed by law.
Hence, the private respondents can no longer redeem
the said property. However, they may continue to
possess the land since the leasehold relation was not
extinguished by the sale of the landholding with
regard to tenancy laws.
Q1: Who is entitled to the possession of the property?
A1:The tenants based on RA 3844, the Agricultural Land Reform Act.
Discussion: RA 3844 provides that the redemption period may be
exercised within two years from the registration of the sale and shall
have priority over any other right of legal redemption.
Even if the land was subject to tenancy law, Hizon was the owner
and he had here several tenants, he could still mortgage the
property. One thing that I also want you to take note, there’s not
really much discussion with regard to tenancy laws in law school.
What we are going to just take note of is the redemption period as
provided under RA 3848.
The tenants can redeem the property but only within the two-year
redemption period. The sale was registered July 31, 1985, so the
two-year redemption was unitl July 31, 1987. While the tenants
could have redeemed the property within that period, they did not do
so but instead it filed a complaint only on July 14, 1992, five years
after the expiration of the redemption period. In other words, they
cannot redeem the property anymore. So the ownership was validly
transferred in favor of PhilBancor, but PhilBancor is not _ by the
tenacy laws.
Private respondents may continue in possession and enjoyment of
the land in question as legitimate tenants because the tenancy
relationship is not attached to the owner but rather to the property.
Leasehold relation is not extinguished by the alienation or transfer of
the legal possession of the landholding with regard to tenancy laws.
|2-Manresa CredTrans TSN |29
March 2, 2016
Transcribed by: Cid Pabalan
LAW ON EXTRAJUDICIAL FORECLOSURES
ACT NO. 3135 – AN ACT TO REGULATE THE SALE OF
PROPERTY UNDER SPECIAL POWERS INSERTED IN OR
ANNEXED TO REAL-ESTATE MORTGAGES
SECTION 1. When a sale is made under a special power inserted in
or attached to any real-estate mortgage hereafter made as security
for the payment of money or the fulfillment of any other obligation,
the provisions of the following election shall govern as to the manner
in which the sale and redemption shall be effected, whether or not
provision for the same is made in the power.
Discussion:
In order to proceed in an extrajudicial foreclosure of a mortgage, the
real estate mortgage must provide the authority given by the
mortgagor in favor of the mortgagee. There must be that special
power inserted authorizing the mortgagee to foreclose and sell the
property in case the mortgagor fails to pay his obligation.
In the absence of that special power or authority, extrajudicial
foreclosure proceeding is not available.
Remedy:
1. File an action for judicial foreclosure or
2. File an action for collection of sum of money
SECTION 2. Said sale cannot be made legally outside of the
province in which the property sold is situated; and in case the place
within said province in which the sale is to be made is subject to
stipulation, such sale shall be made in said place or in the municipal
building of the municipality in which the property or part thereof is
situated.
SECTION 3. Notice shall be given by posting notices of the sale for
not less than twenty days in at least three public places of the
municipality or city where the property is situated, and if such
property is worth more than four hundred pesos, such notice shall
also be published once a week for at least three consecutive weeks
in a newspaper of general circulation in the municipality or city.
Discussion:
Section 3 emphasizes the requirement of the posting and publication
of the sale.
In light of that we have the case of Ouano vs. CA.
CASE:
FIRST DIVISION [G.R. No. 129279. March 4, 2003]
ALFREDO M. OUANO, petitioner, vs. COURT OF APPEALS, and
HEIRS OF JULIETA M. OUANO
On June 8, 1977, respondent Julieta M. Ouano (Julieta), now
deceased, obtained a loan from the Philippine National Bank (PNB)
in the amount of P104,280.00. As security for said loan, she
executed a real estate mortgage over two parcels of land located at
Opao, Mandaue City. She defaulted on her obligation. On September
29, 1980, PNB filed a petition for extrajudicial foreclosure with the
City Sheriff of Mandaue City.

On November 4, 1980, the sheriff prepared a notice of sale setting
the date of public auction of the two parcels of land on December 5,
1980 at 9:00 a.m. to 4:00 p.m. He caused the notice to be published
in the Cebu Daily Times, a newspaper of general circulation in
Mandaue City, in its issues of November 13, 20 and 27, 1980. He
likewise posted copies thereof in public places in Mandaue City and
in the place where the properties are located.
However, the sale as scheduled and published did not take place as
the parties, on four separate dates, executed Agreements to
Postpone Sale (Agreements). These Agreements were addressed to
the sheriff, requesting the latter to defer the auction sale to another
date at the same time and place, without any further republication of
the Notice.Petitioner, however, insists that there was substantial
compliance with the publication requirement, considering that prior
publication and posting of the notice of the first date were made
ISSUES:
1. Whether the rescheduled extrajudicial foreclosure sale was
valid despite absence of republication of the Notice,
despite agreement between parties to do away with the
republication.
NO. The governing law for extrajudicial foreclosures is Act No. 3135
as amended by Act No. 4118.
The provision relevant to this case is Section 3, which provides:
SEC. 3. Notice shall be given by posting notices of the sale for not
less than twenty (20) days in at least three public places of the
municipality or city where the property is situated, and if such
property is worth more than four hundred pesos, such notice shall
also be published once a week for at least three consecutive weeks
in a newspaper of general circulation in the municipality of city.
It is a well-settled rule that statutory provisions governing publication
of notice of mortgage foreclosure sales must be strictly complied
with, and that even slight deviations therefrom will invalidate the
notice and render the sale at least voidable.Where required by the
statute or by the terms of the foreclosure decree, public notice of the
place and time of the mortgage foreclosure sale must be given, a
statute requiring it being held applicable to subsequent sales as well
as to the first advertised sale of the property.
The principal object of a notice of sale in a foreclosure of mortgage is
not so much to notify the mortgagor as to inform the public generally
of the nature and condition of the property to be sold, and of the time,
place, and terms of the sale. Notices are given to secure bidders and
prevent a sacrifice of the property. Clearly, the statutory requirements
of posting and publication are mandated, not for the mortgagors
benefit, but for the public or third persons. In fact, personal notice to
the mortgagor in extrajudicial foreclosure proceedings is not even
necessary, unless stipulated. As such, it is imbued with public policy
considerations and any waiver thereon would be inconsistent with the
intent and letter of Act No. 3135.
Publication, therefore, is required to give the foreclosure sale a
reasonably wide publicity such that those interested might attend the
public sale. To allow the parties to waive this jurisdictional
requirement would result in converting into a private sale what ought
to be a public auction.
2. Whether publication may be waived as agreed by the
parties
It cannot be waived. The principal object of a notice of sale in a
foreclosure of mortgage is not so much to notify the mortgagor as to
inform the public generally of the nature and condition of the property
to be sold, and of the time, place, and terms of the sale. Notices are
given to secure bidders and prevent a sacrifice of the property.
Clearly, the statutory requirements of posting and publication are
|2-Manresa CredTrans TSN |30
mandated, not for the mortgagors benefit, but for the public or third
persons. In fact, personal notice to the mortgagor in extrajudicial
foreclosure proceedings is not even necessary, unless stipulated. As
such, it is imbued with public policy considerations and any waiver
thereon would be inconsistent with the intent and letter of Act No.
3135.
3. Whether the Rules of Court applies to an extrajudicial
foreclosure sale, specifically, Rule 39, Section 24
Adjournment of Sale: By written consent of debtor and
creditor, the officer may adjourn any sale upon execution
to any date agreed upon in writing by the parties. Without
such agreement, he may adjourn the sale from day to day,
if it becomes necessary to do so for lack of time to
complete the sale on the day fixed in the notice.
No. At the outset, distinction should be made of the three different
kinds of sales under the law, namely: an ordinary execution sale, a
judicial foreclosure sale, and an extrajudicial foreclosure sale.
An ordinary execution sale is governed by the pertinent provisions of
Rule 39 of the Rules of Court.
Rule 68 of the Rules of Court applies in cases of judicial foreclosure
sale.
On the other hand, Act No. 3135, as amended by Act No. 4118
otherwise known as An Act to Regulate the Sale of Property under
Special Powers Inserted in or Annexed to Real Estate Mortgages
applies in cases of extrajudicial foreclosure sale.
A different set of law applies to each class of sale mentioned.
The cited provision in the Rules of Court hence does not apply to an
extrajudicial foreclosure sale.
4. Whether or not Julieta’s act of requesting the
postponement and repeatedly signing the Agreements
(WAIVER) had placed her under estoppel, barring her from
challenging the lack of publication of the auction sale.
NO. The waiver being void for being contrary to the express mandate
of Act No. 3135, such cannot be ratified by estoppel. Estoppel cannot
give validity to an act that is prohibited by law or one that is against
public policy. Neither can the defense of illegality be waived.
5. Whether or not there is laches when Julieta filed her
complaint with the trial court after almost two years from
the May 29, 1981 auction sale
NO. An action or defense for the declaration of the inexistence of a
contract does not prescribe under Article 1410 of the Civil Code.
The case of Ouano was cited in the case of:
[G.R. No. 125838. June 10, 2003]
DEVELOPMENT BANK OF THE PHILIPPINES, vs. COURT OF
APPEALS and EMERALD RESORT HOTEL CORPORATION
ERHC failed to pay its loan, DBP filed with the Office of the Sheriff,
Regional Trial Court of Iriga City, an Application for Extra-judicial
Foreclosure of Real Estate and Chattel Mortgages.
Deputy Provincial Sheriffs Abel Ramos and RupertoGaleon issued
the required notices of public auction sale of the personal and real
properties. However, Sheriffs Ramos and Galeonfailed to execute
the corresponding certificates of posting of the notices. On 10 July
1986, the auction sale of the personal properties proceeded.
The Office of the Sheriff scheduled on 12 August 1986 the public
auction sale of the real properties. The Bicol Tribune published on 18
July 1986, 25 July 1986 and 1 August 1986 the notice of auction sale

of the real properties. However, the Office of the Sheriff postponed
the auction sale on 12 August 1986 to 11 September 1986 at the
request of ERHC. DBP did not republish the notice of the
rescheduled auction sale because DBP and ERHC signed an
agreement to postpone the 12 August 1986 auction sale. ERHC,
however, disputes the authority of Jaime Nuevas who signed the
agreement for ERHC.
In a letter dated 24 November 1986, ERHC informed DBP of its
intention to lease the foreclosed properties.
On 22 December 1986, ERHC filed with the Regional Trial Court of
Iriga City a complaint for annulment of the foreclosure sale of the
personal and real properties. Subsequently, ERHC filed a
Supplemental Complaint. ERHC alleged that the foreclosure was
void mainly because (1) DBP failed to comply with the procedural
requirements prescribed by law; and (2) the foreclosure was
premature.
ISSUES:
1. Whether DBP complied with the posting and publication
requirements under applicable laws for a valid foreclosure.
ON THE POSTING OF AUCTION SALE NOTICES:
DBP insists that the non-execution of the certificate of posting of the
auction sale notices did not invalidate the foreclosure. CORRECT.
A certificate of posting is not required, much less considered
indispensable for the validity of an extrajudicial foreclosure sale of
real property under Act No. 3135. In the present case, the foreclosing
sheriffs failed to execute the certificate of posting of the auction sale
notices. However, this fact alone does not prove that the sheriffs
failed to post the required notices. As held in Bohanan, the fact alone
that there is no certificate of posting attached to the sheriff's records
is not sufficient to prove the lack of posting.
Based on the records, DBP presented sufficient evidence to prove
that the sheriffs posted the notices of the extrajudicial sale.
In the absence of contrary evidence, as in this case, the presumption
prevails that the sheriffs performed their official duty of posting the
notices of sale. Consequently, we hold that the non-execution of the
certificate of posting cannot nullify the foreclosure of the chattel and
real estate mortgages in the instant case.
On whether there was publication of the notice of sale of the real
properties in compliance with Act No. 3135:
There is no question that DBP published the notice of auction sale
scheduled on 12 August 1986. However, no auction sale took place
on 12 August 1986 because DBP, at the instance of ERHC, agreed
to postpone the same to 11 September 1986. DBP contends that the
agreement to postpone dispensed with the need to publish again the
notice of auction sale. Thus, DBP did not anymore publish the notice
of the 11 September 1986 auction sale. DBP insists that the law does
not require republication of the notice of a rescheduled auction sale.
Consequently, DBP argues vigorously that the extrajudicial
foreclosure of the real estate mortgage is valid. INCORRECT.
In Ouano v. Court of Appeals, it was held that republication in the
manner prescribed by Act No. 3135 is necessary for the validity of a
postponed extrajudicial foreclosure sale. Another publication is
required in case the auction sale is rescheduled, and the absence of
such republication invalidates the foreclosure sale.
2. If publication requirement may be waived by parties, SAME
RULING IN OUANO.
|2-Manresa CredTrans TSN |31
3. Is it possible to only have ONE PUBLISHED NOTICE OF
SALE, but the subsequent RESCHEDULED sale will be
valid without need of another publication?
YES. If the first notice of sale EXPRESSLY STATES AND ALLOWS
the holding of a rescheduled auction sale without reposting or
republication of the notice. However, the rescheduled auction sale
will only be valid if the rescheduled date of auction is clearly specified
in the prior notice of sale. The rescheduled dates must be
SPECIFIED. The absence of this information in the prior notice of
sale will render the rescheduled auction sale void for lack of
reposting or republication. If the notice of auction sale contains this
particular information, whether or not the parties agreed to such
rescheduled date, there is no more need for the reposting or
republication of the notice of the rescheduled auction sale.
The Office of the Court Administrator issued Circular No. 7-2002
pursuant to the 14 December 1999 Resolution of this Court in A.M.
No. 99-10-05-0, as amended by the Resolutions of 30 January 2001
and 7 August 2001. The Court issued these Resolutions for two
reasons.
First, the Court seeks to minimize the expenses which the mortgagee
incurs in publishing the notice of extrajudicial sale. With the added
information in the notice of sale, the mortgagee need not cause the
reposting and republication of the notice of the rescheduled auction
sale. There is no violation of the notice requirements under Acts Nos.
3135 and 1508 precisely because the interested parties as well as
the public are informed of the schedule of the next auction sale, if the
first auction sale does not proceed. Therefore, the purpose of a
notice of sale, which is to notify the mortgagor and the public of the
foreclosure sale, is satisfied.
Second, the Court hopes to deter the practice of some mortgagors in
requesting postponement of the auction sale of real properties, then
later attacking the validity of the foreclosure for lack of republication.
This practice will only force mortgagees to deny outright requests for
postponement by mortgagors since it will only mean added
publication expense on the part of mortgagees. Such development
will eventually work against mortgagors because mortgagees will
hesitate to grant postponements to mortgagors.
In the instant case, there is no information in the notice of auction
sale of any date of a rescheduled auction sale. Even if such
information were stated in the notice of sale, the reposting and
republication of the notice of sale would still be necessary because
Circular No. 7-2002 took effect only on 22 April 2002. There were no
such guidelines in effect during the questioned foreclosure.
CASE:
G.R. No. 198800, December 11, 2013
JOSE T. RAMIREZ, Petitioner, v. THE MANILA BANKING
CORPORATION, Respondent.
Ramirez obtained a loan from Manila Banking and mortgaged his
property. In their contract of mortgage, it was expressly stipulated
that:
“All correspondence relative to this MORTGAGE, including demand
letters, summons, subpoenas or notifications of any judicial or
extrajudicial actions shall be sent to the MORTGAGOR”
Ramirez defaulted in his obligation thus Manila Banking proceeded
with the extrajudicial foreclosure of the mortgaged property without
giving notice to Ramirez, contrary to what they have stipulated as
mentioned above.
ISSUE:

1. What is the legal effect of violating an express stipulation of
the deed of mortgage which requires personal notice to the
petitioner–mortgagor by the respondent–mortgagee bank?
The extrajudicial foreclosure sale is NULL AND VOID.
Personal notice to the mortgagor in extrajudicial foreclosure
proceedings is not necessary because Section 3 of Act No. 3135
only requires the posting of the notice of sale in three public places
and the publication of that notice in a newspaper of general
circulation HOWEVER, if there is an additional requirement as to the
manner of giving notice as agreed by the parties, IT MUST BE
COMPLIED WITH, otherwise the extrajudicial foreclosure sale will be
void.
The Act only requires (1) the posting of notices of sale in three public
places, and (2) the publication of the same in a newspaper of general
circulation. Personal notice to the mortgagor is not necessary.
Nevertheless, the parties to the mortgage contract are not precluded
from exacting additional requirements.
SECTION 4. The sale shall be made at public auction, between the
hours or nine in the morning and four in the afternoon; and shall be
under the direction of the sheriff of the province, the justice or
auxiliary justice of the peace of the municipality in which such sale
has to be made, or a notary public of said municipality, who shall be
entitled to collect a fee of five pesos each day of actual work
performed, in addition to his expenses.
SECTION 5. At any sale, the creditor, trustee, or other persons
authorized to act for the creditor, may participate in the bidding and
purchase under the same conditions as any other bidder, unless the
contrary has been expressly provided in the mortgage or trust deed
under which the sale is made.
SECTION 6. In all cases in which an extrajudicial sale is made under
the special power hereinbefore referred to, the debtor, his
successors in interest or any judicial creditor or judgment creditor of
said debtor, or any person having a lien on the property subsequent
to the mortgage or deed of trust under which the property is sold,
may redeem the same at any time within the term of one year from
and after the date of the sale; and such redemption shall be
governed by the provisions of sections four hundred and sixty-four to
four hundred and sixty-six, inclusive, of the Code of Civil Procedure,
in so far as these are not inconsistent with the provisions of this Act.
Discussion:
The part which states that “within the term of one year from and after
the date of the sale” refers to ONE YEAR FROM THE DATE OF THE
REGISTRATION OF THE SALE as a general rule. As an exception,
there is the EQUITY OF REDEMPTION in case there is a mortgagor
as a juridical person.
For judicial foreclosure, Rule 68 is applied, for equity of redemption
except when the mortgagee is a banking institution wherein you
apply the right of redemption, one year from the date of the
registration of the sale.
There are instances wherein the issue involved is not necessarily a
mortgage but it needs to be considered so as not to confuse it with
the redemption period regarding foreclosure proceedings.
There are foreclosure proceedings for failure to pay taxes to the BIR,
or failure to pay real property taxes to the LGU.
|2-Manresa CredTrans TSN |32
To discuss the distinction, we have case of:
G.R. No. 171033 August 3, 2010
CITY MAYOR, CITY TREASURER, CITY ASSESSOR, ALL OF
QUEZON CITY, and ALVIN EMERSON S. YU vs. RIZAL
COMMERCIAL BANKING CORPORATION
The spouses Roberto and Monette Naval obtained a loan from
respondent Rizal Commercial Banking Corporation, secured by a
real estate mortgage of properties covered by Transfer Certificate of
Title (TCT) Nos. N-167986, N-167987, and N-167988. In 1998, the
real estate mortgage was later foreclosed and the properties were
sold at public auction with respondent as the highest bidder. The
corresponding Certificates of Sale were issued in favor of respondent
on August 4, 1998. However, the certificates of sale were allegedly
registered only on February 10, 2004.
Meanwhile, on May 30, 2003, an auction sale of tax
delinquentpropertieswas conducted by the City Treasurer of Quezon
City. Included in the properties that were auctioned were two (2)
townhouse units covered by TCT Nos. N-167986 and N-167987 and
the parcel of land covered by TCT No. N-167988. For these
delinquent properties, Alvin Emerson S. Yu was adjudged as the
highest bidder. Upon payment of the tax delinquencies, he was
issued the corresponding Certificate of Sale of Delinquent Property.
On February 10, 2004, the Certificate of Sale of Delinquent Property
was registered with the Office of the Register of Deeds of Quezon
City.
On June 10, 2004, respondent tendered payment for all of the
assessed tax delinquencies, interest, and other costs of the subject
properties with the Office of the City Treasurer, Quezon City.
However, the Office of the City Treasurer refused to accept said
tender of payment.
Undeterred, on June 15, 2004, respondent filed before the Office of
the City Treasurer a Petition for the acceptance of its tender of
payment and for the subsequent issuance of the certificate of
redemption in its favor. Nevertheless, respondent’s subsequent
tender of payment was also denied.
Consequently, respondent filed a Petition for Mandamus with Prayer
for Issuance of a Temporary Restraining Order and a Writ of
Preliminary Injunction3 before the RTC. Petitioners contended,
among other things, that it had until February 10, 2005, or one (1)
year from the date of registration of the certificate of sale on February
10, 2004, within which to redeem the subject properties, pursuant to
Section 78 of Presidential Decree (P.D.) No. 464 or the Real
Property Tax Code.
After the parties filed their respective pleadings, the RTC initially
denied the petition in the Order4 dated December 6, 2004. In
denying the petition, the RTC opined that respondent’s reliance on
Section 78 of P.D. No. 464 as basis of the reckoning period in
counting the one (1) year period within which to redeem the subject
properties was misplaced, since P.D. No. 464 has been expressly
repealed by Republic Act (R.A.) No. 7160, or the Local Government
Code.
It has to be noted that in this case Quezon City has an ordinance
which provides that he one-year redemption period should be
counted from the date of the annotation of the sale of the property at
the proper registry.
ISSUE:
What law applies for the determination of the correct redemption
period?
What was involved here was foreclosure due to non-payment of
property taxes.

Thus, the owner or any person holding a lien or claim over a tax
delinquent property sold at public auction has one (1) year from the
date of registration of sale to redeem the property. However, since
the passing of R.A. No. 7160, such is no longer controlling. The issue
of whether or not R.A No. 7160 or the Local Government Code,
repealed P.D. No. 464 or the Real Property Tax Code has long been
laid to rest by this Court.
Jurisdiction thrives to the effect that R.A. No. 7160 repealed P.D. No.
464. From January 1, 1992 onwards, the proper basis for the
computation of the real property tax payable, including penalties or
interests, if applicable, must be R. A. No. 7160.
Inasmuch as the crafter of the Local Government Code clearly
worded the above-cited Section to repeal P.D. No. 464, it is a clear
showing of their legislative intent that R.A. No. 7160 was to
supersede P.D. No. 464. As such, it is apparent that in case of sale
of tax delinquent properties, R.A. No. 7160 is the general law
applicable. Consequently, as regards redemption of tax delinquent
properties sold at public auction, the pertinent provision is Section
261 of R.A. No. 7160, which provides:
“Section 261. Redemption of Property Sold. Within one (1) year from
the date of sale, the owner of the delinquent real property or person
having legal interest therein, or his representative, shall have the
right to redeem the property upon payment to the local treasurer of
the amount of delinquent tax, including the interest due thereon, and
the expenses of sale from the date of delinquency to the date of sale,
plus interest of not more than two percent (2%) per month on the
purchase price from the date of sale to the date of redemption. Such
payment shall invalidate the certificate of sale issued to the
purchaser and the owner of the delinquent real property or person
having legal interest therein shall be entitled to a certificate of
redemption which shall be issued by the local treasurer or his deputy.
From the date of sale until the expiration of the period of redemption,
the delinquent real property shall remain in the possession of the
owner or person having legal interest therein who shall remain in the
possession of the owner or person having legal interest therein who
shall be entitled to the income and other fruits thereof.
The local treasurer or his deputy, upon receipt from the purchaser of
the certificate of sale, shall forthwith return to the latter the entire
amount paid by him plus interest of not more than two percent (2%)
per month. Thereafter, the property shall be free from all lien of such
delinquent tax, interest due thereon and expenses of sale.”
From the foregoing, the owner of the delinquent real property or
person having legal interest therein, or his representative, has the
right to redeem the property within one (1) year from the date of sale
upon payment of the delinquent tax and other fees.
Verily, the period of redemption of tax delinquent properties should
be counted not from the date of registration of the certificate of sale,
as previously provided by Section 78 of P.D. No. 464, but rather on
the date of sale of the tax delinquent property, as explicitly provided
by Section 261 of R.A. No. 7160.
However since in the case at bar, there is an ordinance involved. At
first glance, this provision runs counter to that of Section 261 of R.A.
No. 7160 which provides that the one year redemption period shall
be counted from the date of sale of the tax delinquent property.
There is, therefore, a need to reconcile these seemingly conflicting
provisions of a general law and a special law.
To harmonize the provisions of the two laws and to maintain the
policy of the law to aid rather than to defeat the owners right to
redeem his property, Section 14 (a), Paragraph 7 of City Ordinance
No. SP-91, S-93 should be construed as to define the phrase one (1)
year from the date of sale as appearing in Section 261 of R.A. No.
7160, to mean one (1) year from the date of the annotation of the
sale of the property at the proper registry.
|2-Manresa CredTrans TSN |33
Consequently, the counting of the one (1) year redemption period of
property sold at public auction for its tax delinquency should be
counted from the date of annotation of the certificate of sale in the
proper Register of Deeds. Applying the foregoing to the case at bar,
from the date of registration of the Certificate of Sale of Delinquent
Property on February 10, 2004, respondent had until February 10,
2005 to redeem the subject properties. Hence, its tender of payment
of the subject properties tax delinquencies and other fees on June
10, 2004, was well within the redemption period, and it was manifest
error on the part of petitioners to have refused such tender of
payment.
Absent an ordinance in any other case involving real property tax
delinquency, RA 7160 applies.
Section 7. In any sale made under the provisions of this Act, the
purchaser may petition the Court of First Instance of the province or
place where the property or any part thereof is situated, to give him
possession thereof during the redemption period, furnishing bond in
an amount equivalent to the use of the property for a period of twelve
months, to indemnify the debtor in case it be shown that the sale was
made without violating the mortgage or without complying with the
requirements of this Act. Such petition shall be made under oath and
filed in form of an ex parte motion in the registration or cadastral
proceedings if the property is registered*, or in special proceedings in
the case of property registered under the Mortgage Law or under
section one hundred and ninety-four of the Administrative Code, or of
any other real property encumbered with a mortgage duly registered
in the office of any register of deeds in accordance with any existing
law, and in each case the clerk of the court shall, upon the filing of
such petition, collect the fees specified in paragraph eleven of
section one hundred and fourteen of Act Numbered Four hundred
and ninety-six, as amended by Act Numbered Twenty-eight hundred
and sixty-six, and the court shall, upon approval of the bond, order
that a writ of possession issue, addressed to the sheriff of the
province in which the property is situated, who shall execute said
order immediately.
*Discussion:
The highest bidder in an extrajudicial foreclosure sale can file a
petition for the issuance of a writ of possession even within the
redemption period but there must be a bond. If after the redemption
period the property is not redeemed, a writ of possession is
ministerial and no bond is required.
An affidavit of consolidation can be submitted and filed by the
mortgagee where in the title could already be consolidated in his
name and thereafter, that may be the basis for the issuance of a writ
of possession.
CASE:
[G.R. No. 199747, April 03, 2013]
TEODORO DARCEN, MAMERTO DARCEN, JR., NESTOR
DARCEN, BENILDA DARCEN-SANTOS, AND ELENITA DARCEN-
VERGEL, v. V. R. GONZALES CREDIT ENTERPRISES, INC.,
REPRESENTED BY ITS PRESIDENT, VERONICA L. GONZALES
The Darcens including the spouse are heirs to parcels of land which
they inherited from their patriarch. The wife, obtained a loan from
Gonzales Credit and mortgaged the inherited properties. Since she
was not able to pay her obligation, Gonzales Credit initiated an
extrajudicial foreclosure proceeding on the mortgaged property.
There was a consolidation of ownership of the said properties under
Gonzales Credit. The heirs were not able to redeem the said
properties within the redemption period. Thereafter, a writ of
possession was issued in favor of Gonzales.
CLAIM OF DARCENS:

