Credits - Pledge
Content
[ G.R. No. 171569, August 01, 2011 ]
UNION BANK OF THE PHILIPPINES, PETITIONER, VS. ALAIN * JUNIAT,
WINWOOD APPAREL, INC., WINGYAN APPAREL, INC., NONWOVEN FABRIC
PHILIPPINES, RESPONDENTS.
DEL CASTILLO, J.:
To have a binding effect on third parties, a contract of pledge must appear in a public
instrument.[1]
This Petition for Review on Certiorari[2] under Rule 45 of the Rules of Court assails the
June 23, 2005 Decision[3]and the February 9, 2006 Resolution[4] of the Court of
Appeals (CA) in CA-G.R. CV No. 66392.
Factual Antecedents
Petitioner Union Bank of the Philippines (Union Bank) is a universal banking
corporation organized and existing under Philippine laws.[5]
Respondents Winwood Apparel, Inc. (Winwood) and Wingyan Apparel, Inc. (Wingyan)
are domestic corporations engaged in the business of apparel manufacturing.[6] Both
respondent corporations are owned and operated by respondent Alain Juniat (Juniat),
a French national based in Hongkong.[7] Respondent Nonwoven Fabric Philippines,
Inc. (Nonwoven) is a Philippine corporation engaged in the manufacture and sale of
various types of nonwoven fabrics.[8]
On September 3, 1992, petitioner filed with the Regional Trial Court (RTC) of Makati,
Branch 57, a Complaint[9]with prayer for the issuance of ex-parte writs of preliminary
attachment and replevin against Juniat, Winwood, Wingyan, and the person in
possession of the mortgaged motorized sewing machines and equipment.[10]Petitioner
alleged that Juniat, acting for and in behalf of Winwood and Wingyan, executed a
promissory note[11]dated April 11, 1992 and a Chattel Mortgage[12] dated March 27,
1992 over several motorized sewing machines and other allied equipment to secure
their obligation arising from export bills transactions to petitioner in the amount of
P1,131,134.35;[13] that as additional security for the obligation, Juniat executed a
Continuing Surety Agreement[14] dated April 11, 1992 in favor of petitioner;[15] that the
loan remains unpaid;[16] and that the mortgaged motorized sewing machines are
insufficient to answer for the obligation.[17]
On September 10, 1992, the RTC issued writs of preliminary attachment and replevin
in favor of petitioner.[18] The writs were served by the Sheriff upon Nonwoven as it
was in possession of the motorized sewing machines and equipment.[19] Although
Nonwoven was not impleaded in the complaint filed by petitioner, the RTC likewise
served summons upon Nonwoven since it was in possession of the motorized sewing
machines and equipment.[20]
On September 28, 1992, Nonwoven filed an Answer,[21] contending that the
unnotarized Chattel Mortgage executed in favor of petitioner has no binding effect on
Nonwoven and that it has a better title over the motorized sewing machines and
equipment because these were assigned to it by Juniat pursuant to their
Agreement[22]dated May 9, 1992.[23] Juniat, Winwood, and Wingyan, on the other
hand, were declared in default for failure to file an answer within the reglementary
period.[24]
On November 23, 1992, petitioner filed a Motion to Sell Chattels Seized by Replevin,
[25]
praying that the motorized sewing machines and equipment be sold to avoid
depreciation and deterioration.[26] However, on May 18, 1993, before the RTC could
act on the motion, petitioner sold the attached properties for the amount of
P1,350,000.00.[27]
Nonwowen moved to cite the officers of petitioner in contempt for selling the attached
properties, but the RTC denied the same on the ground that Union Bank acted in
good faith.[28]
Ruling of the Regional Trial Court
On May 20, 1999, the RTC of Makati, Branch 145,[29] rendered a Decision[30] in favor
of petitioner. The RTC ruled that both the Chattel Mortgage dated March 27, 1992 in
favor of petitioner and the Agreement dated May 9, 1992 in favor of Nonwoven have
no obligatory effect on third persons because these documents were not notarized.[31]
However, since the Chattel Mortgage in favor of petitioner was executed earlier,
petitioner has a better right over the motorized sewing machines and equipment
under the doctrine of "first in time, stronger in right" (prius tempore, potior jure).[32]
Thus, the RTC disposed of the case in this wise:
WHEREFORE, above premises considered, judgment is hereby rendered as follows:
1.] Declaring the [petitioner] UNION BANK OF THE PHILIPPINES, as having the
better right to the goods and/or machineries subject of the Writs of Preliminary
Attachment and Replevin issued by this Court on September 10, 1992.
2.] Declaring the [petitioner] as entitled to the proceeds of the sale of the subject
machineries in the amount of P1,350,000.00;
3.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and Wingyan
Apparel, Inc. to be jointly and severally liable to the [petitioner], for the deficiency
between the proceeds of the sale of the machineries subject of this suit
[P1,350,000.00] and original claim of the plaintiff [P1,919,907.03], in the amount of
P569,907.03, with legal interest at the rate of 12% per annum from date of this
judgment until fully paid; and
4.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and Wingyan
Apparel, Inc. to be jointly and severally liable to the [petitioner] for the amount of
P50,000.00 as reasonable attorneys fees; and
5.] Cost of this suit against the [respondents].SO ORDERED.[33]
Nonwoven moved for reconsideration[34] but the RTC denied the same in its
Order[35] dated July 14, 1999.
Ruling of the Court of Appeals
On appeal, the CA reversed the ruling of the RTC. The CA ruled that the contract of
pledge entered into between Juniat and Nonwoven is valid and binding, and that the
motorized sewing machines and equipment were ceded to Nonwoven by Juniat by
virtue of a dacion en pago.[36] Thus, the CA declared Nonwoven entitled to the
proceeds of the sale of the attached properties.[37] The fallo reads:
WHEREFORE, premises considered, the assailed decision is hereby REVERSED
and SET ASIDE. [Petitioner] Union Bank of the Philippines is hereby DIRECTED to
pay Nonwoven Fabric Philippines, Inc. P1,350,000.00, the amount it holds in escrow,
realized from the May 18, 1993 sale of the machineries to avoid deterioration during
pendency of suit. No pronouncement as to costs.SO ORDERED.[38]
Petitioner sought reconsideration[39] which was denied by the CA in a
Resolution[40] dated February 9, 2006.
Issues
Hence, the present recourse where petitioner interposes the following issues:
1.
Whether x x x the Court of Appeals committed serious reversible error in
setting aside the Decision of the trial court holding that Union Bank of the
Philippines had a better right over the machineries seized/levied upon in the
proceedings before the trial court and/or the proceeds of the sale thereof;
2.
Whether x x x the Court of Appeals seriously erred in holding that
[Nonwoven] has a valid claim over the subject sewing machines.[41]
Petitioner's Arguments
Echoing the reasoning of the RTC, petitioner insists that it has a better title to the
proceeds of the sale.[42] Although the Chattel Mortgage executed in its favor was not
notarized, petitioner insists that it is nevertheless valid, and thus, has preference over
a subsequent unnotarized agreement.[43] Petitioner further claims that except for the
said agreement, no other evidence was presented by Nonwoven to show that the
motorized sewing machines and equipment were indeed transferred to them by
Juniat/Winwood/Wingyan.[44]
Respondent Nonwoven's Arguments
Nonwoven, on the other hand, claims ownership over the proceeds of the sale under
Article 1544[45] of the Civil Code on double sale, which it claims can be applied by
analogy in the instant case.[46] Nonwoven contends that since its prior possession
over the motorized sewing machines and equipment was in good faith, it has a better
title over the proceeds of the sale.[47] Nonwoven likewise maintains that petitioner has
no right over the proceeds of the sale because the Chattel Mortgage executed in its
favor was unnotarized, unregistered, and without an affidavit of good faith.[48]
Our Ruling
The petition has merit.
