Chattel Mortgage

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CHATTEL MORTGAGE
BUENAVENTURA T. SALDANA, plaintiff-appellant, vs. PHILIPPINE GUARANTY COMPANY, INC., et al., defendants-appellees. Gatchalian & Padilla for Emiliano Tabasondra for appellee Company.Teodoro Padilla for the other appellees. REYES, J.B.L., J.: This case arose from a complaint for damages filed by Buenaventura Saldana (docketed as Civil Case No. 32703 of the Court of First Instance of Manila) that was dismissed by order of the Court dated August 20, 1957, for lack of sufficient cause of action. In another order of September 30, 1957 of the same court, plaintiff's motion for reconsideration was denied, and the case was appealed to this Court. The facts are that 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 covering properties described as follows: A building of strong materials, used for restaurant business, located in front of the San Juan de Dios Hospital at Dewey Boulevard, Pasay City, and the following personal properties therein contained: 1 Radio, Zenith, cabinet type. 1 Cooler. 1 Electric range, stateside, 4 burners. 1 Frigidaire, 8 cubic feet. 1 G.E. Deepfreezer. 8 Tables, stateside. 32 Chromium chairs, stateside. 1 Sala set upholstered, 6 pieces. 1 Bedroom set, 6 pieces. And all other furniture's, fixtures or equipment found in the said premises. 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. A writ of execution was duly issued and, on appellant.

January 28, 1957, the same was served on the judgment debtor by the sheriff of Pasay City; whereupon the following properties of Josefina Eleazar were levied upon: 8 Tables with 4 (upholstered) chairs each. 1 Table with 4 (wooden) chairs. 1 Table (large) with 5 chairs. 1 Radio-phono (Zenith, 8 tubes). 2 Showcases (big, with mirrors). 1 Rattan sala set with 4 chairs, 1 table and 3 sidetables . 1 Wooden drawer. 1 Tocador (brown with mirror). 1 Aparador . 2 Beds (single type). 1 Freezer (deep freeze). 1 Gas range (magic chef, with 4 burners). 1 Freezer (G.E.). On January 31, 1957, the plaintiff-appellant Saldana filed a third-party claim asserting that the above-described properties levied are subject to his chattel mortgage of May 8, 1953. In virtue thereof, the sheriff released only some of the property originally included in the levy of January 28, 1957, to wit: 1 Radio, Zenith, cabinet type. 8 Tables, stateside. 32 Chromiun chairs, stateside. 1 G.E. Deep freezer. To proceed with the execution sale of the rest of the properties still under levy, the defendantsappellees 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. Accordingly, on February 13, 1957, the said properties were sold to the defendant hospital as the highest bidder, for P1,500.00. 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. 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". Gauged by this standard, general description have been held by this Court. (See Stockholder vs. Ramirez, 44 Phil., 993; Pedro de Jesus vs. Guam Bee Co., Inc., 72 Phil., 464). A similar rule obtains in the United States courts and decisions there have repeatedly upheld clauses of general import in mortgages of chattels other than goods for trade, and containing expressions similar to that of the contract now before us. Thus, "and all other stones belonging to me and all other goods and chattels" (Russel vs. Winne, 97 Am. Dec. 755); "all of the property of the said W.W. Allen used or situated upon the leased premises" (Dorman vs. Crooks State Bank, 64 A.L.R. 614); "all goods in the store where they are doing business in E. City, N.C." (Davis vs. Turner, 120 Fed. 605); "all and singular the goods, wares, stock, iron tools manufactured articles and property of every description, being situated in or about the shop or building now occupied by me in Howley Stree" (Winslow vs. Merchants Ins. Co., 38 Am. Dec. 368,) were held sufficient description, on the theory that parol evidence could supplement it to render identification rule is expressed in Walker vs. Johnson (Mont.) 1254 A.L.R. 937: The courts and textbook writers have developed several rules for determination of the sufficiency of the description in a chattel mortgage. The rules are general in nature and are different where the controversy is between the parties to the mortgage from the situation where third parties with out actual notice come in. In 11 C.J. 457, it is said: "Ad against third persons the description in the mortgage must point out its subject matter so that such person may identify the chattels observed, but it is not essential that the description be so specific that the property may be identified by it alone, if such description or means of identification which, if pursued will disclose the property conveyed." In 5 R.C.L. 423 the rule is stated that a description which will enable a third person, aided by inquires which the instrument itself suggest to identify the property is sufficiently definite." In 1 Jones on Chattel Mortgages and Conditional Sales, Bowers Edition, at page 95 the writer says: "As to them (third persons), the description is sufficient if it points to evidence whereby the precise thing mortgaged may be ascertained with certainty." Here there is nothing in the description "873 head of sheep" from which anyone, the mortgagee or third persons, could ascertain with any certainty what chattels were covered by the mortgage. In many instances the courts have held the description good where, though otherwise faulty, the mortgage explicity states that the property is in the possession of the mortgagor, and especially where it is the only property of that kind owned by him. The specifications in the chattel mortgage contract in the instant case, we believe, in substantial compliance with the "reasonable description rule" fixed by the chattel Mortgage Act. 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 therefrom 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. A contrary view would unduly impose a more rigid condition than what the law prescribes, which is that the description be only such as to enable identification after a reasonable inquiry and investigation. The case of Giberson vs. A.N. Jureidini Bros., 44 Phil., 216, 219, cited by the appellees and the lower court, cannot be likened to the case at bar, for there, what were sought to be mortgaged included two stores wit all its merchandise, effects, wares, and other bazar goods which were being constantly disposed of and replaced with new supplies in connection with the business, thereby making any particular or definite identification either impractical or impossible under the circumstances. Here, the properties deemed overed were more or less fixed, or at least permanently situated or used in the premises of the mortgagor's restaurant. The rule in the Jureidini case is further weakened by the court's observation that (44 Phil., p. 220) — Moreover, if there should exist any doubts on the questions we have just discussed, they should be treshed out in the insolvency proceedings, which appears inconsistent with the definitive character of the rulings invoked. We find that the ground for the appealed order (lack of cause of action) does not appear so indubitable as to warrant a dismissal of the action without inquiry into the merits and without the description in the deed of mortgage (Nico vs. Blanco, 81 Phil., 213; Zobel vs. Abreau, 52 Off. Gaz., 3592). Wherefore, the orders appealed from are set aside and the case remanded to the lower court for further proceedings. Costs against appellee. FILIPINAS MABLE CORPORATION, petitioner, vs. THE HONORABLE INTERMEDIATE APPELLATE COURT, THE HONORABLE CANDIDO VILLANUEVA, Presiding Judge of Br. 144, RTC, Makati, DEVELOPMENT BANK OF THE PHILIPPINES (DBP), BANCOM SYSTEMS CONTROL, INC. (Bancom), DON FERRY, CASIMERO TANEDO, EUGENIO PALILEO, ALVARO TORIO, JOSE T. PARDO, ROLANDO ATIENZA, SIMON A. MENDOZA, Sheriff NORVELL R. LIM, respondents. Vicente Millora for petitioner. Jesus A. Avencena and Bonifacio M. Abad for respondents.

GUTIERREZ, JR., J.: This petition for review seeks to annul the decision and resolution of the appellate court which upheld the trial court's decision denying the petitioner's prayer to enjoin the respondent from foreclosing on its properties. On January 19, 1983, petitioner Filipinas Marble Corporation filed an action for nullification of deeds and damages with prayer for a restraining order and a writ of preliminary injunction against the private respondents. In its complaint, the petitioner alleged in substance that it applied for a loan in

the amount of $5,000,000.00 with respondent Development Bank of the Philippines (DBP) in its desire to develop the fun potentials of its mining claims and deposits; that DBP granted the loan subject, however, to sixty onerous conditions, among which are: (a) petitioner shall have to enter into a management contract with respondent Bancom Systems Control, Inc. [Bancom]; (b) DBP shall be represented by no less than six (6) regular directors, three (3) to be nominated by Bancom and three (3) by DBP, in Filipinos Marble's board, one of whom shall continue to be the chairman of the board; (c) the key officers/executives [the President and the officers for finance, marketing and purchasing] to be chosen by Bancom for the corporation shall be appointed only with DBP's prior approval and all these officers are to be made directly responsible to DBP; DBP shall immediately designate Mr. Alvaro Torio, Assistant Manager of DBP's Accounting Department as DBP's Comptroller in the firm whose compensation shall be borne by Filipinas Marble; and (d) the $5 Million loan shall be secured by: 1) a final mortgage on the following assets with a total approved value of P48,630,756.00 ... ; 2) the joint and several signatures with Filipinas Marble of Mr. Pelagio M. Villegas, Sr., Trinidad Villegas, and Jose E. Montelibano and 3) assignment to DBP of the borrower firm's right over its mining claims; that pursuant to these above- mentioned and other "take it or leave it" conditions, the petitioner entered into a management contract with Bancom whereby the latter agreed to manage the plaintiff company for a period of three years; that under the management agreement, the affairs of the petitioner were placed under the complete control of DBP and Bancom including the disposition and disbursement of the $5,000,000 or P37,600,000 loan; that the respondents and their directors/officers mismanaged and misspent the loan, after which Bancom resigned with the approval of DBP even before the expiration date of the management contract, leaving petitioner desolate and devastated; that among the acts and omissions of the respondents are the following. (a) failure to purchase all the necessary machinery and equipment needed by the petitioner's project for which the approved loan was intended; (b) failure to construct a processing plant; (c) abandonment of imported machinery and equipment at the pier, (d) purchase of unsuitable lot for the processing plant at Binan; (e) failure to develop even a square meter of the quarries in Romblon or Cebu; and (f) nearly causing the loss of petitioner's rights over its Cebu claims; and that instead of helping petitioner get back on its feet, DBP completely abandoned the petitioner's project and proceeded to foreclose the properties mortgaged to it by petitioner without previous demand or notice. In essence, the petitioner in its complaint seeks the annulment of the deeds of mortgage and deed of assignment which it executed in favor of DBP in order to secure the $5,000,000.00 loan because it is petitioner's contention that there was no loan at all to secure since what DBP "lent" to petitioner with its right hand, it also got back with its left hand; and that, there was failure of consideration with regard to the execution of said deeds as the loan was never delivered to the petitioner. The petitioner further prayed that pending the trial on the merits of the case, the trial court immediately issue a restraining order and then a writ of preliminary injunction against the sheriffs to enjoin the latter from proceeding with the foreclosure and sale of the petitioner's properties in Metro Manila and in Romblon. Respondent DBP opposed the issuance of a writ of preliminary injunction stating that under Presidential Decree No. 385, DBP's right to foreclose is mandatory as the arrearages of petitioner had already amounted to P123,801,265.82 as against its total obligation of P151,957,641.72; that under the same decree, no court can issue any restraining order or injunction against it to stop the foreclosure since Filipinas Marble's arrearages had already reached at least twenty percent of its total obligations; that the alleged non-receipt of the loan proceeds by the petitioner could, at best, be accepted only in a technical sense because the money was received by the officers of the petitioner acting in such capacity and, therefore, irrespective of whoever is responsible for placing them in their positions, their receipt of the money was receipt by the petitioner corporation and that the complaint does not raise any substantial controversy as to the amount due under the mortgage as the issues raised therein refer to the propriety of the manner by which the proceeds of the loan were expended

by the petitioner's management, the allegedly precipitate manner with which DBP proceeded with the foreclosure, and the capacity of the DBP to be an assignee of the mining lease rights. After a hearing on the preliminary injunction, the trial court issued an order stating: The Court has carefully gone over the evidence presented by both parties, and while it sympathizes with the plight of the plaintiff and of the pitiful condition it now has found itself, it cannot but adhere to the mandatory provisions of P.D. 385. While the evidence so far presented by the plaintiff corporation appears to be persuasive, the same may be considered material and relevant to the case. Hence, despite the impressive testimony of the plaintiff's witnesses, the Court believes that it cannot enjoin the defendant Development Bank of the Philippines from complying with the mandatory provisions of the said Presidential Decree. It having been shown that plaintiff's outstanding obligation as of December 31, 1982 amounted to P151,957,641.72 and with arrearages reaching up to 81 % against said total obligation, the Court finds the provisions of P.D. 385 applicable to the instant case. It is a settled rule that when the statute is clear and unambiguous, there is no room for interpretation, and all that it has to do is to apply the same. On appeal, the Intermediate Appellate Court upheld the trial court's decision and held: While petitioner concedes 'that Presidential Decree No. 385 applies only where it is clear that there was a loan or where the loan is not denied' (p. 14-petition), it disclaims receipt of the $5 million loan nor benefits derived therefrom and bewails the onerous conditions imposed by DBP Resolution No. 385 dated December 7, 1977, which allegedly placed the petitioner under the complete control of the private respondents DBP and Bancom Systems Control Inc. (Bancom, for short). The plausibility of petitioner's statement that it did Dot receive the $5 million loan is more apparent than real. At the hearing for injunction before the counsel for DBP stressed that $2,625,316.83 of the $5 million loan was earmarked to finance the acquisition of machinery, equipment and spare parts for petitioner's Diamond gangsaw which machineries were actually imported by petitioner Filipinas Marble Corporation and arrived in the Philippines. Indeed, a summary of releases to petitioner covering the period June 1978 to October 1979 (Exh. 2, Injunction) showed disbursements amounting to millions of pesos for working capital and opening of letter of credits for the acquisition of its machineries and equipment. Petitioner does not dispute that releases were made for the purchase of machineries and equipment but claims that such imported machineries were left to the mercy of the elements as they were never delivered to it. xxxxxxxxx Apart from the foregoing, petitioner is patently not entitled to a writ of preliminary injunction for it has not demonstrated that at least 20% of its outstanding arrearages has been paid after the foreclosure proceedings were initiated. Nowhere in the record is it shown or alleged that petitioner has paid in order that it may fall within the exception prescribed on Section 2, Presidential Decree No. 385. Dissatisfied with the appellate court's decision, the petitioner filed this instant petition with the following assignments of errors:

1. There being 'persuasive' evidence that the $5 million proceeds of the loan were not received and did not benefit the petitioner per finding of the lower court which should not be disturbed unless there is grave abuse of discretion, it must follow that PD 385 does not and cannot apply; 2. If there was no valid loan contract for failure of consideration, the mortgage cannot exist or stand by itself being a mere accessory contract. Additionally, the chattel mortgage has not been registered. Therefore, the same is null and void under Article 2125 of the New Civil Code; and 3. PD 385 is unconstitutional as a 'class legislation', and violative of the due process clause. With regard to the first assignment of error, the petitioner maintains that since the trial court found "persuasive evidence" that there might have been a failure of consideration on the contract of loan due to the manner in which the amount of $5 million was spent, said court committed grave abuse of discretion in holding that it had no recourse but to apply P.D. 385 because the application of this decree requires the existence of a valid loan which, however, is not present in petitioner's case. It likewise faults the appellate court for upholding the applicability of the said decree. Sections 1 and 2 of P.D. No. 385 respectively provide: Section 1. It shall be mandatory for government financial institutions after the lapse of sixty (60) days from the issuance of this Decree, to foreclose the collaterals and/or securities for any loan, credit accommodation, and/or guarantees granted by them whenever the arrearages on such account, including accrued interest and other charges, amount to at least twenty (20%) of the total outstanding obligations, including interest and other charges, as appearing in the book of accounts and/or related records of the financial institution concerned. This shall be without prejudice to the exercise by the government financial institution of such rights and/or remedies available to them under their respective contracts with their debtors, including the right to foreclose on loans, credits, accommodations, and/or guarantees on which the arrearages are less than twenty percent (20%). Section 2. No restraining order, temporary or permanent injunction shall be issued by the court against any government financial institution in any action taken by such institution in compliance with the mandatory foreclosure provided in Section 1 hereof, whether such restraining order, temporary or permanent injunction is sought by the borrower(s) or any third party or parties, except after due hearing in which it is established by the borrower, and admitted by the government financial institution concerned that twenty percent (20%) of the outstanding arrearages has been paid after the filing of foreclosure proceedings. Presidential Decree No. 385 was issued primarily to see to it that government financial institutions are not denied substantial cash inflows, which are necessary to finance development projects all over the country, by large borrowers who, when they become delinquent, resort to court actions in order to prevent or delay the government's collection of their debts and loans. The government, however, is bound by basic principles of fairness and decency under the due process clause of the Bill of Rights. P.D. 385 was never meant to protect officials of government lending institutions who take over the management of a borrower corporation, lead that corporation

to bankruptcy through mismanagement or misappropriation of its funds, and who, after ruining it, use the mandatory provisions of the decree to avoid the consequences of their misdeeds. The designated officers of the government financing institution cannot simply walk away and then state that since the loans were obtained in the corporation's name, then P.D. 385 must be peremptorily applied and that there is no way the borrower corporation can prevent the automatic foreclosure of the mortgage on its properties once the arrearages reach twenty percent (20%) of the total obligation no matter who was responsible. In the case at bar, the respondents try to impress upon this Court that the $5,000,000.00 loan was actually granted and released to the petitioner corporation and whatever the composition of the management which received the loan is of no moment because this management was acting in behalf of the corporation. The respondents also argue that since the loan was extended to the corporation, the releases had to be made to the then officers of that borrower corporation. Precisely, what the petitioner is trying to point out is that the DBP and Bancom people who managed Filipinas Marble misspent the proceeds of the loan by taking advantage of the positions that they were occupying in the corporation which resulted in the latter's devastation instead of its rehabilitation. The petitioner does not question the authority under which the loan was delivered but stresses that it is precisely this authority which enabled the DBP and Bancom people to misspend and misappropriate the proceeds of the loan thereby defeating its very purpose, that is, to develop the projects of the corporation. Therefore, it is as if the loan was never delivered to it and thus, there was failure on the part of the respondent DBP to deliver the consideration for which the mortgage and the assignment of deed were executed. We cannot, at this point, conclude that respondent DBP together with the Bancom people actually misappropriated and misspent the $5 million loan in whole or in part although the trial court found that there is "persuasive" evidence that such acts were committed by the respondent. This matter should rightfully be litigated below in the main action. Pending the outcome of such litigation, P.D. 385 cannot automatically be applied for if it is really proven that respondent DBP is responsible for the misappropriation of the loan, even if only in part, then the foreclosure of the petitioner's properties under the provisions of P.D. 385 to satisfy the whole amount of the loan would be a gross mistake. It would unduly prejudice the petitioner, its employees and their families. Only after trial on the merits of the main case can the true amount of the loan which was applied wisely or not, for the benefit of the petitioner be determined. Consequently, the extent of the loan where there was no failure of consideration and which may be properly satisfied by foreclosure proceedings under P.D. 385 will have to await the presentation of evidence in a trial on the merits. As we have ruled in the case of Central Bank of the Philippines vs. Court of Appeals, (1 39 SCRA 46, 5253; 56): When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965, they undertook reciprocal obligations, the obligation or promise of each party is the consideration for that of the othe. (Penacio vs. Ruaya, 110 SCRA 46 [1981]; ... xxxxxxxxx The fact that when Sulpicio M. Tolentino executed his real estate mortgage, no consideration was then in existence, as there was no debt yet because Island Savings Bank had not made any release on the loan, does not make the real est

NORTHERN vs. HON. JORGE R. COQUIA, CORPORATION, intervenor. RESOLUTION

MOTORS, etc., et al., respondents,

INC., petitioner, FILINVEST CREDIT

AQUINO, J.: Respondent Honesto Ong and City Sheriff of Manila filed a motion for the reconsideration of this Court's resolution of August 29, 1975. In that resolution, it was held that the lien of Northern Motors, Inc., as chattel mortgagee, over certain taxicabs is superior to the levy made on the said cabs by Honesto Ong, the assignee of the unsecured judgment creditor of the chattel mortgagor, Manila Yellow Taxicab Co., Inc. On the other hand, Northern Motors, Inc. in its motion for the partial reconsideration of the same August 29 resolution, prayed for the reversal of the lower court's orders cancelling the bond filed by Filwriters Guaranty Assurance Corporation. Northern Motors, Inc. further prayed that the sheriff should be required to deliver to it the proceeds of the execution sale of the mortgaged taxicabs without deducting the expenses of execution. 1. Respondents' motion for reconsideration. — Honesto Ong in his motion invokes his supposed "legal and equity status" vis-a-vis the mortgaged taxicabs. He contends that his only recourse was to levy upon the taxicabs which were in the possession of the judgment debtor, Manila Yellow Taxicab Co. Inc., whereas, Northern Motors, Inc., as unpaid seller and mortgagee, "has still an independent legal remedy" against the mortgagor for the recovery of the unpaid balance of the price. That contention is not a justification for setting aside the holding that 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). It is relevant to note that intervenor Filinvest Credit Corporation, the assignee of a portion of the chattel mortgage credit, realized that to vindicate its claim by independent action would be illusory. For that pragmatic reason, it was constrained to enter into a compromise with Honesto Ong by agreeing to pay him P145,000. That amount was characterized by Northern Motors, Inc. as the "ransom" for the taxicabs levied upon by the sheriff at the behest of Honesto Ong. Honesto Ong's theory that Manila Yellow Taxicab's breach of the chattel mortgage should not affect him because he is not privy of such contract is untenable. The registration of the chattel mortgage is an effective and binding notice to him of its existence (Ong Liong Tiak vs. Luneta Motor Company, 66 Phil 459). The mortgage creates a real right (derecho real, jus in re or jus ad rem, XI Enciclopedia Juridica Española 294) or a lien which, being recorded, follows the chattel wherever it goes. Honesto Ong's contention that Northern Motors, Inc., was negligent because it did not sue the sheriff within the 120-day period provided for in section 17, Rule 39 of the Rules of Court is not correct.

Such action was filed on April 14, 1975 in the Court of First Instance of Rizal, Pasig Branch XIII, in Civil Case No. 21065 entitled "Northern Motors, Inc. vs. Filwriters Guaranty Assurance Corporation, et al.". However, instead of Honesto Ong, his assignor, Tropical Commercial Corporation, was impleaded as a defendant therein. That might explain his unawareness of the pendency of such action. The other arguments of Honesto Ong in his motion may be boiled down to the proposition that the levy made by mortgagor's judgment creditor against the chattel mortgagor should prevail over the chattel mortgage credit. That proposition is devoid of any legal sanction and is glaringly contrary to the nature of a chattel mortgage. To uphold that contention is to destroy the essence of chattel mortgage as a paramount encumbrance on the mortgaged chattel. Respondent Ong admits "that the mortgagee's right to the mortgaged property is superior to that of the judgment creditor". But he contends that the rights of the purchasers of the cars at the execution sale should be respected. He reasons out they were not parties to the mortgage and that they acquired the cars prior to the mortgagee's assertion of its rights thereto. That contention is not well-taken. 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. Moreover, at an execution sale the buyers acquire only the right of the judgment debtor which in this case was a mere right or equity of redemption. The sale did not extinguish the pre-existing mortgage lien (See sec. 25, Rule 39, Rules of Court; Potenciano vs. Dineros and Provincial Sheriff of Rizal, 97 Phil, 196; Lara vs. Bayona, 97 Phil. 951; Hacbang vs. Leyte Autobus Co., Inc., L-7907, May 30, 1963, 8 SCRA 103). Some arguments adduced by Honesto Ong in his motion were intended to protect the interests of the mortgagor, Manila Yellow Taxicab Co., Inc., which he erroneously characterized as a "respondent" (it is not a respondent in this case). Ong argues that the proceeds of the execution sale, which was held on December 18, 1974, should be delivered to Northern Motors, Inc. "only to such extent as has exceeded the amount paid by respondent Manila Yellow Taxicab to" Northern Motors, Inc. That argument is not clear. Ong probably means that the installments already paid by Manila Yellow Taxicab Co., Inc. to Northern Motors, Inc. should be deducted from the proceeds of the execution sale. If that is the point which Ong is trying to put across, and it is something which does not directly affect him, then, that matter should be raised by Manila Yellow Taxicab Co., Inc. in the replevin case, Civil Case No. 20536 of the Court of First Instance of Rizal, Pasig Branch VI, entitled "Northern Motors, Inc. versus Manila Yellow Taxicab Co., Inc. et al." Ong's contention, that the writ of execution, which was enforced against the seven taxicabs (whose sale at public auction was stopped) should have precedence over the mortgage lien, cannot be sustained. Those cabs cannot be sold at an execution sale because, as explained in the resolution under reconsideration, the levy thereon was wrongful. The motion for reconsideration of Ong and the sheriff should be denied. 2. Petitioners motion for partial reconsideration. — The lower court in its order of January 3, 1975 cancelled the indemnity bonds for P480,000 filed on December 18, 1975 by Filwriters Guaranty Assurance Corporation for Tropical Commercial Co., Inc. The bonds were cancelled without notice to Northern Motors, Inc. as third-party claimant. We already held that the cancellation of the bonds constituted a grave abuse of discretion but we previously denied petitioner's prayer for the reinstatement of the bonds because Northern Motors

Inc. had given the impression that it had not filed any action for damages against the sheriff within the one hundred twenty-day period contemplated in Section 17, Rule 39 of the Rules of Court. As already noted above, the truth is that such an action for damages was filed on April 14, 1975 against the surety, the sheriff and the judgment creditor in Civil Case No. 21065 of the Court of First Instance of Rizal, Pasig Branch XIII. The action involves the indemnity bond for P240,000 (No. 0032 posted on December 18, 1974). It may also be noted that in a prior case, Civil Case No. 20536 of the Court of First Instance of Rizal at Pasig, entitled "Northern Motors, Inc. vs. Manila Yellow Taxicab Co., Inc., et al.", a replevin case (where an amended complaint dated January 15, 1975 was filed), the surety, Filwriters Guaranty Assurance Corporation, was impleaded as a defendant by reason of its bond for P240,000. Northern Motors, Inc. in that case prayed that the surety be ordered to pay to it damages in the event that the eight taxicabs could not be surrendered to the mortgagee. Northern Motors, Inc., in its instant motion for partial reconsideration, reiterates its petition for the reinstatement of the bond filed by Filwriters Guaranty Assurance Corporation. If the said bond is not reinstated or if the lower court's orders cancelling it are allowed to stand, the aforementioned Civil Cases Nos. 20536 and 21065 would be baseless or futile actions against the surety. That injustice should be corrected. Hence, our resolution of August 29, 1975, insofar as it did not disturb the lower court's orders cancelling the indemnity bonds, should be reconsidered. Northern Motors. Inc. further prays for the reconsideration of that portion of our resolution allowing the sheriff to deduct expenses from the proceeds of the execution sale for the eight taxicabs which sale was held on December 18, 1974. It argues that Honesto Ong or Manila Yellow Taxicab Co., Inc. should shoulder such expenses of execution. 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 apparently they had been transferred to persons whose addresses are unknown (see par. 12, page 4, Annex B of motion), the proceeds of the execution sale may be regarded as a partial substitute for the unrecovarable cabs (See arts. 1189[2] and 1269, Civil Code; Urrutia & Co. vs. Baco River Plantation Co., 26 Phil. 632). Northern Motors, Inc. is entitled to the entire proceeds without deduction of the expenses of execution. WHEREFORE, private respondents' motion for reconsideration is denied and petitioner's motion for partial reconsideration is granted. The resolution of August 29, 1975 is modified in the sense that the lower court's orders of January 3 and 6, 1975, cancelling the indemnity bond for P240,000 (as reaffirmed in its order of January 17, 1975), are set aside. The said indemnity bond for P240,000 is regarded as in full force and Respondent Sheriff of Manila is further directed to deliver to Northern Motors, Inc. the entire proceeds of the execution sale held on December 18, 1974 for the eight taxicabs which were mortgaged to that firm. SO ORDERED. BA FINANCE CORPORATION, petitioner, vs. HON. COURT OF APPEALS, Hon. Presiding Judge of Regional Trial Court of Manila, Branch 43, MANUEL CUADY and LILIA CUADY, respondents. Valera, Urmeneta & Associates for petitioner.

Pompeyo L. Bautista for private respondents.

PARAS, J.:p This is a petition for review on certiorari which seeks to reverse and set aside (1) the decision of the Court of Appeals dated July 21, 1987 in CA-G.R. No. CV-06522 entitled "B.A. Finance Corporation, Plaintiff-Appellant, vs. Manuel Cuady and Lilia Cuady, Defendants-Appellees," affirming the decision of the Regional Trial Court of Manila, Branch 43, which dismissed the complaint in Civil Case No. 82-10478, and (2) the resolution dated February 9, 1988 denying petitioner's motion for reconsideration. As gathered from the records, the facts are as follows: On July 15, 1977, private respondents Manuel Cuady and Lilia Cuady obtained from Supercars, Inc. a credit of P39,574.80, which amount covered the cost of one unit of Ford Escort 1300, four-door sedan. Said obligation was evidenced by a promissory note executed by private respondents in favor of Supercars, Inc., obligating themselves to pay the latter or order the sum of P39,574.80, inclusive of interest at 14% per annum, payable on monthly installments of P1,098.00 starting August 16, 1977, and on the 16th day of the next 35 months from September 16, 1977 until full payment thereof. There was also stipulated a penalty of P10.00 for every month of late installment payment. To secure the faithful and prompt compliance of the obligation under the said promissory note, the Cuady spouses constituted a chattel mortage on the aforementioned motor vehicle. On July 25, 1977, Supercars, Inc. assigned the promissory note, together with the chattel mortgage, to B.A. Finance Corporation. The Cuadys paid a total of P36,730.15 to the B.A. Finance Corporation, thus leaving an unpaid balance of P2,344.65 as of July 18, 1980. In addition thereto, the Cuadys owe B.A. Finance Corporation P460.00 representing penalties or surcharges for tardy monthly installments (Rollo, pp. 27-29). Parenthetically, the B.A. Finance Corporation, as the assignee of the mortgage lien obtained the renewal of the insurance coverage over the aforementioned motor vehicle for the year 1980 with Zenith Insurance Corporation, when the Cuadys failed to renew said insurance coverage themselves. Under the terms and conditions of the said insurance coverage, any loss under the policy shall be payable to the B.A. Finance Corporation (Memorandum for Private Respondents, pp. 3-4). On April 18, 1980, the aforementioned motor vehicle figured in an accident and was badly damaged. The unfortunate happening was reported to the B.A. Finance Corporation and to the insurer, Zenith Insurance Corporation. The Cuadys asked the B.A. Finance Corporation to consider the same as a total loss, and to claim from the insurer the face value of the car insurance policy and apply the same to the payment of their remaining account and give them the surplus thereof, if any. But instead of heeding the request of the Cuadys, B.A. Finance Corporation prevailed upon the former to just have the car repaired. Not long thereafter, however, the car bogged down. The Cuadys wrote B.A. Finance Corporation requesting the latter to pursue their prior instruction of enforcing the total loss provision in the insurance coverage. When B.A. Finance Corporation did not respond favorably to their request, the Cuadys stopped paying their monthly installments on the promissory note (Ibid., pp. 45). On June 29, 1982, in view of the failure of the Cuadys to pay the remaining installments on the note, B.A. Finance Corporation sued them in the Regional Trial Court of Manila, Branch 43, for the recovery of the said remaining installments (Memorandum for the Petitioner, p. 1).