The issuance of the writ of possession is improper as they are in
adverse possession of the property. The issuance of the writ
shouldn’t have been ministerial. Thus the Darcens filed an action for
the annulment of the writ.
ISSUES:
1. Whether or not it is ministerial for the court to issue a writ of
possession after consolidation of the ownership of the
property in the name of the buyer.
YES. The long-settled rule in extrajudicial foreclosure of real estate
mortgage is that after consolidation of ownership of the foreclosed
property, it is the ministerial duty of the court to issue, as a matter of
right, an ex parte writ of possession to the buyer.
The established rule is that the purchaser in an extrajudicial
foreclosure sale becomes the absolute owner of the property if no
redemption is made within one (1) year from the registration of the
certificate of sale by those who are entitled to redeem. Possession
being a recognized essential attribute of ownership, after
consolidation of title the purchaser may demand possession as a
matter of right.29 Under Section 7 of Act No. 3135, as amended by
Act No. 4118, the issuance of the writ is merely a ministerial function
of the RTC, which the new owner may obtain through an ex parte
motion.
The possession may be granted to the buyer either (a) within the
one-year redemption period, upon the filing by the purchaser of a
bond, or (b) after the lapse of the redemption period, without need of
a bond.
2. Whether or not a pending action for the annulment of the
writ stays the issuance of the writ of possession.
NO.
As a GENERAL RULE:
It is settled that a pending action for annulment of mortgage or
foreclosure sale does not stay the issuance of the writ of possession.
The trial court, where the application for a writ of possession is filed,
does not need to look into the validity of the mortgage or the manner
of its foreclosure. The purchaser is entitled to a writ of possession
without prejudice to the outcome of the pending annulment case.
As an EXCEPTION:
The ministerial duty of the court to issue an ex parte writ of
possession ceases once it appears that there is a third party in
possession of the property, who is a stranger to the mortgage and
who claims a right adverse to that of the debtor/ mortgagor.
For the EXCEPTION TO APPLY:
The property need not only be possessed by a third party, but also
held by the third party adversely to the debtor/mortgagor.
Basis:
Section 33, Rule 39 of the Rules of Court provides that in an
execution sale, the possession of the property shall be given to the
purchaser or last redemptioner, unless a third party is actually
holding the property adversely to the judgment obligor.
The application of the above Section has been extended to
extrajudicial foreclosure sales pursuant to Section 6 of Act No. 3135,
to wit:
Sec. 6. In all cases in which an extrajudicial sale is made under the
special power hereinbefore referred to, the debtor, his successors in
interest or any judicial creditor or judgment creditor of said debtor, or
any person having a lien on the property subsequent to the mortgage
|2-Manresa CredTrans TSN |34
or deed of trust under which the property is sold, may redeem the
same at any time within the term of one year from and after the date
of sale; and such redemption shall be governed by the provisions of
section four hundred and sixty-four to four hundred and sixty-six,
inclusive, of the Code of Civil Procedure, in so far as these are not
inconsistent with the provisions of this Act.
In this case, the DARCENS, were not able to prove that they are
adverse party claimants thus the issuance of the writ may be done
ministerially.
Section 8. The debtor may, in the proceedings in which possession
was requested, but not later than thirty days after the purchaser was
given possession, petition that the sale be set aside and the writ of
possession cancelled, specifying the damages suffered by him,
because the mortgage was not violated or the sale was not made in
accordance with the provisions hereof, and the court shall take
cognizance of this petition in accordance with the summary
procedure provided for in section one hundred and twelve of Act
Numbered Four hundred and ninety-six; and if it finds the complaint
of the debtor justified, it shall dispose in his favor of all or part of the
bond furnished by the person who obtained possession. Either of the
parties may appeal from the order of the judge in accordance with
section fourteen of Act Numbered Four hundred and ninety-six; but
the order of possession shall continue in effect during the pendency
of the appeal.
Section 9. When the property is redeemed after the purchaser has
been given possession, the redeemer shall be entitled to deduct from
the price of redemption any rentals that said purchaser may have
collected in case the property or any part thereof was rented; if the
purchaser occupied the property as his own dwelling, it being town
property, or used it gainfully, it being rural property, the redeemer
may deduct from the price the interest of one per centum per month
provided for in section four hundred and sixty-five of the Code of Civil
Procedure.
Aside from the laws in relation to extrajudicial foreclosure of
mortgage, the Supreme Court issued A.M. No. 99-10-05-0,
December 14, 1999. (Amended by A.M. 99-10-05-0, August 7, 2001)
to provide for the PROCEDURE of an extrajudicial foreclosure of
mortgage.
A.M. No. 99-10-05-0, December 14, 1999
(Amended by A.M. 99-10-05-0, August 7, 2001)
PROCEDURE IN EXTRA-JUDICIAL FORECLOSURE OF
MORTGAGE
In line with the responsibility of an Executive Judge under
Administrative Order No. 6, dated June 30, 1975, for the
management of courts within his administrative area, included in
which is the task of supervising directly the work of the Clerk of
Court, who is also the Ex Officio Sheriff, and his staff, and the
issuance of commissions to notaries public and enforcement of their
duties under the law, the following procedures are hereby prescribed
in extrajudicial foreclosure of mortgages:
1. All applications for extra-judicial foreclosure of mortgage whether
under the direction of the sheriff or a notary public, pursuant to Act
3135, as amended by Act 4118, and Act 1508, as amended, shall be
filed with the Executive Judge, through the Clerk of Court who is also
the Ex-Officio Sheriff.
2. Upon receipt of an application for extra-judicial foreclosure of
mortgage, it shall be the duty of the Clerk of Court to:
a) receive and docket said application and to stamp thereon the
corresponding file number, date and time of filing;

b) collect the filing fees therefor and issue the corresponding official
receipt;
c) examine, in case of real estate mortgage foreclosure, whether the
applicant has complied with all the requirements before the public
auction is conducted under the direction of the sheriff or a notary
public, pursuant to Sec. 4 of Act 3135, as amended;
d) sign and issue the certificate of sale, subject to the approval of the
Executive Judge, or in his absence, the Vice-Executive Judge; and
e) after the certificate of sale has been issued to the highest bidder,
keep the complete records, while awaiting any redemption within a
period of one (1) year from date of registration of the certificate of
sale with the Register of Deeds concerned, after which the records
shall be archived.
Where the application concerns the extrajudicial foreclosure of
mortgages of real estates and/or chattels in different locations
covering one indebtedness, only one filing fee corresponding to such
indebtedness shall be collected. The collecting Clerk of Court shall,
apart from the official receipt of the fees, issue a certificate of
payment indicating the amount of indebtedness, the filing fees
collected, the mortgages sought to be foreclosed, the real estates
and/or chattels mortgaged and their respective locations, which
certificate shall serve the purpose of having the application docketed
with the Clerks of Court of the places where other properties are
located and of allowing the extrajudicial foreclosures to proceed
thereat.
3. The notices of auction sale in extrajudicial foreclosure for
publication by the sheriff or by a notary public shall be published in a
newspaper of general circulation pursuant to Section 1, Presidential
Decree No. 1709, dated January 26, 1977, and non-compliance
therewith shall constitute a violation of Section 6 thereof.
4. The Executive Judge shall, with the assistance of the Clerk of
Court, raffle application for extrajudicial foreclosure of mortgage
under the direction of the sheriff among all sheriffs, including those
assigned to the Office of the Clerk of Court and Sheriffs IV assigned
in the branches.
5. No auction sale shall be held unless there are at least two (2)
participating bidders, otherwise the sale shall be postponed to
another date. If on the new date set for the sale there shall not be at
least two bidders, the sale shall then proceed. The names of the
bidders shall be reported by the sheriff or the notary public who
conducted the sale to the Clerk of Court before the issuance of the
certificate of sale.
This Resolution amends or modifies accordingly Administrative Order
No. 3 issued by then Chief Justice Enrique M. Fernando on 19
October 1984 and Administrative Circular No. 3-98 issued by the
Chief Justice Andres R. Narvasa on 5 February 1998.
The Court Administrator may issue the necessary guidelines for the
effective enforcement of this Resolution.
The Clerk of Court shall cause the publication of this Resolution in a
newspaper of general circulation not later than 27 December 1999
and furnish copies thereof to the Integrated Bar of the Philippines.
This Resolution shall take effect on the fifteenth day of January year
2000.
Enacted this 14th day of December 1999 in the City of Manila.
A.M. No. 99-10-05-0.February 26, 2002]
RE:PROCEDURE IN THE EXTRA-JUDICIAL FORECLOSURE OF
MORTGAGES
|2-Manresa CredTrans TSN |35
EN BANC
Gentlemen:
Quoted hereunder, for your information, is a resolution of this Court
dated  FEB 26 2002.
A.M. No. 99-10-05-0(Re:Procedure in the Extra-Judicial Foreclosure
of Mortgages.)
For consideration is the Memorandum, dated February 8, 2002, of
Clerk of Court Luzviminda D. Puno transmitting the request of the
Office of the Court Administrator (OCA) for the correction of Circular
No. 7-2002 which the OCA had earlier submitted to provide
guidelines for the enforcement of A.M. No. 99-10-05-0 and which
was subsequently approved by this Court in its resolution of January
22, 2002.The corrections submitted for the Court's approval are as
follows:
(1)       [The] [l]etterhead should be that of the Office of the Court
Administrator;
(2)       [The] [t]itle of the circular should be deleted as the same is
already stated in the subject matter;
(3)       In relation to Sec. 4(b)(1), provision should be made as to
personal notice to debtor-mortgagor, and instead of Circular No. 5-
98, 12 January 1998, reference should be made to the new circular
on publication, i.e., Guidelines in the Accreditation of Newspapers
and Periodicals and Distribution of Legal Notices and Advertisements
for Publication, Resolution promulgated on 16 October 2001 in A.M.
No. 01-1-07-SC; and
(4)       The word "Sheriff" in Sec. 6 should be changed to "Clerk of
Court", thus:
"Sec. 6.After the sale, the Clerk of Court shall collect x xx."
After due consideration of the request of the Office of the Court
Administrator and finding the same to be well taken, the Court
RESOLVED:
(1) to GRANT the aforesaid request for the correction of Circular No.
7-2002, except No. 3 regarding the addition of a provision for
personal notice of extrajudicial foreclosure of real estate mortgages
to the debtor-mortgagor, which is hereby denied.Personal notice to
the debtor-mortgagor in case of the extrajudicial foreclosure of real
estate mortgage is not required by Act No. 3135 (Bonnevie v. Court
of Appeals, 125 SCRA 122 (1983)), being merely the enforcement of
the agreement of the parties to a contract (Community Savings and
Loan Association, Inc. v. Court of Appeals, 153 SCRA 564
(1987)).The addition of such requirement can only make the
procedure for extrajudicial foreclosure cumbersome; and
(2) to AMEND Sec. 4(b)(1) of its Circular No. 7-2002 so as to make it
read as follows:
Sec. 4.The Sheriff to whom the application for extra-judicial
foreclosure of mortgage was raffled shall do the following:
....
b.(1) In case of foreclosure of real estate mortgage, cause the
publication of the notice of sale by posting it for not less than twenty
(20) days in at least three (3) public places in the municipality or city
where the property is situated and if such property is worth more than
four hundred (P400.00) pesos, by having such notice published once
a week for at least three (3) consecutive weeks in a newspaper of
general circulation in the municipality or city (Sec. 3, Act No. 3135, as
amended).The executive Judge shall designate a regular working
day and definite time each week during which said notice shall be
distributed personally by him for publication to qualified newspapers
or periodicals as defined in Sec. 1 of P.D. No. 1079, which
distribution shall be effected by raffle (A.M. No. 01-1-07-SC, Oct. 16,

2001).UNLESS OTHERWISE STIPULATED BY THE PARTIES TO
THE MORTGAGE CONTRACT, THE DEBTOR-MORTGAGOR
NEED NOT BE PERSONALLY SERVED A COPY OF THE NOTICE
OF THE EXTRAJUDICIAL FORECLOSURE.
The Clerk of Court is directed to furnish the OCA a magnetic
(diskette) copy of Circular No. 7-2002 so that the pertinent changes
can be made pursuant to this resolution.The OCA is directed to
submit to the Court Circular No. 7-2002, as thus corrected, for final
approval and for determination of the date of its effectivity.
Very truly yours,
LUZVIMINDA D. PUNO
Clerk of Court
March 3, 2016 (1st Hour)
Transcribed by: Luna Acosta
Antichresis
Article 2132. By the contract of antichresis the creditor acquires the
right to receive the fruits of an immovable of his debtor, with the
obligation to apply them to the payment of the interest, if owing, and
thereafter to the principal of his credit.
Antichresis is an accessory contract entered into to secure the
performance of a principal obligation. Delivery is required not for the
validity of the contract, but in order for the creditor to receive the
fruits. So, the contract of antichresis requires delivery by the debtor
to the creditor of the immovable property not for the purpose of
transferring ownership, but in order for the creditor to obtain the
fruits. Antichresis covers all the fruits of an encumbered property
unless otherwise stipulated by the parties. It is also susceptible of
covering all kinds of obligations whether pure or conditional.
Antichresis vs pledge
Antichresis Pledge
Contract of security; accessory contract
Debtor loses control over the subject matter of the contract but
retains ownership
Immovable/real property Movable/personal property
Use and enjoyment of fruits Generally: possession only
Antichresis vs mortgage
Antichresis Mortgage
Contract of security; accessory contract
Both immovable property
Subject matter is delivered to the Generally: debtor retains
creditor possession, unless otherwise
stipulated by the parties
No real right involved: creditor A real right is involved over the
only has a right to obtain the property but the creditor has no
fruits of the property right to receive the fruits
Creditor is obliged to pay the No obligation to pay
taxes and charges
made upon the estate
Creditor shall apply the fruits to No similar obligation as there is
the interest owing then to the no right to
balance of the principal appropriate the fruits
Alojado vs Siongco
FACTS: Juana Mabaquiao sold the land to Nicolas Alegata
for the sum of P7,744. After the death of Alegata, the land
|2-Manresa CredTrans TSN |36
was adjudicated to Lim Kang Sang and Lim Eng Teeng, his
only heirs. They sold this land to Lim Ponso & Co., with the
right to repurchase for the period of one year, which period
expired without this right having been exercised. Lim
Ponso & Co. transferred this land unconditionally to Lim
Siongco and Lim Kingko. A proceeding for the settlement
of the intestate estate was also instituted in which
Ambrosio T. Alojado was appointed administrator. The
latter, in said capacity, now brings this action against Lim
Sionco, Lim Kingko and Lim Ponso & Co. and prays that he
be declared the absolute owner of this land. The plaintiff
contends that the contract executed by Juana Mabaquiao
with Nicolas Alegata was not a contract of sale with the
right to repurchase, but a contract or antichresis.
ISSUE: WON the contract entered into by the parties is a
contract of antichresis. NO
HELD: From the terms of the contract it is clearly a sale
with the right to repurchase. The contract is very defective
in its wording, especially so where it refers to the period
within which to exercise the right to repurchase. But
examining it as a whole, it clearly appears that it was the
parties' intention that the vendor could repurchase the land
without delay when he had the means to pay the purchase
price. What characterizes a contract or antichresis is that
the creditor acquires the right to receive the fruits of the
property of his debtor with the obligation to apply them to
the payment of interests, if any is due, and then to the
principal of his credit. Nowhere in the contract in question
does this character of a contract of antichresis appear. The
only substantial thing agreed upon between the parties was
to repurchase the land when there is already means.
The decision of this court in the case of De la Vega vs.
Ballilos which the appellant invokes in support of his
contention, is in no way applicable. The case dealt with a
contract called mortgage by the parties and the court held
that in reality it was contract of antichresis. But in the
contract in that case it was agreed that the debtor assigned
and transfer the ownership and possession of the land to
the creditor for his management and enjoyment as a profit
from the amount for which it had been mortgaged. This
agreement, which characterizes the contract of antichresis,
does not exist in the instant case.
Q1: Is there a contract of Anticresis?
A1: No, maam, there was a contract of sale with right to repurchase.
Q2: Can’t we say that there is an equitable mortgage here?
A2: No maam. The parties here clearly agreed to sell the property,
not to mortgage it.
Q3: Can the land still be redeemed? Did they stipulate in the contract
of sale that the property cannot be redeemed anymore after a
particular period?
A3: The property cannot be redeemed anymore maam even if there
was no specified period. The contract stated that they will redeem the
property once they are able to, however Article 1606 of the Civil
Code provides that when there is no redemption period, it shall be for
four years. If there is a period, it shall not be more than 10 years.
Since the right of redemption has already exceeded 10 years, then
the heirs cannot redeem the property anymore.
Article 1606. The right referred to in article 1601, in the absence of
an express agreement, shall last four years from the date of the
contract.
Should there be an agreement, the period cannot exceed ten years.
In this case there was no contract of antichresis. Remember, a
contract of antichresis is an accessory contract. You must show proof
that there was an intention of the parties that the creditor will receive
the fruits of the property and apply these fruits to the interest owing

and then to the principal. In this case, it was clear that there was no
such intent between the parties. In fact there was no evidence shown
that there was a principal obligation or a contract of loan to support
the alleged antichresis. Under this fact you can also say that there
was no equitable mortgage because there was no intention that the
contract of sale with right to repurchase was to secure a principal
obligation. It is clear that the intention was to sell the property and
give a right to repurchase when he had the means to pay the
repurchase price.
Recall your law on sales regarding right of redemption. In this case
the period is said to be fixed because it states “when he has the
means”, this is not considered as a condition but a period. Therefore
since it is a period, then the redemption should not exceed ten years.
Considering that the case was brought only after 15 years and there
was no move to redeem the property, there can be no redemption
anymore and the title has been consolidated in the name of Alegata
or his heirs.
Going back to antichresis, this contract must be clearly intended and
expressly agreed between the parties. There is an agreement that
the creditor shall have possession of the property given as security
and apply the fruits thereof to the interest owing and thereafter the
principal obligation.
Article 2133. The actual market value of the fruits at the time of the
application thereof to the interest and principal shall be the measure
of such application.
At the time you apply the fruits to the interest and principal obligation,
you take into consideration the market value of the fruits, not the
market value at the time the property was delivered or the loan was
perfected.
Article 2134. The amount of the principal and of the interest shall be
specified in writing; otherwise, the contract of antichresis shall be
void. (n)
It is clear under this provision that the antichresis should be in writing
not only for the enforcement of the obligation as against third persons
but for its validity.
Baretto vs Baretto
FACTS: Alberto Barretto alleges that he is the owner of the
whole hacienda called Balintagac as the heir of Antonio
Vicente Barretto (Vicente for brevity). One Leonardo F.
Barretto entered into the property and has been receiving
two-thirds of the fruits which the usurped portion annually
produced despite demands from Alberto to vacate the
property and return the fruits or pay its value.
Leonardo alleges that he is the true owner of the hacienda
along with his co-heirs who succeeded over the ownership
of Juan Antonio Barretto Sr., (Antonio for brevity) and
denies the ownership of Alberto. Leonardo alleged that by
a notarial document, Juan Antonio Barretto Jr., (Juan for
brevity) the executor of the estate of Antonio declared
himself as the sole and absolute owner of the hacienda
and borrowed money from Vicente with the hacienda as
security. For the failure of Juan to pay the debt, Vicente
foreclosed the mortgage in order to recover the money
loaned. Half of the mortgaged hacienda was levied upon
and a judgment to sell the property was rendered, but the
other half of the attached hacienda could not be sold in
spite of the fact that it was placed at auction three times.
Due to the non-payment of the loan, the heirs of Juan
administered, to the exclusion of the true heirs of Antonio,
the entire hacienda for the exclusive account of Vicente,
acknowledging him as the owner of all of it and delivering
|2-Manresa CredTrans TSN |37
to him all its products.
ISSUES: 1. WON there was a contract of antichresis. YES
HELD: Vicente as creditor — not being able to collect his
credit nor obtain the adjudication in his favor of half of
hacienda which was mortgaged for the security of the debt,
and there having been no bidders on the three occasions in
which it was offered for public auction — took possession
of the hacienda and from that time on received through his
administrators the products of the same for the purpose of
collecting his credit interests. Vicente and his heir Alberto
therefore held it in usufruct with the knowledge and
express consent of its owners, the heirs of Juan and
Antonio. This was all accomplished by virtue of a verbal
contract, and not by written one, entered into between the
owners of the hacienda and the creditor Vicente Barretto.
From the documentary and oral evidence on record, the
debtors delivered not only one half pertaining to Juan, but
the whole hacienda including the share of the heirs of
Antonio with a view that the creditor might collect by
usufruct his credit with the accrued interests.
The assignment of the hacienda to Vicente was not made
in payment of his credit, the debtors have limited
themselves to give to the creditor the right to collect his
credit from the fruits of the hacienda, conferring upon him
the possession of the property, but not transferring to him
the dominion of the same. The agreement or verbal
stipulation is defined by the (old) Civil Code in its article
1881, which says: “By the antichresis a creditor acquires a
right to receive the fruits of real property of his debtor, with
the obligation to apply them to the payment of the interest,
if due, and afterwards to the principal of his credit.” The
possession of the hacienda enjoyed by the creditor Vicente
Barretto while living and later on by his successors up to
Alberto was conferred to them by virtue of the stated
contract or agreement in antichresis.
2. WON the heirs of Juan and Antonio may regain
possession of the property? No
HELD: Although article 1884 of the same Code states that
the creditor does not acquire through possession the
ownership of the real property delivered by virtue of an
antichresis, for failure to pay the debt within the stipulated
time — any agreement to the contrary being void —
nevertheless, the debtor according to the preceding article
1883 cannot recover the use of the real property given in
antichresis to the creditor, without previously fully paying
the creditor, who in case of insolvency may ask for the sale
of the real property which he possesses by virtue of the
covenant in antichresis, unless the pending debt be paid. It
does appear in any way that the debt, for the payment of
which the whole hacienda was delivered in antichresis, has
been paid, it is doubtless that the defendant Leonardo,
when he effected the usurpation, acted without just reason
and in contravention of the provisions of the said article
1883 of the Civil Code. It is known that the action to
recover a thing, where a legitimate possessor has been
deprived of his possession, takes place in accordance with
the law, even against the owner himself, who wrested the
possession, since the despoiler can never be protected by
the law even on his right of ownership, without first
restoring what he acquired through his authority by an
illegal act of dispossession.
Q1: Is there a contract of antichresis here?
A1: Yes maam.
Q2: Why is it in this case it was valid even if there was no stipulation
in writing?