Nonwoven lays claim to the attached motorized sewing machines and equipment
pursuant to the Agreement it entered into with Juniat, to wit:
Hong Kong, 9th May, 1992
With reference to talks held this morning at the Holiday Inn Golden Mile Coffee Shop,
among the following parties:
a. Redflower Garments Inc. - Mrs. Maglipon
b. Nonwoven Fabrics Phils. Inc. - Mr. J. Tan
c. Winwood Apparel Inc./Wing Yan Apparel, Inc. - Mr. A. Juniat, Mrs. S. Juniat
IT WAS AGREED THAT:
a. Settlement of the accounts between Nonwoven Fabrics Phils. Inc. and Winwood
Apparel Inc./Wing Yan Apparel, Inc. should be effected as agreed through partial
payment by L/C with the balance to be settled at a later date for which Winwood
Apparel, Inc. agrees to consign 94 sewing machines, 3 snap machines and 2
boilers, presently in the care of Redflower Garments Inc., to the care of
Nonwoven Fabrics Phils., Inc. as guarantee.Meanwhile, Nonwoven will resume
delivery to Winwood/Win Yang as usual.x x x x[49] (Emphasis supplied.)
It insists that since the attached properties were assigned or ceded to it by Juniat, it
has a better right over the proceeds of the sale of the attached properties than
petitioner, whose claim is based on an unnotarized Chattel Mortgage.
We do not agree.
Indeed, the unnotarized Chattel Mortgage executed by Juniat, for and in behalf of
Wingyan and Winwood, in favor of petitioner does not bind Nonwoven.[50] However, it
must be pointed out that petitioner's primary cause of action is for a sum of money
with prayer for the issuance of ex-parte writs of attachment and replevin against
Juniat, Winwood, Wingyan, and the person in possession of the motorized sewing
machines and equipment.[51] Thus, the fact that the Chattel Mortgage executed in
favor of petitioner was not notarized does not affect petitioner's cause of action.
Petitioner only needed to show that the loan of Juniat, Wingyan and Winwood
remains unpaid and that it is entitled to the issuance of the writs prayed for.
Considering that writs of attachment and replevin were issued by the RTC,
[52]
Nonwoven had to prove that it has a better right of possession or ownership over
the attached properties. This it failed to do.
A perusal of the Agreement dated May 9, 1992 clearly shows that the sewing
machines, snap machines and boilers were pledged to Nonwoven by Juniat to
guarantee his obligation. However, under Article 2096 of the Civil Code, "[a] pledge
shall not take effect against third persons if a description of the thing pledged and the
date of the pledge do not appear in a public instrument." Hence, just like the chattel
mortgage executed in favor of petitioner, the pledge executed by Juniat in favor of
Nonwoven cannot bind petitioner.
Neither can we sustain the finding of the CA that: "The machineries were ceded to
THIRD PARTY NONWOVEN by way of dacion en pago, a contract later entered into
by WINWOOD/WINGYAN and THIRD PARTY NONWOVEN."[53] As aptly pointed out
by petitioner, no evidence was presented by Nonwoven to show that the attached
properties were subsequently sold to it by way of a dacion en pago. Also, there is
nothing in the Agreement dated May 9, 1992 to indicate that the motorized sewing
machines, snap machines and boilers were ceded to Nonwoven as payment for the
Wingyan's and Winwood's obligation. It bears stressing that there can be no transfer
of ownership if the delivery of the property to the creditor is by way of security.[54] In
fact, in case of doubt as to whether a transaction is one of pledge or dacion en pago,
the presumption is that it is a pledge as this involves a lesser transmission of rights
and interests.[55]
In view of the foregoing, we are constrained to reverse the ruling of the CA.
Nonwoven is not entitled to the proceeds of the sale of the attached properties
because it failed to show that it has a better title over the same.
WHEREFORE, the petition is hereby GRANTED. The assailed June 23, 2005
Decision and the February 9, 2006 Resolution of the Court of Appeals in CA-G.R. CV
No. 66392 are hereby REVERSED and SET ASIDE. The May 20, 1999 Decision of
the Regional Trial Court of Makati, Branch 145, is
hereby REINSTATED and AFFIRMED.
SO ORDERED. Corona, C.J., (Chairperson), Leonardo-De Castro,
Bersamin, and Villarama, Jr. JJ., concur.
to be sold at public auction on 4 November 1991. However, before the scheduled date of
auction, all of respondents caused the consignation with the RTC Clerk of Court of various
amounts. It was claimed that respondents had attempted to tender these payments to the
Parays, but had been rebuffed. The deposited amounts were as follows:
Abdulia C. Rodriguez
[ G.R. NO. 132287, January 24, 2006 ]
SPOUSES BONIFACIO AND FAUSTINA PARAY, AND VIDAL ESPELETA, PETITIONERS,
VS. DRA. ABDULIA C. RODRIGUEZ, MIGUELA R. JARIOL ASSISTED BY HER
HUSBAND ANTOLIN JARIOL, SR., LEONORA NOLASCO ASSISTED BY HER
HUSBAND FELICIANO NOLASCO, DOLORES SOBERANO ASSISTED BY HER
HUSBAND JOSE SOBERANO, JR., JULIA R. GENEROSO, TERESITA R. NATIVIDAD
AND GENOVEVA R. SORONIO ASSISTED BY HER HUSBAND ALFONSO SORONIO,
RESPONDENTS.
The assailed decision of the Court of Appeals took off on the premise that pledged shares
of stock auctioned off in a notarial sale could still be redeemed by their owners. This notion
is wrong, and we thus reverse.
The facts, as culled from the record, follow.
Respondents were the owners, in their respective personal capacities, of shares of stock in
a corporation known as the Quirino-Leonor-Rodriguez Realty Inc.[1] Sometime during the
years 1979 to 1980, respondents secured by way of pledge of some of their shares of
stock to petitioners Bonifacio and Faustina Paray ("Parays") the payment of certain loan
obligations. The shares pledged are listed below:
Teresita Natividad
277,381.82 .. 14 Oct. 1991
Genoveva R. Soronio
425,353.50 .. 14 Oct. 1991
Julia R. Generoso
Teresita R. Natividad
638,385.00 .. 25 Oct. 1991
264,375.00 .. 11 Nov. 1991
Dolores R. Soberano
12,031.61.. 25 Oct. 1991
520,216.39 ..11 Nov. 1991
490,000.00.. 18 Oct. 1991
88,000.00 ..18 Oct. 1991[5]
38,385.44 .. 14 Oct. 1991
Miguela Jariol
Notwithstanding the consignations, the public auction took place as scheduled, with
petitioner Vidal Espeleta successfully bidding the amount of P6,200,000.00 for all of the
pledged shares. None of respondents participated or appeared at the auction of 4
November 1991.