After the termination of the pre-trial conference, the case was set for trial on the merits on April 25, 1984. B.A. Finance Corporation's evidence was presented on even date and the presentation of Cuady's evidence was set on August 15, 1984. On August 7,1984, Atty. Noel Ebarle, counsel for the petitioner, filed a motion for postponement, the reason being that the "handling" counsel, Atty. Ferdinand Macibay was temporarily assigned in Cebu City and would not be back until after August 15, 1984. Said motion was, however, denied by the trial court on August 10, 1984. On August 15, 1984, the date of hearing, the trial court allowed private respondents to adduce evidence ex-parte in the form of an affidavit to be sworn to before any authorized officer. B.A. Finance Corporation filed a motion for reconsideration of the order of the trial court denying its motion for postponement. Said motion was granted in an order dated September 26, 1984, thus: The Court grants plaintiff's motion for reconsideration dated August 22, 1984, in the sense that plaintiff is allowed to adduce evidence in the form of counter-affidavits of its witnesses, to be sworn to before any person authorized to administer oaths, within ten days from notice hereof. (Ibid., pp. 1-2). B.A. Finance Corporation, however, never complied with the above-mentioned order, paving the way for the trial court to render its decision on January 18, 1985, the dispositive portion of which reads as follows: IN VIEW WHEREOF, the Court DISMISSES the complaint without costs. SO ORDERED. (Rollo, p. 143) On appeal, the respondent appellate court * affirmed the decision of the trial court. The decretal portion of the said decision reads as follows: WHEREFORE, after consultation among the undersigned members of this Division, in compliance with the provision of Section 13, Article VIII of the Constitution; and finding no reversible error in the judgment appealed from, the same is hereby AFFIRMED, without any pronouncement as to costs. (Ibid., p. 33) B.A. Finance Corporation moved for the reconsideration of the above decision, but the motion was denied by the respondent appellate court in a resolution dated February 9, 1988 (Ibid., p. 38). Hence, this present recourse. On July 11, 1990, this Court gave due course to the petition and required the parties to submit their respective memoranda. The parties having complied with the submission of their memoranda, the case was submitted for decision. The real issue to be resolved in the case at bar is whether or not B.A. Finance Corporation has waived its right to collect the unpaid balance of the Cuady spouses on the promissory note for failure of the former to enforce the total loss provision in the insurance coverage of the motor vehicle subject of the chattel mortgage. It is the contention of B.A. Finance Corporation that even if it failed to enforce the total loss provision in the insurance policy of the motor vehicle subject of the chattel mortgage, said failure does not operate to extinguish the unpaid balance on the promissory note, considering that the circumstances obtaining in the case at bar do not fall under Article 1231 of the Civil Code relative to the modes of extinguishment of obligations (Memorandum for the Petitioner, p. 11).

On the other hand, the Cuadys insist that owing to its failure to enforce the total loss provision in the insurance policy, B.A. Finance Corporation lost not only its opportunity to collect the insurance proceeds on the mortgaged motor vehicle in its capacity as the assignee of the said insurance proceeds pursuant to the memorandum in the insurance policy which states that the "LOSS: IF ANY, under this policy shall be payable to BA FINANCE CORP., as their respective rights and interest may appear" (Rollo, p. 91) but also the remaining balance on the promissory note (Memorandum for the Respondents, pp. 16-17). The petition is devoid of merit. B.A. Finance Corporation was deemed subrogated to the rights and obligations of Supercars, Inc. when the latter assigned the promissory note, together with the chattel mortgage constituted on the motor vehicle in question in favor of the former. Consequently, B.A. Finance Corporation is bound by the terms and conditions of the chattel mortgage executed between the Cuadys and Supercars, Inc. Under the deed of chattel mortgage, B.A. Finance Corporation was constituted attorney-in-fact with full power and authority to file, follow-up, prosecute, compromise or settle insurance claims; to sign execute and deliver the corresponding papers, receipts and documents to the Insurance Company as may be necessary to prove the claim, and to collect from the latter the proceeds of insurance to the extent of its interests, in the event that the mortgaged car suffers any loss or damage (Rollo, p. 89). In granting B.A. Finance Corporation the aforementioned powers and prerogatives, the Cuady spouses created in the former's favor an agency. Thus, under Article 1884 of the Civil Code of the Philippines, B.A. Finance Corporation is bound by its acceptance to carry out the agency, and is liable for damages which, through its non-performance, the Cuadys, the principal in the case at bar, may suffer. Unquestionably, the Cuadys suffered pecuniary loss in the form of salvage value of the motor vehicle in question, not to mention the amount equivalent to the unpaid balance on the promissory note, when B.A. Finance Corporation steadfastly refused and refrained from proceeding against the insurer for the payment of a clearly valid insurance claim, and continued to ignore the yearning of the Cuadys to enforce the total loss provision in the insurance policy, despite the undeniable fact that Rea Auto Center, the auto repair shop chosen by the insurer itself to repair the aforementioned motor vehicle, misrepaired and rendered it completely useless and unserviceable (Ibid., p. 31). Accordingly, there is no reason to depart from the ruling set down by the respondent appellate court. In this connection, the Court of Appeals said: ... Under the established facts and circumstances, it is unjust, unfair and inequitable to require the chattel mortgagors, appellees herein, to still pay the unpaid balance of their mortgage debt on the said car, the non-payment of which account was due to the stubborn refusal and failure of appellant mortgagee to avail of the insurance money which became due and demandable after the insured motor vehicle was badly damaged in a vehicular accident covered by the insurance risk. ... (Ibid.) On the allegation that the respondent court's findings that B.A. Finance Corporation failed to claim for the damage to the car was not supported by evidence, the records show that instead of acting on the instruction of the Cuadys to enforce the total loss provision in the insurance policy, the petitioner insisted on just having the motor vehicle repaired, to which private respondents reluctantly acceded. As heretofore mentioned, the repair shop chosen was not able to restore the aforementioned motor vehicle to its condition prior to the accident. Thus, the said vehicle bogged down shortly thereafter. The subsequent request of the Cuadys for the B.A. Finance Corporation to file a claim for total loss with the insurer fell on deaf ears, prompting the Cuadys to stop paying the remaining balance on the promissory note (Memorandum for the Respondents, pp. 4-5).

Moreover, B.A. Finance Corporation would have this Court review and reverse the factual findings of the respondent appellate court. This, of course, the Court cannot and will not generally do. It is axiomatic that the judgment of the Court of Appeals is conclusive as to the facts and may not ordinarily be reviewed by the Supreme Court. The doctrine is, to be sure, subject to certain specific exceptions none of which, however, obtains in the instant case (Luzon Brokerage Corporation v. Court of Appeals, 176 SCRA 483 [1989]). Finally, B.A. Finance Corporation contends that respondent trial court committed grave abuses of discretion in two instances: First, when it denied the petitioner's motion for reconsideration praying that the counsel be allowed to cross-examine the affiant, and; second, when it seriously considered the evidence adduced ex-parte by the Cuadys, and heavily relied thereon, when in truth and in fact, the same was not formally admitted as part of the evidence for the private respondents (Memorandum for the Petitioner, p. 10). This Court does not have to unduly dwell on this issue which was only raised by B.A. Finance Corporation for the first time on appeal. A review of the records of the case shows that B.A. Finance Corporation failed to directly raise or ventilate in the trial court nor in the respondent appellate court the validity of the evidence adduced ex-parte by private respondents. It was only when the petitioner filed the instant petition with this Court that it later raised the aforementioned issue. As ruled by this Court in a long line of cases, issues not raised and/or ventilated in the trial court, let alone in the Court of Appeals, cannot be raised for the first time on appeal as it would be offensive to the basic rules of fair play, justice and due process (Galicia v. Polo, 179 SCRA 375 [1989]; Ramos v. Intermediate Appellate Court, 175 SCRA 70 [1989]; Dulos Realty & Development Corporation v. Court of Appeals, 157 SCRA 425 [1988]; Dihiansan, et al. v. Court of Appeals, et al., 153 SCRA 712 [1987]; De la Santa v. Court of Appeals, et al., 140 SCRA 44 [1985]). PREMISES CONSIDERED, the instant petition is DENIED, and the decision appealed from is AFFIRMED. SO ORDERED.

JACA vs. Davao Lumber
FERNANDEZ, J.: This is a Petition for Certiorari with a prayer for a writ of preliminary injunction filed by Urbano Jaca and Bonifacio Jaca against the Davao Lumber Company and Honorable Manases Reyes as Judge of the Court of First Instance of Davao seeking the following relief: WHEREFORE, petitioners pray: 1. That a writ of Preliminary Injunction be immediately issued restraining the respondent Judge from carrying out or enforcing the Orders [Annexes "Z" and "FF"] complained of pending the hearing of the merits of the instant petition; 2. After due hearing, that this Honorable Court annuls and sets aside the complained Orders [Annexes "Z" and "FF"]; Petitioners further pray for all other reliefs which are just and equitable in the premises. Davao City, Philippines, February 5, 1966.

In November, 1963, Urbano Jaca and Bonifacio Jaca filed with the Court of First Instance of Davao, a complaint for Accounting, Return of Price Differentials and Damages against the Davao Lumber Company. The case was docketed as Civil Case No. 4189. The complaint alleges that the plaintiff Urbano Jaca has been, and still is, a licensee of a logging concession located in the City of Davao and together with his co-plaintiff, Bonifacio Jaca, engaged in the logging business of producing timber and logs for export and/or domestic purposes; that the defendant is a business corporation with which plaintiffs had business dealings covering the sale and/or exportation of their logs; that sometime in 1954, herein parties-litigants entered into an agreement whereby plaintiffs may secure, by way of advances, either cash or materials, foodstuffs, and/or equipment from the defendant corporation; that the payment of such account was to be made either in cash and/or by plaintiff's turning over all the logs that they produce in the aforesaid concession to the defendant, and in the latter case, the current prices, either export or domestic, of the logs at the time of their delivery was to be considered; that while the aforesaid business relationship between the parties was subsisting, defendant made plaintiff Urbano Jaca execute in its favor a chattel mortgage, a copy of which instrument. however, plaintiffs were never furnished but that as far as they can recollect the primary conditions of such chattel mortgage were that plaintiffs would turn over to defendant corporation all the logs they may produce from the aforesaid concession the same to be priced either as export or domestic and their value to be applied by defendant to, and be credited for, the account of plaintiff's indebtedness, and further that in case of need, plaintiffs may secure, by way of advances, either cash, foodstuffs, materials or equipment's, under an "open credit account"; that under the aforementioned "open credit account" relationship between the plaintiffs and defendant, orders were secured by plaintiffs, by way of advances, from the defendant, this to be paid by them with plaintiffs' production from their concession, liquidating those old accounts and keeping all accounts current; that in pursuance to the agreement, as aforestated, plaintiff Urbano Jaca executed assignments of letters of credit in favor of the defendant, in order that the latter may be able to use, as defendant corporation did in fact use, the said letters of credit for bank negotiations of the former in the exportation of logs; that the plaintiffs and the defendant had this business relationship, as aforementioned, from 1954 up to sometime in August, 1963; that during this whole period of time, the plaintiffs had been faithfully delivering all their log production to the defendant for export or domestic purposes; that before the filing of this complaint, the plaintiff made repeated demands on the defendant for a formal accounting of their business relationship from 1954 up to August, 1963, but that the defendant failed and refused, and still fails and refuses, to effect such formal accounting, asserting that it had no time as yet to examine into all the details of the accounting; that sometime on October 30, 1963, much to their surprise, plaintiffs received letters of demand from the defendant in which they were requested to pay their accounts in favor of defendant, which according to the latter had long been overdue; [copies of such letters are hereto attached marked as Annexes "A" and "B", and made integral parts of this complaint] that plaintiffs are no longer indebted to the defendant, and as a matter of fact, it is their belief that, if a formal accounting be made, there would still appear a claim in their favor in the amount of P250,000.00 more or less, representing the price differentials of logs which they delivered to the defendant from 1954 up to August, 1963; and that further, there was a deliberate fraud practiced by the defendant on them, especially in defendant's undergrading and/or reclassification of logs delivered to it by plaintiffs; that further, there were many

errors committed in the monthly statements submitted to the plaintiffs arising from the fact that there were charges of cash, equipment, materials and foodstuffs in said statements never ordered and/or received by the plaintiffs; and still further that the proceeds of the letter of credit were not fully applied and/or credited to the account of plaintiffs; that defendant has, up to the present, denied the plaintiffs the benefits of a formal accounting and inasmuch as the invoices, receipts, vouchers, requisition slips and other pertinent papers and document of their business transactions are in the possession of defendant, it is difficult for plaintiffs to ascertain with accuracy the ledger balance between the parties, unless a detailed examination of the matter is had; that plaintiffs have thereby been constrained to file this case in Court in order to compel defendant to have a formal accounting between them, and that it is the desire of plaintiffs that pending the formal hearing of this case, three commissioners, constituting accountants be judicially appointed for the purpose of examining all the books, pertinent papers and documents and all other data in relation with their business transaction; that in order to protect their interest and to litigate this case, the plaintiffs were compelled to secure and retain the services of attorneys, and that they have thereby suffered damages in the sum of Twenty Thousand Pesos [P20,000.00] by way of attorney's fees. [2] In December, 1963, the Davao Lumber Company filed its Answer with Affirmative Defenses and Counterclaim. [3] In its counterclaim, the Davao Lumber Company alleged that Plaintiffs Urbano Jaca and Bonifacio Jaca are the ones indebted to the defendant in the sum of P756,236.52 and P91,651.97, respectively; that on January 24, 1961, the plaintiff Urbano Jaca executed a chattel mortgage in favor of the defendant to secure the payment of any and all obligations contracted by him in favor of the defendant covering several chattels valued at P532,000.00; that said obligation of Urbano Jaca totalling P756,236.52 is overdue and unpaid despite repeated formal demands for settlement thereof made by defendant; that the action brought by the plaintiffs is purely baseless and malicious for which the plaintiffs should be required to pay defendant, damages and attorney's fees amounting to at least P20.000.00. [4] In June, 1965, the respondent Judge rendered a Decision, the dispositive portion of which reads: CONSIDERING THE FOREGOING, judgment is hereby rendered in favor of defendant and against the plaintiff, ordering that: 1. The complaint for accounting, return of price differentials and damages filed by plaintiffs Urbano Jaca and Bonifacio Jaca versus defendant Davao Lumber Company is dismissed, as it is hereby dismissed; 2. Ordering Urbano Jaca, to pay defendant the amount of P756,236.52 with legal interest from the date of the filing of the counterclaim; 3. Ordering plaintiff Bonifacio Jaca to pay defendant the amount of P91,651.00 with legal interest; 4. Ordering that the chattel mortgage executed by Urbano Jaca in favor of defendant Exhibit "3", be foreclosed as it is hereby foreclosed; 5. Ordering plaintiffs to pay jointly and severally P20,000.00 as attorney's fees in favor of defendant.

6. With cost against plaintiffs. SO ORDERED. Given at Davao City, on this 11th day of June, 1965. [5] In September, 1965, the Davao Lumber Company filed a motion for execution pending appeal on the following grounds: [1] There are good reasons to authorize an order of execution pending appeal pursuant to Rule 39, Section 2 of the Rules of Court, which provides: Sec. 2. Execution pending appeal. - On motion of the prevailing party with notice to the adverse party the court may, in its discretion, order execution to issue before the expiration of the. time to appeal, upon good reasons to be stated in a special order. If a record on appeal is filed thereafter, the motion and the special order shall be included therein. [a] In this same civil case, the court issued an Order dated November 17, 1964 directing the plaintiffs "to deliver to the receiver all the properties, chattels and equipment covered by the Chattel Mortgage, the delivery to be made within thirty (30) days," but plaintiffs did not, comply with said Order of November 17, 1964. [b] Defendant's counsel filed a "Motion to Implement Order ordering Urbano Jaca to deliver Chattels to Receiver" dated July 28, 1965, but up this date, plaintiffs have not complied with said Order. [c] That there are various reports from the receiver, one of them dated April 19, 1965, stating that the Receiver has not taken custody of the mortgaged chattels due to the refusal or inability to mortgagor Urbano Jaca to deliver the same to him. [d] Despite the long lapse of time from the Order of November 17, 1964, the court in its Order of September 1, 1965, directed said mortgagor Urbano Jaca to comply forthwith with the Order dated November 17, 1964 "fifteen (15) days upon receipt of this Order," but up to this date, there has been consistent refusal or failure to comply with said order of delivery. [2] Another good reason for execution pending appeal [Rule 39, Section 2] is the fact that plaintiff Urbano Jaca, the mortgagor in the deed of chattel mortgage dated January 24, 1961, has violated Article 319 of the Revised Penal Code, for he has sold some of the mortgaged properties to third persons, particularly, a wrecker, to Teodoro M. Alagon of Davao City on February 12, 1962 for P10,000.00. A copy of the letter-complaint addressed by defendant's counsel to the City Fiscal of Davao, dated February 5, 1964 is attached hereto and made an integral part of this Motion as Annex "A". [3] Moreover, plaintiffs have not only failed to comply with the Order of the Honorable Court for the delivery of the properties under receivership to the Receiver [par. 3 of this Motion] and in fact has violated the Chattel Mortgage contract [Par. 4 of this Motion], but plaintiffs have no properties or assets

with which to satisfy the judgment of this Honorable Court, which amounts to principal items of P756,326.52, P91,651.00 and P20,000.00, or a total of P867,887.52. [4] Obviously, the appeal interposed by the plaintiffs is to delay the enforcement and/or execution of the decision rendered by this Honorable Court, so that when the Decision correctly rendered by this Honorable Court should be affirmed on appeal the judgment will become nugatory. [6]

The respondent judge granted the motion for execution pending appeal in an order dated November 29, 1965. [7] Urbano Jaca and Bonifacio Jaca filed a motion for reconsideration of the order granting execution pending appeal in December, 1965, [8] but the same was denied in an order dated January 10, 1966. [9] Petitioners Urbano Jaca and Bonifacio Jaca contend that the respondent Judge acted in excess of jurisdiction and/or with grave abuse of discretion in issuing the order granting execution pending appeal and the order denying the motion for reconsideration of the order granting execution pending appeal because said orders were issued in complete disregard of the applicable provisions of the Rules of Court, the laws, and the settled decisions of the Honorable Supreme Court. Petitioners assail the order granting execution pending appeal and the order denying the motion for execution pending appeal on the following grounds: [1] granting that execution pending appeal will issue in a foreclosure proceedings, the respondent Judge acted in excess of jurisdiction when he considered, over the objection of petitioners, in the motion for reconsideration of the Order granting premature execution [Annex "AA"] the alleged sale by Florentina Perez, wife of petitioner, Urbano Jaca of the two [2] chevrolet trucks which were not part of the mortgaged chattels to Atty. Raul Nengasca as a reason for execution pending appeal in his Order [Annex "FF"] denying the motion for reconsideration, since this matter is not among the grounds stated in the motion for execution pending appeal [Annex "X"] neither has it been brought out during the hearing of said motion, nor is it one of the reasons stated in the Order of Execution Pending Appeal [Annex "Z"] which is the Order sought to be reconsidered and it is a cardinal rule in pleadings that a motion should state the grounds upon which it is based [Section 3, Rule 15 of the Rules of Court] and the Order sought to be obtained and that no other grounds can be entertained, passed upon and considered by the court over the objection of the adverse party; [2] the respondent judge acted with grave abuse of discretion equivalent to lack of jurisdiction in finding that there exists special or good reasons for execution pending appeal because discretionary execution under Section 2, Rule 39 of the Rules of Court will only issue if there are superior circumstances demanding urgency which outweigh the injury or damage that the losing party may suffer upon securing a reversal of the judgment on appeal considering the merits of his appeal [Moran, Comments on the Rules of Court, Vol. 2, Part II, 1963 ed., p. 239 and p. 242, citing Aguilos vs. Barrios, et al. 72 Phil. 285: Ledesma vs. Teodoro, 52 O.G. 784; De Leon, et al. vs. Soriano, et al., L-7684, Sept. 17, 1954; City of Bacolod vs. Enriquez, 55 O.G. p. 10545], and in the instant case, the reasons ultimately relied upon by the respondent Judge in granting execution pending appeal as stated in the Order [Annex "FF"], denying

petitioners motion for reconsideration of the Order granting execution, are not such superior circumstances demanding urgency of execution because: [a] the first reason that petitioner Urbano Jaca sold a wrecker to Teodoro M. Alagon is alleged to have been made yet on February 12, 1962, or about over one and half years prior to the filing of the instant case on November 22, 1963, and such sale would not show a fraudulent design on the part of petitioner Urbano Jaca to defeat the judgment against him by disposing of the mortgaged chattels and thus would demand urgency of execution of the judgment; [b] the second reason regarding the sale of the two chevrolet trucks [not alleged to be a part of the mortgaged chattels to the respondent Davao Lumber Company] to Atty. Raul Nengasca does not refer to the property of either of the petitioners, neither does it refer to a sale made by anyone of them; rather, it refers to a sale made by Florentina Perez [wife of petitioner Urbano Jaca], who is not a party to the action, regarding her own property; [c] the third and last reason that the orders of the court directing petitioner Urbano Jaca to deliver all the mortgaged chattels to the receiver are valid and must be complied with could not even be considered any reason at all for immediate execution, as it does not supply at all any element of a superior circumstance requiring urgency of execution for there is, in fact, no legal connection whatsoever in the validity of such Orders and their compliance with the propriety of an immediate execution of the judgment pending appeal; furthermore, the appeal of petitioners are based on good grounds and could never be said to be intended merely for delay, and that the amount involved in the judgment is huge; [3] That there are, in fact, good reasons for not allowing execution pending appeal considering: [1] that the amount involved in the judgment is huge; [2] that the petitioners have challenged the Counterclaim, under which the judgment sought to be executed is rendered, for lack of cause of action; [3] that the petitioners have challenged the chattel mortgage, under which the judgment of foreclosure has been rendered, as null and void ab initio and that no cause of action can arise therefrom; [4] that the petitioners have challenged the Commissioner's Report to be null and void which is the primary, if not in fact the sole, evidence of said respondent on its Counterclaim and upon which the judgment sought to be executed is based; [4] no execution pending appeal, in fact, can issue on foreclosure proceedings because the ninety-day period provided in Section 2, Rule 68 of the Rules of Court is a substantive right granted to the mortgagor-debtor which may not be omitted and that upon taking an appeal, said period is suspended and is not revived until the judgment is affirmed by the appellate court and the case returned to the trial court, and in the instant case, the respondent judge acted in excess of jurisdiction in allowing execution pending appeal when the Counterclaim under which the judgment sought to be executed is rendered, is

for a foreclosure of chattel mortgage and that petitioners have taken an appeal to the judgment rendered against them; [5] granting, arguendo, that the foreclosure proceedings is only against petitioner Urbano Jaca as mortgagor, but the action against petitioner Bonifacio Jaca is for a collection of a sum of money, the respondent Judge acted with grave abuse of discretion equivalent to lack of jurisdiction in allowing execution pending appeal as against said petitioner Bonifacio Jaca because in so far as said petitioner is concerned there is no showing of any special or good reasons, in fact, there is no showing of any reason at all anywhere in the records of the case, including the Orders complained of, as a basis for which discretionary execution may be issued against him. [10]

The private respondent maintains that the respondent judge acted in full compliance with the Rules of Court, the law and applicable decisions of this Honorable Court because: [1] The present case is an action for accounting and not a foreclosure proceeding. Therefore, execution pending appeal can be issued pursuant to Sec. 2 of Rule 39, Rules of Court. This provision of the Rules of Court applies in the present case for there are good and valid reasons for the issuance of a writ of execution pending appeal as stated in respondents' Motion [Annex "X"]. Moreover, petitioners have no properties or assets with which to satisfy the judgment of P867,887.52 plus other items stated in the Decision. The respondent Judge, therefore, was correct in ordering the issuance of a writ of execution [Annex "1"]. Furthermore, to stay execution, petitioners should have filed a supersedeas bond in accordance with Sec. 3 of Rule 3. [a] Respondent denies the erroneous and gratuitous conclusion of alleged 'excess of jurisdiction' as alleged in par. 44(a) of the Petition. It further denies the other misleading statements alleged therein, the truth of the matter being the grounds enumerated in the Motion for Execution Pending Appeal [Annex "X"] and the reasons mentioned in the Order [Annex "Z"] granting said motion. [b] Respondent denies the erroneous conclusion that the respondent Judge acted with grave abuse of discretion, equivalent to lack of jurisdiction' as alleged in par. 44(b) of the Petition, and states that the respondent Judge correctly acted in accordance with Sec. 2, Rule 39 of the Rules of Court. It further denies the misleading statement therein that the reasons ultimately relied upon by the respondent Judge are those stated in the Order [Annex "FF"], which is false, because the good and valid reasons relied upon by the respondent Judge are those stated in his Order [Annex "Z"] granting the Motion for Execution Pending Appeal [Annex "X"]: [1] Respondent admits the allegation that petitioner Urbano Jaca sold a wrecker to Teodoro M. Alagon on February 12, 1962 for P10,000.00; and denies the statement that such sale would not show a fraudulent design on his part to defeat the judgment against him. It further alleges that it is one of the good and valid reasons for execution pending appeal [Rule 39, Sec. 2], because said petitioner, the mortgagor in the deed of chattel mortgage dated January 24, 1961, has violated Article 319 of the Revised Penal Code in selling the said mortgaged property;

[2] The misleading allegations contained in subparagraphs 2 and 3 of par. 44(b) of the Petition are false, for they are matters that arose in the petitioners' Motion for Reconsideration of the Order granting execution pending appeal. Respondent further states that they are not the original and valid reasons given by the respondent Judge in his Order [Annex "Z"]; [c] There are goods reasons for allowing execution pending appeal considering that: [1] the amount involved in the judgment in favor of respondent Davao Lumber Company is P867,887.52 plus attorney's fees of P20,000.00, and the petitioners admitted at the hearing of the Motion for Execution Pending Appeal that they are insolvent [See Order, Annex "Z"]; [2] the petitioners have never challenged the Counterclaim of respondent Davao Lumber Company during the hearing on the merits; [3] the petitioners failed to present any evidence challenging the chattel mortgage under which the counterclaim for foreclosure has been rendered; [4] the petitioners have not disproved the Commissioner's Report [Annex "K"]. In fact, they failed to present their own evidence before the Commissioner which might tend to controvert the undisputed documentary evidence of respondent Davao Lumber Company; [5] execution pending appeal was properly issued in the present case, which is an ordinary civil action for accounting and not primarily a foreclosure of chattel mortgage the respondent Judge, therefore, acted in full compliance with the law and jurisprudence in allowing execution pending appeal; [6] the judgment sought to be executed pending appeal sentences petitioner Urbano Jaca to pay respondent Davao Lumber Company the amount of P756,236.52 with legal interest; sentences petitioner Bonifacio Jaca to pay said respondent the amount of P91,651.00 with legal interest; orders the Chattel Mortgage executed by Urbano Jaca in favor of said respondent foreclosed; orders petitioners to pay, jointly and severally, the amount of P20,000.00 as attorney's fees and costs; the said judgment was rendered after hearing on the merits of its action for accounting, which is not a proceeding for foreclosure of chattel mortgage; the provisions of the Rules of Court on foreclosure proceeding invoked by petitioners do not find any application in the case at bar; the respondent Judge, therefore, in allowing execution pending appeal, precisely acted in full compliance with Sec. 2 of Rule 39; [7] as above pointed out, the judgment rendered in this case is joint and several, and consequently, the respondent Judge was correct in ordering the execution thereof as against both petitioners who have no properties or assets to satisfy the judgment in favor of respondent company. [11]

The basic issue in this case is whether or not there are good reasons justifying the issuance of an order granting premature execution. Section 2, Rule 39 of the Rules of Court provides that on motion of the prevailing party with notice to the adverse party the court may, in its discretion, order execution to issue even before the expiration of the time to appeal, upon good reasons to be stated in a special order. If a record on appeal is filed thereafter, the motion and the special order shall be included therein. The

discretionary power of the Court of First Instance to grant or deny a motion for execution before the expiration of the time to appeal will not be interfered with by the appellate court, unless it be shown that there has been an abuse thereof or a subsequent change of conditions. [12] As provided in Sec. 2, Rule 39 of the New Rules of Court, the existence of good reasons is what confers discretionary power on a court of first instance to issue a writ of execution pending appeal. [13] The reasons allowing execution must constitute superior circumstances demanding urgency which will outweigh the injury or damage should the losing party secure a reversal of the judgment on appeal. [14] The decision in Civil Case No. 4189 requires petitioners to pay the enormous amount of P867,887.52. Clearly, premature execution of said decision wig result in irreparable damage to petitioners as the collection of said amount may be enforced through the seizure of money and/or sale of properties used in the logging business of petitioners. In other words, execution of the decision in Civil Case No. 4189 may result in the termination of petitioner's business. Thus, any damage to the petitioners brought about by the premature execution of the decision will be justified only upon a finding that the appeal is being taken only for the purpose of delay and of rendering the judgment nugatory.cralaw The facts of record show that the petitioner's appeal is not frivolous and not intended for delay. The findings of the respondent judge that the petitioners are indebted to the respondent Davao Lumber Company are based solely on the report submitted by Estanislao R. Lagman, the commissioner appointed by the court. This report was assailed by the petitioners as null and void in a motion to strike out the report from the records of the case. According to petitioners, the report is null and void because the so-called 'findings of the Commissioner in his report filed before this Honorable Court is the result of the exercise of certain highly irregular function not contemplated by the Rules of Court and, therefore, deprived Plaintiffs' their constitutional right to their day in court.cralaw ARGUMENTS: 1. That among other things, Section 3, Rule 33 of Rules of Court, provides: Section 3: Subject to the specifications and limitations stated in the order the commissioner has and shall exercise the power to regulate the proceedings in every hearing before him and to do all act and take measures necessary or proper for the efficient performance of his duties under the order,The trial or hearing before him shall proceed in all respect as though the same had been had before the Court.