Maam answers: The last letter in Article 2134 is (n). This means that
this is a new provision inserted into the New Civil Code. So dati, hindi
pa kailangan na naka sulat.
Q3: When can the heirs of Juan Antonio here regain ownership of the
property subject to antichresis?
A3: Only when the debt has been paid maam. Until the obligation is
paid by applying the fruits to the interest then to the principal maam,
Alberto can continue in his possession of the land under a contract of
antichresis.
Here it was shown that the creditor took possession of the hacienda
by virtue of a voluntary assignment with the express consent of the
heirs. It was also shown that the debtors committed themselves to
give to the creditor the right to collect his credit from the fruits of the
hacienda. In other words, possession was transferred for this
purpose, but certainly not to transfer ownership. The verbal
stipulation between the parties in this case gave rise to a perfected
contract of antichresis because there was still no prohibition under
2134 that it must be in writing to be valid. Before, under the old Civil
Code, a verbal or oral agreement for antichresis was valid.
In antichresis there is no transfer of ownership. However, this does
not mean that the debtor or his heirs can regain possession of the
property at any time. In order for any property under antichresis to be
released from such contract, the debtors must pay the principal
obligation either by applying the fruits to the interest and obligation or
to fully pay the agreed price and releasing the property from the
antichresis. In case of insolvency, they can ask for the sale of the
property and apply the proceeds to the obligation due to the creditor.
In no case shall the property subject of the antichresis be released
until payment of the obligation. As a contract of security, the
antichresis is only extinguished when the principal obligation has
been extinguished.
On the part of the creditor, just because he has actual possession of
the property and the use and enjoyment of the fruits, does not mean
that he can obtain ownership over the property. Acquisitive
prescription does not apply in this case, no matter how long the
period of possession is because what the creditor has is merely the
right to possess the property and apply the fruits to the obligation and
not the right to own the same. In antichresis the creditor is given
possession over the property only as a form of security for the debt
or obligation and once the principal obligation is extinguished, so
must the antichresis. The property has to be released and
possession given back to the debtor who retains ownership over it.
In the book of De Leon, as well as in other sources, they still discuss
how a contract of antichresis is a consensual contract. Of course now
we know under 2134 that it is no longer the case. It has already
become a formal or solemn contract, perfected by the compliance to
2134. Non-compliance will render the contract void.
Bangis vs Heirs of Serafin
FACTS: Spouses Serafin, Sr. and Saludada Adolfo were
the original registered owners of a lot which was
mortgaged to the DBP. Upon default in the payment of the
loan obligation, it was foreclosed and ownership was
consolidated in DBP’s name under a TCT. Serafin Adolfo,
Sr. repurchased the same and was issued a TCT a year
after his wife died. He allegedly mortgaged the subject
property to Ancieto Bangis who took possession of the land
but their transaction was not reduced into writing. When
Adolfo died, his heirs executed a deed of extrajudicial
partition covering the subject property and TCT issued to
them. The said property was subdivided and separate
titles were issued in names of the heirs of Adolfo.
The heirs of Adolfo filed a complaint for annulment of the
|2-Manresa CredTrans TSN |38
deed of sale and declaration of the purported contract of
sale as antichresis, accounting and redemption of property
and damages against Bangis. The RTC rendered a
decision in favor of the heirs of Adolfo declaring that the
contract as an antichresis, ordering the defendant to deliver
the possession of the property in question to the plaintiffs
and the TCT under Bangis as null and void. Thus, the
heirs of Bangis appealed before the CA. CA affirmed the
RTC finding that the contract between the parties was a
mortgage, not a sale. It noted that while Bangis was given
possession of the subject property, the certificate of title
remained in the custody of Adolfo and was never
cancelled.
ISSUE: WON the transaction between the parties was one
of antichresis
HELD: There was neither an antichresis nor sale. For the
contract of antichresis to be valid, Article 2134 of the Civil
Code requires that “the amount of the principal and of the
interest shall be specified in writing; otherwise the contract
of antichresis shall be void.” In this case, the Heirs of
Adolfo were indisputably unable to produce any document
in support of their claim that the contract between Adolfo
and Bangis was an antichresis, hence, the CA properly
held that no such relationship existed between the parties.
The bare testimony of one of the Heirs of Bangis, Rodolfo
Bangis, that the subject photocopy was only handed to him
by his father, Aniceto, with the information that the original
thereof “could not be found” was insufficient to justify its
admissibility. The identification made by Notary Public
Atty. Valentin Murillo that he notarized such document
cannot be given credence as his conclusion was not
verified against his own notarial records. The Heirs of
Bangis failed to establish the existence and due execution
of the subject deed on which their claim of ownership was
founded.
Q1: Why was there no contract of antichresis here?
A1: No, it did not comply with Article 2134 that a contract of
antichresis must be in writing.
Q2: Why, when was this contract entered into?
A2: Sometime in 1975 maam.
Q3: So the New Civil Code was already in effect here. Why was
there no sale?
A3: There was no clear proof that there was a contract of sale maam,
what they presented was only a photo copy of the alleged deed of
sale.
Q4: But we already know from our Sales that a contract of sale is
perfected by mere consent, in what other way can you prove a
contract of sale? Was there anything presented to show the intention
of the parties to enter into a contract of sale?
Maam answers: No, other than the photocopy there was no other
proof shown. In fact the title remained with Adolfo the debtor. They
could have shown that there was a clear intention of the parties to
have a sale here through proving subsequent acts of ownership for
example.
Q5: So there is no contract of antichresis kasi walang compliance
with 2134, hindi rin sale kasi there was no proof that the parties
intended to transfer ownership. What does that tell us, if there is an
alleged sale but the title remains in the possession of the debtor?
Was there a valid contract at all?
A5: That there could be a loan or mortgage maam.
There is a mortgage here, as we have already discussed, even if
there was no written agreement, there can be a valid mortgage. It

was clear here that the party was delivered to the creditor to secure
the principal contract. Although as a general rule, delivery of the
property is not required in a mortgage, the parties can agree that the
property can be delivered to the mortgagee to secure the obligation.
In the dispositive portion of the case the SC held that there is a
liability to pay the obligation together with the payment of the interest,
therefore it is not antichresis, nor is it a sale, but a mortgage.
For a contract of antichresis to be valid, Article 2134 provides that the
amount of the principal as well as the interest should be written. The
heirs of Adolfo were unable to produce any document to show that
the contract was an antichresis. There could have been no contract
of sale as well as there must be proof that the parties really intended
to transfer ownership of the property, here the certificate of title
remained with Adolfo. Since there was no sale or antichresis, at the
very least what we have here is a contract of mortgage. The
mortgage continued to exist despite the lapse of a considerable
number of years from the time it was constituted because the
obligation was not satisfied. The non-compliance with 2134 will
invalidate the contract of antichresis but it will not affect the validity of
the principal obligation.
Article 2135. The creditor, unless there is a stipulation to the
contrary, is obliged to pay the taxes and charges upon the estate.
He is also bound to bear the expenses necessary for its preservation
and repair.
The sums spent for the purposes stated in this article shall be
deducted from the fruits.
Obligations of the Antichretic creditor:
1. Pay taxes due to the property unless there is a stipulation to the
contrary. If the creditor does not pay the taxes, he cannot sue the
debtor for indemnity for damages due to his own failure.
2. Bear the expenses for preservation and repair
These two sums are deducted from the fruits due to the creditor.
Article 2136. The debtor cannot reacquire the enjoyment of the
immovable without first having totally paid what he owes the
creditor. But the latter, in order to exempt himself from the
obligations imposed upon him by the preceding article, may
always compel the debtor to enter again upon the enjoyment of
the property, except when there is a stipulation to the contrary.
It is clear here that the debtor cannot compel the return of the
property until the obligation is totally paid.
Macapinlac vs Repide
FACTS: Jose Macapinlac was indebted to the Bachrach
Motor Company, for the price of an automobile and its
accessories, purchased upon credit; and as evidence of
this indebtedness the he executed fourteen (14)
promissory notes. With the delivery of the PNs, Macapinlac
executed what on its face purports to be a deed of sale,
with privilege of repurchase, to be exercised on or before
October 2, 1917 (due date of the debt), covering his
property, the Hacienda Dolores.
On November 8, 1917, Francisco Gutierrez Repide
acquired all the rights of E. M. Bachrach in the property
which had been conveyed to the latter. Repide was well
aware that the transfer of the property to Bachrach had
been made by the Macapinlac for the purpose of securing
a debt owing to the Bachrach Company, and he was
furthermore aware that part of the debt has been paid and
there was only balance of less than one-half of the sum.
After Repide had acquired the interest in the hacienda in
question, he processed the certificate of title to be
transferred to his own name. To accomplish this, it was
|2-Manresa CredTrans TSN |39
necessary to make it appear that the contract of sale with
pacto de retro noted in the original Torrens certificate was
really and truly what it appeared to be, that is, a contract of
sale, not a mere mortgage, and that the ownership had
consolidated in the purchaser by reason of the failure of the
seller to repurchase the property before the expiration of
the time allowed for redemption. Repide was in actual
possession of the property in question, and that he had in
effect been enjoying possession since August 24, 1917.
ISSUES: 1. WON the contract executed between
Macapinlac and Bachrach Motor, the sale with pacto de
retro was a deed of sale or an equitable mortgage.
Equitable Mortgage (EM)
HELD: 1.In taking up these problems we begin with the
situation created by the execution of the contract of sale
with pacto de retro between the plaintiff, Jose C.
Macapinlac, and E. M. Bachrach Company. In this
connection the first and most obvious proposition to be laid
down is that since said conveyance is alleged to have been
executed as security for a debt owing by the plaintiff to the
Bachrach Company, it follows that in equity said
conveyance must be treated as a mere security or
substantially as a mortgage, that is, as creating a mere
equitable charge in favor of the creditor or person named
as the purchaser therein.
In this connection the cardinal rule is that a party who
acquires any interest in property with notice of an existing
equity takes subject to that equity. In other words, having
acquired the interest of Bachrach in the Hacienda Dolores,
with knowledge that the contract of August 22, 1916, has
been executed as security for a debt, Francisco Gutierrez
Repide — or his estate must be understood to stand
towards the present plaintiff in exactly the same position
occupied by Bachrach, if the transfer to Repide had never
been effected.
2. What contract governs between Macapinlac and Repide
(as successor in interest of Bachrach) if the original
contract executed by plaintiff with Bachrach was an EM?
Antichresis
HELD: 2. The estate of Francisco Gutierrez Repide
occupies the position of a mortgagee in possession. The
SC has has upheld the case of Barretto vs Barreto wherein
the heirs of a mortgagee of an estate were found in
possession of mortgaged property more than thirty years
after the mortgage had been executed; and it was shown
that the mortgage had never been foreclosed. Upon this
state of facts it was in effect held that the rights of the
parties, heirs respectively of the mortgagor and mortgagee,
were essentially the same as under the contract of
antichresis.
Under the Civil Code (arts. 1881-1884), it was held that
while non-payment of the debt does not vest the ownership
of the property in the creditor, nevertheless the debtor
cannot recover the enjoyment of the property without first
paying in full what he owes to his creditor. At the same
time, however, the creditor is under obligation to apply the
fruits derived from the estate in satisfaction, first, of the
interest on the debt, if any, and, secondly, to the payment
of the principal. From this is necessarily deduced the
obligation of the creditor to account to the debtor for said
fruits and the corresponding right of the debtor to have the
same applied in satisfaction of the mortgage debt.
The respective rights and obligations of the parties to a
contract of antichresis, under the Civil Code, may be taken
to be established, namely, that if the mortgagee acquires
possession in any lawful manner, he is entitled to retain

such possession until the indebtedness is satisfied and the
property redeemed; that the non-payment of the debt within
the term agreed does not vest the ownership of the
property in the creditor; that the general duty of the
mortgagee in possession towards the premises is that of
the ordinary prudent owner' that the mortgagee must
account for the rents and profits of the land, or its value for
purposes of use and occupation, any amount thus realized
going towards the discharge of the mortgage debt; that if
the mortgagee remains in possession after the mortgage
debt has been satisfied, he becomes a trustee for the
mortgagor as to the excess of the rents and profits over
such debt; and, lastly, that the mortgagor can only enforce
his rights to the land by an equitable action for an account
and to redeem.
Q1: Who is the creditor here? Who is Repide, why is he in
possession of the subject property?
A1: Bachrach is the original creditor here and Repide obtained the
rights of Bachrach in this case as he is the transferee of the property.
Q2: Does this mean that Bachrach sold the property itself to Repide?
A2: No, maam. The possession of Repide is that of an antichretic
creditor, but the SC also applied here the rules on mortgage with
regards to antichresis maam.
Q3: This is another old case wherein the SC held that there is a
contract of antichresis.
Is the mortgagor here entitled to the return of the subject property?
A3: Article 2136 of the Civil Code provides maam that the debtor
cannot reacquire the enjoyment of the immovable without first having
totally paid what he owes the creditor. The creditor must apply the
fruits first to the interest due to the creditor then to the principal
obligation until the obligation is fully paid. However in this case, the
actual amount to be paid was not yet known so there is still a need to
account for the actual amount that Macapinlac has to pay to Repide
as an antichretic creditor.
Q4: In the absence of the accounting of the actual amount that must
be paid, what is the effect with regard to possession?
A4: Since there is a contract of antichresis maam, Repide can
possess the property not as an owner but as anticretic creditor
because it is only in his possession for him to obtain the fruits.
In an antichresis the debtor cannot regain possession of the property
until he has paid the full obligation due to the creditor. The creditor on
the other hand has the obligation to apply the fruits of the property to
the satisfaction of the interest first then to the principal. There is the
obligation of the creditor to account to the debtor for the said fruits
which will be applied to the satisfaction of the debt. While it is true
that Bachrach is the original creditor in this case, where the
possession of the property was transferred to Repide, there was no
transfer of ownership. It was not a contract of sale to transfer the
ownership of the property because in the first place, Bachrach was
only an anticretic creditor. The contract entered into between
Bachrach and Repide was only an assignment of rights over the
subject property, the right to collect the fruits due.
In this instance, although the SC here used the term mortgagee, he
was really an anticretic creditor. If the antichretic creditor acquires
possession in any lawful manner, he is entitled to retain such
possession until the indebtedness is satisfied and the property
redeemed. The failure of the debtor to fulfill the anticretic debt in the
period provided does not transfer ownership to the creditor. The
creditor remains only in possession of the land and collects the fruits
and rents therein to apply it to the debt.
The general duty of the mortgagee in possession towards the
premises is that of the ordinary prudent owner' that the mortgagee
must account for the rents and profits of the land, or its value for
purposes of use and occupation, any amount thus realized going
|2-Manresa CredTrans TSN |40
towards the discharge of the mortgage debt. If the creditor remains in
possession after the anticretic debt has been satisfied, he becomes a
trustee for the mortgagor as to the excess of the rents and profits
over such debt. If the creditor refuses to account for the fruits to be
applied, the debtor can file an action to compel the accounting
thereof. With that the debtor will know how much he will really pay. In
this case the amount actually due cannot be known yet until an
accounting has been made. The mortgagor can only enforce his
rights to the land by an equitable action for an account and to
redeem.
Under 2136, take note of the second paragraph. If the creditor does
not want to pay the taxes and other expenses, he can compel the
debtor to enter into enjoyment of the property again, unless there is a
stipulation to the contrary.
Article 2137. The creditor does not acquire the ownership of the
real estate for non-payment of the debt within the period agreed
upon.
Every stipulation to the contrary shall be void. But the creditor may
petition the court for the payment of the debt or the sale of the real
property. In this case, the Rules of Court on the foreclosure of
mortgages shall apply.
If the obligation is not paid, it says here that the creditor does not
acquire ownership of the property. Ownership is not transferred upon
delivery of the possession but merely the right to receive the fruits.
Spouses Ramirez and Bonifacio vs CA, Martin and Guinto
FACTS: Spouses Ramirez filed an application for
registration of a parcel of Riceland in Rizal which was
granted. Later, private respondents Martin and Guinto filed
a petition to review the decree of registration on the ground
of fraud. They alleged that in 1938, they loaned P400 from
Spouses Ramirez and secured such loan with a mortgage
on the subject land by way of antichresis.
As a result of the antichresis, the Tax Declaration No. was
substituted and petitioners started paying taxes on the
land. However, Spouses Ramirez refused to return the land
to respondents after several attempts to redeem it. They
filed the present petition after learning of the issuance of
the certificate of title in the names of the Ramirez’.
The trial court found the deeds of sale spurious and ruled
in favor of respondents. It found that respondents took
possession of the land as owners after the death of Agapita
Bonifacio and in 1938, mortgaged it to Ramirez to secure
the loan valued at P400. It was agreed that the
respondents could not redeem the property within a period
of 5 years and that the petitioners would take possession of
the land, enjoy its fruits, and pay the land taxes thereon.
The written agreement was kept by the Ramirez as
creditors.
ISSUE: WON Ramirez’ are merely antichetic creditors?
YES
HELD: Ramirez willfully and fraudulently suppressed the
facts that petitioners are the legal and rightful owners of the
ricefield and that they possess such ricefield merely as
antichretic creditors as security for the loan of P400.
Ramirez spouses are guilty of fraudulent misrepresentation
and concealment when they declared in their application
that no other person had any claim or interest in the said
land.
While there was an admission that the petitioners have
been in actual possession of the disputed land since
1938, it was made to show and prove the fact that the

petitioners are only antichretic creditors. Ramirez never
admitted that they have not possessed the land at all. On
the contrary, they alleged that they and their predecessors-
in-interest namely Gregoria Pascual and Agapita Bonifacio
have been in possession of the land since time immemorial
and that the petitioners were placed in possession of the
land pursuant to a contract of antichresis. The SC has on
several occasions held that the antichretic creditor cannot
ordinarily acquire by prescription the land surrendered to
him by the debtor. Ramirez spouses are not possessors in
the concept of owner but mere holders placed in
possession of the land by its owners. Thus, their
possession cannot serve as a title for acquiring dominion.
However, under Article 2136 of the Civil Code, the debtor
cannot reacquire the enjoyment of the immovable without
first having totally paid what he owes the creditor. Thus,
respondents may reacquire the land after paying the still
existing debt.
Q1: Was there an antichresis here? What is the effect of the
acknowledgement by the possessors of the property that there was
an antichresis?
A1: Yes maam. This means that they acknowledge that they remain
in possession of the property only until the debt has been paid.
Q2: Can the antichretic creditor acquire ownership over the property
by virtue of acquisitive prescription?
A2: No maam. In this case it was held that the petitioners being
merely antichretic creditors, their possession is not which is
contemplated in law for prescription. They must be in possession of
the property in the concept of an owner. Because they acknowledged
that there is in fact an antichresis, they cannot later on say that they
have acquired the property through prescription.
There was no dispute as to the existence of the contract of
antichresis. It was admitted that the petitioners have been in actual
possession of the land since 1938, but it was proven that they were
only antichretic creditors. In other words they agreed that petitioners
will take possession of the land and then apply the fruits to the
principal obligation. Considering that the petitioners are only
antichretic creditors, they cannot acquire the property by prescription
even if the land was delivered to them. In order for acquisitive
prescription to run, the possession must be in the concept of an
owner. Here they are mere holders, the land placed in their
possession by agreement with the actual owners. Their possession
therefore cannot be constituted as a title for dominion, unless they
repudiate their status as an antichretic creditor.
In a contract of antichresis, the parties cannot enter into a stipulation
wherein in case of default, the antichretic creditor will be the owner of
the subject property because that will constitute pactum
commissorium which is void under our laws for being against public
policy. A stipulation authorizing the antichretic creditor to appropriate
the land upon default is void.
Remedies available to the creditor upon default
1. file for specific performance to compel the debtor to pay
2. file a petition for the sale of the property under judicial or
extrajudicial foreclosure as allowed in contracts of mortgage and
pledge
Article 2138. The contracting parties may stipulate that the interest
upon the debt be compensated with the fruits of the property which is
the object of the antichresis, provided that if the value of the fruits
should exceed the amount of interest allowed by the laws against
usury, the excess shall be applied to the principal.
Here it emphasizes the obligation of the antichretic creditor to apply
the fruits of the property to the satisfaction of the interest first then
the principal.
|2-Manresa CredTrans TSN |41
Article 2139. The last paragraph of article 2085, and articles 2089 to
2091 are applicable to this contract.
Article 2085, last paragraph: Third persons who are not parties to the
principal obligation may secure the latter by pledging or mortgaging
their own property.
Third parties can also use their properties to secure a contract of
antichresis even if they are not the debtor.
Article 2089. A pledge or mortgage is indivisible, even though the
debt may be divided among the successors in interest of the debtor
or of the creditor. Therefore, the debtor's heir who has paid a part of
the debt cannot ask for the proportionate extinguishment of the
pledge or mortgage as long as the debt is not completely satisfied.
Neither can the creditor's heir who received his share of the debt
return the pledge or cancel the mortgage, to the prejudice of the
other heirs who have not been paid. From these provisions is
excepted the case in which, there being several things given in
mortgage or pledge, each one of them guarantees only a
determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of
the pledge or mortgage as the portion of the debt for which each
thing is specially answerable is satisfied.
Article 2090. The indivisibility of a pledge or mortgage is not affected
by the fact that the debtors are not solidarily liable.
Articles 2089 and 2090 emphasize that an antichresis is also
indivisible by nature.
Article 2091. The contract of pledge or mortgage may secure all
kinds of obligations, be they pure or subject to a suspensive or
resolutory condition.
2091 refers to the fact that an antichresis may secure all kinds of
obligations.
In real life, especially now, hindi na ganun ka common ang purely
antichresis contracts between creditors and debtors. Its either a
mortgage or sale with repurchase para mas madali. The property is
delivered as a security but no right is given to apply the fruits to the
debt. There are also some instances wherein there is a mix between
antichresis and another contract, for example, the mortgagee will
allow the mortgagor to work on the land or plant crops, the property
is in the possession of the mortgagee but the mortgagor will have the
fruits in order to pay the creditor. That is still a valid contract even if it
is mixed. We have learned that if there is no specific name or law to
a contract, it can be an inominate contract wherein the agreement of
the parties or the applicable provisions of law will apply and not
strictly one law or the other.
March 3, 2016 (2nd hour)
Transcribed by: Jennifer Lim
CHATTEL MORTGAGE
Article 2140. By a chattel mortgage, personal property is
recorded in the Chattel Mortgage Register as a security for
the performance of an obligation. If the movable, instead of
being recorded, is delivered to the creditor or a third
person, the contract is a pledge and not a chattel
mortgage. (n)
A chattel mortgage is still an accessory contract. A contract by virtue
of which it is recorded in a chattel mortgage registered as a security
for the performance of an obligation. Registration therefore is

required because it is provided by 2140. Likewise, aside from being
an accessory contract, a chattel mortgage is also unilateral because
it produces only obligations on the part of the creditor to free the
thing from encumbrance to fulfill the obligation.
However, take note of the distinctions of a chattel mortgage and a
pledge.
Chattel Mortgage Pledge
Registration is required Not required
Delivery is not essential
Real contract wherein
delivery is essential for its
Act No. 1508 governs the validity
property mortgaged
Sale of thing pledged –
Creditor can sue for the Article 2130
balance except if the sale is
on installments of a
personal property –covered Creditor cannot sue for the
by the Recto Law balance
Debtor can receive the
excess
Debtor is not entitled to the
excess unless there is a
stipulation to the contrary
Recall in Recto Law, there are three remedies available to a vendor
who sold the personal property in installment: cancellation of sale,
specific performance, and foreclosure of a chattel mortgage. If the
remedy availed of by the seller is the foreclosure, you can not
anymore sue for the deficiency. Such is only under the Recto Law,
otherwise, the creditor can sue for the balance.
Do take note of the similarities of a contract of pledge
Chattel Mortgage & Pledge
An accessory contract to secure the performance of an
obligation
Constituted on personal property
Indivisible in nature & a lien on a property
Creditor cannot appropriate the property for himself in
payment of the debt. When debtor defaults, the property
is sold to pay the creditor
Extinguished by the fulfillment of the principal obligation
or by the destruction of the property
Article 2141. The provisions of this Code on pledge, insofar
as they are not in conflict with the Chattel Mortgage Law
shall be applicable to chattel mortgages. (n)
Notice, there are only two provisions in the Civil Code that are
applicable to Chattel Mortgage. Because the main law is the Chattel
Mortgage Law, Act No. 1508, then the provisions of the Civil Code
suppletorily in so far as they not inconsistent. Also take note of the
Special Laws applicable depending on the property involved (Motor
Vehicles Law, Ship Mortgage Decree, Revised Administrative Code,
and Revised Penal Code applicable for Chattel Mortgages).
In the RPC, you have article 319 knowingly removing any personal
property in the Chattel mortgage law to any province or city other
than the one which the thing is located at the time of the execution
without the written consent of the mortgagee. Another is selling or
|2-Manresa CredTrans TSN |42
pledging of a thing already mortgaged or any part thereof without the
written consent of the mortgage at the back of the mortgage and
registered in the Chattel Mortgage register,
Do take note; Article 100 of the RPC, every person criminally liable is
also civilly liable. But these are two kinds of liability. It could also
mean an occasion wherein you are not relieved of you criminal
liability, so mortgagor is not really relieved from criminal liability even
if the indebtedness has already been paid. Mortgagor seller must
inform the mortgagee that the thing can be sold and with his (the
mortgagee’s) consent. In such instance, the sale is valid, however, in
the absence of consent of the mortgagee, the mortgagor can be held
criminally liable.
Subject matter of a chattel mortgage is a personal or movable
property. But deviations are already allowed by jurisprudence.
1. Shares of stock – incorporeal rights wherein the rights as a
share holder may be the subject of a mortgage.
Registration in both the domicile of the corporation or of the
person is required.
2. Interest in a business
3. Machineries treated by the parties as personal property
4. Vessels- applying the Ship Mortgage Decree, it is essential
that it be recorded in the Philippine Coast Guard
5. Motor Vehicles – LTO or LTFRB for vehicles used for
public service
BORLOUGH v FORTUNE
FACTS: United Car Exchange sold to Fortune Enterprise a
car. The same car was sold by Fortune Enterprises to
Salvador Aguinaldo. The latter not able to pay it in full, he
executed a promissory note.
To secure the pay payment of this note, Aguinaldo
executed a deed of chattel mortgage over said car. The
deed was duly registered in the office of the Register of
Deeds of Manila. As the buyer-mortgagor defaulted in the
payment of the installments due, counsel for Fortune
Enterprises Inc. addressed a letter on May 16, 1952,
requesting him to make the necessary payment and to
keep his account up to date, to that no court action would
be resorted to.
It further appears that the car found its way again into the
United Car Exchange which sold the same in cash for
P4,000 to one O. N. Borlough on April 6, 1952.
Accordingly, he registered it on the following day with the
Motor Vehicles Office.
Issue: As between a prior mortgage executed over a motor
vehicle, registered under the Chattel Mortgage Law only,
without annotation thereof in the Motor Vehicles Office, and
a subsequent registration of the vehicle in the Motor
Vehicles Office accompanied by actual possession of the
motor vehicle, which should prevail? O.N. Borlough’s rights
should be upheld.
Held: Two recording laws are here being invoked, one by
each contending party — the Chattel Mortgage Law (Act
No. 1508), by the mortgagor and the Revised Motor
Vehicles Law (Act No. 3992), by a purchaser in
possession.
The Revised Motor Vehicles Law is a special legislation
enacted to "amend and compile the laws relative to motor
vehicles," whereas the Chattel Mortgage Law is a general
law covering mortgages of all kinds of personal property.
The former is the latest attempt to assemble and compile
the motor vehicle laws of the Philippines, all the earlier
laws on the subject having been found to be very deficient