TINGA, J.:
Miguel Rodriguez
Jariol
Abdulia C. Rodriguez
Leonora R. Nolasco
Genoveva Soronio
Dolores R. Soberano
Julia Generoso
P 120,066.66 .. 14 Oct. 1991
Leonora R. Nolasco
1,000 shares covered by Stock Certificates No. 011, 060, 061 &
062;
300 shares covered by Stock Certificates No. 023 & 093;
407 shares covered by Stock Certificates No. 091 & 092;
699 shares covered by Stock Certificates No. 025, 059 & 099;
699 shares covered by Stock Certificates No. 021, 053, 022 & 097;
1,100 shares covered by Stock Certificates No. 085, 051, 086 &
084;
440 shares covered by Stock Certificates Nos. 054 & 055 [2]
When the Parays attempted to foreclose the pledges on account of respondents' failure to
pay their loans, respondents filed complaints with the Regional Trial Court (RTC) of Cebu
City. The actions, which were consolidated and tried before RTC Branch 14, Cebu City,
sought the declaration of nullity of the pledge agreements, among others. However the
RTC, in its decision[3] dated 14 October 1988, dismissed the complaint and gave "due
course to the foreclosure and sale at public auction of the various pledges subject of these
two cases."[4] This decision attained finality after it was affirmed by the Court of Appeals
and the Supreme Court. The Entry of Judgment was issued on 14 August 1991.
Respondents then received Notices of Sale which indicated that the pledged shares were
Respondents instead filed on 13 November 1991 a complaint seeking the declaration of
nullity of the concluded public auction. The complaint, docketed as Civil Case No. CEB10926, was assigned to Branch 16 of the Cebu City RTC. Respondents argued that their
tender of payment and subsequent consignations served to extinguish their loan
obligations and discharged the pledge contracts. Petitioners countered that the auction
sale was conducted pursuant to the final and executory judgment in Civil Cases Nos. R20120 and 20131, and that the tender of payment and consignations were made long after
their obligations had fallen due.
The Cebu City RTC dismissed the complaint, expressing agreement with the position of
the Parays.[6] It held, among others that respondents had failed to tender or consign
payments within a reasonable period after default and that the proper remedy of
respondents was to have participated in the auction sale.[7] The Court of Appeals Eighth
Division however reversed the RTC on appeal, ruling that the consignations extinguished
the loan obligations and the subject pledge contracts; and the auction sale of 4 November
1991 as null and void.[8] Most crucially, the appellate court chose to uphold the sufficiency
of the consignations owing to an imputed policy of the law that favored redemption and
mandated a liberal construction to redemption laws. The attempts at payment by
respondents were characterized as made in the exercise of the right of redemption.
The Court of Appeals likewise found fault with the auction sale, holding that there was a
need to individually sell the various shares of stock as they had belonged to different
pledgors. Thus, it was observed that the minutes of the auction sale should have specified
in detail the bids submitted for each of the shares of the pledgors for the purpose of
knowing the price to be paid by the different pledgors upon redemption of the auctioned
sales of stock.
Petitioners now argue before this Court that they were authorized to refuse as they did the
tender of payment since they were undertaking the auction sale pursuant to the final and
executory decision in Civil Cases Nos. R-20120 and 20131, which did not authorize the
payment of the principal obligation by respondents. They point out that the amounts
consigned could not extinguish the principal loan obligations of respondents since they
were not sufficient to cover the interests due on the debt. They likewise argue that the
essential procedural requisites for the auction sale had been satisfied.
We rule in favor of petitioners.
The fundamental premise from which the appellate court proceeded was that the
consignations made by respondents should be construed in light of the rules of
redemption, as if respondents were exercising such right. In that perspective, the Court of
Appeals made three crucial conclusions favorable to respondents: that their act of
consigning the payments with the RTC should be deemed done in the exercise of their
right of redemption; that the buyer at public auction does not ipso facto become the owner
of the pledged shares pending the lapse of the one-year redemptive period; and that the
collective sale of the shares of stock belonging to several individual owners without
specification of the apportionment in the applications of payment deprives the individual
owners of the opportunity to know of the price they would have to pay for the purpose of
exercising the right of redemption.
The appellate court's dwelling on the right of redemption is utterly off-tangent. The right of
redemption involves payments made by debtors after the foreclosure of their properties,
and not those made or attempted to be made, as in this case, before the foreclosure sale.
The proper focus of the Court of Appeals should have been whether the consignations
made by respondents sufficiently acquitted them of their principal obligations. A pledge
contract is an accessory contract, and is necessarily discharged if the principal obligation is
extinguished.
Nonetheless, the Court is now confronted with this rather new fangled theory, as
propounded by the Court of Appeals, involving the right of redemption over pledged
properties. We have no hesitation in pronouncing such theory as discreditable.
Preliminarily, it must be clarified that the subject sale of pledged shares was an
extrajudicial sale, specifically a notarial sale, as distinguished from a judicial sale as
typified by an execution sale. Under the Civil Code, the foreclosure of a pledge occurs
extrajudicially, without intervention by the courts. All the creditor needs to do, if the credit
has not been satisfied in due time, is to proceed before a Notary Public to the sale of the
thing pledged.[9]
In this case, petitioners attempted as early as 1980 to proceed extrajudicially with the sale
of the pledged shares by public auction. However, extrajudicial sale was stayed with the
filing of Civil Cases No. R-20120 and 20131, which sought to annul the pledge contracts.
The final and executory judgment in those cases affirmed the pledge contracts and
disposed them in the following fashion:
WHEREFORE, premises considered, judgment is hereby rendered dismissing the
complaints at bar, and (1) Declaring the various pledges covered in Civil Cases Nos. R-20120 and R-20131 valid
and effective; and
(2) Giving due course to the foreclosure and sale at public auction of the various pledges
subject of these two cases.
Costs against the plaintiffs.
SO ORDERED.[10]
The phrase "giving due course to the foreclosure and sale at public auction of the various
pledges subject of these two cases" may give rise to the impression that such sale is
judicial in character. While the decision did authorize the sale by public auction, such
declaration could not detract from the fact that the sale so authorized is actually
extrajudicial in character. Note that the final judgment in said cases expressly did not direct
the sale by public auction of the pledged shares, but instead upheld the right of the Parays
to conduct such sale at their own volition.
Indeed, as affirmed by the Civil Code,[11] the decision to proceed with the sale by public
auction remains in the sole discretion of the Parays, who could very well choose not to
hold the sale without violating the final judgments in the aforementioned civil cases. If the
sale were truly in compliance with a final judgment or order, the Parays would have no
choice but to stage the sale for then the order directing the sale arises from judicial
compulsion. But nothing in the dispositive portion directed the sale at public auction as a
mandatory recourse, and properly so since the sale of pledged property in public auction
is, by virtue of the Civil Code, extrajudicial in character.
The right of redemption as affirmed under Rule 39 of the Rules of Court applies only to
execution sales, more precisely execution sales of real property.
The Court of Appeals expressly asserted the notion that pledged property, necessarily
personal in character, may be redeemed by the creditor after being sold at public auction.
Yet, as a fundamental matter, does the right of redemption exist over personal property?
No law or jurisprudence establishes or affirms such right. Indeed, no such right exists.
The right to redeem property sold as security for the satisfaction of an unpaid obligation
does not exist preternaturally. Neither is it predicated on proprietary right, which, after the
sale of property on execution, leaves the judgment debtor and vests in the purchaser.
Instead, it is a bare statutory privilege to be exercised only by the persons named in the
statute.[12]
The right of redemption over mortgaged real property sold extrajudicially is established by
Act No. 3135, as amended. The said law does not extend the same benefit to personal
property. In fact, there is no law in our statute books which vests the right of redemption
over personal property. Act No. 1508, or the Chattel Mortgage Law, ostensibly could have
served as the vehicle for any legislative intent to bestow a right of redemption over
personal property, since that law governs the extrajudicial sale of mortgaged personal
property, but the statute is definitely silent on the point. And Section 39 of the 1997 Rules
of Civil Procedure, extensively relied upon by the Court of Appeals, starkly utters that the
right of redemption applies to real properties, not personal properties, sold on execution.