2. That on August 22, 1964, without the proper notice to their respective counsels, the Plaintiffs received the following letter from the Commissioner, pertinent portions of which reads as follows: and, copy of which letter is attached hereto, forming an integral part in this Opposition, marked Annex "A" In compliance to the above order, I am now to proceed, as ordered by the Court, to examine your books of accounts and other records for the year 1962 and 1963. I will be dropping at your office on August 25, 1964. Kindly have our records ready.cralaw

3. That on August 25, 1964, the Commissioner went to Plaintiff's' office and asked to see the Books, and if possible to bring the same with him to his office; that, the plaintiffs' counsel refused to have said records examined in such manner; 4. That the Counsel for the Plaintiffs reminded the Commissioner on many occasions that, the examination of books and records of Accounts should be done in a manner provided for under the Rules of Court and, that in pursuance of said mandate, a hearing and/or proceedings be conducted in the presence of all parties, their witnesses and, their counsels and, the hearing be conducted as if it were taken before the court of justice, as said accounts being one controversial and contested in issues; 5. That said commissioner refused to conduct said hearing in accordance to law; 6. That report is void in law. [15] In an order dated November 17, 1964, the respondent judge approved the commissioners' report in toto As to the allegation of the plaintiff that they were denied their day in court, the respondent judge stated that "plaintiffs deliberately ignored to comply with the lawful order of the court directing them to present the pertinent books of accounts on the 12th day of October, 1964, at 2:00 P.M. Sala of Branch 11, and therefore, their position that they are denied their day in court is clearly untenable." [16] Petitioners filed their motion for reconsideration of the order approving the commissioner's report in November, 1964, explaining that their failure to appear was due to the fact that they received the order requiring them to appear on October 12, 1964 already after said date when it was too late for them to comply with the order of appearance. [17] Notwithstanding the reasonable explanation of their absence in the hearing of October 12, 1964, the respondent judge denied the motion for reconsideration in an order dated December 4, 1964. [18] It is obvious that the refusal of the respondent judge to order a hearing before the commissioner was in clear violation of Section 3, Rule 33, Revised Rules of Court, which specifically provides "that the trial or hearing before a commissioner shall proceed in all respects as though the same had been had before the court." For this purpose, Section 5 of the same Rule provides that "upon receipt of the order of reference, unless otherwise provided therein, the commissioner shall forthwith set a time and place for the first meeting of the parties or their attorneys to be held within ten [10] days after the date of reference." Pertinent also is Section 10 of Rule 33 which provides that "Objections to the report based upon grounds which were available to the parties during the proceedings before the commissioner, other than objections to the findings and conclusions therein set forth, shall not be considered by the court unless they were made before the commissioner." The respondent judge's refusal to order the commissioner to conduct a hearing in accordance with Section 5, Rule 33 was fatal to the cause of the petitioners. Under Section 10 of Rule 33, objections to the report based upon grounds which were available to the parties during the proceedings before the commissioner other than objections to the findings and conclusions therein set forth shall not be considered by the court, unless they were made before the commissioner. Objections to the report which were available to the parties during the proceedings refer to objections to the admissibility or

non-admissibility of evidence to be considered by the commissioner. Since no meeting was held before the commissioner, petitioners never had the opportunity to object to the admissibility of evidence of cash, equipment, materials and foodstuff, which they alleged in their complaint, were never received by them. Also, they failed to question the failure of the commissioner to include in his examination the price quotations of the logs which, as claimed in the complaint, were underclassified and undergraded.cralaw The records show that respondent Davao Lumber Company was able to prove its claim against petitioners because respondent judge refused to order the commissioner to hold a hearing as required by the rules. Thus, objections which petitioners may have against the claims of respondent were never considered. In the same manner, the claim of petitioners that respondent Davao Lumber Company is indebted to them was not also considered. The Commissioner limited his examination to the following: MR. URBANO LACAS ACCOUNTS: [a] From Feb. 17, 1961 to Oct. 31, 1962, Urbano Jaca purchased on account from the Merchandise Dept. of Davao Lumber Co. per statement attached, marked schedule 1 - P190:010.41 [b] From July 2, 1960 to Oct. 31, 1962, Urbano Jaca purchased on account from the Sawmill Dept. of Davao Lumber Co. per statement hereto attached, marked schedule 2 - P75,075.73 [c] Old vales or cash advances prior to July 25, 1963 which Urbano Jaca replaced with four (4) BPI Checks Nos. D-236619 to D-236622 P50,000.00 each as alleged by DLC - P200,000.00 [d] From Nov. 3, 1962 to Aug. 30, 1963, Urbano Jaca purchased on accounts from the Sawmill Dept. various goods, per attached statement, marked Schedule 3 - P57,459.27 [e] From Nov. 3, 1962 to Aug. 30, 1963, Urbano Jaca purchased from the Mds. Dept. of DLC various goods, per attached statement, marked Scheduled 4 - P68,857.07 [f] From July 25, 1963 to Sept. 16, 1963 Urbano Jaca obtained cash advances or vales per attached statement, marked schedule 5 - P164,844.45 [g] Purchase of gasoline made by Urbano Jaca from Shell Co., under Davao Lumber Co.'s guaranty P2,523.60 Total amount due Davao Lumber Co. from Urbano Jaca - P758,770.53 The amount of P2,523.60 due Shell Co. may be deducted from the total amount if Urbano Jaca can show proof that the account has been paid. MR. BONIFACIO JACAS ACCOUNTS: [a] From Nov. 3, 1962 to Aug. 8, 1963 Bonifacio Jaca purchased on account various goods from the Sawmill Dept. of DLC per attached statement,. marked schedule 6 - P39,999.69

[b] From Feb. 4, 1963 to Aug. 8, 1963 Bonifacio Jaca purchased on account from the Mdse. Dept. various goods, per attached statement marked schedule 7 - P48,319.08 [c] Purchases of gasoline from Shell Co. guaranteed by Davao Lumber Co. - P5,252.12. [d] From Aug. 6, 1963 to Aug. 23, 1963, Bonifacio Jaca obtained cash advances or vales, per attached statement marked schedule 8 - P3,333.20 Total amount due Davao Lumber Co. from Mr. Bonifacio Jaca P96,904.09. [19] Clearly, the examination was only made on advances made to petitioners. There was not even an attempt to examine receipts of payments made by petitioners. It is hard to believe that the petitioners had not paid any amount for the advances made to them. In fact, the respondents stated in paragraph 4 of its answer to the complaint that the plaintiffs stopped delivering logs in August, 1963, [20] indicating that from 1962 to 1963, the years included in the report of the commissioner, the petitioners had delivered logs to the Davao Lumber Company. There is doubt that petitioners are really indebted to respondent Davao Lumber Company in such a big amount as found by the trial court. The appeal of the petitioner appears to be meritorious. The fear of respondent that the judgment of the trial court might not be satisfied if not executed at once is not well founded. If the judgment is executed now, and on appeal the same is reversed, although there are provisions for restitution, damages incurred by petitioners can not be fully compensated. [21] The reasons stated in the order of execution pending appeal are not well founded. The first reason stated in the order was the consistent refusal of petitioner to deliver the mortgaged chattels to the receiver. [22] The records disclose that respondent Davao Lumber Company is not even entitled to the appointment of a receiver. It is an established rule that the applicant for receivership must have an actual and existing interest in the property for which a receiver is sought to be appointed. [23] The Davao Lumber Company's proof of interest in the property is the deed of chattel mortgage executed by Urbano Jaca in favor of Davao Lumber Company on January 24, 1961. This deed of chattel mortgage is void because it provides that the security stated therein is for the payment of any and all obligations herein before contracted and which may hereafter be contracted by the Mortgagor in favor of the Mortgagee. [24] In the case of Belgian Catholic Missionaries vs. Magallanes Press, this Court held: A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage [11 CJ, 448; 5 RCL 420-421]. Where the statute provides that the parties to a chattel mortgage must make oath that the debt is a just debt, honestly due and owing from the mortgagor to the mortgagee, it is obvious that a valid mortgage cannot be made to secure a debt to be thereafter contracted. [11 CJ. 448]. [25]

The second reason stated was the fact that petitioner Urbano Jaca violated Article 319 of the Revised Penal Code by selling to a certain Teodoro Alagon some of the mortgaged properties. [26] As already discussed, the deed of chattel mortgage executed by Urbano Jaca in favor of the Davao Lumber

Company is void. Hence, petitioner Urbano Jaca could not have violated Article 319 of the Revised Penal Code. Moreover, the respondent Davao Lumber Company has not successfully refuted the allegation of the petitioners that the sale of the wrecker to Teodoro Alagon was exclusively negotiated by the lumber company's managing partner, Tian Se, and that the latter caused Urbano Jaca to sign the deed of sale because he was the owner of the wrecker. The third reason stated is the fact that petitioners have no properties and assets to satisfy the judgment. [27] The basis of respondent judge's conclusion that petitioners do not have sufficient assets is an unsubstantiated allegation in the motion for execution pending appeal of respondent lumber company. [28] To rectify this omission, respondent lumber company, in its opposition to the motion for reconsideration of the order of execution pending appeal, tried to point out that the sale of two chevrolet trucks by Urbano Jaca and their failure to file a counterbond indicate that they are without sufficient assets. [29] This later attempt to substantiate a baseless allegation in the motion for execution pending appeal is futile. The trucks alleged to be sold are not properties of petitioner Urbano Jaca They are paraphernal properties of his wife, Florentina Perez, and the same trucks were in fact sold by her. And even if said trucks were owned by Urbano Jaca, their sale to Atty. Raul Nengasca does not totally indicate insolvency. As has been repeatedly observed, petitioner Urbano Jaca is engaged in business. Sale of property used in business does not establish insolvency. The sale may have been prompted by the need for more modern equipment on account of obsolescence, or the need to be directed to more profitable endeavor. The same reason applies to their failure to file a counterbound. The cash needed for the counterbound may be utilized for the continuance of the business or to increase business profits. In short, the acts of petitioner cannot always be interpreted as signs of insolvency but may also indicate sound business judgment prompted by the need to have liquid reserve of cash.cralaw In its answer to the petition, [30] respondent lumber company contends that petitioners, having availed of the remedy of appeal, are barred from filing a petition for certiorari. Although Section 1, Rule 65 of the Rules of Court provides that the special civil action of certiorari may only be invoked when "there is no appeal, nor any plain speedy and adequate remedy in the course of law," this rule is not without exception. The availability of the ordinary course of appeal does not constitute sufficient ground to prevent a party from making use of the extraordinary remedy of certiorari where the appeal is not an adequate remedy or equally beneficial, speedy and sufficient. [31] It is the inadequacy - not the mere absence - of all other legal remedies and the danger of failure of justice without the writ, that must usually determine the propriety of certiorari.cralaw In the case at bar, the remedy of appeal is inadequate. It will not immediately relieve petitioners from the injurious effect of the order granting execution. The slow and inexpensive remedy of appeal will not prevent respondent Judge from executing his decision requiring petitioners to pay the huge amount of P867,887.52. Moreover, to dismiss the petition on the ground that petitioner has already availed of the remedy of appeal will only aggravate the patent injustice already inflicted on petitioners. The reasons stated in the order granting execution pending appeal are not sufficient.

WHEREFORE, the petition for writ of certiorari is granted and the orders granting execution pending appeal dated November 29, 1965 and the order denying the motion for reconsideration of the order granting execution pending appeal dated January 10, 1966 are nullified and set aside, without pronouncement as to costs.cralaw SO ORDERED.
ANDRES vs. GEO. C. SELLNER and B. A. GREEN, defendants-appellants. Williams and Salinas and Salinas for appellee. Ferrier for PUIG, plaintiff-appellee,

appellants.

VILLAMOR, J.: This litigation arose from the non-payment of a promissory note signed by the defendants, which is as follows: On or before July 12, 1921, we promise to pay jointly and severally at Manila to the order of D. Andres Puig or his general attorney-in-fact, D. Ramon Salinas, the sum of forty seven thousand pesos (P47,000), Philippine currency, which we received on this date from said Mr. Salinas by way of loan at 10 per cent per annum; and we hereby guarantee our said obligation with five hundred seventy (570) preferred shares of the Manila Improvement Co. of the face value of one hundred pesos (P100) each, which will be issued within fifteen (15) days in the name of Mr. Puig, who shall hold them until we fulfill this obligation. In case we fail to make payment on July 12, 1921, the shares pledged shall become the property of D. Andres Puig. — Manila, July 12, 1920. — (Sgd.) Geo. C. Sellner. — (Sgd.) B. A. Green. The Honorable Geo. R. Harvey, judge, rendered a carefully prepared decision, sentencing the defendants Geo. C. Sellner and B. A. Green to pay the plaintiff jointly and severally the sum of fortyseven thousand pesos (P47,000), as principal, thirty-five pesos (P35), balance of the interest for the fourth quarter of 1921, the interest on said principal at the rate of ten per cent (10%) per annum from January 1, 1922, until the judgment is paid, and the cost; and ordering, moreover, in the event that the defendants should fail to pay the full amount of the judgment within three (3) months from the date thereof, that the sheriff of this city proceed to sell the five hundred seventy (570) shares pledged at public auction to the highest bidder, after attaching the same and advertising said sale during the legal period in two local newspapers, one in English and another in Spanish, in order that the plaintiff may recover the amount of the judgment after compliance with the formalities prescribed by law. From this judgment the defendants have appealed, and in their brief they assign seven errors, which, to our mind, can be reduced to one, namely, that numbered 2, which is as follows: The trial court erred in not holding that the condition contained in the note, to wit, "In case we fail to make payment on July 12, 1921, the shares pledged shall become the property of D. Andres Puig," was valid and binding against the plaintiff, as well as against the defendants.

The question as to the validity of a stipulation, such as that now before us, was already decided by the supreme court of Spain in the negative, as may be seen, among others, in a decision dated November 3, 1902, wherein it is said: That while it is true that contracts are binding, whatever may be the form in which they may have been entered into, if the essential conditions required for their validity exist, and that the obligations arising therefrom have the force of law between the contracting parties, who must fulfill them according to the terms thereof, it is likewise evident that these two percepts of articles 1278 and 1091 of the Civil Code are subject to the provisions of article 1255, which does not permit the making of stipulations contrary to law, morals or public order, one of which stipulations would be, according to the general language of article 1859, that wherein it is agreed that the debtor (creditor) may appropriate the thing pledged, as if it were sold to him, by the mere lapse of the term of the contract of loan, and said stipulation being void, under article 1884 of said Code, as to the mortgagee, there is no reasonable ground, in view of the precedents of our old law, for holding it lawful with respect to the pledgee, who in the absence of other conditions validly stipulated may not ignore the requirements of article 1872 in the alienation of the property pledged, for it is a right granted the creditor and can be waived by him, it is also a guaranty given the debtor, which he should not lose by the will alone of the creditor, or by making a stipulation that is void in law. (94 Jur. Civ., 412, 420.) And in this jurisdiction, a similar question was presented several times to this court of decision. In the case of Mahoney vs. Tuason (39 Phil., 952), it was held: The creditor has no right to appropriate to himself the personal property and chattels pledged, nor he can he make payment by himself and to himself for his own credit with the value of the said property, because he is only permitted to recover his credit from the proceeds of the sale at public auction of the chattels and personal property pledged not in the manner prescribed by article 1872 of the Civil Code but in that provided for in section 14 of the said Act No. 1508, which is the one force.
1aw ph!l.net

And it was further held: The vice of nullity which vitiates the additional agreement entered into by the contracting parties authorizing the creditor to appropriate the property and effects pledged in payment of his credit does not affect substantially the principal contract of chattel mortgage with regard to its validity and efficacy, for the reason that the principal contract of pledge or chattel mortgage having been perfected it can subsist although the contracting parties have not agreed as to the manner the creditor could recover his credit from the value of the things pledged, in case of the insolvency of the debtor, inasmuch as the law has expressly established the procedure in order that the creditor may not be defrauded or deceived in his right to recover his credit from the proceeds of the chattels retained by him as a security, in case the debtor does not comply with his obligation, because, if the debtor could not pay his debt, there exist no just or legal reason which prevents the creditor from recovering his credit from the proceeds of the effects pledged sold at a sale effected in accordance with law. Adhering, therefore, to the doctrines laid down by this court in the case aforecited, we hold that the judgment appealed from is in accordance with law, and must be, as is hereby, affirmed with costs against the appellants. So ordered.

PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G. TEVES, VICTORIA V. TEVES and HIRAM DIDAY R. PULIDO, petitioners, vs. HON. COURT OF APPEALS and DEVELOPMENT BANK OF THE PHILIPPINES,respondents. DECISION
GONZAGA-REYES, J.:

Before Us for review on certiorari is the decision of the respondent Court of Appeals in CA G.R. CV No. 27861, promulgated on April 23, 1992,[1] affirmingin toto the decision of the Regional Trial Court of Makati[2] to award respondent bank‟s deficiency claim, arising from a loan secured by chattel mortgage. The antecedents of the case are as follows: On April 17, 1980, petitioner PAMECA Wood Treatment Plant, Inc. (PAMECA) obtained a loan of US$267,881.67, or the equivalent of P2,000,000.00 from respondent Bank. By virtue of this loan, petitioner PAMECA, through its President, petitioner Herminio C. 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 for a sum of P322,350.00. On June 29, 1984, respondent bank filed a complaint for the collection of the balance of P4,366,332.46[3] with Branch 132 of the Regional Trial Court of Makati City against petitioner PAMECA and private petitioners herein, as solidary debtors with PAMECA under the promissory note. On February 8, 1990, the RTC of Makati rendered a decision on the case, the dispositive portion of which we reproduce as follows:

“WHEREFORE, judgment is hereby rendered ordering the defendants to pay jointly and severally plaintiff the (1) sum of P4,366,332.46 representing the deficiency claim of the latter as of March 31, 1984, plus 21% interest per annum and other charges from April 1, 1984 until the whole amount is fully paid and (2) the costs of the suit. SO ORDERED.”[4]
The Court of Appeals affirmed the RTC decision. Hence, this Petition. The petition raises the following grounds:

“1. Respondent appellate court gravely erred in not reversing the decision of the trial court, and 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, and therefore null and void. 2. Respondent appellate court gravely erred in not applying by analogy Article 1484 and Article 2115 of the Civil Code by reading the spirit of the law, and taking into consideration the fact that the contract of loan was a contract of adhesion. 3. The appellate court gravely erred in holding the petitioners Herminio Teves, Victoria Teves and Hiram Diday R. Pulido solidarily liable with PAMECA Wood Treatment Plant, Inc. when the intention of the parties was that the loan is only for the corporation‟s benefit.”
Relative to the first ground, petitioners contend that the amount of P322,350.00 at which respondent bank bid for and purchased the mortgaged properties was unconscionable and inequitable considering that, at the time of the public sale, the mortgaged properties had a total value of more than P2,000,000.00. According to petitioners, this is evident from an inventory dated March 31, 1980[5], which valued the properties at P2,518,621.00, in accordance with the terms of the chattel mortgage contract[6] between the parties that required that the inventories “be maintained at a level no less than P2 million”. Petitioners argue that respondent bank‟s act of bidding and purchasing the mortgaged properties for P322,350.00 or only about 1/6 of their actual value in a public sale in which it was the sole bidder was fraudulent, unconscionable and inequitable, and constitutes sufficient ground for the annulment of the auction sale. To this, respondent bank contends that the above-cited inventory and chattel mortgage contract were not in fact submitted as evidence before the RTC of Makati, and that these documents were first produced by petitioners only when the case was brought to the Court of Appeals.[7] The Court of Appeals, in turn, disregarded these documents for petitioners‟ failure to present them in evidence, or to even allude to them in their testimonies before the lower court.[8] Instead, respondent court declared that it is not at all unlikely for the chattels to have sufficiently deteriorated as to have fetched such a low price at the time of the auction sale.[9] Neither did respondent court find anything irregular or fraudulent in the circumstance that respondent bank was the sole bidder in the sale, as all the legal procedures for the conduct of a foreclosure sale have been complied with, thus giving rise to the presumption of regularity in the performance of public duties.[10] Petitioners also question the ruling of respondent court, affirming the RTC, to hold private petitioners, officers and stockholders of petitioner PAMECA, liable with PAMECA for the obligation under the loan obtained from respondent bank, contrary to the doctrine of separate and distinct corporate personality.[11] Private petitioners contend that they became signatories to the promissory note “only as a matter of practice by the respondent bank”, that the promissory note was in the nature of a contract of adhesion, and that the loan was for the benefit of the corporation, PAMECA, alone.[12] Lastly, invoking the equity jurisdiction of the Supreme Court, petitioners submit that Articles 1484[13] and 2115[14] of the Civil Code be applied in analogy to the instant case to preclude the recovery of a deficiency claim.[15]

Petitioners are not the first to posit the theory of the applicability of Article 2115 to foreclosures of chattel mortgage. In the leading case of Ablaza vs. Ignacio[16], the lower court dismissed the complaint for collection of deficiency judgment in view of Article 2141 of the Civil Code, which provides that the provisions of the Civil Code on pledge shall also apply to chattel mortgages, insofar as they are not in conflict with the Chattel Mortgage Law. It was the lower court‟s opinion that, by virtue of Article 2141, the provisions of Article 2115 which deny the creditor-pledgee the right to recover deficiency in case the proceeds of the foreclosure sale are less than the amount of the principal obligation, will apply. This Court reversed the ruling of the lower court and held that the provisions of the Chattel Mortgage Law regarding the effects of foreclosure of chattel mortgage, being contrary to the provisions of Article 2115, Article 2115 in relation to Article 2141, may not be applied to the case. Section 14 of Act No. 1508, as amended, or the Chattel Mortgage Law, states:

“x x x The officer making the sale shall, within thirty days thereafter, make in writing a return of his doings and file the same in the office of the Registry of Deeds where the mortgage is recorded, and the Register of Deeds shall record the same. The fees of the officer for selling the property shall be the same as the case of sale on execution as provided in Act Numbered One Hundred and Ninety, and the amendments thereto, and the fees of the Register of Deeds for registering the officer‟s return shall be taxed as a part of the costs of sale, which the officer shall pay to the Register of Deeds. The return shall particularly describe the articles sold, and state the amount received for each article, and shall operate as a discharge of the lien thereon created by the mortgage. The proceeds of such sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in their order, and the balance, after paying the mortgage, shall be paid to the mortgagor or persons holding under him on demand.” (Emphasis supplied)
It is clear from the above provision that the effects of foreclosure under the Chattel Mortgage Law run inconsistent with those of pledge under Article 2115. Whereas, in pledge, the sale of the thing pledged extinguishes the entire principal obligation, such that the pledgor may no longer recover proceeds of the sale in excess of the amount of the principal obligation, Section 14 of the Chattel Mortgage Law expressly entitles the mortgagor to the balance of the proceeds, upon satisfaction of the principal obligation and costs. Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds there is a corollary obligation on the part of the debtor-mortgagee to pay the deficiency in case of a reduction in the price at public auction. As explained in Manila Trading and Supply Co. vs. Tamaraw Plantation Co.[17], cited in Ablaza vs. Ignacio, supra:

“While it is true that section 3 of Act No. 1508 provides that „a chattel mortgage is a conditional sale‟, it further provides that it „is a conditional sale of personal property as security for the payment of a debt, or for the performance of some other obligation specified therein.‟ The lower court overlooked the fact that the chattels included in the chattel mortgage are only given as security and not as a payment of the debt, in case of a failure of payment. The theory of the lower court would lead to the absurd conclusion that if the chattels mentioned in the mortgage, given as security, should sell for more than the amount of the indebtedness secured, that the creditor would be entitled to the full amount for which it might be sold, even though that amount was greatly in excess of the indebtedness. Such a result certainly was not contemplated by the legislature when it adopted Act No. 1508. There seems to be no reason supporting that theory under the provision of the law. The value of the chattels changes greatly from time to time, and sometimes very rapidly. If, for example, the chattels should greatly increase in value and a sale under that condition should result in largely overpaying the indebtedness, and if the creditor is not permitted to retain the excess, then the same token would require the debtor to pay the deficiency in case of a reduction in the price of the chattels between the date of the contract and a breach of the condition. Mr. Justice Kent, in the 12th Edition of his Commentaries, as well as other authors on the question of chattel mortgages, have said, that „in case of a sale under a foreclosure of a chattel mortgage, there is no question that the mortgagee or creditor may maintain an action for the deficiency, if any should occur.‟ And the fact that Act No. 1508 permits a private sale, such sale is not, in fact, a satisfaction of the debt, to any greater extent than the value of the property at the time of the sale. The amount received at the time of the sale, of course, always requiring good faith and honesty in the sale, is only a payment, pro tanto, and an action may be maintained for a deficiency in the debt.”
We find no reason to disturb the ruling in Ablaza vs. Ignacio, and the cases reiterating it[18] Neither do We find tenable the application by analogy of Article 1484 of the Civil Code to the instant case. As correctly pointed out by the trial court, the said article applies clearly and solely to the sale of personal property the price of which is payable in installments. Although Article 1484, paragraph (3) expressly bars any further action against the purchaser to recover an unpaid balance of the price, where the vendor opts to foreclose the chattel mortgage on the thing sold, should the vendee‟s failure to pay cover two or more installments, this provision is specifically applicable to a sale on installments. To accommodate petitioners‟ prayer even on the basis of equity would be to expand the application of the provisions of Article 1484 to situations beyond its specific purview, and ignore the language and intent of the Chattel Mortgage Law. Equity, which has been aptly described as

“justice outside legality”, is applied only in the absence of, and never against, statutory law or judicial rules of procedure.[19] We are also unable to find merit in petitioners‟ submission that the public auction sale is void on grounds of fraud and inadequacy of price. Petitioners never assailed the validity of the sale in the RTC, and only in the Court of Appeals did they attempt to prove inadequacy of price through the documents, i.e., the “Open-End Mortgage on Inventory” and inventory dated March 31, 1980, likewise attached to their Petition before this Court. Basic is the rule that parties may not bring on appeal issues that were not raised on trial. 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 on January 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. The inventory, in turn, was as of March 31, 1980, or even prior to April 17, 1980, the date when the parties entered into the contracts of loan and chattel mortgage, and is far from being an accurate estimate of the market value of the properties at the time of the foreclosure sale four years thereafter. Thus, even assuming that the inventory and chattel mortgage contract were duly submitted as evidence before the trial court, it is clear that they cannot suffice to substantiate petitioners‟ allegation of inadequacy of price. 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,[20] and may not be inferred from the lone circumstance that it was only respondent bank that bid in the sale of the foreclosed properties. The sparseness of petitioners‟ evidence in this regard leaves Us no discretion but to uphold the presumption of regularity in the conduct of the public sale. We likewise affirm private petitioners‟ joint and several liability with petitioner corporation in the loan. As found by the trial court and the Court of Appeals, the terms of the promissory note unmistakably set forth the solidary nature of private petitioners‟ commitment. Thus:

“On or before May 12, 1980, for value received, PAMECA WOOD TREATMENT PLANT, INC., a corporation organized and existing under the laws of the Philippines, with principal office at 304 El Hogar Filipina Building, San Juan, Manila, promise to pay to the order of DEVELOPMENT BANK OF THE PHILIPPINES at its office located at corner Buendia and Makati Avenues, Makati, Metro Manila, the principal sum of TWO HUNDRED SIXTY SEVEN THOUSAND EIGHT HUNDRED AND EIGHTY ONE & 67/100 US DOLLARS (US$ 267,881.67) with interest at the rate of three per cent (3%) per annum over DBP‟s borrowing rate for these funds. Before the date of maturity, we hereby bind ourselves, jointly and severally, to make partial payments as follows:”
xxx

“In case of default in the payment of any installment above, we bind ourselves to pay DBP for advances xxx “
xxx

“We further bind ourselves to pay additional interest and penalty charges on loan amortizations or portion thereof in arrears as follows:”
xxx

"In addition to the above, we also bind ourselves to pay for bank advances for insurance premiums, taxes xxx “
xxx

"We further bind ourselves to reimburse DBP on a pro-rata basis for all costs incurred by DBP on the foreign currency borrowings from where the loan shall be drawn xxx “
xxx

“In case of non-payment of the amount of this note or any portion of it on demand, when due, or any other amount or amounts due on account of this note, the entire obligation shall become due and demandable, and if, for the enforcement of the payment thereof, the DEVELOPMENT BANK OF THE PHILIPPINES is constrained to entrust the case to its attorneys, we jointly and severally bind ourselves to pay for attorney’s fees as provided for in the mortgage contract, in addition to the legal fees and other incidental expenses. In the event of foreclosure of the mortgage securing this note, we further bind ourselves jointly and severally to pay the deficiency, if any.” (Emphasis supplied)[21]
The promissory note was signed by private petitioners in the following manner:

“PAMECA WOOD TREATMENT PLANT, INC. By: (Sgd) HERMINIO G. TEVES (For himself & as President of above-named corporation) (Sgd) HIRAM DIDAY PULIDO (Sgd) VICTORIA V. TEVES”[22]

From the foregoing, it is clear that private petitioners intended to bind themselves solidarily with petitioner PAMECA in the loan. As correctly submitted by respondent bank, private petitioners are not made to answer for the corporate act of petitioner PAMECA, but are made liable because they made themselves co-makers with PAMECA under the promissory note. IN VIEW OF THE FOREGOING, the Petition is DENIED and the Decision of the Court of Appeals dated April 23, 1992 in CA G.R. CV No. 27861 is hereby AFFIRMED. Costs against petitioners. SO ORDERED.

PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G. TEVES, VICTORIA V. TEVES and HIRAM DIDAY R. PULIDO, petitioners, vs. HON. COURT OF APPEALS and DEVELOPMENT BANK OF THE PHILIPPINES,respondents. DECISION
GONZAGA-REYES, J.:

Before Us for review on certiorari is the decision of the respondent Court of Appeals in CA G.R. CV No. 27861, promulgated on April 23, 1992,[1] affirmingin toto the decision of the Regional Trial Court of Makati[2] to award respondent bank‟s deficiency claim, arising from a loan secured by chattel mortgage. The antecedents of the case are as follows: On April 17, 1980, petitioner PAMECA Wood Treatment Plant, Inc. (PAMECA) obtained a loan of US$267,881.67, or the equivalent of P2,000,000.00 from respondent Bank. By virtue of this loan, petitioner PAMECA, through its President, petitioner Herminio C. 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 for a sum of P322,350.00. On June 29, 1984, respondent bank filed a complaint for the collection of the balance of P4,366,332.46[3] with Branch 132 of the Regional Trial Court of Makati City against petitioner PAMECA and private petitioners herein, as solidary debtors with PAMECA under the promissory note. On February 8, 1990, the RTC of Makati rendered a decision on the case, the dispositive portion of which we reproduce as follows:

“WHEREFORE, judgment is hereby rendered ordering the defendants to pay jointly and severally plaintiff the (1) sum of P4,366,332.46 representing the deficiency claim of the latter as of March 31, 1984, plus 21% interest per annum and other charges from April 1, 1984 until the whole amount is fully paid and (2) the costs of the suit. SO ORDERED.”[4]

The Court of Appeals affirmed the RTC decision. Hence, this Petition. The petition raises the following grounds:

“1. Respondent appellate court gravely erred in not reversing the decision of the trial court, and 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, and therefore null and void. 2. Respondent appellate court gravely erred in not applying by analogy Article 1484 and Article 2115 of the Civil Code by reading the spirit of the law, and taking into consideration the fact that the contract of loan was a contract of adhesion. 3. The appellate court gravely erred in holding the petitioners Herminio Teves, Victoria Teves and Hiram Diday R. Pulido solidarily liable with PAMECA Wood Treatment Plant, Inc. when the intention of the parties was that the loan is only for the corporation‟s benefit.”
Relative to the first ground, petitioners contend that the amount of P322,350.00 at which respondent bank bid for and purchased the mortgaged properties was unconscionable and inequitable considering that, at the time of the public sale, the mortgaged properties had a total value of more than P2,000,000.00. According to petitioners, this is evident from an inventory dated March 31, 1980[5], which valued the properties at P2,518,621.00, in accordance with the terms of the chattel mortgage contract[6] between the parties that required that the inventories “be maintained at a level no less than P2 million”. Petitioners argue that respondent bank‟s act of bidding and purchasing the mortgaged properties for P322,350.00 or only about 1/6 of their actual value in a public sale in which it was the sole bidder was fraudulent, unconscionable and inequitable, and constitutes sufficient ground for the annulment of the auction sale. To this, respondent bank contends that the above-cited inventory and chattel mortgage contract were not in fact submitted as evidence before the RTC of Makati, and that these documents were first produced by petitioners only when the case was brought to the Court of Appeals.[7] The Court of Appeals, in turn, disregarded these documents for petitioners‟ failure to present them in evidence, or to even allude to them in their testimonies before the lower court.[8] Instead, respondent court declared that it is not at all unlikely for the chattels to have sufficiently deteriorated as to have fetched such a low price at the time of the auction sale.[9] Neither did respondent court find anything irregular or fraudulent in the circumstance that respondent bank was the sole bidder in the sale, as all the legal procedures for the conduct of a foreclosure sale have been complied with, thus giving rise to the presumption of regularity in the performance of public duties.[10] Petitioners also question the ruling of respondent court, affirming the RTC, to hold private petitioners, officers and stockholders of petitioner PAMECA, liable with PAMECA for the obligation under the loan obtained from respondent bank, contrary to the doctrine of separate and distinct corporate personality.[11] Private petitioners contend that they became signatories to the

promissory note “only as a matter of practice by the respondent bank”, that the promissory note was in the nature of a contract of adhesion, and that the loan was for the benefit of the corporation, PAMECA, alone.[12] Lastly, invoking the equity jurisdiction of the Supreme Court, petitioners submit that Articles 1484[13] and 2115[14] of the Civil Code be applied in analogy to the instant case to preclude the recovery of a deficiency claim.[15] Petitioners are not the first to posit the theory of the applicability of Article 2115 to foreclosures of chattel mortgage. In the leading case of Ablaza vs. Ignacio[16], the lower court dismissed the complaint for collection of deficiency judgment in view of Article 2141 of the Civil Code, which provides that the provisions of the Civil Code on pledge shall also apply to chattel mortgages, insofar as they are not in conflict with the Chattel Mortgage Law. It was the lower court‟s opinion that, by virtue of Article 2141, the provisions of Article 2115 which deny the creditor-pledgee the right to recover deficiency in case the proceeds of the foreclosure sale are less than the amount of the principal obligation, will apply. This Court reversed the ruling of the lower court and held that the provisions of the Chattel Mortgage Law regarding the effects of foreclosure of chattel mortgage, being contrary to the provisions of Article 2115, Article 2115 in relation to Article 2141, may not be applied to the case. Section 14 of Act No. 1508, as amended, or the Chattel Mortgage Law, states:

“x x x The officer making the sale shall, within thirty days thereafter, make in writing a return of his doings and file the same in the office of the Registry of Deeds where the mortgage is recorded, and the Register of Deeds shall record the same. The fees of the officer for selling the property shall be the same as the case of sale on execution as provided in Act Numbered One Hundred and Ninety, and the amendments thereto, and the fees of the Register of Deeds for registering the officer‟s return shall be taxed as a part of the costs of sale, which the officer shall pay to the Register of Deeds. The return shall particularly describe the articles sold, and state the amount received for each article, and shall operate as a discharge of the lien thereon created by the mortgage. The proceeds of such sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in their order, and the balance, after paying the mortgage, shall be paid to the mortgagor or persons holding under him on demand. ” (Emphasis supplied)
It is clear from the above provision that the effects of foreclosure under the Chattel Mortgage Law run inconsistent with those of pledge under Article 2115. Whereas, in pledge, the sale of the thing pledged extinguishes the entire principal obligation, such that the pledgor may no longer recover proceeds of the sale in excess of the amount of the principal obligation,

Section 14 of the Chattel Mortgage Law expressly entitles the mortgagor to the balance of the proceeds, upon satisfaction of the principal obligation and costs. Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds there is a corollary obligation on the part of the debtor-mortgagee to pay the deficiency in case of a reduction in the price at public auction. As explained in Manila Trading and Supply Co. vs. Tamaraw Plantation Co.[17], cited in Ablaza vs. Ignacio, supra:

“While it is true that section 3 of Act No. 1508 provides that „a chattel mortgage is a conditional sale‟, it further provides that it „is a conditional sale of personal property as security for the payment of a debt, or for the performance of some other obligation specified therein.‟ The lower court overlooked the fact that the chattels included in the chattel mortgage are only given as security and not as a payment of the debt, in case of a failure of payment. The theory of the lower court would lead to the absurd conclusion that if the chattels mentioned in the mortgage, given as security, should sell for more than the amount of the indebtedness secured, that the creditor would be entitled to the full amount for which it might be sold, even though that amount was greatly in excess of the indebtedness. Such a result certainly was not contemplated by the legislature when it adopted Act No. 1508. There seems to be no reason supporting that theory under the provision of the law. The value of the chattels changes greatly from time to time, and sometimes very rapidly. If, for example, the chattels should greatly increase in value and a sale under that condition should result in largely overpaying the indebtedness, and if the creditor is not permitted to retain the excess, then the same token would require the debtor to pay the deficiency in case of a reduction in the price of the chattels between the date of the contract and a breach of the condition. Mr. Justice Kent, in the 12th Edition of his Commentaries, as well as other authors on the question of chattel mortgages, have said, that „in case of a sale under a foreclosure of a chattel mortgage, there is no question that the mortgagee or creditor may maintain an action for the deficiency, if any should occur.‟ And the fact that Act No. 1508 permits a private sale, such sale is not, in fact, a satisfaction of the debt, to any greater extent than the value of the property at the time of the sale. The amount received at the time of the sale, of course, always requiring good faith and honesty in the sale, is only a payment, pro tanto, and an action may be maintained for a deficiency in the debt.”
We find no reason to disturb the ruling in Ablaza vs. Ignacio, and the cases reiterating it[18] Neither do We find tenable the application by analogy of Article 1484 of the Civil Code to the instant case. As correctly pointed out by the trial court, the said article applies clearly and solely to the sale of personal property the price of which is payable in installments. Although Article 1484, paragraph (3) expressly bars any further action against the purchaser to recover an

unpaid balance of the price, where the vendor opts to foreclose the chattel mortgage on the thing sold, should the vendee‟s failure to pay cover two or more installments, this provision is specifically applicable to a sale on installments. To accommodate petitioners‟ prayer even on the basis of equity would be to expand the application of the provisions of Article 1484 to situations beyond its specific purview, and ignore the language and intent of the Chattel Mortgage Law. Equity, which has been aptly described as “justice outside legality”, is applied only in the absence of, and never against, statutory law or judicial rules of procedure.[19] We are also unable to find merit in petitioners‟ submission that the public auction sale is void on grounds of fraud and inadequacy of price. Petitioners never assailed the validity of the sale in the RTC, and only in the Court of Appeals did they attempt to prove inadequacy of price through the documents, i.e., the “Open-End Mortgage on Inventory” and inventory dated March 31, 1980, likewise attached to their Petition before this Court. Basic is the rule that parties may not bring on appeal issues that were not raised on trial. 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 on January 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. The inventory, in turn, was as of March 31, 1980, or even prior to April 17, 1980, the date when the parties entered into the contracts of loan and chattel mortgage, and is far from being an accurate estimate of the market value of the properties at the time of the foreclosure sale four years thereafter. Thus, even assuming that the inventory and chattel mortgage contract were duly submitted as evidence before the trial court, it is clear that they cannot suffice to substantiate petitioners‟ allegation of inadequacy of price. 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,[20] and may not be inferred from the lone circumstance that it was only respondent bank that bid in the sale of the foreclosed properties. The sparseness of petitioners‟ evidence in this regard leaves Us no discretion but to uphold the presumption of regularity in the conduct of the public sale. We likewise affirm private petitioners‟ joint and several liability with petitioner corporation in the loan. As found by the trial court and the Court of Appeals, the terms of the promissory note unmistakably set forth the solidary nature of private petitioners‟ commitment. Thus:

“On or before May 12, 1980, for value received, PAMECA WOOD TREATMENT PLANT, INC., a corporation organized and existing under the laws of the Philippines, with principal office at 304 El Hogar Filipina Building, San Juan, Manila, promise to pay to the order of DEVELOPMENT BANK OF THE PHILIPPINES at its office located at corner Buendia and Makati Avenues, Makati, Metro Manila, the principal sum of TWO HUNDRED SIXTY SEVEN THOUSAND EIGHT HUNDRED AND EIGHTY ONE & 67/100 US DOLLARS (US$ 267,881.67) with interest at the rate of three per cent (3%) per annum over DBP‟s borrowing rate for these funds. Before the

date of maturity, we hereby bind ourselves, jointly and severally, to make partial payments as follows:”
xxx

“In case of default in the payment of any installment above, we bind ourselves to pay DBP for advances xxx “
xxx

“We further bind ourselves to pay additional interest and penalty charges on loan amortizations or portion thereof in arrears as follows:”
xxx

"In addition to the above, we also bind ourselves to pay for bank advances for insurance premiums, taxes xxx “
xxx

"We further bind ourselves to reimburse DBP on a pro-rata basis for all costs incurred by DBP on the foreign currency borrowings from where the loan shall be drawn xxx “
xxx

“In case of non-payment of the amount of this note or any portion of it on demand, when due, or any other amount or amounts due on account of this note, the entire obligation shall become due and demandable, and if, for the enforcement of the payment thereof, the DEVELOPMENT BANK OF THE PHILIPPINES is constrained to entrust the case to its attorneys, we jointly and severally bind ourselves to pay for attorney’s fees as provided for in the mortgage contract, in addition to the legal fees and other incidental expenses. In the event of foreclosure of the mortgage securing this note, we further bind ourselves jointly and severally to pay the deficiency, if any.” (Emphasis supplied)[21]
The promissory note was signed by private petitioners in the following manner:

“PAMECA WOOD TREATMENT PLANT, INC. By: (Sgd) HERMINIO G. TEVES

(For himself & as President of above-named corporation) (Sgd) HIRAM DIDAY PULIDO (Sgd) VICTORIA V. TEVES”[22]
From the foregoing, it is clear that private petitioners intended to bind themselves solidarily with petitioner PAMECA in the loan. As correctly submitted by respondent bank, private petitioners are not made to answer for the corporate act of petitioner PAMECA, but are made liable because they made themselves co-makers with PAMECA under the promissory note. IN VIEW OF THE FOREGOING, the Petition is DENIED and the Decision of the Court of Appeals dated April 23, 1992 in CA G.R. CV No. 27861 is hereby AFFIRMED. Costs against petitioners. SO ORDERED.

BA FINANCE CORPORATION, petitioner vs. HON. COURT OF APPEALS and ROBERTO M. REYES,respondents. DECISION VITUG, J.: The case at bar is a suit for replevin and damages. The petition for review on certiorari assails the decision of the Court of Appeals[1] in CA- G.R. CV No. 23605 affirming that of the Regional Trial Court of Manila, Branch XX,[2] which has disposed of its Civil Case No. 87-42270 in this wise: "WHEREFORE, the case against defendant-spouses (sic) Reynaldo Manahan is hereby dismissed without prejudice, for failure to prosecute. Plaintiff having failed to show the liability of defendant John Doe in the person of Roberto M. Reyes, the case against the latter should likewise be dismissed. Moreover, plaintiff is hereby directed to return the vehicle seized by virtue of the order of seizure issued by this Court with all its accessories to the said Roberto M. Reyes."[3] The decisions of both the appellate court and the court a quo are based on a like finding of the facts hereinafter briefly narrated. The spouses Reynaldo and Florencia Manahan executed, on 15 May 1980, a promissory note[4] binding themselves to pay Carmasters, Inc., the amount of P83,080.00 in thirty-six monthly installments commencing 01 July 1980. To secure payment, the Manahan spouses executed a deed of chattel mortgage[5] over a motor vehicle, a Ford Cortina 1.6 GL, with motor and serial number CUBFWE801010. Carmasters later assigned[6] the promissory note and the chattel mortgage to petitioner BA Finance Corporation with the conformity of the Manahans. When the latter failed to pay the due installments, petitioner sent demand letters. The demands not having been heeded, petitioner, on 02 October 1987, filed a complaint for replevin with damages against the spouses, as well as against a John

Doe, praying for the recovery of the vehicle with an alternative prayer for the payment of a sum of money should the vehicle not be returned. Upon petitioner's motion and the filing of a bond in the amount of P169,161.00, the lower court issued a writ of replevin. The court, however, cautioned petitioner that should summons be not served on the defendants within thirty (30) days from the writ's issuance, the case would be dismissed for failure to prosecute.[7] The warning was based on what the court perceived to be the deplorable practice of some mortgagees of "freezing (the) foreclosure or replevin cases" which they would so "conveniently utilize as a leverage for the collection of unpaid installments on mortgaged chattels."[8] The service of summons upon the spouses Manahan was caused to be served by petitioner at No. 35 Lantana St., Cubao, Quezon City. The original of the summons had the name and the signature of private respondent Roberto M. Reyes indicating that he received, on 14 October 1987, a copy of the summons and the complaint.[9] Forthwith, petitioner, through its Legal Assistant, Danilo E. Solano, issued a certification to the effect that it had received from Orson R. Santiago, the deputy sheriff of the Regional Trial Court of Manila, Branch 20, the Ford Cortina seized from private respondent Roberto M. Reyes, the John Doe referred to in the complaint,[10] in Sorsogon, Sorsogon.[11] On 20 October 1987, the lower court came out with an order of seizure. Alleging possession in good faith, private respondent filed, on 26 October 1987, a motion for an extension of time within which to file his answer and/or a motion for intervention. The court granted the motion. A few months later, or on 18 February 1988, the court issued an order which, in part, stated: "Perusal of the record shows that an order for the seizure of personal property was issued on October 20, 1987 in pursuance to a previous order of the Court dated October 13, 1987. However, to date, there is no showing that the principal defendants were served with summons inspite of the lapse of four (4) months. "Considering, this is a replevin case and to forestall the evils that arise from this practice, plaintiff failing to heed the Order dated October 13, 1987, particularly second paragraph thereof, the above-entitled case is hereby ordered DISMISSED for failure to prosecute and further ordering the plaintiff to return the property seized with all its accessories to defendant John Doe in the person of Roberto M. Reyes. "SO ORDERED."[12] On 26 February 1988, petitioner filed a notice of dismissal of the case "without prejudice and without pronouncement as to costs, before service of Summons and Answer, under Section 1, Rule 17, of the Rules of Court."[13] It also sought in another motion the withdrawal of the replevin bond. In view of the earlier dismissal of the case (for petitioner's failure to prosecute), the court, on 02 March 1988, merely noted the notice of dismissal and denied the motion to withdraw the replevin bond considering that the writ of replevin had meanwhile been implemented.[14]

On 09 March 1988, private respondent filed a motion praying that petitioner be directed to comply with the court order requiring petitioner to return the vehicle to him. In turn, petitioner filed, on 14 March 1988, a motion for the reconsideration of the orders of 18 February 1988 and 02 March 1988 contending that: (a) the dismissal of the case was tantamount to adjudication on the merits that thereby deprived it with the remedy to enforce the promissory note, the chattel mortgage and the deed of assignment, under Section 3, Rule 117, of the Rules of Court; (b) the order to return the vehicle to private respondent was a departure from jurisprudence recognizing the right of the mortgagor to foreclose the property to respond to the unpaid obligation secured by the chattel mortgage, and (c) there were no legal and factual bases for the court's view that the filing of the replevin case was "characterized (by) evil practices."[15] On 20 April 1988, the court granted petitioner's motion for reconsideration and accordingly recalled the order directing the return of the vehicle to private respondent, set aside the order dismissing the case, directed petitioner "to cause the service of summons together with a copy of the complaint on the principal defendants within five (5) days from receipt"[16] thereof at petitioner's expense, and ordered private respondent to answer the complaint. A few months later, or on 02 August 1988, petitioner filed a motion to declare private respondent in default. The court granted the motion on that same day and declared private respondent "in default for his failure to file the x x x answer within the reglementary period."[17] The court likewise granted petitioner's motion to set the case for the presentation, ex parte, of evidence. Petitioner, thereupon, submitted the promissory note, the deed of chattel mortgage, the deed of assignment, a statement of account in the name of Florencia Manahan and two demand letters. On 27 February 1989, the trial court rendered a decision dismissing the complaint against the Manahans for failure of petitioner to prosecute the case against them. It also dismissed the case against private respondent for failure of petitioner to show any legal basis for said respondent's liability. The court ratiocinated: "x x x. Roberto M. Reyes is merely ancillary debtor in this case. The defendant spouses Manahan being the principal debtor(s) and as there is no showing that the latter has been brought before the jurisdiction of this court, it must necessarily follow that the plaintiff has no cause of action against said Roberto M. Reyes herein before referred to as defendant John Doe. Under the circumstances, it is incumbent upon the plaintiff to return the seized vehicle unto the said Roberto M. Reyes."[18] In its appeal to the Court of Appeals, petitioner has asserted that a suit for replevin aimed at the foreclosure of the chattel is an action quasi in rem which does not necessitate the presence of the principal obligors as long as the court does not render any personal judgment against them. This argument did not persuade the appellate court, the latter holding that"x x x. In action quasi in rem an individual is named as defendant and the purpose of the proceeding is to subject his interest therein to the obligation or lien burdening the property, such as proceedings having for their sole object the sale or disposition of the property of the defendant, whether by attachment, foreclosure, or other form of remedy (Sandejas vs. Robles, 81 Phil. 421). In the case at bar,

the court cannot render any judgment binding on the defendants spouses for having allegedly violated the terms and conditions of the promissory note and the contract of chattel mortgage on the ground that the court has no jurisdiction over their persons, no summons having been served on them. That judgment, if rendered, is void for having denied the defendants spouses due process of law which contemplates notice and opportunity to be heard before judgment is rendered, affecting one's person or property (Macabingkil vs. Yatco, 26 SCRA 150, 157). "It is next contended by appellant that as between appellant, as mortgagee, and John Doe, whose right to possession is dubious if not totally non-existent, it is the former which has the superior right of possession. "We cannot agree. "It is an undisputed fact that the subject motor vehicle was taken from the possession of said Roberto M. Reyes, a third person with respect to the contract of chattel mortgage between the appellant and the defendants spouses Manahan. "The Civil Code expressly provides that every possessor has a right to be respected in his possession (Art. 539, New Civil Code); that good faith is always presumed, and upon him who alleges bad faith on the part of a possessor rests the burden of proof (Art. 527, ibid.); and that the possession of movable property acquired in good faith is equivalent to a title; nevertheless, one who has lost any movable or has been unlawfully deprived thereof, may recover it from the person in possession of the same (Art. 559, ibid.). Thus, it has been held that a possessor in good faith is entitled to be respected and protected in his possession as if he were the true owner thereof until a competent court rules otherwise (Chus Hai vs. Kapunan, 104 Phil. 110; Yu, et al. vs. Hon. Honrado, etc., et al., 99 SCRA 237). In the case at bar, the trial court did not err in holding that the complaint does not state any cause of action against Roberto M. Reyes, and in ordering the return of the subject chattel to him."[19] The appellate court, subsequently, denied petitioner's motion for reconsideration. In the instant appeal, petitioner insists that a mortgagee can maintain an action for replevin against any possessor of the object of a chattel mortgage even if the latter were not a party to the mortgage. Replevin, broadly understood, is both a form of principal remedy and of a provisional relief. It may refer either to the action itself, i.e., to regain the possession of personal chattels being wrongfully detained from the plaintiff by another, or to the provisional remedy that would allow the plaintiff to retain the thing during the pendency of the action and hold it pendente lite.[20] The action is primarily possessory in nature and generally determines nothing more than the right of possession. Replevin is so usually described as a mixed action, being partly in rem and partly in personam-in rem insofar as the recovery of specific property is concerned, and in personam as regards to damages involved. As an "action in rem," the gist of the replevin action is the right of the plaintiff to obtain possession of specific personal property by reason of his being the owner or of his having a special interest therein.[21] Consequently, the person in possession of the property sought to be replevied is ordinarily the proper and only necessary party defendant, and the plaintiff is not required to so join as defendants other persons

claiming a right on the property but not in possession thereof. Rule 60 of the Rules of Court allows an application for the immediate possession of the property but the plaintiff must show that he has a good legal basis, i.e., a clear title thereto, for seeking such interim possession. Where the right of the plaintiff to the possession of the specific property is so conceded or evident, the action need only be maintained against him who so possesses the property. In rem actio est per quam rem nostram quae ab alio possidetur petimus, et semper adversus eum est qui rem possidet. In Northern Motors, Inc. vs. Herrera,[22] the Court has said: "There can be no question that persons having a special right of property in the goods the recovery of which is sought, such as a chattel mortgagee, may maintain an action for replevin therefor. Where the mortgage authorizes the mortgagee to take possession of the property on default, he may maintain an action to recover possession of the mortgaged chattels from the mortgagor or from any person in whose hands he may find them."[23] In effect then, the mortgagee, upon the mortgagor's default, is constituted an attorney-in-fact of the mortgagor enabling such mortgagee to act for and in behalf of the owner. Accordingly, that the defendant is not privy to the chattel mortgage should be inconsequential. By the fact that the object of replevin is traced to his possession, one properly can be a defendant in an action for replevin. It is here assumed that the plaintiff's right to possess the thing is not or cannot be disputed. In case the right of possession on the part of the plaintiff, or his authority to claim such possession or that of his principal, is put to great doubt (a contending party might contest the legal bases for plaintiff's cause of action or an adverse and independent claim of ownership or right of possession is raised by that party), it could become essential to have other persons involved and accordingly impleaded for a complete determination and resolution of the controversy. For instance, in Servicewide Specialists, Inc., vs. Court of Appeals, et al., G.R. No. 103301, 08 December 1995, this Court ruled: "While, in its present petition for review on certiorari, Servicewide has raised a number of points, the crucial issue still remains, however, to be whether or not an action filed by the mortgagee for replevin to effect a foreclosure of the property covered by the chattel mortgage would require that the mortgagor be so impleaded as an indispensable party thereto. "Rule 60 of the Rules of Court allows a plaintiff, in an action for the recovery of possession of personal property, to apply for a writ of replevin if it can be shown that he is `the owner of the property claimed x x x or is entitled to the possession thereof. The plaintiff need not be the owner so long as he is able to specify his right to the possession of the property and his legal basis therefor. The question then, insofar as the matter finds relation to the instant case, is whether or not the plaintiff (herein petitioner) who has predicated his right on being the mortgagee of a chattel mortgage should implead the mortgagor in his complaint that seeks to recover possession of the encumbered property in order to effect its foreclosure. "The answer has to be in the affirmative. In a suit for replevin, a clear right of possession must be established. A foreclosure under a chattel mortgage may properly be commenced only once there is

default on the part of the mortgagor of his obligation secured by the mortgage. The replevin in the instant case has been sought to pave the way for the foreclosure of the object covered by the chattel mortgage. The conditions essential for that foreclosure would be to show, firstly, the existence of the chattel mortgage and, secondly, the default of the mortgagor. These requirements must be established since the validity of the plaintiff's exercise of the right of foreclosure are inevitably dependent thereon. It would thus seem, considering particularly an adverse and independent claim of ownership by private respondent, that the lower court acted improvidently when it granted the dismissal of the complaint against Dollente, albeit on petitioner's (then plaintiff) plea, on the ground that the ‘non-service of summons upon Ernesto Dollente (would) only delay the determination of the merits of the case, to the prejudice of the parties' In Imson v. Court of Appeals, we have explained: ‘“x x x. An indispensable party is one whose interest will be affected by the court's action in the litigation, and without whom no final determination of the case can be had. The party's interest in the subject matter of the suit and in the relief sought are so inextricably intertwined with the other parties that his legal presence as a party to the proceeding is an absolute necessity. In his absence there cannot be a resolution of the dispute of the parties before the court which is effective, complete, or equitable. `Conversely, a party is not indispensable to the suit if his interest in the controversy or subject matter is distinct and divisible from the interest of the other parties and will not necessarily be prejudiced by a judgment which does complete justice to the parties in court. He is not indispensable if his presence would merely permit complete relief between him and those already parties to the action or will simply avoid multiple litigation.' "Without the presence of indispensable parties to a suit or proceeding, a judgment of a court cannot attain real finality." (Footnotes omitted.) A chattel mortgagee, unlike a pledgee, need not be in, nor entitled to, the possession of the property unless and until the mortgagor defaults and the mortgagee thereupon seeks to foreclose thereon. Since the mortgagee's right of possession is conditioned upon the actual fact of default which itself may be controverted, the inclusion of other parties, like the debtor or the mortgagor himself, may be required in order to allow a full and conclusive determination of the case. When the mortgagee seeks a replevin in order to effect the eventual foreclosure of the mortgage, it is not only the existence of, but also the mortgagor's default on, the chattel mortgage that, among other things, can properly uphold the right to replevy the property. The burden to establish a valid justification for that action lies with the plaintiff. An adverse possessor, who is not the mortgagor, cannot just be deprived of his possession, let alone be bound by the terms of the chattel mortgage contract, simply because the mortgagee brings up an action for replevin. The appellate court, accordingly, acted well in arriving at its now questioned judgment. WHEREFORE, the decision of the Court of Appeals is AFFIRMED. No costs. SO ORDERED.