in form as well as in substance (Villar and De Vega,
Revised Motor Vehicles Law, p. 1); it had been designed
primarily to control the registration and operation of motor
vehicles (section 2, Act No. 3992).
In the first place, the provisions of the Revised Motor
Vehicles Law on registration are not inconsistent with does
of the Chattel Mortgage Law. In the second place, implied
repeals are not favored; implied repeals are permitted only
in cases of clear and positive inconsistency. We have,
therefore, an additional requirements in the Revised Motor
Vehicles Law, aside from the registration of a chattel
mortgage, which is to report a mortgage to the Motor
Vehicles Office, if the subject of the mortgage is a motor
vehicle; the report merely supplements or complements the
registration.
The recording provisions of the Revised Motor Vehicles
Law, therefore, are merely complementary to those of the
Chattel Mortgage Law. A mortgage in order to affect third
persons should not only be registered in the Chattel
Mortgage Registry, but the same should also be recorded
in the motor Vehicles Office as required by section 5 (e) of
the Revised Motor Vehicles Law. And the failure of the
respondent mortgage to report themortgage executed in its
favor had the effect of making said mortgage ineffective
against Borlough, who had his purchase registered in the
said Motor Vehicles Office.
On failure to comply with the statute, the transferee's title is
rendered invalid as against a subsequent purchaser from
the transferor, who is enabled by such failure of
compliance to retain the indicia of ownership, such as a
subsequent purchaser in good faith, or a purchaser from a
conditional buyer in possession; and the lien of a chattel
mortgage given by the buyer to secure a purchase money
loan never becomes effective in such case as against an
innocent purchaser.
Q: What is the effect of failure to register the vehicle in the Motor
Vehicle Register?
A: Because of this he cannot exercise his rights over an innocent
purchaser for value.
Q: What there still a valid mortgage even if it was not registered?
A: There was still a valid mortgage; however, it does not bind third
persons who acquired the property in good faith.
Q: Does this mean that the Revised Motor Vehicle Law has repealed
the requirements under the Chattel Mortgage Law?
A: No. It is not contradictory, but in fact, suppletory to the law. It only
provides an extra layer of protection to the mortgage mortgagor but
also as to third persons who may have an interest over the property.
There are two laws cited in this case, the Chattel Mortgage Law and
the Revised Motor Vehicles Law. This Revised Motor Vehicles law is
a special law made to amend and compile the motor vehicle laws of
the Philippines, all the earlier laws on the subject having been found
to be very deficient in form as well as in substance; it had been
designed primarily to control the registration and operation of motor
vehicles. On the other hand, the Chattel Mortgage Law is a general
law covering mortgages of all kinds of personal property.
With the enactment of the RMV Law, the CM Law was not repealed.
In fact, it is complimentary, The recording provisions of the Revised
Motor Vehicles Law, therefore, are merely complementary to those of
the Chattel Mortgage Law. A mortgage in order to affect third
persons should not only be registered in the Chattel Mortgage
Registry, but the same should also be recorded in the motor Vehicles
Office.
|2-Manresa CredTrans TSN |43
Failure of the respondent mortgagee to report the mortgage executed
in its favor had the effect of making said mortgage ineffective against
Borlough, who had his purchase registered in the said Motor
Vehicles Office.
On failure to comply with the statute, the transferee's title is rendered
invalid as against a subsequent purchaser from the transferor, who is
enabled by such failure of compliance to retain the indicia of
ownership, such as a subsequent purchaser in good faith, or a
purchaser from a conditional buyer in possession; and the lien of a
chattel mortgage given by the buyer to secure a purchase money
loan never becomes effective in such case as against an innocent
purchaser.
On holding a lien on a property in so far as he can be reasonably do
so, must protect others in good faith by complying with the provision
of the laws concerning certificate of titles on motor vehicles. In this
case, Fortune is not entitled to the lien against Borlough considering
he is an innocent purchaser for value.
Again as we discussed, registration affects third persons.
Registration with the LTO to bind third persons. In the absence
thereof, you cannot have a better right. Registration is only an
additional requirement.
Another deviation is a house which is an immovable property but if it
of mixed materials, it can be a valid subject of a chattel mortgage.
Also, a house that is demolished as well as a house built on rented
land.
Q: What is the effect of a chattel mortgage executed on a building?
A: It is valid if the parties intended it to be a personal property
THE STANDARD OIL COMPANY OF NEW YORK vs.
JOAQUIN JARAMILLO - MORILLA
FACTS:
De la Rosa was the lessee of a parcel of land situated in
the Manila and owner of the house built thereon. She
executed a document in the form of a chattel mortgage,
purporting to convey to Standard Oil Company of New York
by way of mortgage both the leasehold interest in said lot
and the building.
After said document had been duly acknowledged and
delivered, Standard Oil presented it to Joaquin Jaramillo,
as register of deeds of the City of Manila, for the purpose of
having the same recorded in the book of record Of Chattel
Mortgages.
Issue: Won There Is Absolute Criterion For Determining
Personal Property For Chattel Mortgage Law; None
Articles 334 and 335 of the Civil Code supply no absolute
criterion for discriminating between real property and
personal property for purpose of the application of the
Chattel Mortgage Law.
It is undeniable that the parties to a contract may by
agreement treat as personal property that which by nature
would be real property; and it is a familiar phenomenon to
see things classed as real property for purposes of taxation
which on general principle might be considered personal
property. Other situations are constantly arising, and from
time to time are presented to this court, in which the proper
classification of one thing or another as real or personal
property may be said to be doubtful.
Here, it was a chattel mortgage but it did not refer to a personal
property but rather to an immovable property which was a building.

Take note that the issue here was the refusal of the register of deeds
to register the said mortgage on the ground that the properties
mentioned were not personal properties. SC ruled that the duty to
register is purely ministerial only. No discretion. Parties may stipulate
whether an immovable is real or personal. The register of deeds has
no authority to pass upon the capacity of the parties to a chattel
mortgage which is presented to him for record as long as it fulfills the
requirements for registration are present, the register of deeds
cannot refuse. Just present a duly notarized instrument.
As long as it is agreed upon by the parties, mortgage of a real
property considered to be a personal property is binding as long as
no third persons are prejudiced. Essentially, we apply here the
doctrine of estoppel. You enter the contract as mortgagor-mortgagee.
The parties themselves deemed it as personal property, although it is
a real property. Therefore, they cannot interpose the validity of the
contract as void for having failed to comply with the requirements of
the law to constitute a chattel mortgage if they have already agreed
that the building or any movable property will be made subject matter
of the mortgage. The parties cannot claim that the contract is void
because it does not comply with the requirements of a chattel
mortgage, but instead complies with the requirements of a real estate
mortgage. Again, apply the principle of estoppel. However the validity
of such contract would depend in so far as there are no third parties
prejudiced. The two parties in a chattel mortgage cannot defeat the
rights over a third party. But of course, do not use the principle of
estoppel in documents which are not executed correctly. As law
students and future lawyers, you know very well what are real and
personal properties. Balik-balik na gidiscuss.
Now let’s discuss
ACT NO. 1508
Section 1. The short title of this Act shall be "The Chattel
Mortgage Law."
Sec. 2. All personal property shall be subject to mortgage,
agreeably to the provisions of this Act, and a mortgage
executed in pursuance thereof shall be termed chattel
mortgage.
So this would also include incorporeal rights such as that of a
stockholder. Registration is required in the place of the principal
business of the corporation and the shareholder.
So mortgage of improvements of a land—can it also be valid subject
matter of mortgage? Yes. Considered as immovable property.
Also, take note that growing crops and large cattle are personal
properties. They are capable of being mortgaged, although they can
be subjected as immovable under Article 415. The real estate
mortgage, in so far as the public is concerned, such improvements
are immovable property.
Sec. 3. Chattel mortgage defined. — A chattel mortgage is
a conditional sale of personal property as security for the
payment of a debt, or the performance of some other
obligation specified therein, the condition being that the
sale shall be void upon the seller paying to the purchaser a
sum of money or doing some other act named. If the
condition is performed according to its terms the mortgage
and sale immediately become void, and the mortgagee is
thereby divested of his title.
Now, Sec. 3. A chattel mortgage is a conditional sale of personal
property.. Wala na yan ha. Because of Article 2140. The CM Law is
also similar sa extra-judicial foreclosure, it is also an old law. It took
effect on July 2,1906. The definition of the Chattel Mortgage is a
contract of security as defined under Article 2140.
Sec. 4. Validity. — A chattel mortgage shall not be valid
|2-Manresa CredTrans TSN |44
against any person except the mortgagor, his executors or
administrators, unless the possession of the property is
delivered to and retained by the mortgagee or unless the
mortgage is recorded in the office of the register of deeds
of the province in which the mortgagor resides at the time
of making the same, or, if he resides without the Philippine
Islands, in the province in which the property is situated:
Provided, however, That if the property is situated in a
different province from that in which the mortgagor resides,
the mortgage shall be recorded in the office of the register
of deeds of both the province in which the mortgagor
resides and that in which the property is situated, and for
the purposes of this Act the city of Manila shall be deemed
to be a province.
Section 4 wala na rin yan siya. Because under the Article 2140 Civil
Code is already in effect, if there is delivery of the subject property,
that will be considered as pledge. Naiwan na lang jan is the
mortgage must of course be recorded in the registry of deeds to bind
against 3rd person..
Sec. 5. Form. — A chattel mortgage shall be deemed to be
sufficient when made substantially in accordance with the
following form, and shall be signed by the person or
persons executing the same, in the presence of two
witnesses, who shall sign the mortgage as witnesses to the
execution thereof, and each mortgagor and mortgagee, or,
in the absence of the mortgagee, his agent or
attorney, shall make and subscribe an affidavit in
substance as hereinafter set forth, which affidavit, signed
by the parties to the mortgage as above stated, and the
certificate of the oath signed by the authority administering
the same, shall be appended to such mortgage and
recorded therewith.
FORM OF CHATTEL MORTGAGE AND AFFIDAVIT.
"This mortgage made this ____ day of ______19____ by
_______________, a resident of the municipality of
______________, Province of ____________, Philippine
Islands mortgagor, to ____________, a resident of the
municipality of ___________, Province of
______________, Philippine Islands, mortgagee,
witnesseth: "That the said mortgagor hereby conveys and
mortgages to the said mortgagee all of the following-
described personal property situated in the municipality of
______________, Province of ____________ and now in
the possession of said mortgagor, to wit: (Here insert
specific description of the property mortgaged.) "This
mortgage is given as security for the payment to the said
______, mortgagee, of promissory notes for the sum of
____________ pesos, with (or without, as the case may
be) interest thereon at the rate of ___________ per centum
per annum, according to the terms of __________, certain
promissory notes, dated _________, and in the words and
figures following (here insert copy of the note or notes
secured). "(If the mortgage is given for the performance of
some other obligation aside from the payment of
promissory notes, describe correctly but concisely the
obligation to be performed.)
"The conditions of this obligation are such that if the
mortgagor, his heirs, executors, or administrators shall well
and truly perform the full obligation (or obligations) above
stated according to the terms thereof, then this obligation
shall be null and void. "Executed at the municipality of
_________, in the Province of ________, this _____ day of
19_____ ____________________ (Signature of
mortgagor.) "In the presence of "_________________
"_________________ (Two witnesses sign here.)
FORM OF OATH. "We severally swear that the foregoing
mortgage is made for the purpose of securing the
obligation specified in the conditions thereof, and for no
other purpose, and that the same is a just and valid
obligation, and one not entered into for the purpose of

fraud." FORM OF CERTIFICATE OF OATH. "At
___________, in the Province of _________, personally
appeared ____________, the parties who signed the
foregoing affidavit and made oath to the truth thereof
before me. "_____________________________"
(Notary public, justice of the peace, 1 or other officer, as
the case may be.)
Section 5 of the law provides for the form of a chattel mortgage, form
of oath and certificate of oath. Take note that we have mentioned last
time the affidavit of good faith. An affidavit of oath is executed by the
parties to attest that the mortgage was made in good faith for the
purpose of securing the obligation thereof and that the sale is a just
and valid obligation, not one done for the purpose of fraud.
Q: What is the effect if there is no affidavit of good faith?
A: The mortgage is valid and not effective as to third persons
ALEKO E. LILIUS vs. MANILA RAILROAD COMPANY
Facts: In this case Laura Lindley Shuman, the Manila Wine
Merchants, Ltd., the Bank of the Philippine Islands and the
Manila Motor Co., Inc., have appealed from an order of the
Court of First Instance of Manila fixing the degree of
preference of the claimants and distributing the proceeds of
the judgment of this court in the case of Lilius vs. Manila
Railroad Co. (59 Phil., 758), the amount of which judgment
in the sum of P33,525.03, including interest and costs, was
deposited by the railroad company with the clerk of the
lower court in that case.
Issue: WON the claim of the Manila Motor Co., Inc., was
inferior in preference to those of the appellees in this case
Ruling:
The court committed no error in holding that the claim of
the Manila Motor Co., Inc., was inferior in preference to
those of the appellees in this case.
But even if the court is authorized to accept the statement
in that judgment as a basis for its finding of fact in relation
to this claim, still it would not establish the claim of
preference of the Manila Motor Co., Inc. Granting that a
mortgage existed between the Manila Motor Co., Inc., and
Aleko E. Lilius, this does not warrant the conclusion that
the instrument evidencing that mortgage is a public
document entitled to preference under article 1924 of the
Civil Code.
Under section 5 of Act No. 1507 as amended by Act No.
2496, a chattel does not have to be acknowledged before a
notary public. As against creditors and subsequent
encumbrances, the law does require an affidavit of good
faith appended to the mortgage and recorded with it.
A chattel mortgage may, however, be valid as between the
parties without such an affidavit of good faith. In 11 Corpus
Juris, 482, the rule is expressly stated that as between the
parties and as to third persons who have no rights against
the mortgagor, no affidavit of good faith is necessary. It will
thus be seen that under the law, a valid mortgage may
exist between the parties without its being evidenced by a
public document.
This court would not be justified, merely from the reference
by the lower court in that case to a mortgage, in assuming
that its date appears in a public document. if the Manila
motor Co., Inc., desired to rely upon a public document in
the form of a mortgagor as establishing its preference in
this case, it should have offered that document in evidence,
|2-Manresa CredTrans TSN |45
so that the court might satisfy itself as to its nature and
unquestionably fix the date of its execution.
There is nothing either in the judgment relied upon or in the
evidence to show the date of said mortgage. The burden
was upon the claimant to prove that it actually had a public
Code. It is essential that the nature and the date of the
document be established by competent evidence before
the court can allow a preference as against the other
parties to this proceeding. Inasmuch as the claimant failed
to establish its preference, based on a public document,
the lower court properly held that its claim against the said
Aleko E. Lilius was based on the final judgment in civil case
No. 41159 of the Court of First Instance of Manila of May 3,
1932.
Nevertheless, it was a valid mortgage as between the parties in the
absence of good faith. The mortgage is still valid between the
mortgagor-mortgagee, but as to third persons, it cannot be binding.
In fact, the absence of that affidavit of good faith, that mortgage
would not be considered as a preferred credit.
Q: Was there an affidavit of good faith in the case of Cebu Intl?
Cebu Int’l Finance vs. CA
Facts: Jacinto Dy executed a Special Power of Attorney in
favor of private respondent Ang Tay, authorizing the latter
to sell the cargo vessel owned by Dy and christened LCT
"Asiatic."
Contrary to their agreements and without the knowledge of
Ang Tay, Ong had his copies of the deed of sale (on which
the aforementioned prohibition does not appear). Ong
presented the notarized deed to the Philippine Coast
Guard which subsequently issued him a Certificate of
Ownership and a Certificate of Philippine Register over the
subject vessel on 27 May 1987. Ong also succeeded in
having the name of the vessel changed to LCT "Orient
Hope."
Subsequently, Ong acquired a loan and as a security, he
executed a chattel mortgage over the subject vessel,[8]
which mortgage was registered with the Philippine Coast
Guard and annotated on the Certificate of Ownership.
Subsequently, the petitioner demanded payment upon
Ong’s default.
Issue: Whether the Chattel mortgage between petitioner
and Ong is valid
Held: yes, the mortgage was valid. The key lies in the
certificate of ownership issued in Ong's name (which, along
with the deed of sale, he submitted to petitioner as proof
that he is the owner of the ship he gave as security for his
loan).
It is paragraph 2 of the mortgage contract which accurately
expresses the true nature of the transaction between
petitioner and Ong -- that it is a simple loan with chattel
mortgage. The amount petitioner loaned to Ong does not
represent the balance of any purchase price since, as we
have previously discussed, the aforementioned documents
state that Ong is already the absolute owner of the subject
vessel.
The prevailing jurisprudence is that a mortgagee has a
right to rely in good faith on the certificate of title of the
mortgagor to the property given as security and in the
absence of any sign that might arouse suspicion, has no
obligation to undertake further investigation.

Hence, even if the mortgagor is not the rightful owner of or
does not have a valid title to the mortgaged property, the
mortgagee or transferee in good faith is nonetheless
entitled to protection. Although this rule generally pertains
to real property, particularly registered land, it may also be
applied by analogy to personal property, in this case
specifically, since shipowners are, likewise, required by law
to register their vessels with the Philippine Coast Guard.
The special affidavit of good faith, on the other hand, is
required only for the purpose of transforming an already
valid mortgage into a "preferred mortgage." Thus, the
abovementioned affidavit is not necessary for the validity of
the chattel mortgage itself but only to give it a preferred
status.
Q: Was there a valid sale from Dy to Ong?
A: Yes, however, there was no transfer of ownership as stated that
ownership would be transferred upon payment of full purchase price.
Q: Since there was no transfer of ownership, there was no transfer of
ownership?
A: Although there was no transfer of ownership, SC ruled that
because of the machinations of Ong, he was able to obtain a
certificate of ownership and had it changed to his name. Thus, Cebu
here relied on that certificate and granted the loan.
Q: What is the effect of the absence of the affidavit of good faith?
A: The effect of affidavit of good faith is only to convert the status of
the mortgage to that of a preferred mortgage and does not affect the
validity of the mortgage.
The SC ruled that the contract between Cebu International and Ong
was a Chattel Mortgage and the Cebu International was the
mortgagee in good faith. The mortgagee has the right to rely in the
good faith in the certificate of title of the mortgagor to the property
given as a security and in the absence of any sign that may arouse
suspicion and has no obligation to undertake further investigation.
Purchaser in good faith, mortgagee in good faith it can be applied in
chattel mortgage.
There was a chattel mortgage, there was no dispute of the sale in
favor of Ong. However, the SC ruled that a mortgagee, such as in
this case Cebu Intl, has relied upon in good faith of the certificate of
title the mortgagor to the property given as a security, even in the
absence of sign to arouse any suspicion, there is no obligation to
conduct further investigation.
Since what was involved here was a vessel, it is also necessary to
register it with the Philippine Coast Guard.
As to the absence of the special affidavit of good faith, this was not
necessary for the validity of the mortgage but only to deal with a
preferred status. Preferred status means that in case the debtors fail
to fulfill the obligation, he is now preferred. In relation to the topic
Preference of Credit which is the second to the last topic.
What does it mean when the property is mortgaged without the
affidavit of good faith?
In case the owner of the ship fails to fulfill his obligation, the ship will
be sold and the proceeds thereof will be paid to the preferred
creditors. The mortgagor would still be considered as a creditor
wherein he would share pro-rata with the ordinary creditors.
What is the relevance of the affidavit of good faith? It is really for the
purpose of securing the obligation that it must be secure a just and
valid obligation and not executed in fraud of third persons. Para hindi
makuha ng creditor, hindi ma sheriff, or hindi ma subject of
foreclosure proceedings. In the absence of that affidavit, di siya
binding to third persons, pero kung meron but it turns out that it was
made for the purpose of fraud, the parties who signed that affidavit
|2-Manresa CredTrans TSN |46
would be liable for perjury and civil liable. Because with that affidavit,
they attest that there was a “valid and just” obligation. It adds more
value.
Sec. 6. Corporations. — When a corporation is a party to
such mortgage the affidavit required may be made and
subscribed by a director, trustee, cashier, treasurer, or
manager thereof, or by a person authorized on the part of
such corporation to make or to receive such mortgage.
When a partnership is a party to the mortgage the affidavit
may be made and subscribed by one member thereof.
Sec. 7. Descriptions of property. — The description of the
mortgaged property shall be such as to enable the parties
to the mortgage, or any other person, after reasonable
inquiry and investigation, to identify the same. If the
property mortgaged be large cattle," as defined by section
one of Act Numbered Eleven and forty-seven, 2 and the
amendments thereof, the description of said property in the
mortgage shall contain the brands, class, sex, age, knots of
radiated hair commonly known as remolinos, or cowlicks,
and other marks of ownership as described and set forth in
the certificate of ownership of said animal or animals,
together with the number and place of issue of such
certificates of ownership.
If growing crops be mortgaged the mortgage may contain
an agreement stipulating that the mortgagor binds himself
properly to tend, care for and protect the crop while
growing, and faithfully and without delay to harvest the
same, and that in default of the performance of such duties
the mortgage may enter upon the premises, take all the
necessary measures for the protection of said crop, and
retain possession thereof and sell the same, and from the
proceeds of such sale pay all expenses incurred in caring
for, harvesting, and selling the crop and the amount of the
indebtedness or obligation secured by the mortgage, and
the surplus thereof, if any shall be paid to the mortgagor or
those entitled to the same.
A chattel mortgage shall be deemed to cover only the
property described therein and not like or substituted
property thereafter acquired by the mortgagor and placed
in the same depository as the property originally
mortgaged, anything in the mortgage to the contrary
notwithstanding.
Saldana vs Phil Guaranty
FACTS: On May 8, 1953, in order to secure an
indebtedness of P15,000.00, Josefina Vda. de Aleazar
executed in favor of the plaintiff-appellant Buenaventura
Saldana a chattel mortgage on.personal properties.
Subsequent to the execution of said mortgage and while
the same was still in force, the defendant Hospital de San
Juan de Dios, Inc. obtained, in Civil Case No. 1930 of the
Municipal Court of Pasay City, a judgment was duly
Josewfina Vda. de Eleazar.
To proceed with the execution sale of the rest of the
properties still under levy, the defendants-appellees
Hospital de San Juan de Dios, Inc. and the Philippine
Guaranty Co., Inc., executed an indemnity bond to answer
for any damages that plaintiff might suffer.
Appellants claims that the phrase in the chattel mortgage
contract — "and all other furnitures, fixtures and equipment
found in the said premises", validly and sufficiently covered
within its terms the personal properties disposed of in the
auction sale, as to warrant an action for damages by the
plaintiff mortgagee.