Tellingly, this Court, as early as 1927, rejected the proposition that personal property may
be covered by the right of redemption. In Sibal 1.v. Valdez,[13] the Court ruled that sugar
cane crops are personal property, and thus, not subject to the right of redemption. [14] No
countervailing statute has been enacted since then that would accord the right of
redemption over personal property, hence the Court can affirm this decades-old ruling as
effective to date.
Since the pledged shares in this case are not subject to redemption, the Court of Appeals
had no business invoking and applying the inexistent right of redemption. We cannot thus
agree that the consigned payments should be treated with liberality, or somehow construed
as having been made in the exercise of the right of redemption. We also must reject the
appellate court's declaration that the buyer of at the public auction is not "ipso facto"
rendered the owner of the auctioned shares, since the debtor enjoys the one-year
redemptive period to redeem the property. Obviously, since there is no right to redeem
personal property, the rights of ownership vested unto the purchaser at the foreclosure
sale are not entangled in any suspensive condition that is implicit in a redemptive period.
Respondents argue that their various consignations made prior to the auction sale
discharged them from the loan and the pledge agreements. They are mistaken.
The Court of Appeals also found fault with the apparent sale in bulk of the pledged shares,
notwithstanding the fact that these shares were owned by several people, on the premise
the pledgors would be denied the opportunity to know exactly how much they would need
to shoulder to exercise the right to redemption. This concern is obviously rendered a nonissue by the fact that there can be no right to redemption in the first place. Rule 39 of the
Rules of Court does provide for instances when properties foreclosed at the same time
must be sold separately, such as in the case of lot sales for real property under Section 19.
However, these instances again pertain to execution sales and not extrajudicial sales. No
provision in the Rules of Court or in any law requires that pledged properties sold at
auction be sold separately.
Petitioners point out that while the amounts consigned by respondents could answer for
their respective principal loan obligations, they were not sufficient to cover the interests
due on these loans, which were pegged at the rate of 5% per month or 60% per annum.
Before this Court, respondents, save for Dolores Soberano, do not contest this interest rate
as alleged by petitioners. Soberano, on the other hand, challenges this interest rate as
"usurious."[17]
On the other hand, under the Civil Code, it is the pledgee, and not the pledgor, who is
given the right to choose which of the items should be sold if two or more things are
pledged.[15] No similar option is given to pledgors under the Civil Code. Moreover, there is
nothing in the Civil Code provisions governing the extrajudicial sale of pledged properties
that prohibits the pledgee of several different pledge contracts from auctioning all of the
pledged properties on a single occasion, or from the buyer at the auction sale in
purchasing all the pledged properties with a single purchase price. The relative
insignificance of ascertaining the definite apportionments of the sale price to the individual
shares lies in the fact that once a pledged item is sold at auction, neither the pledgee nor
the pledgor can recover whatever deficiency or excess there may be between the
purchase price and the amount of the principal obligation.[16]
A different ruling though would obtain if at the auction, a bidder expressed the desire to bid
on a determinate number or portion of the pledged shares. In such a case, there may lie
the need to ascertain with particularity which of the shares are covered by the bid price,
since not all of the shares may be sold at the auction and correspondingly not all of the
pledge contracts extinguished. The same situation also would lie if one or some of the
owners of the pledged shares participated in the auction, bidding only on their respective
pledged shares. However, in this case, none of the pledgors participated in the auction,
and the sole bidder cast his bid for all of the shares. There obviously is no longer any
practical reason to apportion the bid price to the respective shares, since no matter how
slight or significant the value of the purchase price for the individual share is, the sale is
completed, with the pledgor and the pledgee not entitled to recover the excess or the
deficiency, as the case may be. To invalidate the subject auction solely on this point serves
no cause other than to celebrate formality for formality's sake.
Clearly, the theory adopted by the Court of Appeals is in shambles, and cannot be
resurrected. The question though yet remains whether the consignations made by
respondents extinguished their respective pledge contracts in favor of the Parays so as to
enjoin the latter from auctioning the pledged shares.
There is no doubt that if the principal obligation is satisfied, the pledges should be
terminated as well. Article 2098 of the Civil Code provides that the right of the creditor to
retain possession of the pledged item exists only until the debt is paid. Article 2105 of the
Civil Code further clarifies that the debtor cannot ask for the return of the thing pledged
against the will of the creditor, unless and until he has paid the debt and its interest. At the
same time, the right of the pledgee to foreclose the pledge is also established under the
Civil Code. When the credit has not been satisfied in due time, the creditor may proceed
with the sale by public auction under the procedure provided under Article 2112 of the
Code.
The particular pledge contracts did not form part of the records elevated to this Court.
However, the 5% monthly interest rate was noted in the statement of facts in the 14
October 1988 RTC Decision which had since become final. Moreover, the said decision
pronounced that even assuming that the interest rates of the various loans were 5% per
month, "it is doubtful whether the interests so charged were exorbitantly or excessively
usurious. This is because for sometime now, usury has become "legally inexistent.""[18] The
finality of this 1988 Decision is a settled fact, and thus the time to challenge the validity of
the 5% monthly interest rate had long passed. With that in mind, there is no reason for the
Court to disagree with petitioners that in order that the consignation could have the effect
of extinguishing the pledge contracts, such amounts should cover not just the principal
loans, but also the 5% monthly interests thereon.
It bears noting that the Court of Appeals also ruled that respondents had satisfied the
requirements under Section 18, Rule 39, which provides that the judgment obligor may
prevent the sale by paying the amount required by the execution and the costs that have
been incurred therein.[19] However, the provision applies only to execution sales, and not
extra-judicial sales, as evidenced by the use of the phrases "sale of property on execution"
and "judgment obligor." The reference is inapropos, and even if it were applicable, the
failure of the payment to cover the interests due renders it insufficient to stay the sale.
The effect of the finality of the judgments in Civil Cases Nos. R-20120 and R-20131 should
also not be discounted. Petitioners' right to proceed with the auction sale was affirmed not
only by law, but also by a final court judgment. Any subsequent court ruling that would
enjoin the petitioners from exercising such right would have the effect of superseding a
final and executory judgment.
Finally, we cannot help but observe that respondents may have saved themselves much
trouble if they simply participated in the auction sale, as they are permitted to bid
themselves on their pledged properties.[20] Moreover, they would have had a better right
had they matched the terms of the highest bidder.[21] Under the circumstances, with the
high interest payments that accrued after several years, respondents were even placed in
a favorable position by the pledge agreements, since the creditor would be unable to
recover any deficiency from the debtors should the sale price be insufficient to cover the
principal amounts with interests. Certainly, had respondents participated in the auction,
there would have been a chance for them to recover the shares at a price lower than the
amount that was actually due from them to the Parays. That respondents failed to avail of
this beneficial resort wholly accorded them by law is their loss. Now, all respondents can
recover is the amounts they had consigned.
WHEREFORE, the petition is GRANTED. The assailed decision of the Court of Appeals is
SET ASIDE and the decision of the Cebu City RTC, Branch 16, dated 18 November 1992
is REINSTATED. Costs against respondents.
SO ORDERED.