JOSE MOVIDO, plaintiff-appellant, vs. REHABILITATION FINANCE CORPORATION and THE PROVINCIAL SHERIFF OF SAMAR, defendantsappellees. Francisco Astilla for appellant. Jesus A. Avanceña, Ricardo V. Garcia and Lydia Florendo-Veloso for appellee RFC. Office of the Solicitor General Ambrosio Padilla and Solicitor Frine C. Zaballero for appellee Provincial Sheriff of Samar. PADILLA, J.: On 1 July 1946 the Vet. Bros. & Company, Inc. mortgaged to Jose S. Movido its rights, title, interest and participation "in a complete sawmill in barrio Mauo, Allen, Samar, with all its machineries, tools and equipment in good running condition" to secure the payment of a loan of P15,000 and interest at the rate of 12% per annum obtained by the former from the latter (Exhibits A; 1-B, Sabarre; 1-B, RFC). On 28 February 1947 the chattel mortgage was registered in the Office of the Registrar of Deeds in and for the province of Samar (Exhibit A-1). On 28 July 1948 Jose S. Movido brought an action against Vet. Bros. & Company, Inc. in the Court of First Instance of Leyte to recover the sum of P13,494.35 with the interest at the rate of 12% per annum from 1 July 1948 until the principal is fully paid and P2,000 by way of damages and expenses of litigation (civil No. 441; Exhibits 1; Exhibits 1-A, Sabarre; 1-A, RFC). On 7 February 1949 the parties thereto, assisted by their respective counsel, entered into and submitted to the Court a compromise agreement terminating their dispute and renouncing their respective claims for damages and for any other claim in connection with the subject matter of the case which was approved and the court rendered judgment in accordance therewith (Exhibits 1-C, Sabarre; 1-C, RFC; 1-D, Sabarre; 1-D, RFC). On 3 March 1949, by an instrument duly executed, Vet Bros. & Company, Inc. and the spouses Simeon G. Toribio and Maximiana Escobar de Toribio mortgaged the real estate and chattels therein enumerated and described in favor of the Rehabilitation finance Corporation to secure the payment of a loan of P46,000 (Exhibit 8, RFC), and on 17 May 1949 on "addendum to chattel mortgage" describing the machinery and logging equipment purchased out of the proceeds of the loan was duly executed by the mortgagors (Exhibit 9, RFC). On 4 March 1949 and 18 May 1949 the chattel mortgages were registered in the registry of deeds for the province of Samar (Exhibit 9, RFC). On 14 April 1953, upon petition of the Rehabilitation Finance Corporation, the provincial sheriff of Samar advertized a public auction sale to be held on 14 May 1953 from (9:00 o'clock in the morning to 4:00 o'clock in the afternoon at the municipal building of Allen, Samar, under the provisions of Act No. 3135, as amended by Act No. 4118, of the chattels enumerated and described in Exhibits 8, RFC and 9, RFC "to apply the proceeds of the sale to the payment of the amount of P31,165.12 computed as of January 20, 1953, including interest thereon up to the date of the sale, plus P3,451.59 thereafter, plus 10% of said amount as attorney's fees, and plus the sheriff fees and incidental expenses:" (Exhibit G-1). On 24 April 1953 Jose S. Movido filed with the Sheriff a third party claim on the chattels advertised for

sale at public auction asserting a prior and superior right in them because of his chattel mortgage recorded before that of the Rehabilitation Finance Corporation and by virtue of a judgment in his favor rendered by the Court of First Instance of Leyte in civil case No. 441 (Exhibit B). Despite such claim the Sheriff proceeded to carry out the sale and on 11 June 1953, after the sale had been successively postponed to 14 May and 28 May, sold the chattels, except those expressly excluded from the public auction sale, to the successful bidders. The proceeds of the sale in the amount of P10,794 was turned over to the Rehabilitation Finance Corporation (Exhibit C). On 26 June 1953, or 15 days after the auction sale, a writ of execution was issued in civil case No. 441 (Exhibits 1-F, Sabarre and 1-F, RFC). On 1 March 1955 Jose S. Movido brought in the Court of First Instance of Leyte an action against the Rehabilitation Finance Corporation and the Provincial Sheriff of Samar charging the latter with having unlawfully, fraudulently and maliciously disregarded his third party claim on the chattels and sold them at public auction on 11 June 1953, upon the request and for the benefit of the former, thereby causing him actual damages in the sum of P5,000 in addition to the expense of P2,000 for attorney's fee. He prayed that the Rehabilitation Finance Corporation be ordered to indemnify him for actual and moral damages and for attorney's fee; and the Sheriff to indemnify him for any and whatever liability he had incurred by reason of the extrajudicial foreclosure of the mortgage made at the instance and for the benefit of his co-defendants, and both, to pay costs (Civil No. 1896). The defendants filed separate answers. The Rehabilitation Finance Corporation set up the defense that by filing a complaint against the Vet Bros & Company, Inc. in the Court of First Instance of Leyte (civil No. 441), to recover the sum due from it, the plaintiff waived his right to foreclose the mortgage and for that reason abandoned his mortgage lien on the chattels; that the plaintiff's third party claim was not valid and sufficient in form and substance to stop and frustrate the public auction sale in question, it being a mere claim for preference in the distribution of the proceeds of the public auction sale; that the alleged chattel mortgage of the plaintiff was invalid and did not bind the chattels; that its mortgage lien in the real estate and chattels was prior, preferred and superior to that of the plaintiff's; and that it had not done or caused to be done any actionable wrong or harm to the plaintiff to make it liable for damages claimed to have been sustained by the plaintiff. It prayed that the complaint be dismissed with cost against the plaintiff and that he be ordered to pay it the sum of P2,000 as damages suffered because of the bringing of an unfounded suit. The Sheriff answered that he did not require the Rehabilitation Finance Corporation to file an indemnity bond and proceeded with the auction sale, because the plaintiff's third party claim on the chattels to be sold did not show sufficient basis for the plaintiff's claim that his lien on the chattels was prior, preferred and superior to that of the Rehabilitation Finance Corporation, and because upon the strength of the judgment rendered by the Court of First Instance of Leyte in civil case No. 441 no writ of execution was presented by him, and prayed that the complaint be dismissed with costs against the plaintiff; that he be ordered to pay him a reasonable amount for moral and exemplary damages; and that he be granted other just and equitable relief. The plaintiff replied to the answer of the Rehabilitation Finance Corporation and controverted its counterclaim.

After trial, on 8 September 1955 the Court rendered judgment holding that the compromise agreement entered into by and between the parties in civil case No. 441 and the judgment rendered by the Court pursuant thereto novated the plaintiff's credit secured by the chattel mortgage, and that when the Vet. Bros. Company, Inc. and the spouses Simeon G. Toribio and Maximiana Escobar de Toribio mortgaged to the Rehabilitation Finance Corporation the same chattels and other properties enumerated in Exhibits 8, RFC and 9, RFC, the plaintiff's lien on the chattels no longer existed; and dismissing the plaintiff's complaint with costs against him but without awarding damages to the defendants. His motion and amended motion for new trial and motion for reconsideration were denied. Hence this appeal originally to the Court of Appeals but certified to this Court on the ground that only questions of law are involved. A mortgage who sues and obtains a personal judgment against a mortgagor upon his credit waives thereby his right to enforce the mortgage securing it.1 By instituting civil case No. 441 in the Court of First Instance of Leyte to recover the sum of P13,494.35 from the Vet. Bros & Company, Inc., on 28 July 1948 and by securing a judgment in his favor upon the compromise agreement entered into by and between him and the defendant therein on 7 February 1949, the appellant abandoned his mortgage lien in the chattels in question. When on 3 March 1949 and on 17 May 1949, therefore, Vet. Bros & Company, Inc. and the spouses Simeon G. Toribio and Maximiana Escobar de Toribio mortgaged the chattels and other properties described in Exhibit 8, RFC 9, RFC to the appellee, the appellant had no longer any lien on the chattels. The rule in Tizon vs. Valdez, 48 Phil., 910 andMatienzo vs. San Jose, G.R. No. 39510, 16 June 1934, relied upon by the appellants, has been abandoned inBachrach Motor Company vs. Icarañgal, supra. Moreover, the appellant secured a writ of execution of the judgment rendered in civil case No. 441 on 26 June 1953 only (Exhibits 1-F, Sabarre; 1-F, RFC), or fifteen days after the public auction sale had been carried out. The judgment appealed from is affirmed, with cost against the appellant. Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion and Endencia, JJ., concur.
BICOL SAVINGS & LOAN ASSOCIATION, petitioner, vs. JAIME GUINHAWA and THE HON. PRESIDING JUDGE OF THE COURT OF FIRST INSTANCE OF CAMARINES SUR (10th JUDICIAL DISTRICT), BRANCH III, respondents. Contreras & Associates for petitioner. Tirso P. Mariano for private respondent.

PARAS, J.: Sometime on June 19, 1980, Victorio Depositario together with private respondent Jaime Guinhawa, acting as solidary co-maker, took a loan from petitioner Bicol Savings and Loan Association (BISLA for brevity) in the sum of P10,622.00, payable at P535.45 every 19th day of each month beginning July 1980 until maturity on June 19, 1982.

To secure the payment of the foregoing loan obligation, the principal borrower Victorio Depositario put up as security a chattel mortgage which was a Yamaha Motorcycle. Said motorcycle was eventually foreclosed by reason of the failure of Depositario and private respondent Guinhawa to pay the loan. As a result of the foreclosure, there was a deficiency in the amount of P5,158.06 as of July 31, 1981, where BISLA made a demand to pay the same. Thus, on August 6, 1981, petitioner BISLA (plaintiff therein) filed in the City Court of Naga, Branch II, a complaint for the recovery of a sum of money constituting the deficiency after foreclosure of the chattel mortgage put up by the principal borrower Depositario against the latter and his solidary comaker Guinhawa (herein private respondent) as defendants. Eventually, a stipulation of facts was entered into between BISLA and Guinhawa. They agreed to drop Depositario, as "his whereabouts being unknown now and he could not be served with summons" (p. 8, Rollo). Said stipulation of facts reads: 1) That defendant admits that after the foreclosure of the chattel mortgage executed by defendant Victorio Depositario, the principal debtor, as security for the payment of the loan, there is left a deficiency in the sum of P5,158.06 as of July 31, 1981, aside from the agreed interest thereon at 17% per annum compounded monthly; 2) That defendant is only a co-maker in the aforementioned loan but that, however, under the promissory note he jointly and severally promised with Victorio Depositario to pay plaintiff the said loan; that he is not a party to the chattel mortgage; and that the same was foreclosed without notice to him; 3) That both parties agree that the only issue to be resolved is whether defendant herein is liable to pay plaintiff the sums mentioned in paragraph 1 hereof; 4) That in view thereof, both parties agree to submit this case for decision based on the foregoing stipulation of facts; 5) That should decision be in favor of the plaintiff the defendant agrees to pay plaintiff not only the sums mentioned in paragraph I hereof but an additional amount equivalent to 10% of the aggregate amount due the plaintiff as attorney's fees and to pay the costs. Should the decision, however, be in favor of the defendant, plaintiff will pay the defendant the same amount of attorney's fees that defendant would have paid if decision is in favor of the plaintiff, and for the latter also to pay the costs. (pp. 3-4, Petition; pp. 8-9, Rollo) On December 4, 1981, the City Court rendered a decision 1 in favor of the petitioner, ruling in part: It is undisputed that the obligation of both defendants under the promissory note they executed in favor of the plaintiff is joint and several. That after the plaintiff foreclosed the chattel mortgage executed by defendant Victorio Depositario there remains a deficiency which is now the subject of this case. The right of the plaintiff to claim for the deficiency resulting between the price obtained in the sale of the property and the outstanding obligation at the time of the foreclosure is clear. (Philippine Bank of Commerce vs. De Vera, 6 SCRA 1026). Under Art. 1216 of the Civil Code, as quoted by the plaintiff in its memorandum, plaintiff has the right to proceed against any of the herein defendants who are solidary debtors or to both of them simultaneously. Said article further provides that a demand made against anyone of the solidary debtors shall not be an obstacle to those which may later on be directed against the others,

so long as the debt has not been fully paid or collected. In the present case, the plaintiff first foreclosed the mortgage put up by defendant Depositario but since the debt was not fully paid out of the proceeds of the sale it is now proceeding against any or both of the defendants herein. Article 1216 of the Civil Code gives the plaintiff in this case the option who among the defendants as solidary debtors, should be sued, the debt not being fully paid (PNB vs. Concepcion Mining Co., Inc., 5 SCRA 745). (pp. 35-36, Rollo) On appeal to the respondent Court of First Instance of Camarines Sur, Branch III, it rendered a decision reversing the said lower court's decision, ruling in part: It is true that the assumed obligation by a co-maker is solidary in nature with respect to the principal debtor but when the creditor chose to foreclose the mortgage, it simply means that the creditor chose to collect from Depositario, one of the solidary debtors and not the appellant. If there is any deficiency in payment, how can the herein appellant be made to assume the deficiency since the appellee creditor choose to foreclose and collect through the mortgage of which the appellant in the first place was not a party to the said mortgage• It is not disputed that a creditor can exact or collect payment of the indebtedness from any of the solidary debtors in a promissory note of which a co-maker assumes a character of one, the appellant herein can not evade or ignore the collection if the creditor sued upon the promissory note. But what did the creditor do? Instead of proceeding upon the promissory note of which the appealing co-maker stands as solidary debtor, the appellee chose the chattel mortgage and collect therefrom of which mortgage the appellant was never a party and having a deficiency therein, the creditor, the herein appellee, would like to collect from the promissory note. In a case of Identical setting, it was held that foreclosure of mortgage precludes any further action against the debtor and his guarantor (Pascual vs. Universal Motors, 61 SCRA 121). (p. 71, Rollo) Hence, this petition. The petition is impressed with merit. In a number of cases, We already held that if in an extrajudicial foreclosure of a chattel mortgage a deficiency exists, an independent civil action may be instituted for the recovery of said deficiency. If the mortgagee has foreclosed the mortgage judicially, he may ask for the execution of the judgment against any other property of the mortgagor for the payment of the balance. To deny to the mortgagee the right to maintain an action to recover the deficiency after foreclosure of the chattel mortgage would be to overlook the fact that the chattel mortgage is only given as a security and not as payment for the debt in case of failure of payment. (Bank of the Philippine Islands vn Olutanga Lumber Co., 47 Phil. 20; Manila Trading & Supply Co. v. Tamaraw Plantation Co., 47 Phil. 513.) The case of Pascual, as cited by the respondent court, is not applicable in this instant case because it was a case of sale on installment, where after foreclosure of the units the plaintiff guarantors who had likewise executed a real estate mortgage of up to P50,000, cannot be held answerable anymore for the deficiency. The conclusion therefore reached by the lower court was erroneous because in the case at bar, the obligation contracted by the principal debtor (Depositario) with a solidary comaker (private respondent herein), was one of loan secured by a chattel mortgage, executed by the principal debtor, and not a sale where the price is payable on installments and where a chattel

mortgage on the thing sold was constituted by the buyer and, further, the obligation to pay the installments having been guaranteed by another. Private respondent Guinhawa contends that he was not a party to the chattel mortgage executed by Depositario but merely a co-maker on the promissory note executed by the latter and therefore cannot be held liable for the deficiency. Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected. And therefore, where the private respondent binds himself solidarily with the principal debtor to pay the latter's debt, he may be proceeded against by the principal debtor. Private respondent as solidary co- maker is also a surety (Art. 2047) and that under the law, the bringing of an action against the principal debtor to enforce the payment of the obligation is not inconsistent with, and does not preclude, the bringing of another action to compel the surety to fulfill his obligation under the agreement. Article 2080 2 of the Civil Code which is relied on by private respondent has no application to the case at bar since his liability here is as a surety not as a guarantor. WHEREFORE, the appealed decision dated October 12, 1982 is hereby REVERSED and SET ASIDE and the decision of the City Court dated December 4, 1981 is hereby REINSTATED. Costs against the private respondent. SO ORDERED.

LORENZO PASCUAL and LEONILA TORRES, plaintiffs-appellees, vs. UNIVERSAL MOTORS CORPORATION, defendant-appellant.

Cesar C. Peralejo for plaintiffs-appellees.

Francisco Carreon & Renato E. Tañada for defendant-appellant.

MAKALINTAL, C.J.:p

In the lower court the parties entered into the following stipulation of facts:

1. That the plaintiffs executed the real estate mortgage subject matter of this complaint on December 14, 1960 to secure the payment of the indebtedness of PDP Transit, Inc. for the purchase of five (5) units of Mercedez Benz trucks under invoices Nos. 2836, 2837, 2838, 2839 and 2840 with a total purchase price or principal obligation of P152,506.50 but plaintiffs' guarantee is not to exceed P50,000.00 which is the value of the mortgage.

2. That the principal obligation of P152,506.50 was to bear interest at 1% a month from December 14, 1960.

3. That as of April 5, 1961 with reference to the two units mentioned above and as of May 22, 1961 with reference to the three units, PDP Transit, Inc., plaintiffs' principal, had paid to the defendant Universal Motors Corporation the sum of P92,964.91, thus leaving a balance of P68,641.69 including interest due as of February 8, 1965.

4. That the aforementioned obligation guaranteed by the plaintiffs under the Real Estate Mortgage, subject of this action, is further secured by separate deeds of chattel mortgages on the Mercedez Benz units covered by the aforementioned invoices in favor of the defendant Universal Motors Corporation.

5. That on March 19, 1965, the defendant Universal Motors Corporation filed a complaint against PDP Transit, Inc. before, the Court of First Instance of Manila docketed as Civil Case No. 60201 with a petition for a writ of Replevin, to collect the balance due under the Chattel Mortgages and to repossess all the units to sold to plaintiffs' principal PDP Transit, Inc. including the five (5) units guaranteed under the subject Real (Estate) Mortgage.

In addition to the foregoing the Universal Motors Corporation admitted during the hearing that in its suit (C.C. No. 60201) against the PDP Transit, Inc. it was able to repossess all the units sold to the latter, including the five (5) units guaranteed by the subject real estate mortgage, and to foreclose all the chattel mortgages constituted thereon, resulting in the sale of the trucks at public auction.

With the foregoing background, the spouses Lorenzo Pascual and Leonila Torres, the real estate mortgagors, filed an action in the Court of First Instance of Quezon City (Civil Case No. 8189) for the

cancellation of the mortgage they constituted on two (2) parcels of land 1 in favor of the Universal Motors Corporation to guarantee the obligation of PDP Transit, Inc. to the extent of P50,000. The court rendered judgment for the plaintiffs, ordered the cancellation of the mortgage, and directed the defendant Universal Motors Corporation to pay attorney's fees to the plaintiffs in the sum of P500.00. Unsatisfied with the decision, defendant interposed the present appeal.

In rendering judgment for the plaintiffs the lower court said in part: "... there does not seem to be any doubt that Art. 1484 2 of the New Civil Code may be applied in relation to a chattel mortgage constituted upon personal property on the installment basis (as in the present case) precluding the mortgagee to maintain any further action against the debtor for the purpose of recovering whatever balance of the debt secured, and even adding that any agreement to the contrary shall be null and void."

The appellant now disputes the applicability of Article 1484 of the Civil Code to the case at bar on the ground that there is no evidence on record that the purchase by PDP Transit, Inc. of the five (5) trucks, the payment of the price of which was partly guaranteed by the real estate mortgage in question, was payable in installments and that the purchaser had failed to pay two or more installments. The appellant also contends that in any event what article 1484 prohibits is for the vendor to recover from the purchaser the unpaid balance of the price after he has foreclosed the chattel mortgage on the thing sold, but not a recourse against the security put up by a third party.

Both arguments are without merit. The first involves an issue of fact: whether or not the sale was one on installments; and on this issue the lower court found that it was, and that there was failure to pay two or more installments. This finding is not subject to review by this Court. The appellant's bare allegation to the contrary cannot be considered at this stage of the case.

The next contention is that what article 1484 withholds from the vendor is the right to recover any deficiency from the purchaser after the foreclosure of the chattel mortgage and not a recourse to the additional security put up by a third party to guarantee the purchaser's performance of his obligation. A similar argument has been answered by this Court in this wise: "(T)o sustain appellant's argument is to overlook the fact that if the guarantor should be compelled to pay the balance of the purchase price, the guarantor will in turn be entitled to recover what she has paid from the debtor vendee (Art. 2066, Civil Code); so that ultimately, it will be the vendee who will be made to bear the payment of the balance of the price, despite the earlier foreclosure of the chattel mortgage given by him. Thus, the protection given by Article 1484 would be indirectly subverted, and public policy overturned." (Cruz vs. Filipinas Investment & Finance Corporation, L-24772, May 27, 1968; 23 SCRA 791).

The decision appealed from is affirmed, with costs against the defendant-appellant.

PLEDGE
EULOGIO BETITA, plaintiff-appellee, vs. SIMEON GANZON, ALEJO DE LA FLOR, and CLEMENTE PEDRENA, defendants-appellants. Padilla, Trenas Varela and Ybiernas for appellee. OSTRAND, J.: This action is brought to recover the possession of four carabaos with damages in the sum of P200. Briefly stated, the facts are as follows: On May 15, 1924, the defendant Alejo de la Flor recovered a judgment against Tiburcia Buhayan for the sum of P140 with costs. Under this judgment the defendant Ganzon, as sheriff levied execution on the carabaos in question which were found in the possession of one Simon Jacinto but registered in the name of Tiburcia Buhayan. The plaintiff herein, Eulogio Betita, presented a third party claim (terceria) alleging that the carabaos had been mortgaged to him and as evidence thereof presented a document dated May 6, 1924, but the sheriff proceeded with the sale of the animals at public auction where they were purchased by the defendant Clemente Perdena for the sum of P200, and this action was thereupon brought. The document upon which the plaintiff bases his cause of action is in the Visayan dialect and in translation reads as follows: I, Tiburcia Buhatan, of age, widow and resident of the sitio of Jimamanay, municipality of Balasan, Province of Iloilo, Philippine Islands, do hereby execute this document extrajudicially and state that I am indebted to Mr. Eulogio Betita, resident of the municipality of Estancia, Province of Iloilo, Philippine Islands, in the sum of P470, Philippine currency, and was so indebted since the year 1922, and as a security to my creditor I hereby offer four head of carabaos belonging to me exclusively (three females and one male), the certificates of registration of said animals being Nos. 2832851, 4670520, 4670521 and 4670522, which I delivered to said Mr. Eulogio Betita. I hereby promise to pay said debt in the coming month of February, 1925, in case I will not be able to pay, Mr. Eulogio Betita may dispose of the carabaos given as security for said debt. This document is a new one or a renewal of our former document because the first carabaos mortgaged died and were substituted for by the newly branded ones." In testimony whereof and not knowing how to sign my name, I caused my name to be written and marked same with my right thumb. Estancia, May 6, 1924. (Marked). TIBURCIA BUHAYAN and Magalona for appellants.

Signed in the presence of: MIGUEL MERCURIO TIRZO ZEPEDA The court below held that inasmuch as this document was prior in date to the judgment under which the execution was levied, it was a preferred credit and judgment was rendered in favor of the plaintiff for the possession of the carabaos, without damages and without costs. From this judgment the defendants appeal. The judgment must be reversed unless the document above quoted can be considered either a chattel mortgage or else a pledge. That it is not a sufficient chattel mortgage is evident; it does not meet the requirements of section 5 of the Chattel Mortgage Law (Act No. 1508), has not been recorded and, considered as a chattel mortgage, is consequently of no effect as against third parties (Williams vs. McMicking, 17 Phil., 408; Giberson vs. A. N. Jureidini Bros., 44 Phi., 216; Benedicto de Tarrosa vs. F. M. Yap Tico & Co. and Provincial Sheriff of Occidental Negros, 46 Phil., 753). Neither did the document constitute a sufficient pledge of the property valid against third parties. Article 1865 of the Civil Code provides that "no pledge shall be effective as against third parties unless evidence of its date appears in a public instrument." The document in question is not public, but it is suggested that its filing with the sheriff in connection with the terceria gave in the effect of a public instrument and served to fix the date of the pledge, and that it therefore fulfills the requirements of article 1865. Assuming, without conceding, that the filing of the document with the sheriff had that effect, it seems nevertheless obvious that the pledge only became effective as against the plaintiff in execution from the date of the filing and did not rise superior to the execution attachment previously levied (see Civil Code, article 1227). Manresa, in commenting on article 1865, says: ART. 1865. A pledge will not be valid against a third party if the certainty of the date is not expressed in a public instrument. This article, the precept of which did not exist in our old law, answers the necessity for not disturbing the relationship or the status of the ownership of things with hidden or simulated contracts of pledge, in the same way and for the identical reasons that were taken into account by the mortgage law in order to suppress the implied and legal mortgages which produce so much instability in real property. Considering the effects of a contract of pledge, it is easily understood that, without this warranty demanded by law, the case may happen wherein a debtor in bad faith from the moment that he sees his movable property in danger of execution may attempt to withdraw the same from the action of justice and the reach of his creditors by simulating, through criminal confabulations, anterior and fraudulent alterations in his possession by means of feigned contracts of this nature; and, with the object of avoiding or preventing such abuses, almost all the foreign writers advise that, for the effectiveness of the pledge, it be demanded as a precise condition that in every case the contract be executed in a public writing, for, otherwise, the determination of its date will be rendered difficult and its proof more so, even in cases in which it is executed before witnesses, due to the difficulty to be encountered in seeking those before whom it was executed.

Our code has not gone so far, for it does not demand in express terms that in all cases the pledge be constituted or formalized in a public writing, nor even in private document, but only that the certainty of the date be expressed in the first of the said class of instruments in order that it may be valid against a third party; and, in default of any express provision of law, in the cases where no agreement requiring the execution in a public writing exists, it should be subjected to the general rule, and especially to that established in the last paragraph of article 1280, according to which all contracts not included in the foregoing cases of the said article should be made in writing even though it be private, whenever the amount of the presentation of one or of the two contracting parties exceeds 1,500 pesetas. (Vol. 12, ed., p. 421.) If the mere filing of a private document with the sheriff after the levy of execution can create a lien of pledge superior to the attachment, the purpose of the provisions of article 1865 as explained by Manresa clearly be defeated. Such could not have been the intention of the authors of the Code. (See also Ocejo, Perez & Co. vs.International Banking Corporation, 37 Phil., 631 and Tec Bi & Co. Chartered Bank of India, Australia & China, 41 Phil., 596.) The alleged pledge is also ineffective for another reason, namely, that the plaintiff pledgee never had actual possession of the property within the meaning of article 1863 of the Civil Code. But it is argued that at the time of the levy the animals in question were in the possession of one Simon Jacinto; that Jacinto was the plaintiff's tenant; and that the tenant's possession was the possession of his landlord. It appears, however, from the evidence that though not legally married, Simon Jacinto and Tiburcia Buhayan were living together as husband and wife and had been so living for many years. Testifying as a witness for the plaintiff, Jacinto on cross-examination made the following statements: Q. But the caraballas in question had never been in possession of Eulogio Betita? — A. The three young ones did not get into his hands. Q. And the others? — A. Sometimes they were in the hands of Betita and at other times in the hands of Buhayan. Q. Those are the caraballas which formerly were mortgaged by Buhayan to Betita, isn't that so? — A. Yes, sir. Q. And the four carabaos now in question had never been in possession of Betita, but were in your possession? — A. When I worked they were in my hands. Q. And before you worked, these caraballas were in possession of your mistress, Tiburcia Buhayan? — A. Yes, sir. Q. Do you mean to say that from the possession of Tiburcia Buhayan the animals passed immediately into your possession? — A. Yes sir. This testimony is substantially in accord with that of the defendant sheriff to the effect that he found the animals at the place where Tiburcia Buhayan was living. Article 1863 of the Civil Code reads as follows:

In addition to the requisites mentioned in article 1857, it shall be necessary, in order to constitute the contract of pledge, that the pledge be placed in the possession of the creditor or of a third person appointed by common consent. In his commentary on this article Manresa says: This requisite is most essential and is characteristic of a pledge without which the contract cannot be regarded as entered into or completed, because, precisely, in this delivery lies the security of the pledge. Therefore, in order that the contract of pledge may be complete, it is indispensable that the aforesaid delivery take place . . . . (P. 411, supra.) It is, of course, evident that the delivery of possession referred to in article 1863 implies a change in the actual possession of the property pledged and that a mere symbolic delivery is not sufficient. In the present case the animals in question were in the possession of Tiburcia Buhayan and Simon Jacinto before the alleged pledge was entered into and apparently remained with them until the execution was levied, and there was no actual delivery of possession to the plaintiff himself. There was therefore in reality no change in possession. It may further be noted that the alleged relation of landlord and tenant between the plaintiff and Simon Jacinto is somewhat obscure and it is, perhaps, doubtful if any tenancy, properly speaking, existed. The land cultivated by Jacinto was not the property of the plaintiff, but it appears that a part of the products was to be applied towards the payment of Tiburcia Buhayan's debt to the plaintiff. Jacinto states that he was not a tenant until after the pledge was made. From what has been said it follows that the judgment appealed from must be reversed and it is ordered and adjudged that the plaintiff take nothing by his action. Without costs. So ordered. DIOSDADO YULIONGSIU, plaintiff-appellant, vs. PHILIPPINE NATIONAL BANK (Cebu Branch), defendant-appellee. Vicente Jaime, Regino Hermosisima & E. Lumontad, Sr. for Tomas Besa, R. B. de los Reyes and C. E. Medina for defendant-appellee. BENGZON, J.P., J.: Plaintiff-appellant Diosdado Yuliongsiu 1 was the owner of two (2) vessels, namely: The M/S Surigao, valued at P109,925.78 and the M/S Don Dino, valued at P63,000.00, and operated the FS203, valued at P210,672.24, which was purchased by him from the Philippine Shipping Commission, by installment or on account. As of January or February, 1943, plaintiff had paid to the Philippine Shipping Commission only the sum of P76,500 and the balance of the purchase price was payable at P50,000 a year, due on or before the end of the current year. 2 On June 30, 1947, plaintiff obtained a loan of P50,000 from the defendant Philippine National Bank, Cebu Branch. To guarantee its payment, plaintiff pledged the M/S Surigao, M/S Don Dino and its equity in the FS-203 to the defendant bank, as evidenced by the pledge contract, Exhibit "A" & "1Bank", executed on the same day and duly registered with the office of the Collector of Customs for the Port of Cebu. 3 Subsequently, plaintiff effected partial payment of the loan in the sum of P20,000. The remaining balance was renewed by the execution of two (2) promissory notes in the bank's favor. plaintiff-appellant.