ISSUE: w/n saldana has a sufficient cause of action
RULING: There is merit in appellant's contention. Section 7
of Act No. 1508, commonly and better known as the
Chattel Mortgage Law, does not demand a minute and
specific description of every chattel mortgaged in the deal
of mortgage but only requires that the description of the
properties be such "as to enable the parties in the
mortgage, or any other person, after reasonable inquiry
and investigation to identify the same
We may notice in the agreement, moreover, that the
phrase in question is found after an enumeration of other
specific articles. It can thus be reasonably inferred there
from that the "furnitures, fixture and equipment" referred to
are properties of like nature, similarly situated or similarly
used in the restaurant of the mortgagor located in front of
the San Juan de Dos Hospital at Dewey Boulevard, Pasay
City, which articles can be definitely pointed out or
ascertain by simple inquiry at or about the premises. Note
that the limitation found in the last paragraph of section 7 of
the Chattel Mortgage Law1 on "like or subsituated
properties" make reference to those "thereafter acquired by
the mortgagor and placed in the same depository as the
property originally mortgaged", not to those already existing
and originally included at the date of the constitution of the
chattel mortgage.
Q: What rule was applied?
A: The court here used the "reasonable description rule"
So in this case, it was emphasized that there was a mortgage.
Section 7 of Act No. 1508, commonly and better known as the
Chattel Mortgage Law, does not demand a minute and specific
description of every chattel mortgaged in the deal of mortgage but
only requires that the description of the properties be such "as to
enable the parties in the mortgage, or any other person, after
reasonable inquiry and investigation to identify the same". In real
estate mortgage, there must be a specific description so as to isolate
it from the rest. As long as in can be identified, this case substantial
compliance may be reasonable description rule.
The "furnitures, fixture and equipment" referred to are properties of
like nature, similarly situated or similarly used in the restaurant of the
mortgagor located in front of the San Juan de Dos Hospital at Dewey
Boulevard, Pasay City, which articles can be definitely pointed out or
ascertain by simple inquiry at or about the premises.
Like or substituted properties may be given preference to those
which are apart by the mortgagor in case in the same depository or
property mortgaged. That is in relation to the last paragraph of Sec.
7. "A chattel mortgage shall be deemed to cover only the property
described therein and not like of substituted property thereafter
acquired by the mortgagor and place in the same depositary as the
property originally mortgaged, anything in the mortgage to the
contrary notwithstanding."
So you have to distinguish properties that are acquired by the
mortgagor. In accordance with the last paragraph, you determine
which of the properties were subsequently acquired which is not
covered by the mortgage. Section 7 does not demand a minute and
specific description of every chattel mortgaged in the deal of
mortgage but only requires that the description of the properties be
such "as to enable the parties in the mortgage, or any other person,
after reasonable inquiry and investigation to identify the same”
March 9, 2016
Transcribed by: Diane Ngeo
|2-Manresa CredTrans TSN |47
We mentioned the distinctions of a chattel mortgage and a pledge, as
well as their similarities. And then, we also mentioned the laws
applicable with regard to chattel mortgage and also the subject
matter thereof.
We also emphasized Section 7 of the Chattel Mortgage Law, as
stated in the case of Saldana, wherein the law does not demand a
specific description of every chattel mortgage in the deal, but only
requires that the description of the mortgage properties be such as to
enable the parties in the mortgage, or any other person, after
reasonable inquiry and investigation to identify the same. So, in the
case of Saldana, we have the substantial compliance with the
reasonable description rule.
How about after incurred obligations? There are two aspects here,
after incurred obligations, and after acquired properties.
After incurred obligations, or after acquired obligations. Let's try to
recall what we have discussed so far: Pledge, Real Estate
Mortgage(REM) and Antichresis, in those types of contracts, they
can secure after incurred obligations so long as these future debts
are accurately described, that's why we have the blanket mortgage or
dragnet clause in a REM which would cover future debts. That's a
valid stipulation in such contract
But how about in a Chattel Mortgage? Do remember that it can only
cover obligations existing at the time mortgage is constituted.
Although a promise expressed in a chattel mortgage which includes
debts that are yet to be contracted can be a binding agreement, the
security itself does not come in existence until after a chattel
mortgage agreement covering the newly contracted debt is executed
- either you execute a fresh new chattel mortgage or amend the old
contract.
The deed of chattel mortgage will be considered void if it provides
that a security stated therein is for the payment of any and all
obligations contracted.
Now, again do remember in a contract of chattel mortgage you do
not deliver the personal property to the mortgagee, you keep it in
your possession. Also take note of the requirement, affidavit of good
faith. What is the purpose of that? Even if you have it in your
possession, it will still be subject to security, so if you try to sell it to
another person, you could be held liable. Another instance is, if in the
affidavit of good faith, ano ang nakalagay dun? That there's a just
and valid obligation. So meaning, an obligation that already exists.
So if you will cover future debts say in the concept of a dragnet
clause, hindi na mag apply yung affidavit of good faith because it
could not apply to just and valid obligations which are yet to exist. So
that's the reason why chattel mortgage cannot cover after incurred
obligations unless they execute a new chattel mortgage or amend
the old one that was executed.
How about after acquired properties? As a general rule, after
acquired properties are not allowed as subject in a chattel mortgage
contract, because it must be the very same property foreclosed.
In a chattel mortgage where it involves personal properties, what is
the effect? Can it cover after acquired properties? For example, I will
lend money from you, I have a grocery business, I will mortgage to
you those personal properties na inventory ko sa aking tindahan.
What happens if at the obligation is already due or demandable, you
still have your store and inventory but it is not the same specific
things or inventory at the time you executed the chattel mortgage.
Why? nabaligya na man nimo. Meron pang naiwan diyan. That is the
instance where you can have a valid chattel mortgage covering after
acquired proprerites, in other words, pwede ma foreclose and then
sold and the proceeds apply to the obligations. So again ha, this is
an instance wherein goods can be replenished in the ordinary course
of business, so the law allows such to be covered by the chattel
mortgage but of course you have to include it the registry that that is
the nature of the properties that are covered by the chattel mortgage.

So after acquired properties may be used to fulfill the obligation even
if the same properties were not present at the time of the execution
of the mortgage as long as there is replenishment of the personal
properties. So again, after incurred obligations and after acquired
properties.
How about the assignment of the mortgagee in relation to a chattel
mortgage? Is it allowed? YES. The creditor can assign the mortgage
credit to a third person to which the latter can hold the mortgages
against the debtor. So if there's failure to pay, that third person, who
is not the mortgagee, can foreclose the property mortgaged. What
are the requirements if the chattel mortgage is assigned to a third
person? Registration is required but not for its validity or it would not
affect the debtor in the sense that it would not be considered as
constructive notice to him. In ObliCon, if there is subrogation, what is
the effect if the debtor pays the original creditor instead of the
assignee. Will the obligation is extinguished? Not necessarily. Why?
Because we have to determine whether the debtor has personal
knowledge of such assignment. If he had no knowledge of such
assignment or subrogation, and he pays to the original creditor, his
obligation is extinguished. But if he has personal knowledge of the
assignment, and he pays to the original creditor, his obligation is not
extinguished and the assignee can go after him.
So relate that here in chattel mortgage, mere registration is not
sufficient. Even if the assignment is registered, if the debtor has no
actual knowledge of the assignment, it will not bind him. So if he pays
to the creditor, it will extinguish his obligation. The debtor cannot be
prejudiced by the assignment that was merely registered without him
having actual knowledge thereof. Thus, there must be
REGISTRATION and ACTUAL KNOWLEDGE on the part of the
debtor.
Who may redeem? The mortgagor, a person holding a subsequent
mortgage, and a subsequent attaching creditor. So this is in relation
to Section 13 of the Chattel Mortgage Law. You could have here an
attaching creditor who redeems to which he will be subrogated to the
rights of the mortgagee and entitled to foreclose the mortgage in the
same manner that the mortgagee could foreclose. Like in the concept
of a second mortgagee sa REM. Ganun din sa chattel mortagage,
you could subject the same property to a second mortgage pero
preferred yung first mortgagee. Now as a subsequent mortgagee,
what can you do? You cannot foreclose yet kasi priority yung first
mortgage but you have the option to pay off the obligation to the first
creditor-mortgagee. So redeem the property from the first mortgage
in effect what happens if you redeem or pays to the first mortgagee,
that mortgage will now be discharged, so ikaw na ngayon ang first
mortgagee, and if there is default you can now foreclose the
property.
How is redemption it made? Paying or delivering to the mortgagee
the amount due on such mortgage as well as the costs and expenses
incurred by such breach of condition before the sale. Right to posses
the property, you already know that in a chattel mortgage delivery is
not required. In fact, if you deliver it will not be a chattel mortgage
anymore but a pledge.
Now, after default, can the creditor get the property from the debtor-
mortgagor? The creditor decides to foreclose the right of the creditor
to take the mortgage property in the possession thereof is implied
from the provision which gives him the right to sell. However, before
the default the mortgagee is not entitled to the possession of the
property, otherwise, the contract becomes a pledge.
What if you're entitled to the possession but the mortgagor refuses to
surrender? The mortgagee can still proceed to the sale, the creditor
however cannot lawfully take the property against the will of the
debtor, so idaan sa proper procedure. Can there be an automatic
appropriation or property mortgaged? No, also prohibited. That would
constitute pactum commisorium. If the debtor refuses to turn over the
possession, the creditor can file a proper proceeding to acquire
possession of the property.
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What if there are third persons in possession of the property? You
also include them in the proceeding. Implead the other persons who
are claiming ownership of that same property.
How is a chattel mortgage foreclosed? Almost the same manner
prescribed in Act 3135, the mortgagee must discharge the mortgage
in the manner provided by law, otherwise he may be held liable for
damages. Still in the concept of a public auction or public sale and
again, no right to appropriate the personal property to himself.
Case of Pameca vs DBP
PAMECA WOOD TREATMENT PLANT, INC., HERMINIO
G.TEVES, VICTORIA V. TEVES and HIRAM DIDAY
R.PULIDO vs. CA and DBP
FACTS: Petitioner PAMECA obtained 2Mworthloan from
respondent Bank. By virtue of this loan, petitioner
PAMECA, through its President, petitioner Teves, executed
a promissory note for the said amount, promising to pay
the loan by installment. As security for the said loan, a
chattel mortgage was also executed over PAMECA's
properties in Dumaguete City, consisting of inventories,
furniture and equipment, to cover the whole value of the
loan.
On January 18, 1984, and upon petitioner PAMECA's
failure to pay, respondent bank extrajudicially foreclosed
the chattel mortgage, and, as sole bidder in the public
auction, purchased the foreclosed properties.
On June 29, 1984, respondent bank filed a complaint for
the collection of the balance against petitioner PAMECA
and private petitioners herein, as solidary debtors with
PAMECA under the promissory note.
Petitioners now claim that respondent appellate court
gravely erred in not holding that the public auction sale of
petitioner PAMECA's chattels were tainted with fraud, as
the chattels of the said petitioner were bought by private
respondent as sole bidder in only 1/6 of the market value of
the property, hence unconscionable and inequitable
(P322,350.00 from 2M), and therefore null and void.
ISSUE: WON the auction sale is null and void on grounds
of fraud and inadequacy of price. – NO
HELD: There is no merit in petitioners' submission that the
public auction sale is void on grounds of fraud and
inadequacy of price.
Having nonetheless examined the inventory and chattel
mortgage document as part of the records, We are not
convinced that they effectively prove that the mortgaged
properties had a market value of at least P2,000,000.00
onJanuary 18, 1984, the date of the foreclosure sale.
At best, the chattel mortgage contract only indicates the
obligation of the mortgagor to maintain the inventory at a
value of at least P2,000,000.00, but does not evidence
compliance therewith.
Furthermore, the mere fact that respondent bank was the
sole bidder for the mortgaged properties in the public sale
does not warrant the conclusion that the transaction was
attended with fraud. Fraud is a serious allegation that
requires full and convincing evidence, and may not be
inferred from the lone circumstance that it was only
respondent bank that bid in the sale of the foreclosed
properties.

NOTE: The mere fact that the mortgagee was the sole
bidder for the mortgaged property in the public sale does
not warrant the conclusion that the transaction was
attended with fraud.
Q: What is 2115?
A: 2115 applies to contract of pledge. 2115 states that when there is
a deficiency of the price, he is not required to pay the deficiency.
Q: Is it applicable to a chattel mortgage?
A: No, the court mention Section 14 of the Chattel Mortgage Law,
and the last part of said law states that the proceeds of the
foreclosure of the chattel mortgage shall be applied first to the cost
and expenses of keeping and sale, and then to the payment of
demand or obligation secured by mortgage and the residue shall be
paid to persons holding subsequent mortgages in their order, and the
balance, after paying the mortgages, shall be paid to the mortgagor
or person holding under him on demand. So, from this part of the
provision it can be said that it is contrary to what is provided for in Art
2 of 2115 or the...
Q: But first we apply the Chattel Mortgage Law, how about 1484?
What is 1484?
A: Recto Law.
Q: Is it applicable here?
A: No, the court that its not applicable because...
Q: Where do we apply Recto Law?
A: Sale of personal property on installments. Under Recto Law, there
is a stipulation that the remedies of the vendor is only alternative not
accumulative. Once he chooses to foreclose the mortgage, he can
no longer recover the deficiency, but the court ruled here that the
Recto Law is also not applicable because it only applies to sale
payable in installments and so it does not apply to chattel mortgage.
Q: How about the issue with regard to the mortgagee being the sole
bidder?
A: The court ruled that allegations of fraud are serious and therefore
it must be proven by full and convincing evidence. The court said that
PAMECA here was not able to prove the existence of fraud.
Therefore, they should uphold the validity of the auction sale.
Take note, Section 14 of the Chattel Mortgage Law is clear with
regard to the residue or the balance. So it is different from a pledge
under Article 3150 because the pledgor may no longer recover the
proceeds of the sale in excess of the amount and further he could not
be held liable for the deficiency. But here, under Section 14 of the
Chattel Mortgage Law, it is very clear as to how it is to be applied. Do
recall sa REM, there's no specific provision allowing it but it is already
implied and jurisprudences already upheld the ruling that the debtor
mortgagor is entitled to the excess, and the mortgagee is also
entitled to recover any deficiency.
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Also mentioned in this case is the Recto Law, applicable only to sale
of personal property on installments. In this case, the sale was not a
personal property on installments, so it is not applicable.
The mere fact that respondent bank was the sole bidder for the
mortgaged properties in the public sale does not warrant the
conclusion that the transaction was attended with fraud. Fraud is a
serious allegation that requires full and convincing evidence, and
may not be inferred from the lone circumstance that it was only
respondent bank that bid in the sale of the foreclosed properties.
Also in Section 14 of the Chattel Mortgage Law, we have this
provision - The mortgagee, may, after 30 days from the time of
condition broken, cause the mortgage property to be sold at a public
auction by a public officer.
This provision is discussed in the case of Cabral vs Evangelista.
Cabral vs Evangelista
FACTS: George had executed in favor of Cabral Spouses
a chattel mortgage covering a Morrison English piano and
a Frigidaire GM Electric Stove as security for payment to
the latter of a promissory note in the sum of P1k executed
on the same date in the Chattel Mortgage Register of Rizal
on 14 Dec 1959. Meanwhile, the Evangelista spouses
obtained a final money judgment against Tanuya in a Civil
Case. They caused the levy in execution on Tanuya’s
personal properties, including the piano and the stove
mortgaged to Cabral spouses.
The said mortgage chattels, together with other personal
properties of the judgment debtor, were sold at public
auction to Evangelista spouses as the highest bidders. The
judgment credit of Evangelista spouses, as creditors in the
said Civil Case, was considered paid up and the Sheriff
issued the corresponding certificate of sale in their favor.
Subsequently, 8 months after the maturity of Tanuya’s
promissory note and his having defaulted in the payment
thereof, Cabral spouses filed their complaint against
Tanuya and the Evangelista spouses, alleging that the
Evangelista spouses had refused their demands to pay the
amount due to Tanuya’s promissory note or to exercises
their right of redemption and praying for judgment, ordering
Tanuya and Evangelista spouses, jointly and solidarily, to
pay them the amounts stipulated on the note, and in case
of the failure to make such payment, to order them to
deliver to the Sheriff the mortgaged chattels for sale at
public auction to satisfy their mortgage credit.
Evangelista spouses now claim that their right over the
mortgaged chattels as purchasers at the public sale in
execution of their judgment against their debtor, defendant
Tunaya, should not be held subordinate to the mortgage
lien of plaintiffs-appellees as mortgagees, by virtue of
prescription and laches on the part of said mortgagees as
well as of their having purchased the chattels at a public
sheriffs sale.
ISSUES:
(1) Has the right of the Cabral spouses to recover the
properties prescribed? NO.
This thirty-day period is the minimum period after violation
of the mortgage condition for the mortgage creditor to
cause the sale at public auction of the mortgaged chattels,
with at least ten days notice to the mortgagor and posting
of public notice of the time, place and purpose of such sale,
and is a period of grace for the mortgagor, who has no right
of redemption after the sale is held, to discharge the

mortgage obligation. 5  give additional time for the debtor to pay who has no right of
The prescription period for recovery of movables for
foreclosure purposes such as in the present case is eight
years as provided in Article 1140 of the Civil Code,  6 and
here plaintiffs had timely filed their action within 8 months
from the mortgage debtor's default.
By the same token, neither could laches properly be
imputed against plaintiffs, who filed their action promptly
after they had been advised by their debtor, defendant
Tunaya, of the public auction sale on June 24, 1960 of the
chattels at the instance of defendants-appellants as his
judgment creditors.
(2) Did the certificate of sale give the Evangelista
spouses superior right against the Cabral spouses?
NO.
Rule 39, section 22 of the old Rules of Court (now Rule 39,
section 25 of the Revised Rules), cited by appellants
precisely provides that "the sale conveys to the purchaser
all the right which the debtor had in such property on the
day the execution or attachment was levied."
It has long been settled by this Court that "The right of
those who so acquire said properties should not and
cannot be superior to that of the creditor who has in his
favor an instrument of mortgage executed with the
formalities of the law, in good faith, and without the least
indication of fraud.
In another case between two mortgagees, we held that "As
between the first and second mortgagees, therefore, the
second mortgagee has at most only he right to redeem,
and even when the second mortgagee goes through the
formality of an extrajudicial foreclosure, the purchaser
acquires no more than the right of redemption from the first
mortgagee."  However, properties of the debtor which are exempt from execution
Q: When do you begin to count the 30 day period?
A: After the violation of the mortgage condition, in this case, the non-
payment of the loan.
Q: Okay, so that's 30 days from the time there was a failure to pay. It
is not a prescriptive period. So what is it? If it's not a prescriptive
period?
A: A period which the mortgagee can institute an action for the sale
of the mortgaged property at a public auction.
Q: What is the prescriptive period that should be applied?
A: The 8 year prescriptive period in the Civil Code.
So take note of the interpretation of this 30 days as provided in
Section 14. It is not considered as a prescriptive period na dapat
iforeclose na yung property within 30 days from the time of default.
The 30 day period is rather the minimum period, so after 30 days,
that's when you can sell the property. Minimum period after violation
of the mortgaged condition for the creditor to cause the sale at public
auction of the mortgaged chattels. And take note here with at least
10 days notice to the mortgagor and posting of public notice of the
time, place, and purpose of such . and is a period of grace - you still
|2-Manresa CredTrans TSN |50
redemption after the sale is held.
So distinction between REM and chattel mortgage? In REM, notice to
the mortgagor is not required under the law. It will only be required if
it is stipulated by the parties. But in chattel mortgage, there must be
notice to the mortgagor, 10 days before the sale. This notice is
relevant because once the property has already been sold, there's no
period to redeem. In other words, you cannot compel the mortgagee
or the highest bidder in the public auction sale to give back to him the
property in exchange for the purchase price plus expenses.
So, in this case, the prescription period to be applied is that provided
in Art 1140 - 8 years from the time the cause of action accrues. Now
also take note, that the defendant-appellants purchased at a public
sheriff's sale kasi execution sale yun, and the delivery to them with a
certificate of sale did not give them a superior right with the chattels
against the mortgagee. The sale convenes to the purchaser all the
right to which the debtor had in such property on the day the
execution or attachment was levied. However, remember here the
chattel mortgage was duly registered, so the right of those who so
acquire said properties should not and cannot be superior to that of
the creditor who has in his favor an instrument of mortgage executed
with the formalities of the law, in good faith, and without the least
indication of fraud.
Now, civil action to recover credit. The creditor-mortgagee is not
limited to foreclosing the chattel mortgage, he can file an ordinary
action for collection of the obligation. In that case, if that is his
remedy, he has deemed to abandon the mortgage. He cannot file
collection plus foreclosure. These remedies are alternative and not
cumulative in nature. If he files an action for collection, he can file for
issuance of a writ of attachment of the property to be attached in
relation to the complaint. Upon final judgment in the property
execution sale, if hindi mag bayad ng other form of property si
debtor, that personal property will be foreclosed not through a chattel
mortgage property foreclosure sale but through an execution sale.
may not be sold at a public auction but if its not exempted, it will be
sold and the proceeds will apply in the payment of the obligation.
Let's take a look at the case of Northern Motors
NORTHERN MOTORS vs COQUIA
FACTS: Manila Yellow Taxicab, executed a chattel
mortgage over several taxicabs in favor of Northern
Motors. TROPICAL is a judgment creditor of Yellow
Taxicab which assigned the credit to ONG.
MYT failed to pay its loan so the Sheriff then levied upon
20 taxicabs in favor of Tropical, 8 of which are security for
the chattel mortgage. Northern Motors filed an intervention
on December 18, 1974; however, the levied taxicabs were
sold the same day at 2pm although agreement shows that
it should have happened at 4pm. Indemnity bond was
posted by TROPICAL, but the bond was cancelled after the
sale without notice to Northern Motors.
A second levy was made upon 35 taxicabs, 7 of which are
mortgaged to Northern Motors. The taxies were levied and
sold at an auction sale. The auction sale proceeded and
the purchasers were of unknown addresses, hence the 8
taxicabs cannot be recovered. The proceeds of the auction
were contested by Northern Motors. Moreover the sheriff
deducted the expenses of the execution sale from the
proceeds.***
ISSUES:

1. WON the expenses for the execution sale should be
deducted from the proceeds thereof. NO
2. WON the purchaser has a better right than the
creditor/mortgagee. NO
HELD:
Ong had no right to levy upon the mortgaged taxicabs and
that he could have levied only upon the mortgagor's equity
of redemption. The essence of the chattel mortgage is that
the mortgaged chattels should answer for the mortgage
credit and not for the judgment credit of the mortgagor's
unsecured creditor. The mortgagee is not obligated to file
an "independent action" for the enforcement of his credit.
To require him to do so would be a nullification of his lien
and would defeat the purpose of the chattel mortgage
which is to give him preference over the mortgaged
chattels for the satisfaction of his credit. (See art. 2087,
Civil Code).
We already held that the execution was not justified and
that Northern Motors, Inc., as mortgagee, was entitled to
the possession of the eight taxicabs. Those cabs should
not have been levied upon and sold at public auction to
satisfy the judgment credit which was inferior to the chattel
mortgage. Since the cabs could no longer be recovered
because they had been transferred to persons whose
addresses are unknown, the proceeds of the execution
sale may be regarded as a partial substitute for the
unrecoverable cabs . Northern Motors, Inc. is entitled to the
entire proceeds without deduction of the expenses of
execution.
POLICY:The mortgagee has a better right over the thing
mortgaged than the judgment creditors of the mortgagor. It
is improper to deduct the expenses of an illegal auction
from the proceeds of thereof. Proceeds of the must be
delivered to the mortgagee in full.
Q: Did he not allege that he is an innocent purchaser for value?
A: He is not an innocent purchaser for value because during the time
of the action, the third party claim was already filed by Northern
Motors therefore it should not be (inaudible) of this by participating in
said auction sale.
Q: What happens now to the claim of Northern Motors? Isn't it that
the taxi cabs were already sold?
A: Yes, with regards to the MFR filed by Northern Motors it was held
here that the decision of the court allowing the sheriff to deduct the
expenses from the proceeds of the execution sale was not proper
because those taxis should not have been levied upon and sold at
public auction to satisfy the judgment credit which was inferior to the
chattel mortgage. Since the cabs could no longer be recovered
because they had been transferred to persons, the proceeds of the
execution sale may be regarded as a partial substitute for the
unrecoverable cabs. Therefore, Northern Motors, Inc. is entitled to
the entire proceeds without deduction of the expenses of execution.
Alright. Emphasized here, the essence of the chattel mortgage is that
the mortgaged chattels should answer for the mortgage credit and
not for the judgment credit of the mortgagor's unsecured creditor.
The mortgagee is not obligated to file an "independent action" for the
enforcement of his credit. To require him to do so would be a
nullification of his lien and would defeat the purpose of the chattel
|2-Manresa CredTrans TSN |51
mortgage which is to give him preference over the mortgaged
chattels for the satisfaction of his credit.
Registration is an effective and binding notice to its existence and
since it is a mortgage, it creates a real right - right attahced to the
property itself and follows the chattel wherever it goes, even if there
would be subsequent sale, as long as it has already been registered.
The mortgagee has a better right over the thing mortgaged than the
judgment creditors of the mortgagor. The third party claim filed by
Northern Motors, Inc. should have alerted the purchasers to the risk
which they were taking when they took part in the auction sale. At
the execution sale, take note, the buyers acquire only the right of the
judgment debtor, which in this case was a mere right or equity of
redemption. Equity of redemption does refer to the equity of
redemption in REM. They treat it as an equitable redemption
because it is giving a chance for the debtor to pay but before the
sale.
The cabs should not have been levied and sold. However, since the
cabs could no longer be recovered, the proceeds of the execution
sale may be regarded as a partial substitute for the unrecoverable
cabs without deduction for the expenses of the execution sale.
Now, application of proceeds of the sale.
The proceeds of the sale are to be applied to the payment of the
following:
(1) Costs and expenses of keeping and sale;
(2) Payment of the obligation secured by the mortgage;
(3) Claims of persons holding subsequent mortgages in their order;
and
(4) The balance, if any, shall be paid to the mortgagor, or person
holding under him.
March 10, 2016 (1st hour)
Transcribed by: Earvin Alparaque
Our second to the last topic is concurrence and preference
of credits. So what do we mean here by concurrence? Sabay diba?
Concur. Implies the possession of two or more creditors of equal
rights or privileges over the same property or all of the properties of
the debtor. Preference on the other hand is a right held by the
creditor to be preferred. So, priority in the payment of his claim over
others out of the debtor's assets. The debtor's assets however, to
apply this rule of concurrence and preference of credits, must be
insufficient to pay all of his obligations.
Now what is the nature and effect of this preference?
Preference is an exception to the general rule. So it is strictly
construed and if you alleged that you are a preferred creditor, you
have the burden of proof that the law with regard to preference of
credits is applicable to you. Also take note a preference does not
create a lien or encumbrance on the property. It does not create any
interest. It is simply a right of the creditor to be paid first. To be
preferred. To be prioritize in the payment. It creates no lien on the
property but merely a preference in application. Also the law does not
give the creditor as preference a right to take the property or sell it as
against another creditor. Here, preference is applied in the
application of the proceeds of the sale of the properties of the debtor.
The right of preference must be asserted and maintained otherwise it
is lost and the preference of the party's right of credit shall attain
significance only after the properties of the debtor have been
inventoried and liquidated and the claims held by the party's creditors
have already been established.
So that is the nature of preference. Preference is different
from lien. Preference only applies to claims which do not attach to a

specific property while a lien is charged to a particular property.
When we talk about credits here, of course these credits are already
due and demandable. Now Article 2236-
Article 2236. The debtor is liable with all his property, present and
future, for the fulfillment of his obligations, subject to the exemptions
provided by law. (1911a)
So, pwede habulin ng creditor ang properties ni debtor in
payment of the obligations. We already know that under Art. 1177-
Article 1177. The creditors, after having pursued the property in
possession of the debtor to satisfy their claims, may exercise all the
rights and bring all the actions of the latter for the same purpose,
save those which are inherent in his person; they may also impugn
the acts which the debtor may have done to defraud them. (1111)
What are the principles here that should be noted? Assets
of the debtor can used to satisfy his obligations. However, there are
certain properties of the debtor which cannot be sold because it is
exempted by law. So some of those were already mentioned in your
Family Code. The family home under Art. 152 to Art. 155-
Art. 152. The family home, constituted jointly by the husband and the
wife or by an unmarried head of a family, is the dwelling house where
they and their family reside, and the land on which it is situated.
(223a)
Art. 153. The family home is deemed constituted on a house and lot
from the time it is occupied as a family residence. From the time of its
constitution and so long as any of its beneficiaries actually resides
therein, the family home continues to be such and is exempt from
execution, forced sale or attachment except as hereinafter provided
and to the extent of the value allowed by law. (223a)
Art. 154. The beneficiaries of a family home are:
(1) The husband and wife, or an unmarried person who is
the head of a family; and
(2) Their parents, ascendants, descendants, brothers and
sisters, whether the relationship be legitimate or
illegitimate, who are living in the family home and who
depend upon the head of the family for legal support.
(226a)
Art. 155. The family home shall be exempt from execution, forced
sale or attachment except:
(1) For nonpayment of taxes;
(2) For debts incurred prior to the constitution of the family
home;
(3) For debts secured by mortgages on the premises
before or after such constitution; and
(4) For debts due to laborers, mechanics, architects,
builders, material men and others who have rendered
service or furnished material for the construction of the
building. (243a)
Family home is generally exempted. When you say
exempted, generally it cannot be sold for the payment of the
obligation of the principal debtor. However, such family home can be
sold for-
|2-Manresa CredTrans TSN |52
(1) Non-payment of taxes
(2) For debts incurred prior to the constitution of the family home;
(3) For debts secured by mortgages on the premises before or after
such constitution; and
(4) For debts due to laborers, mechanics, architects, builders,
material men and others who have rendered service or furnished
material for the construction of the building.
Same in the family code, Art. 205-
Art. 205. The right to receive support under this Title as
well as any money or property obtained as such support
shall not be levied upon on attachment or execution. (302a)
Under Rule 39, there is section 13 which enumerates the
properties which is exempted from execution-
Section 13. Property exempt from execution. — Except as
otherwise expressly provided by law, the following
property, and no other, shall be exempt from execution:
(a) The judgment obligor's family home as
provided by law, or the homestead in which he
resides, and land necessarily used in connection
therewith;
(b) Ordinary tools and implements personally
used by him in his trade, employment, or
livelihood;
(c) Three horses, or three cows, or three
carabaos, or other beasts of burden, such as the
judgment obligor may select necessarily used by
him in his ordinary occupation;
(d) His necessary clothing and articles for
ordinary personal use, excluding jewelry;
(e) Household furniture and utensils necessary
for housekeeping, and used for that purpose by
the judgment obligor and his family, such as the
judgment obligor may select, of a value not
exceeding one hundred thousand pesos;
(f) Provisions for individual or family use sufficient
for four months;
(g) The professional libraries and equipment of
judges, lawyers, physicians, pharmacists,
dentists, engineers, surveyors, clergymen,
teachers, and other professionals, not exceeding
three hundred thousand pesos in value;
(h) One fishing boat and accessories not
exceeding the total value of one hundred
thousand pesos owned by a fisherman and by
the lawful use of which he earns his livelihood;
(i) So much of the salaries, wages, or earnings of
the judgment obligor for his personal services
within the four months preceding the levy as are
necessary for the support of his family;
(j) Lettered gravestones;
(k) Monies, benefits, privileges, or annuities
accruing or in any manner growing out of any life

insurance;
(l) The right to receive legal support, or money or
property obtained as such support, or any
pension or gratuity from the Government;
(m) Properties specially exempted by law.
Properties belonging to the absolute community or conjugal
partnership except insofar the debt has redounded to the benefit of
the family. Now, that is under Art. 2238 of the Civil Code-
Article 2238. So long as the conjugal partnership or
absolute community subsists, its property shall not be
among the assets to be taken possession of by the
assignee for the payment of the insolvent debtor's
obligations, except insofar as the latter have redounded to
the benefit of the family. If it is the husband who is
insolvent, the administration of the conjugal partnership or
absolute community may, by order of the court, be
transferred to the wife or to a third person other than the
assignee.
And we also have Art. 2240 of the Civil Code-
Article 2240. Property held by the insolvent debtor as a
trustee of an express or implied trust, shall be excluded
from the insolvency proceedings. (n)
However, no article or specie of property mentioned in
section 13 of Rule 39 shall be exempt from execution issued upon a
judgment recovered for its price or for a judgment foreclosure of the
mortgage thereon.
Also property in custodia legis and of public dominion is
exempted from attachment or execution.
Article 2237-
Article 2237. Insolvency shall be governed by special laws
insofar as they are not inconsistent with this Code. (n)
Before, meron yung Insolvency Act, ngayon inisa nalang
ung "FRIA"- Republic Act 10142 (Financial Rehabilitation and
Insolvency Act of 2010).
So what we're talking about here, we are not talking about
the procedure but we are talking about, under concurrence and
preference of credits, sino ang unang bayaran. Kung ibenta ito na
properties, sino ang una bayaran?
So Article 2238(refer above), you have there the conjugal
properties. So assets, Conjugal partnership or Absolute community
do not pass to the assignee or to the one who is tasked to manage
and administer the properties of the insolvent debtor elected by the
creditors or appointed by the courts. Such property does not belong
to the individual spouses. Exemption here applies, so he cannot
execute his properties as long as the conjugal partnership or
absolute community subsists and the obligation did not redound to
the benefit of the family. The fact that the husband becomes
insolvent does not have the effect of dissolving the conjugal
partnership or the absolute community.
Now, Art. 2239-
Article 2239. If there is property, other than that mentioned
|2-Manresa CredTrans TSN |53
in the preceding article, owned by two or more persons,
one of whom is the insolvent debtor, his undivided share or
interest therein shall be among the assets to be taken
possession of by the assignee for the payment of the
insolvent debtor's obligations. (n)
So co-ownership, so you have to (nurse?) one who will
become insolvent his only undivided share or interest which should
be possessed by the assignee.
And then Art. 2240(refer above), property held by the
insolvent debtor as trustee of an express or implied trust shall be
excluded from the insolvency proceedings. The trustee merely holds
a property in behalf of a beneficiary. So the trustee is not strictly
speaking the owner of the trust although he is considered as having
legal title. Now considering he holds it in trust of another person, then
it should be excluded from the insolvency proceedings in relation to
that trustee who has already become insolvent, kasi hindi niya yun
property.
Now let's have classification of credits. So general
classification of credits, you have-
(1) Special preferred credits under Art. 2241 and 2242
(2) Ordinary preferred credits under Art. 2244
(3) Common credits under Art. 2245
Specially preferred credits envision a situation where a
particular property, either movable or immovable, is subject to certain
obligations. These special preferred credits or obligations have to be
satisfied using the proceeds from the sale of said property. Art. 2241
covers a movable property. So let us say you have a car, now there
are credits attached specifically to that movable property which is
considered preferred under the law. So what are these preferred
credits? What do we mean here with the preferred credits? If that car
or the movable property will be sold, proceeds would be first applied
to these preferred creditors. So who are these? We have Art. 2241-
Article 2241. With reference to specific movable property of
the debtor, the following claims or liens shall be preferred:
(1) Duties, taxes and fees due thereon to the
State or any subdivision thereof;
(2) Claims arising from misappropriation, breach
of trust, or malfeasance by public officials
committed in the performance of their duties, on
the movables, money or securities obtained by
them;
(3) Claims for the unpaid price of movables sold,
on said movables, so long as they are in the
possession of the debtor, up to the value of the
same; and if the movable has been resold by the
debtor and the price is still unpaid, the lien may
be enforced on the price; this right is not lost by
the immobilization of the thing by destination,
provided it has not lost its form, substance and
identity; neither is the right lost by the sale of the
thing together with other property for a lump sum,
when the price thereof can be determined
proportionally;
(4) Credits guaranteed with a pledge so long as
the things pledged are in the hands of the
creditor, or those guaranteed by a chattel

mortgage, upon the things pledged or
mortgaged, up to the value thereof;
(5) Credits for the making, repair, safekeeping or
preservation of personal property, on the
movable thus made, repaired, kept or possessed;
(6) Claims for laborers' wages, on the goods
manufactured or the work done;
(7) For expenses of salvage, upon the goods
salvaged;
(8) Credits between the landlord and the tenant,
arising from the contract of tenancy on shares,
on the share of each in the fruits or harvest;
(9) Credits for transportation, upon the goods
carried, for the price of the contract and
incidental expenses, until their delivery and for
thirty days thereafter;
(10) Credits for lodging and supplies usually
furnished to travellers by hotel keepers, on the
movables belonging to the guest as long as such
movables are in the hotel, but not for money
loaned to the guests;
(11) Credits for seeds and expenses for
cultivation and harvest advanced to the debtor,
upon the fruits harvested;
(12) Credits for rent for one year, upon the
personal property of the lessee existing on the
immovable leased and on the fruits of the same,
but not on money or instruments of credit;
(13) Claims in favor of the depositor if the
depositary has wrongfully sold the thing
deposited, upon the price of the sale.
In the foregoing cases, if the movables to which the lien or
preference attaches have been wrongfully taken, the
creditor may demand them from any possessor, within
thirty days from the unlawful seizure. (1922a)
First, Duties, taxes and fees due on the movable. Yan ang
priority, now all the rest in Art. 2241 would share pro-rata. So hindi na
yan siya in order.
These preference of credits however will not be applied if
the debtor has already parted with the ownership of the said
property. Why? because he does not own it anymore and that is why
he has no right over the said property and therefore it cannot be
executed as payment of his obligations. So, what happens here? If
you have a car the value of which is P2 million and you have the
following liabilities- taxes and duties, sabihin natin luxury car so let us
say it has an unpaid balance of duties of P500,000 and then let us
say it is subject to a chattel mortgage, P500,000. Let us say there
was also an unpaid price amounting to P500,000. What are the other
credits here, for example expenses for repairs, P500,000. and then
another expenses, let us say safekeeping of the vehicle, also
P500,000. So what do we have here? The liabilities exceed the value
of the movable property.
|2-Manresa CredTrans TSN |54
*So if it is sold for P2 million, how would the proceeds be
applied? So first, you apply it to the taxes and duties. So that would
mean from P2 million minus P500,000, P1.5 million nalang. share
sila diyan(the remaining liabilities). So pro-rata sila. So
(P500,000/P2,000,000) times P1.5 million so that is P375,000. So
out of the liability for example covered by the chattel mortgage,
P375,000 would come from the proceeds of sale of the movable
property. What happens to the balance of P125,000? It is not
extinguished but doon na siya mahulog sa other credits. Hindi na
siya special preferred. It would now share together with the common
credits.
Art. 2241 and 2242 do not give preference, order or priority
of payment, hindi yan siya 1,2,3,4 and 5. Una lang yung duties and
taxes due to the government in relation to that movable property. All
the rest will concur to the remaining proceeds of the sale of the
subject property.
So we have the case of Cordova-
CORDOVA vs REYES
FACTS: petitioner Jose Cordova bought from Philfinance
certificates of stock of Celebrity Sports Plaza Inc (CSPI)
and shares of stock of other corporations. CSPI shares
were delivered to former Filmanbank and Philtrust Banks
(as custodian banks to hold the shares in behalf of
Cordova).
In 1981, Philfinance was placed under receivership by
SEC. Thereafter, private respondents Reyes and Atty
Wendell Coronel were appointed as liquidators. In 1991,
without the knowledge and consent of Cordova and without
authority from SEC, private respondents withdrew the CSPI
shares from the custodian banks. They subsequently sold
the shares to Northeast Corporation and included the
proceeds thereof in the funds of Philfinance. Cordova filed
a complaint against private respondents in the receivership
proceedings with the SEC for the return of the shares.
In 1998, SEC dismissed the petition, but granted it upon
reconsideration. It held that Cordova was the owner of the
CSPI shares by virtue of a confirmation sale (which was
considered as a deed of assignment) issued to him by
Philfinance. But since the shares had already been sold
and proceeds commingled with other assets of Philfinance,
Cordova’s status was converted into that of an ordinary
creditor for the value of such shares.
ISSUES:
1. WON petitioner should be considered as preferred
(and secured) creditor of Philfinance NO
HELD:To resolve the issues, we have to determine if
petitioner was indeed a creditor of Philfinance. – SC held
that petitioner had become an ORDINARY creditor of
Philfinance. Certainly, petitioner had the right to demand
the return of the shares. He filed a complaint in the
liquidation proceedings. He sought instead to recover their
monetary value.
The CSPI shares were specific or determinate movable
properties. But after they were sold, the money raised from
the sale became generic and were commingled with other
assets of Philfinance. Unlike shares of stock, money is
generic. This means that once a certain amount is added to
the cash balance, one can no longer pinpoint the specific
amount included which then becomes part of a whole mass
of money.
It thus became impossible to identify the exact proceeds of
the sale of the CSPI shares. Petitioner’s only remedy was

to file a claim on the whole mass of these assets, to which
unfortunately all other creditors of Philfinance also had a
claim.
Petitioner’s right of action against Philfinance was a “claim”
properly to be litigated in the liquidation proceedings. He
had a right to the payment of the value of his shares. His
demand was of a pecuniary nature since he was claiming
the monetary value of his shares. It was in this sense that
he was a creditor of Philfinance.
Like all the other ordinary creditors or claimants against
Philfinance, he was entitled to a rate of recovery of only
15% of his money claim.
Q1: Was he really subsequently paid of the value or any portion
thereof?
A1: Before it was proceeded to the Supreme Court mam, the
Securities and Exchange Commission already ruled in his favor but
only given him the 15% value of the total amount of shares(P5
million).
So Art. 2241 talks about specific movable property. Since
the share of stocks here is a movable property noh although
incorporeal in nature. It was a specific movable property but Cordova
here was not considered as a preferred creditor anymore because
the stocks were already sold. His claim now is monetary in nature.
So hindi na siya covered sa Art. 2241. But it does not mean na hindi
na siya makahabol, pwede parin pero as one of the common
creditors sharing pro-rata with the rest sa remaining na properties or
assets ng debtors.
In this case, he was entitled to only 15% of the money
claim. Pro-rata yan na effect. Now how about in immovable
properties? We have Art. 2242-
Article 2242. With reference to specific immovable property
and real rights of the debtor, the following claims,
mortgages and liens shall be preferred, and shall constitute
an encumbrance on the immovable or real right:
(1) Taxes due upon the land or building;
(2) For the unpaid price of real property sold,
upon the immovable sold;
(3) Claims of laborers, masons, mechanics and
other workmen, as well as of architects,
engineers and contractors, engaged in the
construction, reconstruction or repair of buildings,
canals or other works, upon said buildings,
canals or other works;
(4) Claims of furnishers of materials used in the
construction, reconstruction, or repair of
buildings, canals or other works, upon said
buildings, canals or other works;
(5) Mortgage credits recorded in the Registry of
Property, upon the real estate mortgaged;
(6) Expenses for the preservation or
improvement of real property when the law
authorizes reimbursement, upon the immovable
preserved or improved;
(7) Credits annotated in the Registry of Property,
in virtue of a judicial order, by attachments or
|2-Manresa CredTrans TSN |55
executions, upon the property affected, and only
as to later credits;
(8) Claims of co-heirs for warranty in the partition
of an immovable among them, upon the real
property thus divided;
(9) Claims of donors or real property for
pecuniary charges or other conditions imposed
upon the donee, upon the immovable donated;
(10) Credits of insurers, upon the property
insured, for the insurance premium for two years.
(1923a)
First, taxes due upon the building. Again that is the priority.
All the rest will concur.(same concept under Art. 2241) *repeats the
illustration under Art. 2241 but changed subject property from a car
to a house and lot.
Now we have the case of Barretto vs Villanueva-
BARRETO vs VILLANUEVA
FACTS: Rosario Cruzado sold all her right, title, and
interest and that of her children in the house and lot herein
involved to Villanueva for P19K. The purchaser paid
P1,500 in advance, and executed a promissory note for the
balance. However, the buyer could only pay P5,500 On
account of the note, for which reason the vendor obtained
judgment for the unpaid balance. In the meantime, the
buyer Villanueva was able to secure a clean certificate of
title and mortgaged the property to appellant Barretto to
secure a loan of P30K, said mortgage having been duly
recorded.
Villanueva defaulted on the mortgage loan in favor of
Barretto. The latter foreclosed the mortgage in her favor,
obtained judgment, and upon its becoming final asked for
execution. Cruzado filed a motion for recognition for her
"vendor's lien" invoking Articles 2242, 2243, and 2249 of
the new Civil Code. After hearing, the court below ordered
the "lien" annotated on the back of the title, with the proviso
that in case of sale under the foreclosure decree the
vendor's lien and the mortgage credit of appellant Barretto
should be paid pro rata from the proceeds.
ISSUE:
1)Won a proceeding, like an insolvency proceeding, is
required before claims of preferred creditors could be
ascertained?
HELD:
Under the system of the Civil Code of the Philippines, only
taxes enjoy a similar absolute preference. All the remaining
thirteen classes of preferred creditors under Article 2242
enjoy no priority among themselves, but must be paid  pro-
rata i.e., in proportion to the amount of the respective
credits.
The full application of Articles 2249 and 2242 demands that
there must be first some proceedings where the claims of
all the preferred creditors may be bindingly adjudicated,
such as:
1. insolvency,
2.  the settlement of decedents estate under

Rule 87 of the Rules of Court, or
3. other liquidation proceedings of similar
import.
This explains the rule of Article 2243 of the new Civil Code
that —
The claims or credits enumerated in the two preceding
articles" shall be considered as mortgages or pledges of
real or personal property, or liens within the purview of
legal provisions governing insolvency.
And the rule is further clarified in the Report of the Code
Commission, as follows:
The question as to whether the Civil Code and the
insolvency Law can be harmonized is settled by Article
2243. The preferences named in Articles 2261 and 2262
(now 2241 and 2242) are to be enforced in accordance
with the Insolvency Law."
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 not the proceeding contemplated by
law for the enforcement of preferences under Article 2242,
unless the claimant were enforcing a credit for taxes that
enjoy absolute priority. If none of the claims is for taxes, a
dispute between two creditors will not enable the Court to
ascertain the pro-rata  dividend corresponding to each,
because the rights of the other creditors likewise" enjoying
preference under Article 2242 cannot be ascertained.
There being no insolvency or liquidation, the claim of the
appellee, as unpaid vendor, did not require the character
and rank of a statutory lien co-equal to the mortgagee's
recorded encumbrance, and must remain subordinate to
the latter.
Q1: What was the nature of the proceeding in this case if it was not
an insolvency proceeding?
A1: It was a foreclosure proceeding mam.
Ok, foreclosure. So that is not what was contemplated
under the law. To apply the rule on preference of credits, there must
be a proceeding such as an insolvency proceeding.
Q2: Who has the better right over the property or over the proceeds
thereto?
A2: It was Magdalena Barretto has the better over the proceeds of
the property. Here, she was a mortgagee who was able to record her
lien as to the property as opposed to Cruzado who was not able to
record her lien as to the property. She was only able to record it after
the property was mortgaged to Barretto. And in this case, since there
was no insolvency proceeding then the well-established principle as
to registered lands would then be applicable in this case.
Q3: What is that principle with regard to registered lands?
A3: A purchaser in good faith and for value takes registered property
free from liens and encumbrances other than statutory liens recorded
on the lot. So the right here of Barretto as a mortgagee in good faith
will then be preferred as to that of Cruzado being an unpaid vendor.
Q4: What happens now to the obligation of Villanueva to Cruzado?
|2-Manresa CredTrans TSN |56
A5: Cruzado's claim against Villanueva will no longer be covered
under Art. 2242. Cruzado can still go after Villanueva after the
payment of preferred creditors .
She could file an action for collection of sum of money
because there was no specific ruling here or finding that Villanueva
was insolvent. So that is one thing you should also take note. Just
because you could not apply Art. 2242 or the rules of concurrence
and preference of credits does not mean you have no other remedy
under the law. You have collection of sum of money or you can
assert your claim in the insolvency proceeding. But what is clear is
that the obligation is not extinguished just because Art. 2241 or 2242
is not applicable.
Now how about in the case of Philippine Savings vs Lantin-
PHILIPPINE SAVINGS vs LANTIN
FACTS:Involved in this case is a duplex-apartment house
on a lot covered by TCT No. 86195 situated at San Diego
Street, Sampaloc, Manila, and owned by the spouses
Filomeno and Socorro Tabligan.
The duplex-apartment house was built for the spouses by
private respondent Candido Ramos, a duly licensed
architect and building contractor, at a total cost of
P32,927.00. The spouses paid private respondent the sum
of P7,139.00 only. Hence, the latter used his own money,
P25,788.50 in all, to finish the construction of the duplex-
apartment.
Meanwhile, the spouses Tabligan obtained from petitioner
Philippine Savings Bank three (3) loans in the total amount
of P35,000.00, the purpose of which was to complete the
construction of the duplex-apartment.
On December 19, 1966, the petitioner registered the
December 16, 1966 deed of real estate mortgage with the
Register of Deeds of Manila. At the time of the registration
of these mortgages, Transfer Certificate of Title No. 86195
was free from all liens and encumbrances.
The spouses failed to pay their monthly amortizations. As a
result thereof, the petitioner bank foreclosed the
mortgages, and at the public auction held on July 23, 1969,
was the highest bidder.
Upon the other hand, the private respondent filed an action
against the spouses to collect the unpaid cost of the
construction of the duplex-apartment. During its pendency,
the private respondent succeeded in obtaining the
issuance of a writ of preliminary attachment, and pursuant
thereto, had the property in question attached.
Consequently, a notice of adverse claim was annotated at
the back of Transfer Certificate of Title No. 86195.
On August 26, 1968, a decision was rendered in Civil Case
No. 69228 in favor of the private respondent and against
the spouses. A writ of execution was accordingly issued
but was returned unsatisfied.
As the spouses did not have any properties to satisfy the
judgment in Civil Case No. 69228, the private respondent
addressed a letter to the petitioner for the delivery to him
(private respondent) of his pro-rata share in the value of
the duplex-apartment in accordance with Article 2242 of
the Civil Code. The petitioner refused to pay the pro-rata
value prompting the private respondent to file the instant