Quisumbing, (Chairman), Carpio and Carpio-Morales, JJ., concur
UNION BANK OF THE PHILIPPINES, PETITIONER, VS. ALAIN * JUNIAT,
WINWOOD APPAREL, INC., WINGYAN APPAREL, INC., NONWOVEN FABRIC
PHILIPPINES, RESPONDENTS.
DEL CASTILLO, J.:
To have a binding effect on third parties, a contract of pledge must appear in a public
instrument.[1]
This Petition for Review on Certiorari[2] under Rule 45 of the Rules of Court assails the
June 23, 2005 Decision[3]and the February 9, 2006 Resolution[4] of the Court of
Appeals (CA) in CA-G.R. CV No. 66392.
Factual Antecedents
Petitioner Union Bank of the Philippines (Union Bank) is a universal banking
corporation organized and existing under Philippine laws.[5]
Respondents Winwood Apparel, Inc. (Winwood) and Wingyan Apparel, Inc. (Wingyan)
are domestic corporations engaged in the business of apparel manufacturing.[6] Both
respondent corporations are owned and operated by respondent Alain Juniat (Juniat),
a French national based in Hongkong.[7] Respondent Nonwoven Fabric Philippines,
Inc. (Nonwoven) is a Philippine corporation engaged in the manufacture and sale of
various types of nonwoven fabrics.[8]
On September 3, 1992, petitioner filed with the Regional Trial Court (RTC) of Makati,
Branch 57, a Complaint[9]with prayer for the issuance of ex-parte writs of preliminary
attachment and replevin against Juniat, Winwood, Wingyan, and the person in
possession of the mortgaged motorized sewing machines and equipment.[10]Petitioner
alleged that Juniat, acting for and in behalf of Winwood and Wingyan, executed a
promissory note[11]dated April 11, 1992 and a Chattel Mortgage[12] dated March 27,
1992 over several motorized sewing machines and other allied equipment to secure
their obligation arising from export bills transactions to petitioner in the amount of
P1,131,134.35;[13] that as additional security for the obligation, Juniat executed a
Continuing Surety Agreement[14] dated April 11, 1992 in favor of petitioner;[15] that the
loan remains unpaid;[16] and that the mortgaged motorized sewing machines are
insufficient to answer for the obligation.[17]
On September 10, 1992, the RTC issued writs of preliminary attachment and replevin
in favor of petitioner.[18] The writs were served by the Sheriff upon Nonwoven as it
was in possession of the motorized sewing machines and equipment.[19] Although
Nonwoven was not impleaded in the complaint filed by petitioner, the RTC likewise
served summons upon Nonwoven since it was in possession of the motorized sewing
machines and equipment.[20]
On September 28, 1992, Nonwoven filed an Answer,[21] contending that the
unnotarized Chattel Mortgage executed in favor of petitioner has no binding effect on
Nonwoven and that it has a better title over the motorized sewing machines and
equipment because these were assigned to it by Juniat pursuant to their
Agreement[22]dated May 9, 1992.[23] Juniat, Winwood, and Wingyan, on the other
hand, were declared in default for failure to file an answer within the reglementary
period.[24]
On November 23, 1992, petitioner filed a Motion to Sell Chattels Seized by Replevin,
[25]
praying that the motorized sewing machines and equipment be sold to avoid
depreciation and deterioration.[26] However, on May 18, 1993, before the RTC could
act on the motion, petitioner sold the attached properties for the amount of
P1,350,000.00.[27]
Nonwowen moved to cite the officers of petitioner in contempt for selling the attached
properties, but the RTC denied the same on the ground that Union Bank acted in
good faith.[28]
Ruling of the Regional Trial Court
On May 20, 1999, the RTC of Makati, Branch 145,[29] rendered a Decision[30] in favor
of petitioner. The RTC ruled that both the Chattel Mortgage dated March 27, 1992 in
favor of petitioner and the Agreement dated May 9, 1992 in favor of Nonwoven have
no obligatory effect on third persons because these documents were not notarized.[31]
However, since the Chattel Mortgage in favor of petitioner was executed earlier,
petitioner has a better right over the motorized sewing machines and equipment
under the doctrine of "first in time, stronger in right" (prius tempore, potior jure).[32]
Thus, the RTC disposed of the case in this wise:
WHEREFORE, above premises considered, judgment is hereby rendered as follows:
1.] Declaring the [petitioner] UNION BANK OF THE PHILIPPINES, as having the
better right to the goods and/or machineries subject of the Writs of Preliminary
Attachment and Replevin issued by this Court on September 10, 1992.
2.] Declaring the [petitioner] as entitled to the proceeds of the sale of the subject
machineries in the amount of P1,350,000.00;
3.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and Wingyan
Apparel, Inc. to be jointly and severally liable to the [petitioner], for the deficiency
between the proceeds of the sale of the machineries subject of this suit
[P1,350,000.00] and original claim of the plaintiff [P1,919,907.03], in the amount of
P569,907.03, with legal interest at the rate of 12% per annum from date of this
judgment until fully paid; and
4.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and Wingyan
Apparel, Inc. to be jointly and severally liable to the [petitioner] for the amount of
P50,000.00 as reasonable attorneys fees; and
5.] Cost of this suit against the [respondents].SO ORDERED.[33]
Nonwoven moved for reconsideration[34] but the RTC denied the same in its
Order[35] dated July 14, 1999.
Ruling of the Court of Appeals
On appeal, the CA reversed the ruling of the RTC. The CA ruled that the contract of
pledge entered into between Juniat and Nonwoven is valid and binding, and that the
motorized sewing machines and equipment were ceded to Nonwoven by Juniat by
virtue of a dacion en pago.[36] Thus, the CA declared Nonwoven entitled to the
proceeds of the sale of the attached properties.[37] The fallo reads:
WHEREFORE, premises considered, the assailed decision is hereby REVERSED
and SET ASIDE. [Petitioner] Union Bank of the Philippines is hereby DIRECTED to
pay Nonwoven Fabric Philippines, Inc. P1,350,000.00, the amount it holds in escrow,
realized from the May 18, 1993 sale of the machineries to avoid deterioration during
pendency of suit. No pronouncement as to costs.SO ORDERED.[38]
Petitioner sought reconsideration[39] which was denied by the CA in a
Resolution[40] dated February 9, 2006.
Issues
Hence, the present recourse where petitioner interposes the following issues:
1.
Whether x x x the Court of Appeals committed serious reversible error in
setting aside the Decision of the trial court holding that Union Bank of the
Philippines had a better right over the machineries seized/levied upon in the
proceedings before the trial court and/or the proceeds of the sale thereof;
2.
Whether x x x the Court of Appeals seriously erred in holding that
[Nonwoven] has a valid claim over the subject sewing machines.[41]
Petitioner's Arguments
Echoing the reasoning of the RTC, petitioner insists that it has a better title to the
proceeds of the sale.[42] Although the Chattel Mortgage executed in its favor was not
notarized, petitioner insists that it is nevertheless valid, and thus, has preference over
a subsequent unnotarized agreement.[43] Petitioner further claims that except for the
said agreement, no other evidence was presented by Nonwoven to show that the
motorized sewing machines and equipment were indeed transferred to them by
Juniat/Winwood/Wingyan.[44]
Respondent Nonwoven's Arguments
Nonwoven, on the other hand, claims ownership over the proceeds of the sale under
Article 1544[45] of the Civil Code on double sale, which it claims can be applied by
analogy in the instant case.[46] Nonwoven contends that since its prior possession
over the motorized sewing machines and equipment was in good faith, it has a better
title over the proceeds of the sale.[47] Nonwoven likewise maintains that petitioner has
no right over the proceeds of the sale because the Chattel Mortgage executed in its
favor was unnotarized, unregistered, and without an affidavit of good faith.[48]
Our Ruling
The petition has merit.