The first note, dated December 18, 1947, for P20,000, was due on April 16, 1948 while the second, dated February 26, 1948, for P10,000, was due on June 25, 1948. These two notes were never paid at all by plaintiff on their respective due dates. 4 On April 6, 1948, the bank filed criminal charges against plaintiff and two other accused for estafa thru falsification of commercial documents, because plaintiff had, as last indorsee, deposited with defendant bank, from March 11 to March 31, 1948, seven Bank of the Philippine Islands checks totalling P184,000. The drawer thereof — one of the co-accused — had no funds in the drawee bank. However, in connivance with one employee of defendant bank, plaintiff was able to withdraw the amount credited to him before the discovery of the defraudation on April 2, 1948. Plaintiff and his co-accused were convicted by the trial court and sentenced to indemnify the defendant bank in the sum of P184,000. On appeal, the conviction was affirmed by the Court of Appeals on October 31, 1950. The corresponding writ of execution issued to implement the order for indemnification was returned unsatisfied as plaintiff was totally insolvent. 5 Meanwhile, together with the institution of the criminal action, defendant bank took physical possession of three pledged vessels while they were at the Port of Cebu, and on April 29, 1948, after the first note fell due and was not paid, the Cebu Branch Manager of defendant bank, acting as attorney-in-fact of plaintiff pursuant to the terms of the pledge contract, executed a document of sale, Exhibit "4", transferring the two pledged vessels and plaintiff's equity in FS-203, to defendant bank for P30,042.72. 6 The FS-203 was subsequently surrendered by the defendant bank to the Philippine Shipping Commission which rescinded the sale to plaintiff on September 8, 1948, for failure to pay the remaining installments on the purchase price thereof. 7 The other two boats, the M/S Surigao and the M/S Don Dino were sold by defendant bank to third parties on March 15, 1951. On July 19, 1948, plaintiff commenced action in the Court of First Instance of Cebu to recover the three vessels or their value and damages from defendant bank. The latter filed its answer, with a counterclaim for P202,000 plus P5,000 damages. After issues were joined, a pretrial was held resulting in a partial stipulation of facts dated October 2, 1958, reciting most of the facts abovenarrated. During the course of the trial, defendant amended its answer reducing its claim from P202,000 to P8,846.01, 8 but increasing its alleged damages to P35,000. The lower court rendered its decision on February 13, 1960 ruling: (a) that the bank's taking of physical possession of the vessels on April 6, 1948 was justified by the pledge contract, Exhibit "A" & "1-Bank" and the law; (b) that the private sale of the pledged vessels by defendant bank to itself without notice to the plaintiff-pledgor as stipulated in the pledge contract was likewise valid; and (c) that the defendant bank should pay to plaintiff the sums of P1,153.99 and P8,000, as his remaining account balance, or set-off these sums against the indemnity which plaintiff was ordered to pay to it in the criminal cases. When his motion for reconsideration and new trial was denied, plaintiff brought the appeal to Us, the amount involved being more than P200,000.00. In support of the first assignment of error, plaintiff-appellant would have this Court hold that Exhibit "A" & "1-Bank" is a chattel mortgage contract so that the creditor defendant could not take possession of the chattels object thereof until after there has been default. The submission is without merit. The parties stipulated as a fact that Exhibit "A" & "1-Bank" is a pledge contract — 3. That a credit line of P50,000.00 was extended to the plaintiff by the defendant Bank, and the plaintiff obtained and received from the said Bank the sum of P50,000.00, and in

order to guarantee the payment of this loan, the pledge contract, Exhibit "A" & Exhibit "1Bank", was executed and duly registered with the Office of the Collector of Customs for the Port of Cebu on the date appearing therein; (Emphasis supplied)
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Necessarily, this judicial admission binds the plaintiff. Without any showing that this was made thru palpable mistake, no amount of rationalization can offset it. 9 The defendant bank as pledgee was therefore entitled to the actual possession of the vessels. While it is true that plaintiff continued operating the vessels after the pledge contract was entered into, his possession was expressly made "subject to the order of the pledgee." 10 The provision of Art. 2110 of the present Civil Code 11being new — cannot apply to the pledge contract here which was entered into on June 30, 1947. On the other hand, there is an authority supporting the proposition that the pledgee can temporarily entrust the physical possession of the chattels pledged to the pledgor without invalidating the pledge. In such a case, the pledgor is regarded as holding the pledged property merely as trustee for the pledgee. 12 Plaintiff-appellant would also urge Us to rule that constructive delivery is insufficient to make pledge effective. He points to Betita v. Ganzon, 49 Phil. 87 which ruled that there has to be actual delivery of the chattels pledged. But then there is also Banco Español-Filipino v. Peterson, 7 Phil. 409 ruling that symbolic delivery would suffice. An examination of the peculiar nature of the things pledged in the two cases will readily dispel the apparent contradiction between the two rulings. In Betita v. Ganzon, the objects pledged — carabaos — were easily capable of actual, manual delivery unto the pledgee. In Banco Español-Filipino v. Peterson, the objects pledged — goods contained in a warehouse — were hardly capable of actual, manual delivery in the sense that it was impractical as a whole for the particular transaction and would have been an unreasonable requirement. Thus, for purposes of showing the transfer of control to the pledgee, delivery to him of the keys to the warehouse sufficed. In other words, the type of delivery will depend upon the nature and the peculiar circumstances of each case. The parties here agreed that the vessels be delivered by the "pledgor to the pledgor who shall hold said property subject to the order of the pledgee." Considering the circumstances of this case and the nature of the objects pledged, i.e., vessels used in maritime business, such delivery is sufficient. Since the defendant bank was, pursuant to the terms of pledge contract, in full control of the vessels thru the plaintiff, the former could take actual possession at any time during the life of the pledge to make more effective its security. Its taking of the vessels therefore on April 6, 1948, was not unlawful. Nor was it unjustified considering that plaintiff had just defrauded the defendant bank in the huge sum of P184,000. The stand We have taken is not without precedent. The Supreme Court of Spain, in a similar case involving Art. 1863 of the old Civil Code, 13 has ruled: 14 Que si bien la naturaleza del contrato de prenda consiste en pasar las cosas a poder del acreedor o de un tercero y no quedar en la del deudor, como ha sucedido en el caso de autos, es lo cierto que todas las partes interesadas, o sean acreedor, deudor y Sociedad, convinieron que continuaran los coches en poder del deudor para no suspender el trafico, y el derecho de no uso de la prenda pertenence al deudor, y el de dejar la cosa bajo su responsabilidad al acreedor, y ambos convinieron por creerlo util para las partes contratantes, y estas no reclaman perjuicios no se infringio, entre otros este articulo. In the second assignment of error imputed to the lower court plaintiff-appellant attacks the validity of the private sale of the pledged vessels in favor of the defendant bank itself. It is contended first, that the cases holding that the statutory requirements as to public sales with prior

notice in connection with foreclosure proceedings are waivable, are no longer authoritative in view of the passage of Act 3135, as amended; second, that the charter of defendant bank does not allow it to buy the property object of foreclosure in case of private sales; and third, that the price obtained at the sale is unconscionable. There is no merit in the claims. The rulings in Philippine National Bank v. De Poli, 44 Phil. 763 and El Hogar Filipino v. Paredes, 45 Phil. 178 are still authoritative despite the passage of Act 3135. This law refers only, and is limited, to foreclosure of real estate mortgages. 15 So, whatever formalities there are in Act 3135 do not apply to pledge. Regarding the bank's authority to be the purchaser in the foreclosure sale, Sec. 33 of Act 2612, as amended by Acts 2747 and 2938 only states that if the sale is public, the bank could purchase the whole or part of the property sold " free from any right of redemption on the part of the mortgagor or pledgor." This even argues against plaintiff's case since the import thereof is this if the sale were private and the bank became the purchaser, the mortgagor or pledgor could redeem the property. Hence, plaintiff could have recovered the vessels by exercising this right of redemption. He is the only one to blame for not doing so. Regarding the third contention, on the assumption that the purchase price was unconscionable, plaintiff's remedy was to have set aside the sale. He did not avail of this. Moreover, as pointed out by the lower court, plaintiff had at the time an obligation to return the P184,000 fraudulently taken by him from defendant bank. The last assignment of error has to do with the damages allegedly suffered by plaintiffappellant by virtue of the taking of the vessels. But in view of the results reached above, there is no more need to discuss the same. On the whole, We cannot say the lower court erred in disposing of the case as it did. Plaintiffappellant was not all-too-innocent as he would have Us believe. He did defraud the defendant bank first. If the latter countered with the seizure and sale of the pledged vessels pursuant to the pledge contract, it was only to protect its interests after plaintiff had defaulted in the payment of the first promissory note. Plaintiff-appellant did not come to court with clean hands. WHEREFORE, the appealed judgment is, as it is hereby, affirmed. Costs against plaintiffappellant. So ordered.

CIRCE S. DURAN and ANTERO S. GASPAR, petitioners, vs. INTERMEDIATE APPELLATE COURT, ERLINDA B. MARCELO TIANGCO and RESTITUTO TIANGCO,respondents.

RELOVA, J.: The respondent then Court of Appeals rendered judgment, modifying the decision of the then Court of First Instance of Rizal, which reads as follows: (1) the complaint of the plaintiffs (herein petitioners) is hereby DISMISSED;

(2) the defendants-appellants spouses Erlinda B. Marcelo Tiangco and Restituto Tiangco (herein private respondents) are hereby declared the lawful owners of the two (2) parcels of land and all the improvements thereon including the 12-door apartment thereon described in the complaint, in the counterclaim, in the cross-claim, and in the Sheriff's Certificate of Sale; (3) the plaintiffs-appellants and the defendant-appellee Fe S. Duran are hereby ordered to deliver to (the Tiangcos) the two parcels of land and all the improvements thereon including the 12-door apartment thereon, subject matter of the complaint, counterclaim, and cross-claim, and in the Sheriff's Certificate of Sale; (4) the plaintiffs-appellants and the defendant-appellee Fe S. Duran are hereby ordered to pay solidarily to the Tiangcos the sum of Two Thousand Four Hundred Pesos (P2,400) a month from May 16, 1972 until delivery of possession of the properties in question to said Tiangco spouses, representing rentals collected by plaintiffs-appellants and defendant- appellee Fe S. Duran; (5) the plaintiffs-appellants and defendant-appellee Fe S. Duran are hereby ordered to pay solidarily to the spouses Tiangco the sum of Twenty Thousand Pesos (P20,000) as damages for attorney's fees, and the sum of Twenty-Five Thousand Pesos (P25,000) for moral damages, and the costs. (pp. 149-150, Rollo) The antecedent facts showed that petitioner Circe S. Duran owned two (2) parcels of land (Lots 5 and 6, Block A, Psd 32780) covered by Transfer Certificate of Title No. 1647 of the Register of Deeds of Caloocan City which she had purchased from the Moja Estate. She left the Philippines in June 1954 and returned in May 1966. On May 13, 1963, a Deed of Sale of the two lots mentioned above was made in favor of Circe's mother, Fe S. Duran who, on December 3, 1965, mortgaged the same property to private respondent Erlinda B. Marcelo-Tiangco. When petitioner Circe S. Duran came to know about the mortgage made by her mother, she wrote the Register of Deeds of Caloocan City informing the latter that she had not given her mother any authority to sell or mortgage any of her properties in the Philippines. Failing to get an answer from the registrar, she returned to the Philippines. Meanwhile, when her mother, Fe S. Duran, failed to redeem the mortgage properties, foreclosure proceedings were initiated by private respondent Erlinda B. Marcelo Tiangco and, ultimately, the sale by the sheriff and the issuance of Certificate of Sale in favor of the latter. Petitioner Circe S. Duran claims that the Deed of Sale in favor of her mother Fe S. Duran is a forgery, saying that at the time of its execution in 1963 she was in the United States. On the other hand, the adverse party alleges that the signatures of Circe S. Duran in the said Deed are genuine and, consequently, the mortgage made by Fe S. Duran in favor of private respondent is valid. With respect to the issue as to whether the signature of petitioner Circe S. Duran in the Deed of Sale is a forgery or not, respondent appellate court held the same to be genuine because there is the presumption of regularity in the case of a public document and "the fact that Circe has not been able to satisfactorily prove that she was in the United States at the time the deed was executed in 1963. Her return in 1966 does not prove she was not here also in 1963, and that she did not leave shortly after 1963. She should have presented her old passport, not her new one. But even if the signatures were a forgery, and the sale would be regarded as void, still it is Our opinion that the Deed of Mortgage is VALID, with respect to the mortgagees, the defendants-appellants. While it is true that under Art. 2085 of the Civil Code, it is essential that the mortgagor be the absolute owner of the property mortgaged, and while as between the daughter and the mother, it was the daughter who

still owned the lots, STILL insofar as innocent third persons are concerned the owner was already the mother (Fe S. Duran) inasmuch as she had already become the registered owner (Transfer Certificates of Title Nos. 2418 and 2419). The mortgagee had the right to rely upon what appeared in the certificate of title, and did not have to inquire further. If the rule were otherwise, the efficacy and conclusiveness of Torrens Certificate of Titles would be futile and nugatory. Thus the rule is simple: the fraudulent and forged document of sale may become the root of a valid title if the certificate has already been transferred from the name of the true owner to the name indicated by the forger (See De la Cruz v. Fable, 35 Phil. 144; Blondeau et al. v. Nano et al., 61 Phil. 625; Fule et al. v. Legare et al., 7 SCRA 351; see also Sec. 55 of Act No. 496, the Land Registration Act). The fact that at the time of the foreclosure sale proceedings (1970-72) the mortgagees may have already known of the plaintiffs' claim is immaterial. What is important is that at the time the mortgage was executed, the mortgagees in good faith actually believed Fe S. Duran to be the owner, as evidenced by the registration of the property in the name of said Fe S. Duran (pp. 146-147, Rollo)." In elevating the judgment of the respondent appellate court to Us for review, petitioners discussed questions of law which, in effect and substance, raised only one issue and that is whether private respondent Erlinda B. Marcelo-Tiangco was a buyer in good faith and for value. Guided by previous decisions of this Court, good faith consists in the possessor's belief that the person from whom he received the thing was the owner of the same and could convey his title (Arriola vs. Gomez dela Serna, 14 Phil. 627). Good faith, while it is always to be presumed in the absence of proof to the contrary, requires a well-founded belief that the person from whom title was received was himself the owner of the land, with the right to convey it (Santiago vs. Cruz, 19 Phil. 148). There is good faith where there is an honest intention to abstain from taking any unconscientious advantage from another (Fule vs. Legare, 7 SCRA 351). Otherwise stated, good faith is the opposite of fraud and it refers to the state of mind which is manifested by the acts of the individual concerned. In the case at bar, private respondents, in good faith relied on the certificate of title in the name of Fe S. Duran and as aptly stated by respondent appellate court "[e]ven on the supposition that the sale was void, the general rule that the direct result of a previous illegal contract cannot be valid (on the theory that the spring cannot rise higher than its source) cannot apply here for We are confronted with the functionings of the Torrens System of Registration. The doctrine to follow is simple enough: a fraudulent or forged document of sale may become the ROOT of a valid title if the certificate of title has already been transferred from the name of the true owner to the name of the forger or the name indicated by the forger." (p. 147, Rollo) Thus, where innocent third persons relying on the correctness of the certificate of title issued, acquire rights over the property, the court cannot disregard such rights and order the total cancellation of the certificate for that would impair public confidence in the certificate of title; otherwise everyone dealing with property registered under the torrens system would have to inquire in every instance as to whether the title had been regularly or irregularly issued by the court. Indeed, this is contrary to the evident purpose of the law. Every person dealing with registered land may safely rely on the correctness of the certificate of title issued therefor and the law will in no way oblige him to go behind the certificate to determine the condition of the property. Stated differently, an innocent purchaser for value relying on a torrens title issued is protected. A mortgagee has the right to rely on what appears in the certificate of title and, in the absence of anything to excite suspicion, he is under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on the face of said certificate. Likewise, We take note of the finding and observation of respondent appellate court in that petitioners were guilty of estoppel by laches "in not bringing the case to court within a reasonable period. Antero Gaspar, husband of Circe, was in the Philippines in 1964 to construct the apartment on the disputed lots. This was testified to by Circe herself (tsn., p. 41, Nov. 27, 1973). In the process of construction, specifically in the matter of obtaining a building permit, he could have discovered

that the deed of sale sought to be set aside had been executed on May 13, 1963 (the building permit needed an application by the apparent owner of the land, namely, Circe's mother, Fe S. Duran). And then again both plaintiffs could have intervened in the foreclosure suit but they did not. They kept silent until almost the last moment when they finally decided, shortly before the sheriff's sale, to file a third-party claim. Clearly, the plaintiffs can be faulted for their estoppel by laches." (p. 148, Rollo) IN VIEW OF THE FOREGOING, We find the petition without merit and hereby AFFIRMED in toto the decision of respondent appellate court promulgated on August 12, 1981. SO ORDERED. OCEJO, PEREZ & CO., plaintiffs-appellees, vs. THE INTERNATIONAL BANKING CORPORATION, defendant-appellant. FRANCISCO CHUA SECO, as assignee, intervener-appellant. Lawrence, Ross and Block for defendant Wolfson and Wolfson for intervener William A. Kincaid and Thomas L. Hartigan for plaintiff and appellee. FISHER, J.: On the 7th day of March, 1914, Chua Teng Chong of Manila, executed and delivered to the International Banking Corporation, hereinafter referred to as "the bank," a promissory note, payable one month after date, for the sum of P20,000. Attached to this note was another private document, signed by Chua Teng Chong, in which it was stated that he had deposited with the bank, as security for the said note, 5,000 piculs of sugar, which in said document were said to be stored in a warehouse situated at No 1008, Calle Toneleros, Binondo, Manila. It appears from the evidence, assuming that the sugar was in the warehouse on that date, that the bank did not take possession of it when the document was executed and delivered, and that Chua Teng Chong continued to retain the sugar in his possession and control. The bank made no effort to exercise any active ownership over said merchandise until the 16th of April, when it discovered that the amount of sugar stored in the said warehouse was much less than the 5,000 piculs mentioned in the contract. The agreement between the bank and Chua Teng Chong with respect to the alleged pledge of the sugar was never recorded in a public instrument. It does not appear from the evidence that the promissory note represents money delivered by the bank on the date of its execution, although it is stated therein that it was executed for value received. On the 24th day of March, 1914, the plaintiff partnership Ocejo, Perez and Co., entered into contract with Chua Teng Chong for the sale to him of a lot of sugar. It was agreed that delivery should be made in the month of April, the sugar to be weighed in the buyer's warehouse. It appears that this sugar was brought to Manila by a steamer in the month of April, and 5,000 piculs were delivered by plaintiff to Chua Teng Chong. The delivery was completed April 16, 1914, and the sugar was stored in the buyer's warehouse situated at No. 119, Muelle de la Industria. On April 17, 1914, plaintiff partnership presented, for collection, its account for the purchase price of the sugar, but the buyer refused to make payment, and put up to the present time the sellers have been unable to collect the purchase price of the merchandise in question. On the same date as that on which the 5,000 piculs of sugar were delivered into the warehouse on Muelle de la Industria, the bank sent an employee to inspect the sugar described in the pledge agreement, and which, as therein stated, should have been stored in the Calle Toneleros warehouse. The bank's representative then discovered that the amount of sugar in that warehouse and and appellant. appellant.

did not exceed 1,800 piculs, whereas the amount which should have been there, according to the contract, was 5,000 piculs. Upon making this discovery, the bank's representative, accompanied by a lawyer, went immediately to see Chua Teng Chong, and the latter informed him that the rest of the sugar covered by the pledge agreement was stored in the warehouse at No. 119, Muelle de la Industria. The bank's representative immediately went to this warehouse and upon arrival there found some 3,200 piculs of sugar, of which he took immediate possession, closing the warehouse with the bank's padlocks. It is admitted that the sugar seized by the bank in the Muelle de la Industria warehouse is the same sugar which the plaintiff firm delivered to Chua Teng Chong. On the date on which the bank took possession of the sugar the promissory note executed March 17, 1914, had fallen due and was unpaid. In the written contract by which the plaintiff firm undertook to sell the sugar in question to Chua Teng Chong nothing was said concerning the time and place for payment. The court below found that the delivery of the sugar by plaintiff to Chua Teng Chong was made upon the mutual understanding that the price was to be paid in cash "upon the completion of delivery." The plaintiff firm proved that in sales of this kind it is the custom among merchants in Manila for the seller to deliver the merchandise into the warehouse of the buyer, for inspection and verification of weights, and that as soon as this operation is completed, the price is payable on demand. After Chua Teng Chong had refused to pay the bill for the price of the sugar which the plaintiff firm presented to him, the day after its delivery, an attempt was made by the plaintiff to recover possession of the sugar, and to that end, on April 24, 1914, the plaintiff made a demand on the bank for the delivery of the sugar, to which demand the bank refused to accede. On April 24, 1914, the buyer Chua Teng Chong was judicially declared to be insolvent, and Francisco Chua Seco was appointed as assignee of the insolvency. On the same date, and a few minutes after the insolvency proceedings were commenced, the plaintiff partnership filed a complaint, upon which this action was commenced, naming the bank as defendant, alleging that said defendant was unlawfully holding some 4,711 piloness of sugar, the property of the plaintiff firm, which the bank had received from Chua Teng Chong, and prayed for the judgment for the possession of said sugar. A few days after, the plaintiff firm took advantage of those provisions of the procedural law which permit a plaintiff to replevin personal property. Subsequently, by agreement of the parties, the sugar was sold and the proceeds of the sale deposited in the bank, subject to the order of the court upon the final disposition of the case. After the answer of the defendant bank was filed, a complaint in intervention was filed by Chua Seco, in which he asserts a preferential right to the sugar, or to the proceeds of its sale, upon the ground that the delivery of the sugar by plaintiff, by virtue of which it passed into the possession and control of Chua Teng Chong, had the effect of transmitting the title of the pledge asserted by the bank was null and void. Upon these allegations the interveners contends that the sugar is the property of the insolvent estate represented by him. The lower court rendered judgment in favor of the plaintiff and from this decision appeals have been taken by the bank and by the intervener. Upon these facts the following questions arise: (a) Did title to the sugar pass to the buyer upon its delivery to him? (b) Assuming to pay that the title passed to the buyer, did his failure to pay the purchase price authorize the seller to rescind the sale? (c) Was the commencement of a replevin suit by the seller equivalent to the rescission of the sale? (d) Can the pledge of the sugar to the bank be sustained upon the evidence as to the circumstances under which it obtained physical possession thereof?

Clearly, there can be no doubt that from March 24, 1914, on which date the parties agreed in regard to the quantity of the sugar which the seller was to deliver and the price which the buyer was to pay, the contract was perfected. (Civil Code, art. 1450.) It is also clear that the obligation of the seller to make delivery of the thing sold was not subject to the condition that the buyer was to pay the price before delivery. The witness Pomar, called on behalf of the seller, testified that the price was to be paid after the completion of delivery. (Stenographic notes, p. 4.) The sugar was delivered to the buyer March 16, 1914. The seller delivered it into the buyer's warehouse, leaving it entirely subject to his control. Article 1462 of the Civil Code provides that the thing sold is deemed to be delivered "when it passes into the possession and control of the buyer." It is difficult to see how the seller could have divested himself more completely of the possession of the sugar, or how he could have placed it more completely under the control of the buyer. On the day following the delivery of the sugar the seller presented his bill to the buyer, but the latter failed and refused to make payment. We agree with the seller's contention that he was entitled to demand payment of the sugar at any time after the delivery. No term having been stipulated within which the payment should be made, payment was demandable at the time and place of the delivery of the thing sold. (Civil Code, art. 1500.) The seller did not avail himself of his right to demand payment as soon as the right to such payment arose, but as no term for payment was stipulated, he was entitled, to require payment to be made at any time after delivery, and it was the duty of the buyer to pay the price immediately upon demand. But the seller not only argues that he was entitled to demand payment at any time after delivery, but contends further that until such payment was in fact made, title to the sugar did not pass to the buyer. We cannot agree with this contention. As Manresa says (vol. 10 p. 120), tradition is a true mode of acquiring ownership "which effects the passage of title and the birth of the right in rem. Therefore, the delivery of the thing . . . signifies that title has passed from the seller to the buyer." If we were to sustain the seller's contention, the consequences to the business community would, in our judgment, be most deplorable. If the seller may make delivery of the thing sold and clothe the buyer with all the appearances of ownership but without the passage of title until the purchase price is actually paid, it occurs to us to inquire how long this anomalous state of affairs may be permitted to continue? It is the buyer's duty, upon the assumed facts to pay the price on demand, but the seller is not bound to present his account immediately. In the present case the buyer was not called upon to make payment until the following day. If the seller had allowed three, four, or five days to go by before presenting his account for payment, would it be permitted him still to contend that title had passed? If the title did not pass, any sale which might in the meantime be made by the buyer, would be void, ass it is evident that no one can transfer a greater interest than that which he possesses. With even greater reason, the destruction of the thing in the possession of the buyer, before demand upon him for payment, would relieve him from the obligation to pay — the thing perishes for its owner. (Tan Leonco vs. Go Inqui, 8 Phil. Rep., 531.) The seller calls this transaction a cash sale, but, strictly speaking, it is not cash sale. It is not like a sale made in a retail store, in which delivery and payment are to be made simultaneously. Of course, when no term for payment is stipulated the seller is not bound to deliver the thing sold until the buyer has paid him the price; but if, notwithstanding this right, delivery is consummated without requiring payment to be made in advance or simultaneously, in fact he grants a term of credit to the buyer, however short and indeterminate it my be, and waives his right to insist upon payment in advance or simultaneously with delivery, but in lieu thereof he becomes entitled to payment upon demand therefor made upon the buyer. As is correctly stated in Williston on Sales:

Confusion especially may be caused by use of the words 'cash sale' or 'terms cash' by business men. In business dealings these words are frequently used when in reality a short period of credit is contemplated. In such a case it is clear there is no cash sale in the legal sense; for, under the circumstances suggested, it is not contemplated that the buyer shall refrain from dealing with the goods or even from reselling them, and if such is the contemplation of the parties, it is impossible to say that the property was not to pass until the price was paid. (Williston, Sales par. 343.) It is contended that there was an express agreement in this case that the passage of the title should be subject to the payment of the price, as a condition precedent. As was stated by Justice Mapa, the author of the decision in the case of De la Rama vs. Sanchez, (10 Phil. Rep., 432): The fact that the price of the property has not yet been paid in full is not, nor can it be, an obstacle to the acquisition of the ownership thereof by the plaintiff, because as such a condition was not stipulated in the contract, the latter immediately produced its natural effects in law, the principal and most important of which being the conveyance of the ownership by means of the delivery of the thing old to the purchaser, without prejudice, of the course, to the right of the vendor to claim payment of any sum still due. The same fundamental doctrine was stated by Chief Justice Arellano in the case of Gonzalez vs. Rojas (16 Phil. Rep., 51): . . . ownership of things is not transferred by contract merely but by delivery. Contracts only constitute titlesor rights to the transfer or acquisition of ownership, while delivery or tradition is the method of accomplishing the same, the title and the method of acquiring it being different in our law." In the case of Kuenzle and Sheriff vs. Watson and Co. (13 Phil. Rep., 26), the court sustained the validity of a sale of personal property subject to the stipulation that title should not pass until the payment of the purchase price. On the other hand, when there has been no such express agreement and the thing sold has been delivered, title passes from the moment the thing sold is placed in the "possession and control of the buyer." Having concluded that the effect of the delivery was to transmit the title of the sugar to the buyer, we will now consider the legal effect of the failure on the part of the buyer to pay the price on demand. Article 1506 of the Civil Code provides that the contract of sale may be rescinded for the same causes as all other obligations, in addition to the special causes enumerated in the preceding articles. It is also observed that the article does not distinguish the consummated sale from the merely perfected sale, and we do not believe that there is any reason for making this distinction. Article 1124 of the Civil Code establishes the principle that all reciprocal obligations are rescindible in the event that one of the parties bound should fail to perform that which is incumbent upon him. In the contract of the sale the obligation to pay the price is correlative to the obligation to deliver the thing sold. Nonperformance by one of the parties authorizes the other to exercise the right, conferred upon him by the law, to elect to demand the performance of the obligation or its rescission (Mateos vs. Lopez, 6 Phil. Rep., 206), together with damages in either event. But the right to rescind the sale for nonperformance on the part of the buyer is not absolute. The law subordinates it to the rights of third persons to whom bad faith is not imputable (Civil Code, arts. 1124 and 1295), and the defendant bank seeks to invoke in its defense this principle, alleging that the sugar in question was pledge to it, after its delivery to the buyer and before the latter was placed in default with respect to the payment of the price.

We believe that this connection of the defendant bank cannot be sustained. In the first place, even giving all possible effect to the contract evidenced by the private document exhibited by the bank (Exhibit No. 1), it is evident that the sugar therein mentioned is not the same as that here in dispute. By this document, which bears date March 4, 1919, an attempt was made to pledge the lot of sugar deposited in warehouse No. 1008, Calle Toneleros, Manila. The sugar in dispute has never been in that warehouse, as the seller delivered it into the bodega at No. 119, Muelle de la Industria. The sugar here in question could not be possibly have been the subject matter of the contract of pledge which the parties undertook to create by the private document dated March 7, 1914, inasmuch as it was not at the time the property of the defendant, and this constitutes an indispensable requisite for the creation of a pledge. (Civil Code, art. 1857.) It does not appear from the record that any effort was made to pledge the sugar which is the subject matter of this case. It is true that it appears that in the afternoon of the day the sugar was delivered, the buyer gave the bank's representative the keys of the warehouse on the Muelle de la Industria in which the sugar was stored, but it also appears from the testimony of the bank's witness, Grey, to whom the keys of the warehouse were delivered, that this was not done because of an agreement concerning the pledge of the sugar now in dispute. Grey testified that on the afternoon of April 16, 1914, he ascertained, after an inspection of the warehouse on Calle Toneleros, that the sugar therein stored was not stated in the document of pledge; that upon observing this storage he asked the debtor to account for it, whereupon at No. 119, Muelle de la Industria;" that upon receiving this reply the witness went to the warehouse at No. 119, Muelle de la Industria, demanded the keys from the person in charge, and then closed the warehouse with the bank's own padlocks. From these statements it appears that no attempt was made to enter into any agreement for the pledge of the sugar here in question. The bank took possession of that sugar under the erroneous belief, based upon the false statement of Chua Teng Chong, that it was a part of the lot mentioned in the private document dated March 7, 1914. But even if it were assumed that on the afternoon of April 16, 1914, an attempt was made to pledge the sugar and that delivery was made in accordance with the agreement, the pledge so established would be void as against third persons. Article 1865 of the Civil Code provides that a pledge is without effect as against third persons "if the certainty of the date does not appear by public instrument." In the case ofTec Bi and Co. vs. Chartered Bank of India, Australia and China, 16 Off. Gaz., 908 decided February 5, 1916, this court held that when the contract of pledge is not recorded in a public instrument, it is void as against third persons; that the seller of the thing pledged, seeking to recover the purchase price thereof, is a third person within the meaning of the article cited; and that the fact that the person claiming as pledgee has taken actual physical possession of the thing sold will not prevent the pledge form being declared void as against the seller. The court held that the principle established by article 1865 of the Civil Code is not adjective in its character, but that "It prescribes a condition without which the contract of pledge cannot adversely affect third persons." Applying the doctrine of the decision cited, it is evident that the pledge aserted by the International Bank is inefficacious. In the brief filed on behalf of the bank it is argued that in no case may a revindicatory action be maintained when the plaintiff attempts to exercise the right to rescind the sale for nonpayment of the purchase price and that therefore a replevin suit will not lie. But as it is held that the bank has no interest in this matter, as its alleged contract of pledge is utterly unavailing, it is evident that the question of procedure does not affect it. It appears that by reason of the insolvency of the buyer Chua Teng Chong an insolvency proceeding was commenced in a court of competent jurisdiction and in that proceeding Francisco Chua Seco was appointed assignee of the property of the insolvent. As such assignee Chua Seco filed a complaint in intervention in this suit, in which he contends that by reason of its sale and delivery by plaintiff to the insolvent, title to the sugar passed to the latter and that the pledge set up by the bank is void as to third persons. Standing in the place of the insolvent buyer, the assignee asks that he be recognized in his representative capacity as the owner of the sugar in question. The voluntary intervention of the assignee of the insolvent buyer cures the defect of nonjoiner of the latter as a party defendant, and all parties in interest have been heard in this proceeding.