action. A decision was rendered in favor of the private
Respondent.
ISSUE: whether or not the private respondent is entitled to
claim a pro-rata share in the value of the property in
question.
RULING:NO. The conclusions of the lower court are not
supported by the law and the facts.
Concurrence of credits occurs when the same specific
property of the debtor or all of his property is subjected to
the claims of several creditors. The concurrence of credits
raises no questions of consequence were the value of the
property or the value of all assets of the debtor is sufficient
to pay in fall all the creditors. However, it becomes material
when said assets are insufficient for then some creditors of
necessity will not be paid or some creditors will not obtain
the full satisfaction of their claims. In this situation, the
question of preference will then arise, that is to say who of
the creditors will be paid the all of the others.
The proceedings in the court below do not partake of the
nature of the insolvency proceedings or settlement of a
decedent’s estate. The action filed by Ramos was only to
collect the unpaid cost of the construction of the duplex
apartment. It is far from being a general liquidation of the
estate of the Tabligan spouses.
Insolvency proceedings and settlement of a decedent’s
estate are both proceedings in rem which are binding
against the whole world. All persons having interest in the
subject matter involved, whether they were notified or not,
are equally bound. Consequently, a liquidation of similar
import or "other equivalent general liquidation’ must also
necessarily be a proceeding in rem so that all interested
persons whether known to the parties or not may be bound
by such proceeding.
In the case at bar, although the lower court found that
"there were no known creditors other than the plaintiff and
the defendant herein", this cannot be conclusive. It will not
bar other creditors in the event they show up and present
their claims against the petitioner bank, claiming that they
also have preferred liens against the property involved.
Consequently, Transfer Certificate of Title No. 101864
issued in favor of the bank which is supposed to be
indefeasible would remain constantly unstable and
questionable. Such could not have been the intention of
Article 2243 of the Civil Code although it considers claims
and credits under Article 2242 as statutory liens. Neither
does the De Barretto case sanction such instability.
So in this case the claim of Ramos was not annotated on
the title prior or at the time of mortgage. Philippine Savings here was
deemed a mortgagee in good faith and subsequently a purchaser in
good faith.
So take note of this, concurrence and preference of credits
is only applicable when the properties of the debtors are not sufficient
to pay all of his obligations. As emphasize in the Barretto case and
here in the case of Philippine Savings, there must be some
proceeding where the claims of all the preferred creditors may be
bindingly adjudicated such as an insolvency proceeding or settlement
of estate or other liquidation proceedings. Now here it is merely an
action for collection. Although the lower court found that there were
no known creditors other than Philippine Savings and Ramos, this
cannot be conclusive. It will not bar other creditors to show up and
present their claims against the bank claiming also they have
preferred liens.
|2-Manresa CredTrans TSN |57
Now in both these cases of De Barretto and Philippine
Savings, it emphasize the indefeasibility of a certificate of Torrens
title. So, it is indefeasible and to rule otherwise in favor of applying
these rules on preference of credits would make the title to one's
property unstable and questionable. Because anytime somebody
would alleged that I have this preferred claim under Art. 2242. So
here it is emphasizes the principle that the purchaser in good faith
and for value takes registered land free from liens and
encumbrances, other than statutory lien and those recorded on the
certificate of title, in respecting the indefeasibility of such title.
Also take note of this term, refectionary credit. A
refectionary credit is an indebtedness incurred for the repair or
reconstruction of something previously made such as a repair or
construction made necessary by the deterioration or destruction of
the property. This credit may be applied to Art. 2241 and 2242, yung
expenses for improvements and repairs.
Now Art. 2243-
Article 2243. The claims or credits enumerated in the two
preceding articles shall be considered as mortgages or
pledges of real or personal property, or liens within the
purview of legal provisions governing insolvency. Taxes
mentioned in No. 1, article 2241, and No. 1, article 2242,
shall first be satisfied. (n)
So those enumerated under Art. 2241 and 2242 would be
considered as mortgages or pledges in a sense that is really a lien or
encumbrance of a specific property. And this Art. 2243 is the basis.
So what we have discussed earlier, the taxes in relation to the
property are preferred noh. It shall be satisfied first. All the rest will
concur.
We have the case of J.L. Bernardo vs CA-
J.L. BERNARDO VS CA
FACTS: Sometime in 1990, the municipal government of
San Antonio, Nueva Ecija approved the construction of the
San Antonio Public Market.
On April 20, 1990, J.L. Bernardo Construction, thru
petitioner Santiago Sugay, submitted its bid together with
other qualified bidders. After evaluating the bids, the
municipal pre-qualification bids and awards committee,
headed by respondent Jose L. Salonga (then incumbent
municipal mayor of San Antonio) as Chairman, awarded
the contract to petitioners. On June 8, 1990, a Construction
Agreement was entered into by the Municipality of San
Antonio thru respondent Salonga and petitioner J.L.
Bernardo Construction.
It is claimed by petitioners that under this Construction
Agreement, the Municipality agreed to assume the
expenses for the demolition, clearing and site filling of the
construction site in the amount of P1,150,000 and, in
addition, to provide cash equity of P767,305.99 to be
remitted directly to petitioners.
Petitioners allege that, although the whole amount of the
cash equity became due, the Municipality refused to pay
the same, despite repeated demands and notwithstanding
that the public market was more than ninety-eight percent
(98%) complete as of July 20, 1991.
On July 31, 1991, J.L. Bernardo Construction filed a
complaint for breach of contract, specific performance, and
collection of a sum of money, with prayer for preliminary
attachment and enforcement of contractors lien against the
Municipality of San Antonio, Nueva Ecija and Salonga, in

his personal and official capacity as municipal mayor.
On September 5, 1991, the Regional Trial Court issued the
writ of preliminary attachment prayed for by plaintiffs. It
also granted J.L. Bernardo Construction the right to
maintain possession of the public market and to operate
the same.
ISSUE:Whether or not the grant of writ of attachment and
the contractor’s lien proper?
HELD: There is no contractor’s lien in favor of petitioners.
Articles 2241 and 2242 of the Civil Code enumerates
certain credits which enjoy preference with respect to
specific personal or real property of the debtor. Specifically,
the contractor’s lien claimed by petitioners is granted under
the third paragraph of Article 2242 which provides that the
claims of contractors engaged in the construction,
reconstruction or repair of buildings or other works shall be
preferred with respect to the specific building or other
immovable property constructed.
However, Article 2242 only finds application when there is
a concurrence of credits, i.e. when the same specific
property of the debtor is subjected to the claims of several
creditors and the value of such property of the debtor is
insufficient to pay in full all the creditors. In such a situation,
the question of preference will arise, that is, there will be a
need to determine which of the creditors will be paid ahead
of the others. Fundamental tenets of due process will
dictate that this statutory lien should then only be enforced
in the context of some kind of a proceeding where the
claims of all the preferred creditors may be bindingly
adjudicated, such as insolvency proceedings.
This is made explicit by Article 2243 which states that the
claims and liens enumerated in articles 2241 and 2242
shall be considered as mortgages or pledges of real or
personal property, or liens within the purview of legal
provisions governing insolvency.
The action filed by petitioners in the trial court does not
partake of the nature of an insolvency proceeding. It is
basically for specific performance and damages. Thus,
even if it is finally adjudicated that petitioners herein
actually stand in the position of unpaid contractors and are
entitled to invoke the contractor’s lien granted under Article
2242, such lien cannot be enforced in the present action for
there is no way of determining whether or not there exist
other preferred creditors with claims over the San Antonio
Public Market. The records do not contain any allegation
that petitioners are the only creditors with respect to such
property. The fact that no third party claims have been filed
in the trial court will not bar other creditors from
subsequently bringing actions and claiming that they also
have preferred liens against the property involved.
Q1: So is it really a preferred credit under Art. 2242?
A1: In this case although it is stated under paragraph 3(of Art. 2242),
it only applies when there is concurrence of credits and as defined
here in this case, there is concurrence of credits if the same specific
property of the debtor is subjected to the claims of several creditors
and the value of such property of the debtor is insufficient to pay in
full all the creditors in such a situation. The question of preference
will arise if there is a need to determine which among the creditors
should be paid ahead of the others. However in this case, due
process dictates that this statutory lien will only be enforced in the
context of some proceeding where the claims of all preferred
|2-Manresa CredTrans TSN |58
creditors will be bindingly adjudicated such as an insolvency
proceeding. In this case the action filed by J.L. Bernardo does not
partake the nature of an insolvency proceeding because it is only an
action for specific performance and there is no way in determining
whether or not other preferred creditors exist.
So again same discussion. Actually the case of Philippine
Savings Bank was also mentioned here. It has the same ruling with
regard to concurrence of credits and the question of preference will
again only arise if there would be a need to determine which of the
creditors will be paid ahead of the others. Again this statutory lien
should only be enforced in the context of a some kind of proceeding
where the claims of all the preferred creditors will be bindingly
adjudicated such as an insolvency proceeding. But again in this
case, walang insolvency proceeding. You cannot raise or Art. 2242
cannot be applied with regard to the things involving the properties in
this case of J.L. Bernardo.
March 10, 2016 (2nd hour)
Transcribed by: Raphael Rivas
Atlantic vs. Herbal Cove
FACTS:
In 1996, Atlantic Erectors (AE) and Herbal Cove (HCC) entered into
a contract to construct townhouses. HCC was not able to complete
the project in time. AE then filed for damages and won the suit. HCC
was ordered to pay in damages and fees. The cause of action is a
money claim by only one creditor. In 1997, AE caused a notice of
lispendens on several TCTs, which carried over when the lots were
further divided into 50 lots. In 1998, HCC filed a motion to cancel the
notice of lispendens, as AE’s action is purely a personal action to
collect a sum of money and damages, and does not directly affect
title to, use or possession of real property.
In opposition, AE argued that the money claim constitutes a lien
that can be enforced to secure payment for the said obligations. It
argues that, to preserve the alleged improvement it had made on the
subject land, such annotation on the property titles of respondent is
necessary. On the other hand, HCC argues that the annotation is
bereft of any factual or legal basis, because the action does not
directly affect the title to the property, or the use or the possession
thereof. The annotation is baseless and cannot be made through the
enforcement of a contractor’s lien under Art. 2242 as said provision
applies only to cases in which there are several creditors carrying on
a legal action against an insolvent debtor.
ISSUE:
WON money claims representing cost of materials and labor are
proper liens for annotations of lispendens on the property title.
RULING:
No.
As a general rule, the only instances in which a notice of lispendens
may be availed of are as follows: (a) an action to recover possession
of real estate; (b) an action for partition; and (c) any other court
proceedings that directly affect the title to the land or the building
thereon or the use or the occupation thereof.
A careful examination of petitioner's Complaint, as well as the reliefs
it seeks, reveals that no such lien or interest over the property was
ever alleged. The Complaint merely asked for the payment of
construction services and materials plus damages, without
mentioning -- much less asserting -- a lien or an encumbrance over
the property. Verily, it was a purely personal action and a simple
collection case. It did not contain any material averment of any
enforceable right, interest or lien in connection with the subject
property.
Even assuming that petitioner had sufficiently alleged such lien or
encumbrance in its Complaint, the annotation of the Notice of Lis

Pendens would still be unjustified, because a complaint for collection
and damages is not the proper mode for the enforcement of a
contractor's lien. Fundamental tenets of due process will dictate that
this statutory lien should then only be enforced in the context of some
kind of a proceeding where the claims of all the preferred creditors
may be bindingly adjudicated, such as insolvency proceedings.
Article 2242 finds application when there is a concurrence of credits,
i.e., when the same specific property of the debtor is subjected to the
claims of several creditors and the value of such property of the
debtor is insufficient to pay in full all the creditors. In such a situation,
the question of preference will arise, that is, there will be a need to
determine which of the creditors will be paid ahead of the others. In
this case, there is no concurrence of credit since there is only one
creditor.
The issue here is with regard to the notice of lispendens. Take
note of the instances when notice of lispendensmay be availed of;
these are,
a) In an action to recover possession of real estate;
b) An action for partition;
c) Any other court proceedings that directly affect the title
to the land or the building thereon or the use of the
occupation thereof.
Considering here that this is a personal action, then there is no
lien alleged in the complaint as an issuance for the ad notice of
lispendens. Remember that one of the nature of preference of credit
is that it must be alleged. Ditowala. Isa pa, this is not an insolvency
proceeding contemplated on the application of preference of credit.
Again, the complaint is merely a pure personal action not containing
any material averment of any enforceable right. Also there was no
proceeding as required by the court wherein all the preferred creditor
may be violated. Therefore, he cannot avail the notice of lispendens.
If ganun, anongpwedenyanggawindito? He can attach the property or
if the ruling is in his favor, then execution of the said property. But he
cannot raise Art 2242 so that he will be given preference in relation to
the said property.
Development Bank vs. CA
FACTS:
Marinduque Mining-Industrial Corporation obtained from PNB and
DBP various loan accommodations. To secure the loans,
Marinduque Mining mortgaged to PNB and DBP all its real and
personal properties. Marinduque Mining failed to settle its loan
obligations, thus PNB and DBP instituted sometime on July and
August 1984 extrajudicial foreclosure proceedings over the
mortgaged properties.
In the meantime, between July 1982 to October 1983, Marinduque
Mining purchased and caused to be delivered construction materials
and other merchandise from Remington Industrial Sales Corporation
The purchases remained unpaid as of August 1, 1984 when
Remington filed a complaint for a sum of money and damages
against Marinduque Mining for the value of the unpaid construction
materials and other merchandise purchased by Marinduque Mining.
Remington's original complaint was later amended to implead PNB
and DBP in view of the foreclosure by the latter of the real and
chattel mortgages).
ISSUE:
WON Remington can enforce its claim (for the payment of the
construction materials purchasedby Marinduque Mining) against
DBP.
RULING:
No.
Remington cannot enforce its lien against DBP because there was
no liquidation proceeding. The liquidation proceeding contemplated
by the CC is not the extrajudicial foreclosure done by DBP over
|2-Manresa CredTrans TSN |59
Marinduque Mining’s properties. The kind of proceeding
contemplated is where the claims of all the preferred creditors may
be bindingly adjudicated, such as insolvency, the settlement of
decedent's estate under Rule 87 of the Rules of Court, or other
liquidation proceedings of similar import. The extrajudicial foreclosure
instituted by PNB and DBP is not the liquidation proceeding
contemplated by the Civil Code; thus, Remington cannot claimits pro
rata share from DBP and PNB.
Q: What are the properties here involved in the mortgage?
A: All of the properties of Marinduque Industry with all its
improvements which is the same properties mortgaged to DBP and
PNB.
Q: What is the nature of the proceeding here?
A: Foreclosure sale, the extrajudicial foreclosure sale here is not a
liquidation proceeding.
Take note here that a real estate mortgage and a chattel mortgage
are executed in favor of PNB. Recall what we discussed last time
that after-acquired assets can be covered by a mortgage. Mortgage
also covers all of Marinduque Mining’s chattels as well as assets of
whatever kind, nature, and description which Marinduqe may
subsequently acquire in substitution, or in addition to the properties
covered by the previous chattel mortgage.
In relation to concurrence and preference of credits, again it is
emphasized that in the absence of any liquidation proceeding, the
claim of the creditor cannot be enforced against any mortgagee in
good faith. As in the extrajudicial foreclosure executed by PNB and
DBP is not the liquidation proceeding contemplated by the Civil
Code, then Remington cannot claim is share in the property.
If it is really proven here that the debtor is insolvent, tehn the
debtor can voluntarily submit a proceeding for the payment of an
obligation in the court of an insolvency proceeding.
So, Art 2241, 2242, and 2243 are the provisions in relation to
special preferred credits. We also have ordinary preferred credits
which apply in a situation wherein a particular credit is not secured by
a movable or immovable property. This credit happen to be one of
those enumerated as ordinary preferred. The credit will enjoy
preference over properties which are not encumbered including the
free portion of the debtor’s property. Now, ordinary preferred credits
are enumerated in Art 2244.
Art. 2244. With reference to other property, real and personal, of the
debtor, the following claims or credits shall be preferred in the order
named:
(1) Proper funeral expenses for the debtor, or children under his or
her parental authority who have no property of their own, when
approved by the court;
(2) Credits for services rendered the insolvent by employees,
laborers, or household helpers for one year preceding the
commencement of the proceedings in insolvency;
(3) Expenses during the last illness of the debtor or of his or her
spouse and children under his or her parental authority, if they have
no property of their own;
(4) Compensation due the laborers or their dependents under laws
providing for indemnity for damages in cases of labor accident, or
illness resulting from the nature of the employment;
(5) Credits and advancements made to the debtor for support of
himself or herself, and family, during the last year preceding the
insolvency;
(6) Support during the insolvency proceedings, and for three months
thereafter;
(7) Fines and civil indemnification arising from a criminal offense;
(8) Legal expenses, and expenses incurred in the administration of
the insolvent’s estate for the common interest of the creditors, when
properly authorized and approved by the court;
(9) Taxes and assessments due the national government, other than
those mentioned in Articles 2241, No. 1, and 2242, No. 1;

(10) Taxes and assessments due any province, other than those
referred to in Articles 2241, No. 1, and 2242, No. 1;
(11) Taxes and assessments due any city or municipality, other than
those indicated in Articles 2241, No. 1, and 2242, No. 1;
(12) Damages for death or personal injuries caused by a quasi-delict;
(13) Gifts due to public and private institutions of charity or
beneficence;
(14) Credits which, without special privilege, appear in (a) a public
instrument; or (b) in a final judgment, if they have been the subject of
litigation. These credits shall have preference among themselves in
the order of priority of the dates of the instruments and of the
judgments, respectively.
This time, you have to take note of the order because this is an order
of priority. If you take a look at Art 2244, makitaninyoang no.1 diyan
is proper funeral expenses and second is credits for services
rendered. In consonance with the provision of the Labor Code, ang
No.1 nangayon is the payment for services rendered by employees
and laborer, and No.2 naang proper funeral expenses.
If makitaniyo din sa 2244, may taxes due to the national
government, followed by those due to any province, and those due to
any city or municipality. Notice here that these taxes are in favor of
the government but they are not the first priority because these taxes
are not in relation to a specific property unlike doonsa 2241.
Example, income tax. Diba may obligation kasa BIR to pay income
tax. Kung meron pang matirana property at aabot pa hanggangdiyan,
then babayaranmunasa BIR.
The property involved in 2244 could be a movable or an
immovable or cash. With these cash or proceeds of the sale of the
properties, bayaranmunaangibangnaka enumerate sa 2244 in order.
May hierarchy yanhanggangmaabotyungpinakababa.
2244 not only enumerates the preferred credits with respect to
other property(real or personal) of the debotr but also gives order or
preference in the order made. Here, taxes and assessments are only
mentioned as # 9, 10, 11 unlike priority No.1 in 2241 and 2242.
Makita ninyoang relevance if specially preferred creditor kasi at the
very least, pagmerng property mabayaran pa. Unlike ordinary
preferred creditor, malakiangpossibiltynahindinamabayaran.
Remember , we only apply the rules on preference and concurrence
of credit if the debtor is insolvent so
kulangtalagaangpambayadsalahat ng utang.
So step 1 is essentially sa special preferred credit paid from the
value of a movable or immovable property where taxes enjoy first
priority and the rest of the credits are paid pro-rata. Is is possible for
example here, 3 million ang value ng property at angutang is 2.5
million so meron pang 500,000. Saanmapuntaang 500,000? Well,
doonsa ordinary preferred credit. Ordinary preferred credits will then
be paid in the order of priority as they are enumerated. The assets
used to pay ordinary preferred credits are those free from
encumbrances. Lastly, non-preferred credits are paid from whatever
free portion remains. Yan ang common credits under 2245.
Preference for unpaid wages as provided in Art 110 of the
LABOR CODE does not purport to pay in favor of unpaid workers or
laborers either upon all of the properties or any particular property
owned by their employer. Claims for unpaid wages do not fall at all in
the category of specially preferred credit under 2241 and 2242,
except to the extent for unpaid wages that are already covered by
2241 which is No.6 for movable, and No. 6 for immovable. Art 110 of
the LABOR CODE did not alter 2241 and 2242. Creditors with liens
over a certain propertry are still given special preferences over the
proceeds of a property.
|2-Manresa CredTrans TSN |60
DBP vs. NLRC
FACTS:
Leonor Ang is an employee of petitioner Tropical Philippine Woods
Industries, Inc. (TPWII).
DBP, a mortgagee of TPWII foreclosed the latter’s plant,
equipments , and facilities. As a result, the operations of stopped and
Leonor Ang was verbally terminated.
On December 14, 1987 aggrieved by the termination of her
employment, private respondent filed with the Labor Arbiter a
complaint for separation pay, 13th month pay, vacation and sick
leave pay, salaries and allowances against TPWII, its General
Manager, and Tropical.
Tropical was held subsidiarily liable by LA for the unpaid wages
applying Art. 110 of the Labor Code. Thus, Tropical now questions
the application of said labor code provision which refers to worker
preference in case of bankruptcy or liquidation of an employer's
business against a mortgage.
ISSUE:
WON Article 110 of the Labor Code is applicable in the case.
RULING:
NO
Art. 110 should not be treated apart from other laws but applied
in conjunction with the pertinent provisions of the Civil Code and the
Insolvency Law to the extent that piece-meal distribution of the
assets of the debtor is avoided
A declaration of bankruptcy or a judicial liquidation must be present
before the worker's preference may be enforced. Thus, Article 110 of
the Labor Code and its implementing rule cannot be invoked by the
respondents in this case absent a formal declaration of bankruptcy or
a liquidation order.
A preference applies only to claims which do not attach to specific
properties. A lien creates a charge on a particular property. The right
of first preference as regards unpaid wages recognized by Article
110 does not constitute a lien on the property of the insolvent debtor
in favor of workers. It is but a preference of credit in their favor, a
preference in application. On the other hand, DBP anchors its claim
on a mortgage credit. A mortgage directly and immediately subjects
the property upon which it is imposed, whoever the possessor may
be, to the fulfillment of the obligation for whose security it was
constituted. It creates a real right which is enforceable against the
whole world. It is a lien on an identified immovable property, which a
preference is not. A recorded mortgage credit is a special preferred
credit under Article 2242 (5) of the Civil Code on classification of
credits. The preference given by Article 1l0, when not falling within
Article 2241 (6) and Article 2242 (3), of the Civil Code and not
attached to any specific property, is all ordinary preferred credit
although its impact is to move it from second priority to first priority in
the order of preference established by Article 2244 of the Civil Code.
In this case, it was emphasized that there must be a
declaration of bankruptcy or a liquidation before the worker’s
preference may be enforced. Art 110 cannot be invoked in this case
in the absence of formal declaration of bankruptcy. The amendment
of Art 110 of the Labor Code expanded the concept of worker’s
preference to cover not only unpaid wages but also other monetary
claims to which even claims of the government must be deemed