Nonwoven lays claim to the attached motorized sewing machines and equipment
pursuant to the Agreement it entered into with Juniat, to wit:
Hong Kong, 9th May, 1992
With reference to talks held this morning at the Holiday Inn Golden Mile Coffee Shop,
among the following parties:
a. Redflower Garments Inc. - Mrs. Maglipon
b. Nonwoven Fabrics Phils. Inc. - Mr. J. Tan
c. Winwood Apparel Inc./Wing Yan Apparel, Inc. - Mr. A. Juniat, Mrs. S. Juniat
IT WAS AGREED THAT:
a. Settlement of the accounts between Nonwoven Fabrics Phils. Inc. and Winwood
Apparel Inc./Wing Yan Apparel, Inc. should be effected as agreed through partial
payment by L/C with the balance to be settled at a later date for which Winwood
Apparel, Inc. agrees to consign 94 sewing machines, 3 snap machines and 2
boilers, presently in the care of Redflower Garments Inc., to the care of
Nonwoven Fabrics Phils., Inc. as guarantee.Meanwhile, Nonwoven will resume
delivery to Winwood/Win Yang as usual.x x x x[49] (Emphasis supplied.)
It insists that since the attached properties were assigned or ceded to it by Juniat, it
has a better right over the proceeds of the sale of the attached properties than
petitioner, whose claim is based on an unnotarized Chattel Mortgage.
We do not agree.
Indeed, the unnotarized Chattel Mortgage executed by Juniat, for and in behalf of
Wingyan and Winwood, in favor of petitioner does not bind Nonwoven.[50] However, it
must be pointed out that petitioner's primary cause of action is for a sum of money
with prayer for the issuance of ex-parte writs of attachment and replevin against
Juniat, Winwood, Wingyan, and the person in possession of the motorized sewing
machines and equipment.[51] Thus, the fact that the Chattel Mortgage executed in
favor of petitioner was not notarized does not affect petitioner's cause of action.
Petitioner only needed to show that the loan of Juniat, Wingyan and Winwood
remains unpaid and that it is entitled to the issuance of the writs prayed for.
Considering that writs of attachment and replevin were issued by the RTC,
[52]
Nonwoven had to prove that it has a better right of possession or ownership over
the attached properties. This it failed to do.
A perusal of the Agreement dated May 9, 1992 clearly shows that the sewing
machines, snap machines and boilers were pledged to Nonwoven by Juniat to
guarantee his obligation. However, under Article 2096 of the Civil Code, "[a] pledge
shall not take effect against third persons if a description of the thing pledged and the
date of the pledge do not appear in a public instrument." Hence, just like the chattel
mortgage executed in favor of petitioner, the pledge executed by Juniat in favor of
Nonwoven cannot bind petitioner.
Neither can we sustain the finding of the CA that: "The machineries were ceded to
THIRD PARTY NONWOVEN by way of dacion en pago, a contract later entered into
by WINWOOD/WINGYAN and THIRD PARTY NONWOVEN."[53] As aptly pointed out
by petitioner, no evidence was presented by Nonwoven to show that the attached
properties were subsequently sold to it by way of a dacion en pago. Also, there is
nothing in the Agreement dated May 9, 1992 to indicate that the motorized sewing
machines, snap machines and boilers were ceded to Nonwoven as payment for the
Wingyan's and Winwood's obligation. It bears stressing that there can be no transfer
of ownership if the delivery of the property to the creditor is by way of security.[54] In
fact, in case of doubt as to whether a transaction is one of pledge or dacion en pago,
the presumption is that it is a pledge as this involves a lesser transmission of rights
and interests.[55]
In view of the foregoing, we are constrained to reverse the ruling of the CA.
Nonwoven is not entitled to the proceeds of the sale of the attached properties
because it failed to show that it has a better title over the same.
WHEREFORE, the petition is hereby GRANTED. The assailed June 23, 2005
Decision and the February 9, 2006 Resolution of the Court of Appeals in CA-G.R. CV
No. 66392 are hereby REVERSED and SET ASIDE. The May 20, 1999 Decision of
the Regional Trial Court of Makati, Branch 145, is
hereby REINSTATED and AFFIRMED.
SO ORDERED. Corona, C.J., (Chairperson), Leonardo-De Castro,
Bersamin, and Villarama, Jr. JJ., concur.
to be sold at public auction on 4 November 1991. However, before the scheduled date of
auction, all of respondents caused the consignation with the RTC Clerk of Court of various
amounts. It was claimed that respondents had attempted to tender these payments to the
Parays, but had been rebuffed. The deposited amounts were as follows:
Abdulia C. Rodriguez
[ G.R. NO. 132287, January 24, 2006 ]
SPOUSES BONIFACIO AND FAUSTINA PARAY, AND VIDAL ESPELETA, PETITIONERS,
VS. DRA. ABDULIA C. RODRIGUEZ, MIGUELA R. JARIOL ASSISTED BY HER
HUSBAND ANTOLIN JARIOL, SR., LEONORA NOLASCO ASSISTED BY HER
HUSBAND FELICIANO NOLASCO, DOLORES SOBERANO ASSISTED BY HER
HUSBAND JOSE SOBERANO, JR., JULIA R. GENEROSO, TERESITA R. NATIVIDAD
AND GENOVEVA R. SORONIO ASSISTED BY HER HUSBAND ALFONSO SORONIO,
RESPONDENTS.
The assailed decision of the Court of Appeals took off on the premise that pledged shares
of stock auctioned off in a notarial sale could still be redeemed by their owners. This notion
is wrong, and we thus reverse.
The facts, as culled from the record, follow.
Respondents were the owners, in their respective personal capacities, of shares of stock in
a corporation known as the Quirino-Leonor-Rodriguez Realty Inc.[1] Sometime during the
years 1979 to 1980, respondents secured by way of pledge of some of their shares of
stock to petitioners Bonifacio and Faustina Paray ("Parays") the payment of certain loan
obligations. The shares pledged are listed below:
Teresita Natividad
277,381.82 .. 14 Oct. 1991
Genoveva R. Soronio
425,353.50 .. 14 Oct. 1991
Julia R. Generoso
Teresita R. Natividad
638,385.00 .. 25 Oct. 1991
264,375.00 .. 11 Nov. 1991
Dolores R. Soberano
12,031.61.. 25 Oct. 1991
520,216.39 ..11 Nov. 1991
490,000.00.. 18 Oct. 1991
88,000.00 ..18 Oct. 1991[5]
38,385.44 .. 14 Oct. 1991
Miguela Jariol
Notwithstanding the consignations, the public auction took place as scheduled, with
petitioner Vidal Espeleta successfully bidding the amount of P6,200,000.00 for all of the
pledged shares. None of respondents participated or appeared at the auction of 4
November 1991.