The judgment of the court below awards the plaintiff the product of the sale of the sugar, it having been so disposed of by agreement by the parties during the pendency of the suit. The intervener excepted to the decision and joined in the bank's appeal. In his brief in this court the intervener raises a question as to the sufficiency of the complaint to support the decision of the court below, adopting the argument of the bank upon this point. That is, assuming that by reason of the nonpayment of the purchase price, the seller is entitled to elect to rescind the sale, is the rescission effected ipso facto by such election, or is it necessary for him to bring an action of rescission? The action of replevin, the intervener contends, is based (Code of Civil Procedure, sec. 263) upon the assumption that the plaintiff at the time of bringing the action is either the owner of the thing which is the subject matter of the suit or entitled to its possession. But the question presented is whether, in cases in which title has passed by delivery and in which the buyer has failed to pay the purchased price on demand, title is revested in the seller by the mere fact that he has mentally determined to elect to rescind? In its brief the plaintiff partnership contends for the affirmative, saying that the acts of the seller — the filing of its complaint — imply that it has made the election. But the intervener, adopting the argument of the bank, contends that the party to whom article 1124 of the Civil Code grants the right to rescind "must apply to the court for a decree for the rescission of the contract. . . ." (Scaevola, vol. 19, p. 673); and this conclusion is supported by the last paragraph of the article cited. Of course, if the action of the court is necessary in order to effectuate the rescission of the sale, such rescission does not follow ipso jure by reason of nonpayment and the determination of the seller to elect to rescind. Consequently, the action of replevin cannot be maintained. The right to rescind a sale, established by article 1506, in no wise differs from that which is established, in general terms, with respect to reciprocal obligations, by article 1124 in "true event that one of the obligors fails to perform the obligation incumbent upon him." But the right so conferred is not an absolute one. The same article provides that "the court shall decree the rescission demanded, unless there are causes which justify him in allowing a term." Therefore, it is the judgment of the court and not the mere will of the plaintiff which produces the rescission of the sale. This being so, the action of replevin will no lie upon the theory that the rescission has already taken place and that the seller has recovered title to the thing sold. If the buyer himself had intervened, instead of the assignee in the bankruptcy suit, we might perhaps have said that all the parties in interest having been heard, we would overlook the matter of procedure and proceed to adjudicate the rights of the parties upon the evidence submitted. But as the buyer has been declared insolvent, it is clear that his creditors have an interest in this question, and that if this interest is discussed in the bankruptcy proceedings, they will have an opportunity to be heard. In the present condition of the case, the only thing we can do is to decide that the title to the sugar having been commenced against him before the declaration of insolvency, the assignee, standing in the shoes of the buyer, has a better right to its possession or to the product of its sale during the pendency of this action. We cannot apply section 126 of the Civil Code Procedure, because one of the material averments of the complaint is that Chua Teng Chong unlawfully took possession of the sugar. The evidence shows, on the contrary, that it was delivered to him by plaintiff. Strictly speaking the mission of the court ends at this point, but following the practice adopted in other cases, for the purposes of avoiding an unnecessary multiplicity of suits, and bearing in mind the fact that the assignee of the bankruptcy is a party to this proceedings, we deem it advisable to indicate that we are of the opinion that the rights of the seller are protected by section 48 of Act No. 1956, inasmuch as the sugar in question had not passed by an "irrevocable title" when the buyer was declared insolvent. Attention is also invited to the decision of the court overruling the motion for a rehearing in the case of Tec Bi & Co. vs. Chartered Bank of India, Australia & China, cited above.1 The decision of the court below is therefore reversed, and it is decided that the assignee of the bankruptcy of Chua Teng Chong is entitled to the product of the sale of the sugar here in question, to wit, P10,826.76, together with the interest accruing thereon, reserving proceedings. So ordered.

Involuntary Insolvency of The Gulf Plantation Co. PACIFIC COMMERCIAL COMPANY, PHILIPPINE-AMERICAN appellants, vs. PHILIPPINE NATIONAL BANK, creditor-appellee. H. B. Hughes, assignee. Simon Dionisio de Leon for appellee. , J.: Lease No. 63 of 534 hectares of public situated in the municipality of Pantucan, Davao Province, P. I., planted to 236,000 hemp and 700 coconut trees, valued at P430,000. Forty-eight buildings of permanent materials valued at P5,500 situated on above lease. Two buildings of strong materials valued at P15,000. One thousand piculs hemp now in the plantation bodega at Pantucan all belonging to the “Gulf Plantation, Incorporated,” valued at P45,000. Twenty three carabaos, 38 bullocks, 18 horses, valued at P6,450. One launch “Peril” valued at P18,000; one auxiliary boat “Manuela,” P9,000; one launch “Rigel,” P800; one launch “New Kirk,” P3,500 and cargo boats, P200. The instrument contains the following endorsement: Doc. stamps affixed P17.20 THE PROVINCIAL GOVERNMENT OF DAVAOOFFICE OF THE REGISTER OF DEEDSReceived this 24th day of Feb., 1921,at 9.30 o‟clock a. m. Entry No. 90, page 3, Volume Day Book (Provisional). THE PROVINCIAL GOVERNMENT OF DAVAOOFFICE OF THE REGISTER OF DEEDSReceived this 24th day of Feb., 1921.at 9.30 o‟clock a. m. March 25, 1922, an insolvency petition was filed to have the Gulf Plantation Company declared insolvent, and it was declared insolvent on September 16, 1922, and the court ordered the sheriff to take possession of all the assets of the insolvent estate. October 23, 1922, with the consent and approval of all creditors, including the Philippine National Bank, and assignee was appointed, and on October 27, 1922, he filed an inventory of all of the properties of the plantation company, March 17, 1923, the court made an order requiring the assignee to render an account and to give the creditors a copy. March 20, 1923, the assignee filed his account for the period between October 1, 1922, and February 28, 1923. On January 7, 1924, the assignee filed a further account covering the period from October 1, 1922, to November 30, 1923. Both of which accounts are still pending and waiting the approval of the court. November 28, 1923, the assignee filed a petition for authority to sell at public R. Cruz for appellants. DRUG COMPANY and STANDARD OIL COMPANY, petitioners-

auction all of the properties of the insolvent estate, which application is also now pending and waiting the order of the court. November 3, 1922, the Philippine National Bank filed a petition, to which was attached a copy of Exhibit A and made a part of it, reciting the execution of the instrument and a breach of its conditions, and praying for the following order from the court: (a) That the mortgage or pledge executed in its favor by the Gulf Plantation, Inc., a copy of which is attached to this claim as appendix A be declared effective and matured; (b) That the assignee appointed in this insolvency proceeding, or if the latter has not yet been appointed, the sheriff of the Province of Davao be authorized to sell at public or private sale, after notice to the Philippine National Bank, all such interest, right or share as the Gulf Plantation, Inc., has or may have in the properties described in Exhibit A; (c) That should the proceeds of the sale of the properties mentioned in appendix A be greater than the sum of P165,000, this amount of P165,000 be delivered to the Philippine National Bank, and the balance to the assignee in insolvency; and (d) In the event that the proceeds of the sale of the properties mentioned in Appendix A is less than the sum of P165,000 that said proceeds be delivered to the Philippine National Bank, and for the balance of difference not paid of the debt of the insolvent corporation to the claimant company, the Philippine National Bank be admitted as an ordinary creditor in this insolvency proceeding. February 9, 1924, the bank, through the fiscal of Davao, and in compliance with an order of the court, filed objections to the approval of the accounts rendered by the assignee. In this situation, the court rendered a judgment in favor of the Philippine National Bank to the effect that it was entitled to the possession of all of the estate of the insolvent corporation, and that in the year 1919 the bank had appointed H. B. Hughes as its representative or administrator of the properties of the Plantation Company, and requiring the bank to pay certain preferred claims, including the income tax and the land tax, and that the bank was entitled to, and should have, possession of all the properties of the insolvent corporation, and to have the property sold and the proceeds of the sale applied to the satisfaction of the claim of the bank, and upon the payment of such preferred claims, to have the proceeds of the sale applied to the satisfaction of the claim of the bank, and that the creditors of the Plantation Company should share in any amount remaining after such application, and dismissed the case, without costs. From this judgment, the creditors appeal and assign the following errors: I. The lower court erred in not finding and holding that the so-called “agreement of pledge” executed by the insolvent Gulf Plantation Company in favor of the Philippine National Bank is null and void on account of its many defects. II. The lower court erred in not finding and holding that the Philippine National Bank has renounced its alleged preferred lien on the properties of the insolvent covered by the pledge, by giving its consent to

the appointment of and assignee and by permitting said assignee to take possession of said properties. III. The lower court erred in not finding and holding that the claim of the Philippine National Bank is an ordinary claim. IV. The lower court erred in holding that the Philippine National Bank is entitled to the possession of the properties of the insolvent. V. The lower court erred in holding that the mortgage in favor of the Philippine National Bank is effective and due. VI. The lower court erred in not overruling the oppo sition of the Philippine National Bank dated February 9, 1924, to the accounts submitted by the assignee. VIII. The lower court erred in dismissing the insolvency proceedings. JOHNS, J.: In view of the numerous recitals made in it, what is known in the record as Exhibit A must be construed as a pledge in both form and substance. It is very apparent from the language used in the instrument that it was prepared on the customary blank form of a pledge for the taking of properties under a pledge. It will be noted that it was never received or filed for any purpose until the 24th of February, 1921, which was two years and a half after it was executed, and that it was then endorsed, only received in the “office of the register of deeds” with “Entry No. 90 page 3, Volume Day Book (Provisional).” That is to say, there is no evidence that it was ever received, filed or recorded anywhere or by anyone, either as a chattel mortgaged or a pledge of personal property. Hence, the receiving of it in the office of the register of deeds on February 24, 1921, is a nullity as to both a pledge and a chattel mortgage. The only witness for either party was Carlos Garcia, the manager of the bank at Davao, and he was called for the sole purpose of testifying as to the amount of the bank‟s claim, which he placed at about P60,000, and that it was due and owing. To make Exhibit A valid as a pledge, as to the personal property therein described , it was the duty of the bank to take the actual, physical possession of the property, and to continue and remain in such possessions, and to make it valid against creditors or the assignee, the bank must have been in such actual, physical possession at the time the Plantation Company was declared insolvent. Upon the question, there is no evidence in the record. Without it, Exhibit A is void as a pledge, and the bank would not have a preference, and would not now be entitled to the possession of the property of the Plantation Company, or to have it sold and the proceeds applied to the satisfaction of its claim. Upon the question of pledge, article 1863 of the Civil Code provides:

In addition to the requisites mentioned in article 1857, it shall be necessary, in order to constitute the contract of pledge, that the pledge, be placed in the possession of the creditor or, of a third person appointed by common consent. Section 4 of Act No. 1508, entitled “an Act providing for the mortgaging of personal property, and for the registration of the mortgages so executed,” provides: A chattel mortgage shall not be valid against any person except the mortgagor, his executors or administrators, unless the possession of the property is delivered to and retained by the mortgagee or unless the mortgage is recorded in the office of the register of deeds of the province in which the mortgagor resides at the time of making the same, or, if he resides without the Philippine Islands, in the province in which the property is situated. That is to say, a chattel mortgage is not valid against any person except the mortgagor, his executors or administrators, without delivery of possession of the property, unless the mortgage is recorded in the office of the register of deeds of the province. It will be noted that, in the absence of such delivery of possession on the recording of the instrument in the office of the register of deeds, a chattel mortgages is valid only as to the mortgagor, his executors or administrators. Hence, it follows that, in the absence of such record and the delivery of possession a chattel mortgage is void as against the creditors or the assignee of an insolvent estate, and upon that question, there is no evidence in the record. If it was the purpose and intent of the bank to have Exhibit A received, filed and recorded as a chattel mortgage, it was not only its duty to so instruct the register of deeds, but it was its further duty to see that the instrument was received, filed and recorded as a chattel mortgage. Upon that point there is no evidence. Again, in the every nature of things, a pledge or chattel mortgage is confined and limited to personal property, and it cannot be extended or made to apply to real property. In what is known as schedule A, attached to Exhibit A, the property is described as lease No. 63 of 534 hectares of public land planted to 236,000 hemp and 700 coconut trees valued at P430,000, and forty-eight buildings of permanent materials valued at P5,500, and two buildings of strong materials valued at P15,000. It may well be doubted whether that kind of property could become the subject matter of a pledge or chattel mortgage. It will be noted that it is a pledge of a lease of public land which is planted to hemp and coconut trees, and of forty-eight buildings of permanent materials and of two buildings of strong materials, clearly indicating that the buildings were attached to the soil and as such would be real estate. It will also be noted that the pledge was executed in 1918, and it is very probable that the one thousand piculs of hemp have long since been sold. As to the twenty-three carabaos, thirty-eight bullocks and eighteen horses, there is no provision for the increase. Hence, the pledge, if valid for any

purpose, should be confined and limited to the particular property described in the pledge, and would not include any increase. That is to say, if it be a fact that at time the pledge was executed the bank took actual, physical possession of the property described in it, and continued to remain in such possession up to the time the petition for insolvency was filed, or that it was in such possession for more than thirty days prior to the filing of the petition, the pledge would then be valid as to the personal property, and the bank would then have a preference on that property for the amount found due and owing upon its claim. If be a fact that the bank was not in the actual, physical possession of the property at the time the insolvency petition was filed, and that the Plantation Company was in such possession as its own, then the bank would not have a preference over any other unsecured creditor. From what has been said, it follows that the judgment of the lower court is reversed, and the case remanded, with instructions for the assignee to proceed with the administration of the insolvent estate in the ordinary course of business and in the manner provided by law, and for such further proceedings as are not inconsistent with this opinion, with costs in favor of the appellant. So ordered.

ESTATE vs.

OF

GEORGE

LITTON, petitioner,

CIRIACO B. MENDOZA and COURT OF APPEALS, respondents. Ruben G. Bala for respondent Mendoza.

GANCAYCO, J.: This petition for review presents two (2) main issues, to wit: (1) Can a plaintiff in a case, who had previously assigned in favor of his creditor his litigated credit in said case, by a deed of assignment which was duly submitted to the court, validly enter into a compromise agreement thereafter releasing the defendant therein from his claim without notice to his assignee? and (2) Will such previous knowledge on the part of the defendant of the assignment made by the plaintiff estop said defendant from invoking said compromise as a ground for dismissal of the action against him? The present case stemmed from Civil Case No. Q-8303
1

entitled "Alfonso Tan vs. Ciriaco B. Mendoza,"

an action for the collection of a sum of money representing the value of two (2) checks which plaintiff Tan claims to have been delivered to him by defendant Mendoza, private respondent herein, by way of guaranty with a commission. The record discloses that the Bernal spouses 2 are engaged in the manufacture of embroidery, garments and cotton materials. Sometime in September 1963, C.B.M. Products,
3

with Mendoza as

president, offered to sell to the Bernals textile cotton materials and, for this purpose, Mendoza introduced the Bernals to Alfonso Tan. Thus, the Bernals purchased on credit from Tan some cotton

materials worth P 80,796.62, payment of which was guaranteed by Mendoza. Thereupon, Tan delivered the said cotton materials to the Bernals. In view of the said arrangement, on November 1963, C.B.M. Products, through Mendoza, asked and received from the Bernals PBTC Check No. 626405 for P 80,796.62 dated February 20, 1964 with the understanding that the said check will remain in the possession of Mendoza until the cotton materials are finally manufactured into garments after which time Mendoza will sell the finished products for the Bernals. Meanwhile, the said check matured without having been cashed and Mendoza demanded the issuance of another check same amount without a date. On the other hand, on February 28, 1964, defendant Mendoza issued two (2) PNB checks 5 in favor of Tan in the total amount of P 80,796.62. He informed the Bernals of the same and told them that they are indebted to him and asked the latter to sign an instrument whereby Mendoza assigned the said amount to Insular Products Inc. Tan had the two checks issued by Mendoza discounted in a bank. However, the said checks were later returned to Tan with the words stamped "stop payment" which appears to have been ordered by Mendoza for failure of the Bernals to deposit sufficient funds for the check that the Bernals issued in favor of Mendoza. Hence, as adverted to above, Tan brought an action against Mendoza docketed as Civil Case No. Q8303
6 4

in the

while the Bernals brought an action for interpleader docketed as Civil Case No. 56850

7

for not

knowing whom to pay. While both actions were pending resolution by the trial court, on March 20, 1966, Tan assigned in favor of George Litton, Sr. his litigatious credit * in Civil Case No. 56850 against Mendoza, duly submitted to the court, with notice to the parties. was framed in the following tenor: DEED OF ASSIGNMENT I, ALFONSO TAN, of age, Chinese, married to UY CHAY UA, residing at No. 6 Kanlaon, Quezon City, doing business under the name and style ALTA COMMERCIAL by way of securing or guaranteeing my obligation to Mr. GEORGE LITTON, SR., do by these presents CEDE, ASSIGN, TRANSFER AND CONVEY unto the said Mr. GEORGE LITTON, SR., my claim against C.B.M. Products, Inc., personally guaranteed by Mr. Ciriaco B. Mendoza, in the amount of Eighty-Thousand Seven Hundred Ninety Six Pesos and Sixty-two centavos (P 80,796.62) the balance of which, in principal, and excluding, interests, costs, damages and attorney's fees now stands at P 76,000.00, P 4,796.62, having already been received by the assignor on December 23, 1965, pursuant to the order of the court in Civil CaseNo. 56850, C.F.I., Manila, authorizing Alfonso Tan to withdraw the amount of P 4,796.62 then on deposit with the court. All rights, and interests in said net amount, plus interests and costs, and less attorney's fees, in case the amount allowed therefor be less than the amounts claimed in the relief in Civil Case 56850 (C.F.I., Manila) and Q-8503 (C.F.I., Quezon City) are by these presents covered by this assignment. I further undertake to hold in trust any and all amounts which may hereafter be realized from the aforementioned cases for the ASSIGNEE, Mr. GEORGE LITTON, SR., and to turn over to him such amounts in application to my liability to him, as his interest may then show, and I further undertake to
8

The deed of assignment

cooperate towards the successful prosecution of the aforementioned cases making available myself, as witness or otherwise, as well as any and all documents thereto appertaining. ... 9 After due trial, the lower court ruled that the said PNB checks were issued by Mendoza in favor of Tan for a commission in the sum of P 4,847.79 and held Mendoza liable as a drawer whose liability is primary and not merely as an indorser and thus directed Mendoza to pay Tan the sum of P 76,000.00, the sum still due, plus damages and attorney's fees.
10

Mendoza seasonably filed an appeal with the Court of Appeals, dockted as C.A. G.R. No. 41900-R, arguing in the main that his liability is one of an accommodation party and not as a drawer. On January 27, 1977, the Court of Appeals rendered a decision affirming in toto the decision of the lower court.
11

Meanwhile, on February 2, 1971, pending the resolution of the said appeal, Mendoza entered into a compromise agreement with Tan wherein the latter acknowledged that all his claims against Mendoza had been settled and that by reason of said settlement both parties mutually waive, release and quit whatever claim, right or cause of action one may have against the other, with a provision that the said compromise agreement shall not in any way affect the right of Tan to enforce by appropriate action his claims against the Bernal spouses. 12 On February 25, 1977, Mendoza filed a motion for reconsideration praying that the decision of January 27, 1977 be set aside, principally anchored upon the ground that a compromise agreement was entered into between him and Tan which in effect released Mendoza from liability. Tan filed an opposition to this motion claiming that the compromise agreement is null and void as he was not properly represented by his counsel of record Atty. Quiogue, and was instead represented by a certain Atty. Laberinto, and principally because of the deed of assignment that he executed in favor of George Litton, Sr. alleging that with such, he has no more right to alienate said credit. While the case was still pending reconsideration by the respondent court, Tan, the assignor, died leaving no properties whatever to satisfy the claim of the estate of the late George Litton, Sr. In its Resolution dated August 30, 1977, the compromise agreement. As to the first ground invoked by Tan, now deceased, the respondent court ruled that the nonintervention of Tan's counsel of record in the compromise agreement does not affect the validity of the settlement on the ground that the client had an undoubted right to compromise a suit without the intervention of his lawyer, citing Aro vs. Nanawa. 14 As to the second ground, respondent court ruled as follows: ... it is relevant to note that Paragraph 1of the deed of assignment states that the cession,assignment, transfer, bond conveyance by Alfonso Tan was only by way of securing, or guaranteeing his obligation to GEORGE LITTON, SR.
13

the respondent court set aside its decision and approved

Hence, Alfonso Tan retained possession and dominion of the credit (Par. 2, Art. 2085, Civil Code). "Even considered as a litigations credit," which indeed characterized the claims herein of Alfonso Tan, such credit may be validly alienated by Tan (Art. 1634. Civil Code). Such alienation is subject to the remedies of Litton under Article 6 of the Civil Code, whereby the waiver, release, or quit-claim made by plaintiff-appellee Alfonso Tan in favor of defendant-appellant Ciriaco B. Mendoza, if proven prejudicial to George Litton, Sr. as assignee under the deed of assignment, may entitle Litton to pursue his remedies against Tan. The alienation of a litigatious credit is further subject to the debtor's right of redemption under Article 1634 of the Civil Code. As mentioned earlier, the assignor Tan died pending resolution of the motion for reconsideration. The estate of George Litton, Sr., petitioner herein, as represented by James Litton, son of George Litton, Sr. and administrator15 of the former's estate, is now appealing the said resolution to this Court as assignee of the amount sued in Civil Case No. Q-8303, in relation to Civil Case No. 56850. Before resolving the main issues aforementioned, the question of legal personality of herein petitioner to bring the instant petition for review, must be resolved. As a rule, the parties in an appeal through a review on certiorari are the same original parties to the case.
16

If after the rendition of judgment the original party dies, he should be substituted by his

successor-in-interest. In this case, it is not disputed that no proper substitution of parties was done. This notwithstanding, the Court so holds that the same cannot and will not materially affect the legal right of herein petitioner in instituting the instant petition in view of the tenor of the deed of assignment, particularly paragraph two thereof
17

wherein

the

assignor,

Tan,

assumed

the

responsibility to prosecute the case and to turn over to the assignee whatever amounts may be realized in the prosecution of the suit. We note that private respondent moved for the dismissal of the appeal without notifying the estate of George Litton, Sr. whereas the former was fully aware of the fact that the said estate is an assignee of Tan's right in the case litigated.
18

Hence, if herein petitioner failed to observe the proper substitution

of parties when Alfonso Tan died during the pendency of private respondent's motion for reconsideration, no one is to blame but private respondent himself. Moreover, the right of the petitioner to bring the present petition is well within the concept of a real party-in-interest in the subject matter of the action. Well-settled is the rule that a real party-in-interest is a party entitled to the avails of the suit or the party who would be injured by the judgment. within the latter category. Hence, as the assignee and successor-in-interest of Tan, petitioner has the personality to bring this petition in substitution of Tan. Now, the resolution of the main issues.
19

We see the petitioner well

The purpose of a compromise being to replace and terminate controverted claims,

20

courts encourage
21

the same. A compromise once approved by final order of the court has the force of res judicata between parties and should not be disturbed except for vices of consent or forgery.

In this case, petitioner seeks to set aside the said compromise on the ground that previous thereto, Tan executed a deed of assignment in favor of George Litton, Sr. involving the same litigated credit. We rule for the petitioner. The fact that the deed of assignment was done by way of securing or guaranteeing Tan's obligation in favor of George Litton, Sr., as observed by the appellate court, will not in any way alter the resolution on the matter. The validity of the guaranty or pledge in favor of Litton has not been questioned. Our examination of the deed of assignment shows that it fulfills the requisites of a valid pledge or mortgage.
22

Although it is true that Tan may validly alienate the

litigatious credit as ruled by the appellate court, citing Article 1634 of the Civil Code, said provision should not be taken to mean as a grant of an absolute right on the part of the assignor Tan to indiscriminately dispose of the thing or the right given as security. The Court rules that the said provision should be read in consonance with Article 2097 of the same code.
23

Although the pledgee or

the assignee, Litton, Sr. did not ipso facto become the creditor of private respondent Mendoza, the pledge being valid, the incorporeal right assigned by Tan in favor of the former can only be alienated by the latter with due notice to and consent of Litton, Sr. or his duly authorized representative. To allow the assignor to dispose of or alienate the security without notice and consent of the assignee will render nugatory the very purpose of a pledge or an assignment of credit. Moreover, under Article 1634,
24

the debtor has a corresponding obligation to reimburse the assignee,

Litton, Sr. for the price he paid or for the value given as consideration for the deed of assignment. Failing in this, the alienation of the litigated credit made by Tan in favor of private respondent by way of a compromise agreement does not bind the assignee, petitioner herein. Indeed, a painstaking review of the record of the case reveals that private respondent has, from the very beginning, been fully aware of the deed of assignment executed by Tan in favor of Litton, Sr. as said deed was duly submitted to Branch XI of the then Court of First Instance of Manila in Civil Case No. 56850 (in relation to Civil Case No. Q-8303) where C.B.M. Products is one of the defendants and the parties were notified through their counsel.
25

As earlier mentioned, private respondent herein is

the president of C.B.M. Products, hence, his contention that he is not aware of the said deed of assignment deserves scant consideration from the Court. Petitioner pointed out at the same time that private respondent together with his counsel were served with a copy of the deed of assignment which allegation remains uncontroverted. Having such knowledge thereof, private respondent is estopped from entering into a compromise agreement involving the same litigated credit without notice to and consent of the assignee, petitioner herein. More so, in the light of the fact that no reimbursement has ever been made in favor of the assignee as required under Article 1634. Private respondent acted in bad faith and in connivance with assignor Tan so as to defraud the petitioner in entering into the compromise agreement.

WHEREFORE, the petition is GRANTED. The assailed resolution of the respondent court dated August 30,1977 is hereby SET ASIDE, the said compromise agreement being null and void, and a new one is hereby rendered reinstating its decision dated January 27, 1977, affirming in toto the decision of the lower court. This decision is immediately executory. No motion for extension of time to file a motion for reconsideration will be granted. SO ORDERED. 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.

DECISION

TINGA, J.:

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:

Miguel Rodriguez Jariol ….1,000 shares covered by Stock Certifi -

cates No. 011, 060, 061 & 062;

Abdulia C. Rodriguez …. 300 shares covered by Stock Certificates

No. 023 & 093;

Leonora R. Nolasco ….. 407 shares covered by Stock Certificates

No. 091 & 092;

Genoveva Soronio…. 699 shares covered by Stock Certificates

No. 025, 059 & 099;

Dolores R. Soberano…. 699 shares covered by Stock Certificates

No. 021, 053, 022 & 097;

Julia Generoso ….. 1,100 shares covered by Stock Certificates

No. 085, 051, 086 & 084;

Teresita Natividad….. 440 shares covered by Stock Certificates

Nos. 054 & 0552

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 decision3 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 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.. P 120,066.66 .. 14 Oct. 1991

Leonora R. Nolasco …. 277,381.82 .. 14 Oct. 1991

Genoveva R. Soronio … 425,353.50 .. 14 Oct. 1991

38,385.44 .. 14 Oct. 1991

Julia R. Generoso …….. 638,385.00 .. 25 Oct. 1991

Teresita R. Natividad …. 264,375.00 .. 11 Nov. 1991

Dolores R. Soberano ….. 12,031.61.. 25 Oct. 1991

520,216.39 ..11 Nov. 1991

Miguela Jariol …. 490,000.00.. 18 Oct. 1991

88,000.00 ..18 Oct. 19915

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.

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. CEB-10926, 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. R-20120 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.º 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.

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 non-issue 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.

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.

Respondents argue that their various consignations made prior to the auction sale discharged them from the loan and the pledge agreements. They are mistaken.

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

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 th e 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.

DANTE O. TINGA Associate Justice

WE CONCUR:

LEONARDO A. QUISUMBING Associate Justice Chairman

ANTONIO T. CARPIO Associate Justice Asscociate Justice ATTESTATION CONCHITA CARPIO-MORALES

I attest that the conclusions in the above Decision had been in consultation before the case was assigned to the writer of the opinion of the Court‟s Division.

LEONARDO A. QUISUMBING Associate Justice Chairman, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairman‟s Attestation, it is hereby certified that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court‟s Division.

ARTEMIO V. PANGANIBAN Chief Justice

PACIENCIA VIZCONDE SERRANO, petitioner, vs. HONORABLE COURT OF APPEALS, LEOCADIO MACARAYA and MAXIMO C. FERNANDEZ, respondents. Guillermo Jumamil and Tanjili Law Office for petitioner. Gregorio Batiller for private respondent.