subordinate as provided in 2244, but not in relation to 2241 and
2242. For example, you have laborer who work in your house for its
construction, that is already a specially preferred credit, but if you
employ persons to work in your office, and then na bankrupt, then na
dismiss si employee. In this case, the dismissed employee cannot go
after properties that are subject to mortgage because Art 110 does
not repeal 2241 and 2242. Here, Art 110 of the Labor Code does not
constitute a lien on the property of the insolvent debtor in favor of his
workers either upon all of the properties or upon any particular
property owned by the employer. The phrase “first preference” in Art
110 pertains to an ordinary prefered credit under 2244.
Republic vs. Peralta
FACTS:
In the voluntary insolvency proceedings commenced in May 1977 by
Quality Tobacco Corporation (the "Insolvent"), the following claims of
creditors were filed:
(i) P2,806,729.92, by the USTC Association of Employees and
workers Union-PTGWO USTC as separation pay for their members.
This amount plus an additional sum of P280,672.99 as attorney's
fees had been awarded by the National Labor Relations Commission
in NLRC Case No. RB-IV-9775-77.
(ii) P53,805.05 by the Federacion de la IndustriaTabaquera y
OtrosTrabajadores de Filipinas ("FOITAF), as separation pay for their
members, an amount similarly awarded by the NLRC in the same
NLRC Case.
(iii) P1,085,188.22 by the Bureau of Internal Revenue for tobacco
inspection fees covering the period 1 October 1967 to 28 February
1973;
(iv) P276,161.00 by the Bureau of Customs for customs duties and
taxes payable on various importations by the Insolvent. These
obligations appear to be secured by surety bonds. 2 Some of these
imported items are apparently still in customs custody so far as the
record before this Court goes.
In its questioned Order of 17 November 1980, the trial court held that
the above-enumerated claims of USTC and FOITAF ("Unions") for
separation pay of their respective members embodied in final awards
of the National Labor Relations Commission were to be preferred
over the claims of the Bureau of Customs and the Bureau of Internal
Revenue. The trial court, in so ruling, relied primarily upon Article 110
of the Labor Code which reads thus:
Article 110. Worker preference in case of bankruptcy — In the event
of bankruptcy or liquidation of an employer's business, his workers
shall enjoy first preference as regards wages due them for services
rendered during the period prior to the bankruptcy or liquidation, any
provision of law to the contrary notwithstanding. Union paid wages
shall be paid in full before other creditors may establish any claim to
a share in the assets of the employer.
The Solicitor General, in seeking the reversal of the questioned
Orders, argues that Article 110 of the Labor Code is not applicable as
it speaks of "wages," a term which he asserts does not include the
separation pay claimed by the Unions. "Separation pay," the Solicitor
General contends, is given to a laborer for a separation from
employment computed on the basis of the number of years the
laborer was employed by the employer; it is a form of penalty or
damage against the employer in favor of the employee for the latter's
dismissal or separation from service.
|2-Manresa CredTrans TSN |61
ISSUE 1: WON the above-enumerated claims of USTC and FOITAF
("Unions") for separation pay of their respective members embodied
in final awards of the National Labor Relations Commission were to
be preferred over the claims of the Bureau of Customs and the
Bureau of Internal Revenue.
HELD 1: Article 97 (f) of the Labor Code defines "wages" in the
following terms:
Wage' paid to any employee shall mean the remuneration or
earnings, however designated, capable of being expressed in terms
of money, whether fixed or ascertained on a time, task, piece, or
commission basis, or other method of calculating the same, which is
payable by an employer to an employee under a written or unwritten
contract of employment for work done or to be done, or for services
rendered or to be rendered, and includes the fair and reasonable
value, as determined by the Secretary of Labor, of board, lodging, or
other facilities customarily furnished by the employer to the
employee. 'Fair and reasonable value' shall not include any profit to
the employer or to any person affiliated with the employer.
We are unable to subscribe to the view urged by the Solicitor
General. For the specific purposes of Article 110 and in the context of
insolvency termination or separation pay is reasonably regarded as
forming part of the remuneration or other money benefits accruing to
employees or workers by reason of their having previously rendered
services to their employer; as such, they fall within the scope of
"remuneration or earnings — for services rendered or to be rendered
— ." Liability for separation pay might indeed have the effect of a
penalty, so far as the employer is concerned. So far as concerns the
employees, however, separation pay is additional remuneration to
which they become entitled because, having previously rendered
services, they are separated from the employer's service. The
relationship between separation pay and services rendered is
underscored by the fact that separation pay is measured by the
amount (i.e., length) of the services rendered. This construction is
sustained both by the specific terms of Article 110 and by the major
purposes and basic policy embodied in the Labor Code. It is also the
construction that is suggested by Article 4 of the Labor Code which
directs that doubts — assuming that any substantial rather than
merely frivolous doubts remain-in the interpretation of the provisions
of the labor Code and its implementing rules and regulations shall be
"resolved in favor of labor."
Article 110 must be read in relation to the provisions of the Civil Code
concerning the classification, concurrence and preference of credits,
which provisions find particular application in insolvency proceedings
where the claims of all creditors, preferred or non-preferred, may be
adjudicated in a binding manner.
Those provisions may be seen to classify credits against a particular
insolvent into three general categories, namely: (a) special preferred
credits listed in Articles 2241 and 2242, (b) ordinary preferred credits
listed in Article 2244; and (c) common credits under Article 2245.
Turning first to special preferred credits under Articles 2241 and
2242, it should be noted at once that these credits constitute liens or
encumbrances on the specific movable or immovable property to
which they relate. Article 2243 makes clear that these credits "shall
be considered as mortgages or pledges of real or personal property,
or liens within the purview of legal provisions governing insolvency."
It should be emphasized in this connection that "duties, taxes and
fees due [on specific movable property of the insolvent] to the State
or any subdivision thereof" (Article 2241 [1]) and "taxes due upon the
insolvent's land or building (2242 [1])"stand first in preference in
respect of the particular movable or immovable property to which the
tax liens have attached. Article 2243 is quite explicit: "[T]axes
mentioned in number 1, Article 2241 and number 1, Article 2242 shall
first be satisfied." The claims listed in numbers 2 to 13 in Article 2241
and in numbers 2 to 10 in Articles 2242, all come after taxes in order

of precedence; such claims enjoy their privileged character as liens
and may be paid only to the extent that taxes have been paid from
the proceeds of the specific property involved (or from any other
sources) and only in respect of the remaining balance of such
proceeds. What is more, these other (non-tax) credits, although
constituting liens attaching to particular property, are not preferred
one over another inter se. Provided tax liens shall have been
satisfied, non-tax liens or special preferred credits which subsist in
respect of specific movable or immovable property are to be treated
on an equal basis and to be satisfied concurrently and
proportionately. Put succinctly, Articles 2241 and 2242 jointly with
Articles 2246 to2249 establish a two-tier order of preference. The first
tier includes only taxes, duties and fees due on specific movable or
immovable property. All other special preferred credits stand on the
same second tier to be satisfied, paripassu and pro rata, out of any
residual value of the specific property to which such other credits
relate.
Credits which are specially preferred because they constitute liens
(tax or non-tax) in turn, take precedence over ordinary preferred
credits so far as concerns the property to which the liens have
attached. The specially preferred credits must be discharged first out
of the proceeds of the property to which they relate, before ordinary
preferred creditors may lay claim to any part of such proceeds.
If the value of the specific property involved is greater than the sum
total of the tax liens and other specially preferred credits, the residual
value will form part of the "free property" of the insolvent — i.e.,
property not impressed with liens by operation of Articles 2241 and
2242. If, on the other hand, the value of the specific movable or
immovable is less than the aggregate of the tax liens and other
specially preferred credits, the unsatisfied balance of the tax liens
and other such credits are to the treated as ordinary credits under
Article 2244 and to be paid in the order of preference there set up.
In contrast with Articles 2241 and 2242, Article 2244 creates no liens
on determinate property which follow such property. What Article
2244 creates are simply rights in favor of certain creditors to have the
cash and other assets of the insolvent applied in a certain sequence
or order of priority.
Only in respect of the insolvent's "free property" is an order of priority
established by Article 2244. In this sequence, certain taxes and
assessments also figure but these do not have the same kind of
overriding preference that Articles 2241 No. 1 and 2242 No. I create
for taxes which constituted liens on the taxpayer's property. Under
Article 2244,
(a) taxes and assessments due to the national government,
excluding those which result in tax liens under Articles 2241 No. 1
and 2242 No. 1 but including the balance thereof not satisfied out of
the movable or immovable property to which such liens attached, are
ninth in priority; (b) taxes and assessments due any province,
excluding those impressed as tax liens under Articles 2241 No. 1 and
2242 No. 1, but including the balance thereof not satisfied out of the
movable or immovable property to which such liens attached, are
tenth in priority; and
(c) taxes and assessments due any city or municipality, excluding
those impressed as tax liens under Articles 2241 No. I and 2242 No.
2 but including the balance thereof not satisfied out of the movable or
immovable property to which such liens attached, are eleventh in
priority.
ISSUE 2:
What is the impact Article 110 of the labor Code has had on those
provisions of the Civil Code?
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HELD 2: A. Claim of the Bureau of Customs for Unpaid Customs
Duties and Taxes- Under Section 1204 of the Tariff and Customs
Code.
Clearly, the claim of the Bureau of Customs for unpaid customs
duties and taxes enjoys the status of a specially preferred credit
under Article 2241, No. 1, of the Civil Code. only in respect of the
articles importation of which by the Insolvent resulted in the
assessment of the unpaid taxes and duties, and which are still in the
custody or subject to the control of the Bureau of Customs. The
goods imported on one occasion are not subject to a lien for customs
duties and taxes assessed upon other importations though also
effected by the Insolvent. Customs duties and taxes which remain
unsatisfied after levy upon the imported articles on which such duties
and taxes are due, would have to be paid out of the Insolvent's "free
property" in accordance with the order of preference embodied in
Article 2244 of the Civil Code. Such unsatisfied customs duties and
taxes would fall within Article 2244, No. 9, of the Civil Code and
hence would be ninth in priority.
B. Claims of the Bureau of Internal Revenue for Tabacco Inspection
Fees —Under Section 315 of the National Internal Revenue Code
("old Tax Code")
It follows that the claim of the Bureau of Internal Revenue for unpaid
tobacco inspection fees constitutes a claim for unpaid internal
revenue taxes which gives rise to a tax lien upon all the properties
and assets, movable and immovable, of the Insolvent as taxpayer.
Clearly, under Articles 2241 No. 1, 2242 No. 1, and 2246-2249 of the
Civil Code, this tax claim must be given preference over any other
claim of any other creditor, in respect of any and all properties of the
Insolvent.
C. Claims of the Unions for Separation Pay of Their Members —
Article 110 of the Labor Code does not purport to create a lien in
favor of workers or employees for unpaid wages either upon all of the
properties or upon any particular property owned by their employer.
Claims for unpaid wages do not therefore fall at all within the
category of speciallypreferred claims established under Articles 2241
and 2242 of the Civil Code, except to the extent that such claims for
unpaid wages are already covered by Article 2241, number 6. "claims
for laborers' wages, on the goods manufactured or the work done;" or
by Article 2242, number 3: "claims of laborers and other workers
engaged in the construction, reconstruction or repair of buildings,
canals and other works, upon said buildings, canals or other works."
To the extent that claims for unpaid wages fall outside the scope of
Article 2241, number 6 and 2242, number 3, they would come within
the ambit of the category of ordinary preferred credits under Article
2244.
Applying Article 2241, number 6 to the instant case, the claims of the
Unions for separation pay of their members constitute liens attaching
to the processed leaf tobacco, cigars and cigarettes and other
products produced or manufactured by the Insolvent, but not to other
assets owned by the Insolvent. And even in respect of such tobacco
and tobacco products produced by the Insolvent, the claims of the
Unions may be given effect only after the Bureau of Internal
Revenue's claim for unpaid tobacco inspection fees shall have been
satisfied out of the products so manufactured by the Insolvent.
Article 2242, number 3, also creates a lien or encumbrance upon a
building or other real property of the Insolvent in favor of workmen
who constructed or repaired such building or other real property.
Article 2242, number 3, does not however appear relevant in the
instant case, since the members of the Unions to whom separation
pay is due rendered services to the Insolvent not (so far as the
record of this case would show) in the construction or repair of
buildings or other real property, but rather, in the regular course of
the manufacturing operations of the Insolvent. The Unions' claims do
not therefore constitute a lien or encumbrance upon any immovable

property owned by the Insolvent, but rather, as already indicated,
upon the Insolvent's existing inventory (if any of processed tobacco
and tobacco products.
Article 110 of the Labor Code did not sweep away the overriding
preference accorded under the scheme of the Civil Code to tax
claims of the government or any subdivision thereof which constitute
a lien upon properties of the Insolvent. It is frequently said that taxes
are the very lifeblood of government. The effective collection of taxes
is a task of highest importance for the sovereign. It is critical indeed
for its own survival. It follows that language of a much higher degree
of specificity than that exhibited in Article 110 of the Labor Code is
necessary to set aside the intent and purpose of the legislator that
shines through the precisely crafted provisions of the Civil Code. It
cannot be assumed simpliciter that the legislative authority, by using
in
Article 110 the words "first preference" and "any provision of law to
the contrary notwithstanding" intended to disrupt the elaborate and
symmetrical structure set up in the Civil Code. Neither can it be
assumed casually that 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 considerations
of public policy prevent us from giving to "other creditors" a
linguistically unlimited scope that would embrace the universe of
creditors save only unpaid employees.
We, however, do not believe that Article 110 has had no impact at all
upon the provisions of the Civil Code. Bearing in mind the overriding
precedence given to taxes, duties and fees by the Civil Code and the
fact that the Labor Code does not impress any lien on the property of
an employer, the use of the phrase "first preference" in Article 110
indicates that what Article 110 intended to modify is the order of
preference found in Article 2244, which order relates, as we have
seen, to property of the Insolvent that is not burdened with the liens
or encumbrances created or recognized by Articles 2241 and 2242.
We have noted that Article 2244, number 2, establishes second
priority for claims for wages for services rendered by employees or
laborers of the Insolvent "for one year preceding the commencement
of the proceedings in insolvency." Article 110 of the Labor Code
establishes "first preference" for services rendered "during the period
prior to the bankruptcy or liquidation, " a period not limited to the year
immediately prior to the bankruptcy or liquidation. Thus, very
substantial effect may be given to the provisions of Article 110
without grievously distorting the framework established in the Civil
Code by holding, as we so hold, that Article 110 of the Labor Code
has modified Article 2244 of the Civil Code in two respects: (a) firstly,
by removing the one year limitation found in Article 2244, number 2;
and (b) secondly, by moving up claims for unpaid wages of laborers
or workers of the Insolvent from second priority to first priority in the
order of preference established I by Article 2244.
Accordingly, and by way of recapitulating the application of Civil
Code and Labor Code provisions to the facts herein, the trial court
should inventory the properties of the Insolvent so as to determine
specifically: (a) whether the assets of the Insolvent before the trial
court includes stocks of processed or manufactured tobacco
products; and (b) whether the Bureau of Customs still has in its
custody or control articles imported by the Insolvent and subject to
the lien of the government for unpaid customs duties and taxes.
In respect of (a), if the Insolvent has inventories of processed or
manufactured tobacco products, such inventories must be subjected
firstly to the claim of theBureau of Internal Revenue for unpaid
tobacco inspection fees. The remaining value of such inventories
after satisfaction of such fees (or should such inspection fees be
satisfied out of other properties of the Insolvent) will be subject to a
lien in favor of the Unions by virtue of Article 2241, number 6. In
case, upon the other hand, the Insolvent no longer has any inventory
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of processed or manufactured product, then the claim of the Unions
for separation pay would have to be satisfied out of the "free
property" of the Insolvent under Article 2244 of the Civil Code. as
modified by Article 110 of the Labor Code.
Turning to (b), should the Bureau of Customs no longer have any
importations by the Insolvent still within customs custody or control,
or should the importations still held by the Bureau of Customs be or
have become insufficient in value for the purpose, customs duties
and taxes remaining unpaid would have only ninth priority by virtue of
Article 2244, number 9. In respect therefore of the Insolvent's "free
property, " the claims of the Unions will enjoy first priority under
Article 2244 as modified and will be paid ahead of the claims of the
Bureau of Customs for any customs duties and taxes still remaining
unsatisfied.
It is understood that the claims of the Unions referred to above do not
include the 10% claim for attorney's fees. Attorney's fees incurred by
the Unions do not stand on the same footing as the Unions' claims
for separation pay of their members.
Q: How would 2241 be applied in relation to its application
in favor of the Bureau of Customs?
A: The Tariff and Customs Code provides that custom
charges constitute a lien upon the articles imported which may be
enforced to such articles which are subject to the control of the
government. As long as these articles are under the control of the
government, then it falls under the first catrgory under 2241 where
before all other creditors will be paid, it should be ensured that
custom duties are paid first.
Q: How about the claim of BIR?
A: The SC said that BIR’s claim falls under Art 2241 in
relation to the Tax Code or the National Internal Revenue Code
which provided that it should fall under the specially preferred credit.
This time, theer is already an insolvency proceeding. You
have an obligation for separation pay, a claim in favor of Bureau of
Customs, and BIR claims for unpaid revenue taxes.
The SC said that the claim in favor of the Bureau of
Customs is a special preferred credit under 2241 No.1. If a movable
property is imported, taxes, and revisions, and duties should be paid.
If they remain unsatisfied after levy, they would have to be paid out of
the insolvent’s remaining property. With regard to the unpaid tobacco
inspection, it is also a tax enjoying special preference under 2241.
For the separation pay, again, if we apply Art 110 of the Labor Code,
it enjoys first priority under 2244, Art 110 establishes first preference
for services rendered during the period prior to bankruptcy or
liquidation. However, sa Civil Code meron pang period na 1 year
limitation but walanayan because Art 110 modifies the Civil Code in
the sense that it removes the one-year limitation found in Art 2244
No.2 of the Civil Code and moving up the things for unpaid wages of
laborers from second to first priority. If the insolvent debtor has still
inventories of processed tobacco products, the inventories must be
subjected first to the claim of the BIR for the unpaid tobacco fees.
The remaining value of such inventories after satisfaction shall be
subject to liens in favor of the labor unions. Kung
merongsobrapwede, but in case the insolvent debtor no longer has
any inventory, then the claims of the union for separation pay, will be
satisfied out of the properties of the insolvent.
As to the obligation in favor of the Bureau of Customs for
duties and taxes, only importations by the insolvent still within the
control of the Bureau of Customs have become insufficient, customs,
duties, and taxes remaining unpaid would have 9 th priority na. And
form what I mentioned earlier that income taxes ay

mahuhulogdoonsa 9th priority under 2244, there are taxes and duties
which could not be paid because doonpalangsa property
nayunkulangangpambayad or walanang control and possession ang
Bureau of Customs. 2244 naang mag apply so No. 9 nasyadoon at
No.1 naang claim nang unpaid laborer. Take note that Art 2244
“must be in order” so you have to familiarize the order enumerated
therein.
The last one under 2244 yung credits which appear in a
public instrument or by final judgment, notice that they are placed in
the same order of preference. Preference among themselves would
be determined by considering the property of the dates of the
instrument and the final judgements. So among it, may priority din.
Art. 2245. Credits of any other kind or class, or by any other right or
title not comprised in the four preceding articles, shall enjoy no
preference.
Kung meron pang natira after nabayaranang 2241, 2242,
at 2244. Example, utangmosakapitbahay not in a public instrument
na subject to a lien of any property. So pwede pa under 2245 but
there is no preference here anymore so all the remaining credits shall
be paid pro-rata regardless of dates.
Art. 2246. Those credits which enjoy preference with respect to
specific movables, exclude all others to the extent of the value of the
personal property to which the preference refers.
Art. 2247. If there are two or more credits with respect to the same
specific movable property, they shall be satisfied pro rata, after the
payment of duties, taxes and fees due the State or any subdivision
thereof.
Ito ang basis natinsa 2241 that No.2 downwards shall be
satisfied pro-rata after payment of taxes, duties, and fees due to the
state or any of its subdivision thereof.
Art. 2248. Those credits which enjoy preference in relation to specific
real property or real rights, exclude all others to the extent of the
value of the immovable or real right to which the preference refers.
Art. 2249. If there are two or more credits with respect to the same
specific real property or real rights, they shall be satisfied pro rata,
after the payment of the taxes and assessments upon the immovable
property or real right.
Again, we have mentioned sa 2242, that No. 2 downwards
shall be satisfied pro-rata after payment of the taxes and
assessments upon the immovable property.
Art. 2250. The excess, if any, after the payment of the credits which
enjoy preference with respect to specific property, real or personal,
shall be added to the free property which the debtor may have, for
the payment of the other credits. (1928a)
Art. 2251. Those credits which do not enjoy any preference with
respect to specific property, and those which enjoy preference, as to
the amount not paid, shall be satisfied according to the following
rules:
(1) In the order established in Article 2244;
|2-Manresa CredTrans TSN |64
(2) Common credits referred to in Article 2245 shall be paid pro rata
regardless of dates.
LETTERS OF CREDIT
Letters of credit are those issued by one merchant to
another for the purpose of attaining a commercial transaction for the
purpose of commercial transactions. However, in many
jurisprudence, it was said that a letter of credit is issued by a bank to
guarantee its client’s ability to pay imported goods in relation to our
discussion sa TRUST RECEIPT; or a firm authorizing an individual or
a firm to draw drafts of the bank or its correspondence for bank’s
accounts under certain conditions of credit.
A letter of credit is a written instrument. The writer requests
or authorizes the addressee(usually a foreign bank) to pay money to
a supplier from another country and assumes responsibility for
payment of debt to the addressee.
Opening a letter of credit in favor of a vendor is only a
mode of payment and is not an essential requirement for a contract
of sale. The transaction for example( Ma’am wrote something on the
board) is if you have a purchaser from Philippines and supplier from
Hongkong, then bank-to-bank transaction yansiya. There is still a
contract between the vendee and vendor but as a mode of paying,
purchaser will a vail a letter of credit to be issued by a Philippine
bank(BDO ang example ni Ma’am). The none opening of a letter of
credit will not prevent the perfection of a contract of sale.
The execution of a letter of credit or the issuance thereof is
not a contrct of guaranty or suretyship because it does not entail a
primary liability on the part of the issuer in case of default. Also a
letter of credit is not a negotiable instrument because if is issued to a
specific person. Thus, it is neither payable to bearer or order.
Also take note of Prudential Bank vs Yap(Dec 8, 1992)
which states that a letter of credit is an engagement by a bank with
another person made at the request of a customer that the issuer will
honor drafts or other demands for payment upon compliance with the
conditions provided in the letter of credit. In a letter of credit, a bank
merely substitutes its own promise to pay for the promise to pay one
of its customers who in turn promises to pay the supplier and the
client of the bank will be the one to pay the bank the amount of the
funds mentioned in the letter of credit plus credit or commitment fees
agreed upon.
Also, this is defined in bank of America vs Court of
Appeals( Dec 10, 1992) wherein it states that a letter of credit is a
financial device developed by merchants as a convenient and
relatively safe mode of dealing with sales of goods to satisfy the
irreconcilable interests of the seller. The buyer will contract a bank
which issue a letter of credit in favor of a seller and by virtue of this
letter, the issuing can authorize the seller to draw drafts and engage
the payment upon presentment simultaneouly by the tender of
documents required by the letter of credit. The buyer and the seller
agree on what documents are to be presented for payment but
ordinarily they are documents of title evidencing or attesting to the
shipment of the goods to the buyer.
Once the credit is established, the seller ships the goods to
the buyer and in the process secures the required shipping
documents and documents of title. To get aid, the seller executes a
draft and sends it together with the requried documents of the issuing
bank. But what usually happens in practice is that instead of the
supplier directly contracting the buyer’s bank, he would transact
through his own bank so bank-to-bank syana transaction.
 |2-Manresa CredTrans TSN |65

The issuing bank pays cash to the seller if it finds that the
documents submitted by the seller conforms to what the letter of
credit requires. The bank obtains possession of the documents upon
paying the seller and transaction is completed. The buyer then
reimburses the bank and acquires the documents entitled to be used.
In this arrangement, the seller gets paid only if he delivers the
documents of title over the goods while buyer acquires the said
documents and control over the goods only after reimbursing the
bank.
The purpose is to substitute and support the agreement of
the buyer-importer to pay money under a contract or other
arrangement.
Essential Conditions of a LETTER OF CREDIT
obligations such as bidders or financial obligation considered as
borrowers. While security arrangements, they are not converted into
a contract of security as the obligation arising therein is primary in
nature, and not subsidiary like a contract of guarantee.
Types of Letter of Credit
1. Irrevocable- obligates a bank to honor drafts drawn in
compliance with the credit and it cannot be cancelled
or modified without the consent of all parties.
2. Revocable- it can be cancelled or amended anytime
before payment and intended as a means for
arranging payment but not as a guarantee for
payment.

1. It is issued in favor of a specific person.
2. The letter of credit is limited to a fixed and specified
amount; or to one or more undetermined amounts but
within the maximum limits which must be stated
exactly.
3. Confirmed-both banks are obligated to honor drafts
drawn in compliance with the letter of credit.
4. Unconfirmed- an obligation only of the issuing bank
and is issued if the exporter has doubts of the foreign
bank’s ability to pay.

A letter of credit can become void if the bearer does not make 5. Revolving Letter of Credit- one that is valid for several
use of it within the period agreed upon by the drawer or in default to transactions even over a given period of time. Most of
a period fixed within six months counted from is date to any point it are issued in a revocable form.
within the Philippines or within 12 months from anywhere outside
thereof. It is void in fact and in law as provided under Art 572 of the 6. Non-revolving- valid for a single transaction only.
Code of Commerce.
7. Non-cumulative- any amount not use by the
Parties Involved beneficiary during a specified period may not be
drawn on a later period.
1. Buyer who procures the letter of credit and obliges
himself to reimburse the bank upon receipt of the 8. Cumulative- any undrawn amounts can be carried
document of title. over to future periods.

2. Issuing bank who issues the letter of credit and

undertakes to pay the seller upon receipt of the draft
and proper documents of title which will be
surrendered tot eh buyer upon reimbursement.

3. Seller who ships the goods to the buyer and delivers ~END OF SEMESTER ~
documents of title and draft to the issuing bank to
recover payment. "If you are absolutely determined to make a lawyer of yourself, the
thing is more than half done already"
In this transaction, there are different independent contracts
which exist. We have a contract of sale between the buyer and the ~Abraham Lincoln
seller. We also have a contract between the buyer and the issuing
bank; and the seller. In consonance with the Independence
applicable to letters of credit, a bank in determining compliance with
the terms of the letter of credit is required to examine only the
shipping documents presented by the seller and precluded from
determining whether the main contract or the contract of sale is
actually accomplished or not. This arrangement assures the seller a
prompt payment, independent of any breach of contract of sale.

Also take note with the rule on strict compliance. The

documents that will be tendered here by the seller must strictly
conform with the terms of the letter of credit. A correspondent bank
which departs from what has been stipulated in the letter of credit
and releases the payment to the payment to the seller acts in its own
risk and may not be able to recover from the buyer.

Stand-by letter of credit--- A bank issued option to the loan

involving three parties (the bank which issued a credit, the party
requesting for such issuance, and the beneficiary). So,here, there is
a letter of credit where for example X would say that for the amount
of 2 million he will open a stand-by letter of credit, and he purchased
goods from a certain supplier which will be covered by the letter of
credit up to the amount provided therein. It supports non-financial
|2-Manresa CredTrans TSN |66