TINGA, J.:
Miguel Rodriguez
Jariol
Abdulia C. Rodriguez
Leonora R. Nolasco
Genoveva Soronio
Dolores R. Soberano
Julia Generoso
P 120,066.66 .. 14 Oct. 1991
Leonora R. Nolasco
1,000 shares covered by Stock Certificates No. 011, 060, 061 &
062;
300 shares covered by Stock Certificates No. 023 & 093;
407 shares covered by Stock Certificates No. 091 & 092;
699 shares covered by Stock Certificates No. 025, 059 & 099;
699 shares covered by Stock Certificates No. 021, 053, 022 & 097;
1,100 shares covered by Stock Certificates No. 085, 051, 086 &
084;
440 shares covered by Stock Certificates Nos. 054 & 055 [2]
When the Parays attempted to foreclose the pledges on account of respondents' failure to
pay their loans, respondents filed complaints with the Regional Trial Court (RTC) of Cebu
City. The actions, which were consolidated and tried before RTC Branch 14, Cebu City,
sought the declaration of nullity of the pledge agreements, among others. However the
RTC, in its decision[3] dated 14 October 1988, dismissed the complaint and gave "due
course to the foreclosure and sale at public auction of the various pledges subject of these
two cases."[4] This decision attained finality after it was affirmed by the Court of Appeals
and the Supreme Court. The Entry of Judgment was issued on 14 August 1991.
Respondents then received Notices of Sale which indicated that the pledged shares were
Respondents instead filed on 13 November 1991 a complaint seeking the declaration of
nullity of the concluded public auction. The complaint, docketed as Civil Case No. CEB10926, was assigned to Branch 16 of the Cebu City RTC. Respondents argued that their
tender of payment and subsequent consignations served to extinguish their loan
obligations and discharged the pledge contracts. Petitioners countered that the auction
sale was conducted pursuant to the final and executory judgment in Civil Cases Nos. R20120 and 20131, and that the tender of payment and consignations were made long after
their obligations had fallen due.
The Cebu City RTC dismissed the complaint, expressing agreement with the position of
the Parays.[6] It held, among others that respondents had failed to tender or consign
payments within a reasonable period after default and that the proper remedy of
respondents was to have participated in the auction sale.[7] The Court of Appeals Eighth
Division however reversed the RTC on appeal, ruling that the consignations extinguished
the loan obligations and the subject pledge contracts; and the auction sale of 4 November
1991 as null and void.[8] Most crucially, the appellate court chose to uphold the sufficiency
of the consignations owing to an imputed policy of the law that favored redemption and
mandated a liberal construction to redemption laws. The attempts at payment by
respondents were characterized as made in the exercise of the right of redemption.
The Court of Appeals likewise found fault with the auction sale, holding that there was a
need to individually sell the various shares of stock as they had belonged to different
pledgors. Thus, it was observed that the minutes of the auction sale should have specified
in detail the bids submitted for each of the shares of the pledgors for the purpose of
knowing the price to be paid by the different pledgors upon redemption of the auctioned
sales of stock.
Petitioners now argue before this Court that they were authorized to refuse as they did the
tender of payment since they were undertaking the auction sale pursuant to the final and
executory decision in Civil Cases Nos. R-20120 and 20131, which did not authorize the
payment of the principal obligation by respondents. They point out that the amounts
consigned could not extinguish the principal loan obligations of respondents since they
were not sufficient to cover the interests due on the debt. They likewise argue that the
essential procedural requisites for the auction sale had been satisfied.
We rule in favor of petitioners.
The fundamental premise from which the appellate court proceeded was that the
consignations made by respondents should be construed in light of the rules of
redemption, as if respondents were exercising such right. In that perspective, the Court of
Appeals made three crucial conclusions favorable to respondents: that their act of
consigning the payments with the RTC should be deemed done in the exercise of their
right of redemption; that the buyer at public auction does not ipso facto become the owner
of the pledged shares pending the lapse of the one-year redemptive period; and that the
collective sale of the shares of stock belonging to several individual owners without
specification of the apportionment in the applications of payment deprives the individual
owners of the opportunity to know of the price they would have to pay for the purpose of
exercising the right of redemption.
The appellate court's dwelling on the right of redemption is utterly off-tangent. The right of
redemption involves payments made by debtors after the foreclosure of their properties,
and not those made or attempted to be made, as in this case, before the foreclosure sale.
The proper focus of the Court of Appeals should have been whether the consignations
made by respondents sufficiently acquitted them of their principal obligations. A pledge
contract is an accessory contract, and is necessarily discharged if the principal obligation is
extinguished.
Nonetheless, the Court is now confronted with this rather new fangled theory, as
propounded by the Court of Appeals, involving the right of redemption over pledged
properties. We have no hesitation in pronouncing such theory as discreditable.
Preliminarily, it must be clarified that the subject sale of pledged shares was an
extrajudicial sale, specifically a notarial sale, as distinguished from a judicial sale as
typified by an execution sale. Under the Civil Code, the foreclosure of a pledge occurs
extrajudicially, without intervention by the courts. All the creditor needs to do, if the credit
has not been satisfied in due time, is to proceed before a Notary Public to the sale of the
thing pledged.[9]
In this case, petitioners attempted as early as 1980 to proceed extrajudicially with the sale
of the pledged shares by public auction. However, extrajudicial sale was stayed with the
filing of Civil Cases No. R-20120 and 20131, which sought to annul the pledge contracts.
The final and executory judgment in those cases affirmed the pledge contracts and
disposed them in the following fashion:
WHEREFORE, premises considered, judgment is hereby rendered dismissing the
complaints at bar, and (1) Declaring the various pledges covered in Civil Cases Nos. R-20120 and R-20131 valid
and effective; and
(2) Giving due course to the foreclosure and sale at public auction of the various pledges
subject of these two cases.
Costs against the plaintiffs.
SO ORDERED.[10]
The phrase "giving due course to the foreclosure and sale at public auction of the various
pledges subject of these two cases" may give rise to the impression that such sale is
judicial in character. While the decision did authorize the sale by public auction, such
declaration could not detract from the fact that the sale so authorized is actually
extrajudicial in character. Note that the final judgment in said cases expressly did not direct
the sale by public auction of the pledged shares, but instead upheld the right of the Parays
to conduct such sale at their own volition.
Indeed, as affirmed by the Civil Code,[11] the decision to proceed with the sale by public
auction remains in the sole discretion of the Parays, who could very well choose not to
hold the sale without violating the final judgments in the aforementioned civil cases. If the
sale were truly in compliance with a final judgment or order, the Parays would have no
choice but to stage the sale for then the order directing the sale arises from judicial
compulsion. But nothing in the dispositive portion directed the sale at public auction as a
mandatory recourse, and properly so since the sale of pledged property in public auction
is, by virtue of the Civil Code, extrajudicial in character.
The right of redemption as affirmed under Rule 39 of the Rules of Court applies only to
execution sales, more precisely execution sales of real property.
The Court of Appeals expressly asserted the notion that pledged property, necessarily
personal in character, may be redeemed by the creditor after being sold at public auction.
Yet, as a fundamental matter, does the right of redemption exist over personal property?
No law or jurisprudence establishes or affirms such right. Indeed, no such right exists.
The right to redeem property sold as security for the satisfaction of an unpaid obligation
does not exist preternaturally. Neither is it predicated on proprietary right, which, after the
sale of property on execution, leaves the judgment debtor and vests in the purchaser.
Instead, it is a bare statutory privilege to be exercised only by the persons named in the
statute.[12]
The right of redemption over mortgaged real property sold extrajudicially is established by
Act No. 3135, as amended. The said law does not extend the same benefit to personal
property. In fact, there is no law in our statute books which vests the right of redemption
over personal property. Act No. 1508, or the Chattel Mortgage Law, ostensibly could have
served as the vehicle for any legislative intent to bestow a right of redemption over
personal property, since that law governs the extrajudicial sale of mortgaged personal
property, but the statute is definitely silent on the point. And Section 39 of the 1997 Rules
of Civil Procedure, extensively relied upon by the Court of Appeals, starkly utters that the
right of redemption applies to real properties, not personal properties, sold on execution.
Tellingly, this Court, as early as 1927, rejected the proposition that personal property may
be covered by the right of redemption. In Sibal 1.v. Valdez,[13] the Court ruled that sugar
cane crops are personal property, and thus, not subject to the right of redemption. [14] No
countervailing statute has been enacted since then that would accord the right of
redemption over personal property, hence the Court can affirm this decades-old ruling as
effective to date.
Since the pledged shares in this case are not subject to redemption, the Court of Appeals
had no business invoking and applying the inexistent right of redemption. We cannot thus
agree that the consigned payments should be treated with liberality, or somehow construed
as having been made in the exercise of the right of redemption. We also must reject the
appellate court's declaration that the buyer of at the public auction is not "ipso facto"
rendered the owner of the auctioned shares, since the debtor enjoys the one-year
redemptive period to redeem the property. Obviously, since there is no right to redeem
personal property, the rights of ownership vested unto the purchaser at the foreclosure
sale are not entangled in any suspensive condition that is implicit in a redemptive period.
Respondents argue that their various consignations made prior to the auction sale
discharged them from the loan and the pledge agreements. They are mistaken.
The Court of Appeals also found fault with the apparent sale in bulk of the pledged shares,
notwithstanding the fact that these shares were owned by several people, on the premise
the pledgors would be denied the opportunity to know exactly how much they would need
to shoulder to exercise the right to redemption. This concern is obviously rendered a nonissue by the fact that there can be no right to redemption in the first place. Rule 39 of the
Rules of Court does provide for instances when properties foreclosed at the same time
must be sold separately, such as in the case of lot sales for real property under Section 19.
However, these instances again pertain to execution sales and not extrajudicial sales. No
provision in the Rules of Court or in any law requires that pledged properties sold at
auction be sold separately.
Petitioners point out that while the amounts consigned by respondents could answer for
their respective principal loan obligations, they were not sufficient to cover the interests
due on these loans, which were pegged at the rate of 5% per month or 60% per annum.
Before this Court, respondents, save for Dolores Soberano, do not contest this interest rate
as alleged by petitioners. Soberano, on the other hand, challenges this interest rate as
"usurious."[17]
On the other hand, under the Civil Code, it is the pledgee, and not the pledgor, who is
given the right to choose which of the items should be sold if two or more things are
pledged.[15] No similar option is given to pledgors under the Civil Code. Moreover, there is
nothing in the Civil Code provisions governing the extrajudicial sale of pledged properties
that prohibits the pledgee of several different pledge contracts from auctioning all of the
pledged properties on a single occasion, or from the buyer at the auction sale in
purchasing all the pledged properties with a single purchase price. The relative
insignificance of ascertaining the definite apportionments of the sale price to the individual
shares lies in the fact that once a pledged item is sold at auction, neither the pledgee nor
the pledgor can recover whatever deficiency or excess there may be between the
purchase price and the amount of the principal obligation.[16]
A different ruling though would obtain if at the auction, a bidder expressed the desire to bid
on a determinate number or portion of the pledged shares. In such a case, there may lie
the need to ascertain with particularity which of the shares are covered by the bid price,
since not all of the shares may be sold at the auction and correspondingly not all of the
pledge contracts extinguished. The same situation also would lie if one or some of the
owners of the pledged shares participated in the auction, bidding only on their respective
pledged shares. However, in this case, none of the pledgors participated in the auction,
and the sole bidder cast his bid for all of the shares. There obviously is no longer any
practical reason to apportion the bid price to the respective shares, since no matter how
slight or significant the value of the purchase price for the individual share is, the sale is
completed, with the pledgor and the pledgee not entitled to recover the excess or the
deficiency, as the case may be. To invalidate the subject auction solely on this point serves
no cause other than to celebrate formality for formality's sake.
Clearly, the theory adopted by the Court of Appeals is in shambles, and cannot be
resurrected. The question though yet remains whether the consignations made by
respondents extinguished their respective pledge contracts in favor of the Parays so as to
enjoin the latter from auctioning the pledged shares.
There is no doubt that if the principal obligation is satisfied, the pledges should be
terminated as well. Article 2098 of the Civil Code provides that the right of the creditor to
retain possession of the pledged item exists only until the debt is paid. Article 2105 of the
Civil Code further clarifies that the debtor cannot ask for the return of the thing pledged
against the will of the creditor, unless and until he has paid the debt and its interest. At the
same time, the right of the pledgee to foreclose the pledge is also established under the
Civil Code. When the credit has not been satisfied in due time, the creditor may proceed
with the sale by public auction under the procedure provided under Article 2112 of the
Code.
The particular pledge contracts did not form part of the records elevated to this Court.
However, the 5% monthly interest rate was noted in the statement of facts in the 14
October 1988 RTC Decision which had since become final. Moreover, the said decision
pronounced that even assuming that the interest rates of the various loans were 5% per
month, "it is doubtful whether the interests so charged were exorbitantly or excessively
usurious. This is because for sometime now, usury has become "legally inexistent.""[18] The
finality of this 1988 Decision is a settled fact, and thus the time to challenge the validity of
the 5% monthly interest rate had long passed. With that in mind, there is no reason for the
Court to disagree with petitioners that in order that the consignation could have the effect
of extinguishing the pledge contracts, such amounts should cover not just the principal
loans, but also the 5% monthly interests thereon.
It bears noting that the Court of Appeals also ruled that respondents had satisfied the
requirements under Section 18, Rule 39, which provides that the judgment obligor may
prevent the sale by paying the amount required by the execution and the costs that have
been incurred therein.[19] However, the provision applies only to execution sales, and not
extra-judicial sales, as evidenced by the use of the phrases "sale of property on execution"
and "judgment obligor." The reference is inapropos, and even if it were applicable, the
failure of the payment to cover the interests due renders it insufficient to stay the sale.
The effect of the finality of the judgments in Civil Cases Nos. R-20120 and R-20131 should
also not be discounted. Petitioners' right to proceed with the auction sale was affirmed not
only by law, but also by a final court judgment. Any subsequent court ruling that would
enjoin the petitioners from exercising such right would have the effect of superseding a
final and executory judgment.
Finally, we cannot help but observe that respondents may have saved themselves much
trouble if they simply participated in the auction sale, as they are permitted to bid
themselves on their pledged properties.[20] Moreover, they would have had a better right
had they matched the terms of the highest bidder.[21] Under the circumstances, with the
high interest payments that accrued after several years, respondents were even placed in
a favorable position by the pledge agreements, since the creditor would be unable to
recover any deficiency from the debtors should the sale price be insufficient to cover the
principal amounts with interests. Certainly, had respondents participated in the auction,
there would have been a chance for them to recover the shares at a price lower than the
amount that was actually due from them to the Parays. That respondents failed to avail of
this beneficial resort wholly accorded them by law is their loss. Now, all respondents can
recover is the amounts they had consigned.
WHEREFORE, the petition is GRANTED. The assailed decision of the Court of Appeals is
SET ASIDE and the decision of the Cebu City RTC, Branch 16, dated 18 November 1992
is REINSTATED. Costs against respondents.
SO ORDERED.
Quisumbing, (Chairman), Carpio and Carpio-Morales, JJ., concur