GUTIERREZ, JR., J.: This is a case which involves the true nature of the purported contract of sale executed by petitioner Paciencia Vizconde Serrano in favor of private respondent Leocadio Macaraya. The background tacts were summarized by the then Court of Appeals as follows: The litigated realty is more or less 384 square meters situated in the municipality of Mati, Davao Province, originally encompassed in plaintiff-appellee's TCT No. T-438 (Exh. D), then under lease, to expire last January 1971, with one Lorenzo Tan, who subleased the same to the Angelo Leonar Enterprises & Co., Inc., in actual possession thereof for a monthly rental of P500.00. On January 17, 1969, Mrs. Serrano executed a notarial document (Exh. A) purporting to convey the said realty by way of absolute sale to defendant Leocadio Macaraya for the price of P12,000.00. In a separate private document of even date (Exh. 1) Mrs. Serrano was given by Macaraya two months therefrom to repurchase her property during which period she was allowed to collect the monthly rentals. Thereafter rentals were collected by Macaraya himself.(1. tsn., 41-42). Mrs. Serrano did not re-purchase The property in question was burdened with unpaid taxes which had accumulated for many years, and pending the determination of the exact amount thereof by the Municipal Treasurer of Mati, Macaraya had his

ownership rights in TCT No. T-438 on September 12, 1969 (Exhs. E & 2) of which fact Mrs. Serrano was duly notified on even date (Exh. 2-A). On September 29, 1969, Macaraya paid the tax arrearages in its entirety, including surcharges, for the period of 11 years from 1958 to 1969, inclusive, in the total amount of P 760.41 (Exh. 3). Thereafter, the sale to Macaraya was registered and on October 3, 1969, TCT No. 15704 (Exh. F) was consequently issued in his name. On October 21, 1969, the Macaraya spouses, Leocadio and Dorotea, jointly executed a deed of absolute sale (Exh. H) of the said property to Maximo C, Fernandez, which transaction was in effect one of (dacion en pago,) the P20,000.00 consideration therefor was applied as partial payment for the Macaraya's outstanding indebtedness to the vendee Fernandez who was consequently issued TCT No. T15789 (Exh. G). There is now pending in the Municipal Court of Mati, Davao Oriental ejectment case No. 366, lodged by Maximo C. Fernandez against the lessee Angelo Leonar Enterprises & Co. In the meantime that the present litigation has not been resolved with finality the parties in the said ejectment case agreed to have the monthly rentals deposited as they fall due in the said municipal court. On April 18, 1970, petitioner Serrano filed with the then Court of First Instance of Davao Oriental, Branch X, a complaint against respondents Leocadio Macaraya and Maximo Fernandez for declaration of nullity of contract, cancellation of titles, reconveyance and damages. She alleged that the contract of sale between her and Macaraya was fictitious and simulated. She averred that it did not reflect their true agreement, which was a mere transaction of loan in the amount of P12,000.00. She further alleged that she actually received only P10,000.00 and that the difference of P2,000.00 was added to the consideration to conceal the usurious monthly interest of P1,000.00. She claimed to be a victim of fraud perpetrated by Macaraya and Fernandez. On the other hand, respondents Macaraya and Fernandez denied the imputation of fraud and insisted upon the regularity of the assailed transactions. Fernandez, who never attended trial but sent his deposition, claimed good faith in purchasing the property in question and denied knowledge of any flaw in the title of Macaraya. On May 29, 1971, the lower court rendered the following decision: WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering: l) Defendants to surrender to the Register Deeds of Davao Oriental, Transfer Certificate of Title No. T-15789 in the name of Maximo C. Fernandez; 2) The Register of Deeds of Davao Oriental to cancel Transfer Certificate of Title T15789 in the name of Maximo C. Fernandez and to re-issue a new one in lieu thereof in the name of PACIENCIA VIZCONDE SERRANO; and 3) Defendants to pay moral damages in the sum of P2,000.00, attorney's fees in the sum of P1,000.00 and the costs of the suit. On appeal to the Court of Appeals, the trial court's decision was totally reversed in the following manner:

IN VIEW OF ALL THE FOREGOING CONSIDERATIONS, the decision appealed from is set aside and the complaint dismissed. The title certificate TCT No. T-15789 of defendant-appellant Maximo C. Fernandez is hereby declared valid and consequently he is likewise declared the absolute owner of the herein litigated property. The Court of Appeals held that "the Deed of Sale" Identified as Exhibit "A" is really a contract of sale with all the required legal formalities and therefore has in its favor the presumption of regularity and nothing but the most convincing evidence will prevail in order to overthrow its probative value with respect to the transactions recorded therein." The appellate court stated that even if Exhibit "A" is void, the property subject of the conflict has been transferred to a third person, the other defendant Maximo C. Fernandez, and, therefore, the nullity of Exhibit "A", would be of no moment and cannot adversely affect the rights of the said defendant-transferee. On November 26, 1976, the petitioner filed a motion for reconsideration and rehearing of the decision of the Court of Appeals. The motion was denied in a resolution dated January 19, 1977. On February 23, 1977, the petitioner filed with the same court a motion for new trial based on newly discovered evidence which would prove that respondent Fernandez was not a buyer in good faith. This motion was denied by the Court of Appeals in its resolution dated April 19, 1977. Petitioner Serrano went to this Court in a petition for certiorari with the following assignments of errors: I THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ERROR IN HOLDING THAT EXHIBIT "A" WAS REALLY A CONTRACT OF SALE WITHOUT CONSIDERING EXHIBIT "I" AND OTHER CIRCUMSTANCES. II THE HONORABLE COURT OF APPEALS ERRED IN NOT DECLARING THAT EXHIBIT "A" TOGETHER WITH EXHIBIT "I" IS A PACTO DE RETRO SALE AND CONSEQUENTLY ERRED IN NOT ALLOWING PETITIONER TO REPURCHASE THE LITIGATED PROPERTY ACCORDING TO LAW. III THE HONORABLE COURT OF APPEALS ERRED IN CONSIDERING DEPOSITION (EXHIBIT 1, FERNANDEZ) IN ITS DECISION CONTRARY TO LAW. IV THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT PRESUMPTION OF GOOD FAITH WAS NOT OVERCOME BY PETITIONER AND IN DECLARING THAT RESPONDENT FERNANDEZ HAS A VALID TITLE OVER THE LITIGATED PROPERTY. V

THE HONORABLE COURT OF APPEALS ERRED IN DENYING PETITIONER'S MOTION FOR RECONSIDERATION AND REHEARING AND THE SUBSEQUENT MOTION FOR NEW TRIAL WITHOUT VALID GROUNDS STATED THEREIN. Even as respondents Macaraya and Fernandez urge this Court to affirm the Court of Appeals decision on its merits, they raise as a preliminary issue the timeliness of the filing of the petition. Our examination of the records of this case shows that the arguments on this issue have no merit. We note that the respondents have deducted the number of days between the petitioner's notice of the decision and the date she filed a motion for reconsideration from the number of days given her to come to us on a petition for review or to take such other action before judgment becomes final and executory. The respondents err in their mode of computing the period before finality of judgment. Section I of Rule 45 of the Rules of Court gives a party 15 days from the denial of a motion for reconsideration by the appellate court to come to the Supreme Court. These 15 days do not include the number of days that lapse from notice of judgment to the filing of the motion for reconsideration. The 15-day period starts anew from the notice of the motion's denial. And even assuming that a petition for review is filed a few days late, where strong considerations of substantial justice are manifest in the petition, this Court may relax the stringent application of technical rules in the exercise of our equity jurisdiction. In addition to the basic merits of the main case, such a petition usually embodies justifying circumstances which warrant our heeding the petitioner's cry for justice, inspite of the earlier negligence of counsel. It bears repeating that rules of procedure are not to be applied rigidly (Tan v. Director of Forestry, 125 SCRA 302). In a number of cases, this Court in the exercise of equity jurisdiction decided to disregard technicalities in order to resolve the case on its merits based on the evidence. (See St. Peter Memorial Park, Inc. v. Cleofas, 121 SCRA 287; Helmuth, Jr. v. People of the Philippines, 112 SCRA 573). As we ruled in the case of Calasiao Farmers Cooperative Marketing Association, Inc. v. Court of Appeals (106 SCRA 630, 637): Dismissal of appeals based on purely technical grounds is frowned upon as the policy of the Courts is to encourage hearing of appeals on the merits. (Gregorio v. Court of Appeals, 72 SCRA 120 [1976]) Rules of procedure, are intended to promote, not to defeat substantial justice, and therefore, they should not be applied in a very rigid and technical sense. In the case at bar, the conclusions of the Court of Appeals on factual matters are contrary to those of the trial court. A minute scrutiny by this Court is in order and resort to duly proven evidence becomes necessary (Legaspi v. Court of Appeals, 69 SCRA 360, and Tolentino v. De Jesus, 56 SCRA 167). Was the contract entered into between petitioner Serrano and respondent Macaraya an absolute sale as found by the Court of Appeals or an equitable mortgage as alleged by the petitioner? The records show that the contract between the parties was actually a deed of sale pacto de retro which was made to appear as an absolute deed of sale. This Court has ruled in Shell Co. of the Phils. Ltd. v. Firemen's Ins. Co. of Newark, N. J. et al. (100 Phil. 757.) that:

To determine the nature of a contract courts do not have or are not bound to rely upon the name or title given it by the contracting parties, should there be a controversy as to what they really had intended to enter into, but the way the contracting parties do or perform their respective obligations stipulated or agreed upon may be shown and inquired into, and should such performance conflict with the name or title given the contract by the parties, the former must prevail over the latter. That a transaction was really one of loan with security, and therefore a mortgage, may be shown by the aid of surrounding circumstances, and parol evidence is competent in that respect. This rule has been accepted for many generations. The difficulty lies in its application, for many factors are to be considered, none of them conclusive in itself, but each to be considered in its company. (1 Glenn, Mortgages, 59-60 [1943]). In the instant case, the petitioner was made to execute a document entitled "Deed of Absolute Sale" in favor of respondent Macaraya. On the same date Macaraya executed an Undertaking" giving the vendor the right to repurchase the lot within two months from date. Significantly, the same Elpidia C. Lagura who signed as witness to the deed of absolute sale was also a witness to the undertaking. As stated in Capulong v. Court of Appeals (130 SCRA 245), the intent to circumvent the Civil Code provision discouraging pacto de retro sales is very apparent. In the Capulong case, we distinguished between these types of contracts and the contract in Villarica v. Court of Appeals (26 SCRA 189). We stated: There is one important factor that differentiates the Villarica case from the instant petition. The document granting the vendors therein an option to buy back the property was executed six (6) days after the execution of the deed of sale whereas in the instant case the option to buy was embodied in a document executed at the same time that the questioned deed of sale was executed. The option to buy in Villarica case was interpreted to be only an afterthought. On the other hand, the intent of the parties to circumvent the provision discouraging pacto de retro sales is very apparent in the instant case. The two contracts, the deed of sale and the document embodying the option to repurchase were prepared, signed, and notarized on the same day. The respondent court should have seen through a transparent effort to make it appear that the two transactions were not intimately related but distinct and separate as in the Villarica case. This should have put the court on guard considering the other circumstances of the case from which no other conclusion could be derived except that the deed of absolute sale and the document giving the right to repurchase were, in fact, only one transaction of sale pacto de retro which must be construed as an equitable mortgage. ... Since the sale of the lot was one of pacto de retro, the question before us now is whether or not it should be treated as an equitable mortgage. The Civil Code provides: ART. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases: (1) When the price of a sale with right to repurchase is unusually inadequate; (2) When the vendor remains in possession as lessee or otherwise; (3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed;

(4) When the purchaser retains for himself a part of the purchase price; (5) When the vendor binds himself to pay the taxes on the thing sold; (6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation. In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury laws. ART. 1603. In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage. ART. 1604. The provisions of article l602 shall also apply to a contract purporting to be an absolute sale. We find the amount of P12,000.00 inadequate for a 384 square meter lot in the poblacion of Mati, Davao which the trial court found to be "a very valuable piece of commercial property." This conclusion is supported by the fact that barely ten months after the questioned transaction between the petitioner and respondent Macaraya, it was transferred to respondent Fernandez (Exhibit H) who admitted that it was good bargain, for a consideration of P20,000.00, The records also show that on June 2, 1970 or another seven months later, (Exhibit "4"), the Angelo Leonar Enterprises, Inc. offered to respondent Macaraya their willingness to purchase the same lot for P30,000.00. There was no showing of any reasons why the value of the lot appreciated so rapidly. What was admitted in the pleadings and testimonies of both parties was the fact that petitioner Serrano "needed the money." In Labasan v. Lacuesta (86 SCRA 16), this Court quoted the Lord Chancellor in Vernon v. Bethell (2 Eden. — 13) thus: Necessitous men are not, truly speaking, free men; but to answer a present emergency, will submit to any terms that the crafty may impose upon them." In the trial proceedings below, we also note that respondent Macaraya had not been consistent in rebutting the allegation that the petitioner had paid him P1,000.00 monthly as interest for the amount loaned. It was also admitted by respondent Macaraya that petitioner Serrano continued receiving rentals from Angelo Leonar Enterprises, Inc., the lessee of the subject property for at least six months after the execution of the contract of sale dated January 17, 1969 (2 tsn. p. 24). The collection of rentals ceased only when respondent Fernandez sued the lessee for ejectment and the rentals were subsequently ordered to be deposited in the municipal court of Mati pending the resolution of this case. This Court finds it strange that respondent, Macaraya would allow petitioner Serrano to receive the fruits of the subject property several months after he acquired absolute ownership of the same. This is contrary to the principle of ownership. As of the filing of the petition and presumably up to the present, the petitioner and supposed vendor in an absolute sale has retained possession of the disputed property. The last issue refers to the petitioner's allegations that respondent Maximo C. Fernandez was not a purchaser in good faith. The trial court stated in its decision that it had serious doubts on the authenticity of the deed of sale executed by Macaraya in favor of his co-respondent Maximo C. Fernandez. The appellate court, however, brushed aside the contentions that Fernandez was a mere dummy in a simulated sale and

ruled that the presumption of good faith was not overcome by clear cut and positive evidence to the contrary. We sustain the factual finding of the trial court. The trial court emphasized in its decision that the supposed buyer in good faith and current owner never showed the slightest interest in the litigation involving the cancellation of his title and the reversion of the lot he purchased from Macaraya to the original vendor. The court stated: It was the defendant Macaraya, who has from the inception of this case, manifested intense interest in the outcome of the same so much so that no one will doubt that he is indeed and truly the owner of the lot in question. Fernandez did not appear at the trial. His deposition taken in Cebu City at the Macaraya Building, Colon Street was introduced in evidence by the respondents. Fernandez admitted that he has never been to Mati, Davao Oriental and he has never seen the lot sold to him by Macaraya. He lives in San Roque, Talisay, Cebu. He never bothered to find out what was sold to him for P20,000.00 in 1969, whether or not the land was really worth that much or that it even existed. Maximo C. Fernandez was then a 64-year old man who worked as a tailor for a living. The records show that the deed of sale was executed by petitioner Serrano in favor of Macaraya on January 17, 1969. It took Macaraya until October 3, 1969 to have the transfer certificate of title — T15704 — registered in his name. The deed of sale in favor of Fernandez was executed in Cebu City on October 21, 1969. Two days later, October 23, 1969, the new title, TCT No. 15704 was already registered in the Registry of Davao in the name of Fernandez, who was all the time in Cebu. It is also highly unusual that the transaction between Macaraya and Fernandez involved no transfer of money. The sale was allegedly one of dacion en pago. The Macarayas, who appear to be well to do, "sold" the P20,000.00 lot to Fernandez, a poor tailor, as "partial payment" for the Macaraya's outstanding indebtedness to the vendee. The fifth assignment of error questions the respondent court's denial of the petitioner's motion for rehearing or new trial. The petitioner wanted to introduce into the records the certification of the Talisay, Cebu treasurer that respondent Fernandez has no property listed in his name in that municipality and the certification of the Bureau of Internal Revenue Regional Director for Central Visayas that respondent Fernandez did not file any income tax returns for the years 1968 through 1972. We see no need to pass upon this issue. There is more than enough evidence in the records to affirm the trial court's finding that Fernandez was not a buyer in good faith. WHEREFORE, the petition is hereby GRANTED. The decision of the Court of Appeals is REVERSED and SET ASIDE. The contract between the petitioner and Leocadio Macaraya being one of equitable mortgage, Transfer Certificate of Title No. T-15789 in the name of Maximo C. Fernandez is ordered CANCELLED and a new one issued in the petitioner's name. SO ORDERED.

CORNELIO CRUZ and CIRIACA SERRANO, plaintiffs-appellants, vs. CHUA A. H. LEE, defendant-appellant. Gibbs and McDonough for plaintiff-appellants. Antonio Gonzalez for defendant-appellant.

STREET, J.: This action was instituted in the Court of First Instance of the City of Manila by Cornelio Cruz and wife, for the purpose of recovering a sum of money from the defendant Chua A.H. Lee, representing the damages alleged to have been sustained by them from the lapsing of certain pawn tickets which they had pledged to the defendant under the circumstances hereinafter stated. Upon hearing the cause the trial court gave judgment in favor of the plaintiffs to recover of the defendant the sum of P1,141, with legal interest from December 16, 1927, and with costs. From this judgment both plaintiffs and defendant appealed. It appears that prior to June 10, 1926, the plaintiff Cornelio Cruz had pledged valuable jewelry to two different pawnshops in the city of Manila, namely, the Monte de Piedad and Ildefonso Tambunting, receiving therefor twelve pawn tickets showing the terms upon which the articles pledged were held by the pledges. On the date stated the plaintiff, being desirous of obtaining a further loan upon the same and other jewels, presented himself to the defendant Chua A.H Lee and pledged to him six pawn tickets of the Monte de Piedad and a bracelet and the six tickets Lee delivered to the plaintiff a sum of money, for which the plaintiff executed a receipt containing words to the effect that the amount of P3,020, therein stated, represented the value of the bracelet and pawn tickets and that it was understood that Lee would become the absolute owner of the articles pledge if Cruz should not return said sum of money within the period of sixty days. One week thereafter Cruz again presented himself at the place of business of Lee and received the further sum of P3,500, at the same time delivering two pawn tickets of the house of Ildefonso Tambunting and four pawn tickets of the Monte de Piedad. At the same time Cruz signed a further receipt containing a stipulation that the sale of the articles pledge would become absolute unless the amount stated in the receipt should be return within sixty days. The tickets which form the principal feature in these two pledges represented a pair of diamond earrings previously pledged to Ildefonso Tambunting for P7,000, and several other pieces of jewelry priviously pledged to the Monte de Piedad for the aggregate amount of P2,020. All of these tickets were renewable, according to the custom of pawnbrokers, upon payment from time to time of the sums of money representing the interest accruing upon the debts for which the jewelry was pawned. The right of repurchasing the jewelry, which was conceded to Cruz in the two receipt above mentioned, was never exercised by him; and on September 25, 1926, Lee filed a complaint against Cruz in the Court of First Instance of Manila (case No. 30569), in which it was allege that the receipts above mentioned had been drawn in the form of a sale with stipulation for repurchase in sixty days but it was understood between the parties that the transaction was a loan and that the jewelry and pawn tickets held by Lee constituted a mere security for the money advanced by him to Cruz. As a consequence Lee asked for judgment against Cruz in the amount of P6,520. On March 31, 1927, judgment in said action was rendered in the Court of First Instance favorably to the plaintiff and, although an attempt was made to get the decision reviewed in the Supreme Court, the judgment was affirmed for failure of the appellants to cause a transcript of the oral testimony to be

brought to said court. 1 After affirmance of the judgment in the Supreme Court the cause was returned to the Court of First Instance for execution, but as a result of certain proceedings not necessary to be here recounted, execution in that case was suspended to wait the result of the judgment to be given in this case. It appears that the defendant Lee on August 18, 1926, renewed the ten pawn tickets issued by the Monte de Piedad by paying the interest necessary to effect the renewal, but these tickets all expired on October 18, 1926, and were never renewed. The pawn tickets issued by the Tambunting's pawnshop on the diamond earrings were dated May 12, 1926, and remained good for one year, having expired on May 12, 1927. Although the pawn tickets issued by the Monte de Piedad expired on October 18, 1926, it is admitted that they could have been renewed or the jewelry redeemed at any time prior to actual sale at public auction, and these jewels were not sold by the Monte de Piedad until in the year 1927, when they were, at different dates, brought in by the appraiser of the Monte de Piedad for the amount then due upon the respective jewels. But the jewelry represented by one of these pawn tickets was that thus not sold until August 10, 1928. From this it will be seen that all of the pawned jewelry was still subject to redemption when civil case No. 30569 was first called for trial on January 3, 1927, and apparently the right of redemption on only one piece of jewelry had been foreclosed by sale when the decision was rendered in the same case at the end of March. The record does not show whether or not the earrings pawned to Ildefonso Tambunting were in fact sold after the tickets lapsed on May 12, 1927, but it is proved that the jewelry was not forthcoming when a inquiry was made therefor by the present plaintiff with a view to redemption after judgment had been rendered in the instituted by Lee against him. The first two errors assigned in the brief of the defendant as appellant raise a question of a preliminary nature, which is, whether the present action can be maintained in view of the fact that the cause of action set out in the present complaint might have been — so the defendant supposes — used as a ground of defense or counterclaim in action No. 30569 of the Court of First Instance of Manila instituted by the present defendant against the present plaintiff. Upon this it is insisted that the trial court should sustained the plea of res judicatainterposed in this case by the defendant. This contention is untenable for the reason that the facts which serve as the basis of the present action were not existence at the time of commencement of action No. 30569. Under section 97 of the Code of Civil Procedure the defendant is required to set up his counterclaim as a defense only in those cases where the right out of which the counterclaim arises existed at the time of the commencement of the action. The principal question requiring decision in the case before us is one of law, namely, whether a person who takes a pawn tickets in pledge is bound to renew the ticket from time to time, by the payment of interest, or premium, as required by the pawnbroker, until the rights of the pledgor are finally foreclosed. In this connection reliance is placed by the attorney for the plaintiff upon article 1867 of the Civil Code, which reads as follows: The creditor must take care of the thing given in pledge with the diligence of a good father of a family; he shall be entitled to recover any expenses incurred for its preservation and shall be liable for its loss or deterioration, in accordance with the provisions of this code. In applying this provision to the situation before us it must be borne in mind that the ordinary pawn ticket is a document by virtue of which the property in the thing pledged passes from hand to hand by mere delivery of the ticket; and the contract of the pledge is, therefore, absolvable to bearer. It results that one who takes a pawn ticket in pledge acquires domination over the pledge; and it is the holder who must renew the pledge, if it is to be kept alive. Article 1867 contemplates that the pledgee may have to undergo expenses in order to prevent the pledge from being lost; and this expenses the pledgee is entitled to recover from the pledgor. From this it follows that were, in a case

like this, the pledge is lost by the failure of the pledgee to renew the loan, he is liable for the resulting damage. Nor, in this case, was the duty of the pledgee destroyed by the fact that the pledgee had obtained a judgment for the debt of the pledgor which was secured by the pledge. The duty to use the deligence of a good father of the family in caring for the pledge subsists as long as the pledge article remains in the power of the pledgee. In this connection we quote as follows from a monographic note appended to Griggs vs. Day (32 Am. St. Rep., 718), in which it is said: As the holder of collateral security is entitled to its possession and to the extent of his interest is substantially the owner thereof, he must, to a certain extent at least, assume the duties of the ownership, and furthermore must protect the interest of his pledgor as well as his own, because the latter, by giving the collateral security, has parted with the power to protect himself. The contract carries with it the implication that the security shall be made available to discharge the obligation': Wheeler vs. Newbould, 16 N.Y., 396. We apprehend that it carries with it the further implication that the property, no matter what its character, shall be lost through the negligence or inattention of the pledgee. In commenting upon article 1867 of the Civil Code, the commentator Manresa points out that the predecessor article in the Civil Code of 1851 limited itself to declaring that the creditor should take such care of the pledge thing as the good father of the family, and this led to a lively controversy among the civilians concerning the consequences of the duty of conservation or safekeeping imposed upon the creditor. But this controversy, says the learned author, has largely lost its interest because the authors of the Code put an end to such discussions by defining the responsibility of the creditor in a form so clear and explicit as to leave no room for doubt (Manresa, Codigo Civil. 4426, 427). In the treatise of Colin and Capitant on the Civil Law, it is stated that the creditor who receives an article in pledge must bear all the expenses necessary to secure the conservation of the pledge and that the debtor is bound to reimburse him for such expenses. As an illustration of the duty of the pledgee to exercise diligence in preserving the pledge, he states that a pledgee who fails to renew at the proper time the inscription of a mortgage guaranteeing a credit will be liable for the damage resulting from its loss (opus citat, p. 77). To the same effect is a passage found in the pages of the French commentator Troplong, Droit Civil Explique, Du Gage, sec. 428. The question of the extent of the duty of the pledgee in caring for the property pledged has often been discussed in connection with pledges of collatteral security. In this case we find the following observation made by the author of the title "Pledge" in 21 Ruling Case Law, to wit: The rights and duties of parties to a pledge of securities for the payment of the debt may of course be fixed by agreement as to the manner in which they are to be collected, but as a general rule not only is it the right of the holder of collateral security to collect the money thereon and apply it to the principal debt but his duties in this respect are active and he is bound to ordinary diligence to preserve the legal validity and pecuniary value of the pledge, and if by negligence, wrongful act or omission on his part loss is sustained, it must be borne by him. (Pledge, sec. 30.)
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The application of the doctrine above expounded to the case in hand leads the conclusion that the defendant Chua A. H. Lee in the case before us in liable for the value of the securities lost by his failure to keep the pledges alive in the extent of their actual value over the amounts for which the same were pledged; and the trial court, in our opinion, committed no error is so holding.

There remains to be considered the question of the proper valuation of the jewelry sacrificed in the manner above stated. Upon this point we are of the opinion that the trial court was too conservative in its estimate; and we find, upon the testimony of Manuel Javier, appraiser of the La Insular Pawnshop, and Francisco Ferrer, a jewelry merchant of Manila supplemented by that of the plaintiff, Cornelio Cruz, that the two diamond earrings represented by the tickets issued by Tambunting's pawnshop were fairly worth P14,000. It is true that Cornelio Cruz testified that these jewels cost him P11,000, but he at the same time stated that they were at the time of the trial in the court below worth at least P15,000. Again, we are of the opinion that the jewels represented by the ten pawn tickets of Monte de Piedad were worth, at a conservation estimate, the sum of P4,040. In fixing these values it must be remembered that it is not the practice of pawnshops to advance more than from thirty-five to fifty per cent of the true value upon pledges of jewels. From the values of the jewelry, as estimated above, there is of course to be deducted the amounts which had been advanced upon the pledges with interest thereon at the situated rate of 18 per cent per annum until the date when the offer was made by the plaintiff Cornelio Cruz in writing to redeem the jewelry. But it should be noted that the sum of P3,500 which the defendant advanced to Cruz upon the pledge of the pawn tickets covering the earings must not be deducted, because the defendant, in the prior action, has already recovered judgment for that amount. Upon liquidation of the account between plaintiffs and defendant in conformity with the suggestion above made, it results that the plaintiffs herein were damaged by the sacrifice of the jewelry in question in the total amount of P6,687.56. Also, in order to clarify the appealed decision, it is declared that the plaintiff is entitled to recover the bracelet composed of seventeen diamonds, forming the additional pledge made by the plaintiff to the defendant, upon satisfaction of the judgment in civil case No. 30569. The judgment appealed from is therefore modified to the extent above indicated, namely, that the plaintiffs shall recover of the defendant the sum of P6,687.56, with legal interest from December 16, 1927, until the same shall be paid, as well as the bracelet of seventeen diamonds upon satisfaction of the judgment above mentioned. So ordered, without costs. TAN CHUN TIC, plaintiff-appellee, vs. WEST COAST LIFE INSURANCE CO. and JOSE C. LOCSIN, Provincial Sheriff of Occidental Negros, defendants-appellants. Gibbs and McDonough and Roman Ozaeta for appellants. Angel S. Gamboa for appellee. VILLAMOR, J.: The instant complaint seeks the annulment and cancellation of the preliminary attachment levied by the defendant provincial sheriff of Occidental Negros on petition of the other defendant, the West Coast Life Insurance Company, upon the property described in the transfer certificates of title Nos. 3220 and 1263 in the name of Go Chulian. The defendants demurred to the complaint on the ground that the same did not state facts sufficient to constitute a cause of action. The demurrer was overruled by M. L. de la Rosa, judge. The defendants answered with a general denial, and as none of them appeared at the hearing, they were adjudged in default; and after the plaintiff had introduced his evidence, the trial court rendered judgment holding that lots Nos. 64 and 662 of the cadastre of Murcia, Occidental Negros, belong in fee simple to the plaintiff, and by virtue thereof ordered that their respective transfer certificates of title Nos. 6328 and 6329 (formerly Nos. 3220 and 1263) of the

office of the registrar of deeds of the province, be cancelled, and that the annotation of the preliminary attachment of said lots be stricken therefrom, with costs against the defendant. The defendant West Coast Life Insurance company appealed from the judgment in due time and form, and in its brief assigns five errors, of which we shall consider the fourth, the rest being, to our mind, of secondary importance in this case. In the fourth assignment of error the appellant alleges that: "The trial court erred in not holding that the stipulation in the mortgage Exhibit A, whereby the lands mortgaged shall become the property of the creditor-mortgagee in the event of the nonpayment of the debt within the term fixed, is a pactum commissoriumand therefore null and void under articles 1859 and 1884 of the Civil Code." From the record it appears that on September 16, 1925, the West Coast Life Insurance Company filed a complaint against Go Chulian, Julio Gonzaga, and Francisco Sanchez in the Court of First Instance of Manila for the recovery from them of the sum of P24,000. On the same day, the West Coast Life Insurance Company obtained from the court a writ of preliminary attachment by virtue of which the provincial sheriff of Occidental Negros, on September 21, 1925, attached, among others, two parcels of land described in the transfer certificates of title Nos. 3220 and 1263 in the name of Go Chulian. The attachment was duly recorded in the registry of deeds of Occidental Negros and annotated on the back of the proper certificates on the same date, September 21, 1925. On September 15, 1925, Go Chulian executed a mortgage on the two parcels in question in favor of Genoveva Gamboa de Jayme, in order to secure the payment of a loan of P4,200. This mortgage appears in Exhibit A, copied literally in the bill of exceptions. According to said document, the mortgage, which fell due on March 30, 1926, contains the following agreement: This mortgage shall fall due on March 30, 1926, it being understood that if upon maturity the mortgagor shall be unable to satisfy the amount owed, he will authorize the mortgagee to take over the aforesaid parcels of land, and to dispose of them after the sugar-cane crop has been harvested for milling in the season of 1925-1926, the ownership of the aforesaid lots being thus transferred to the mortgagee who shall then be the owner thereof in fee simple, dispensing with expensive lawsuits. On March 30, 1926, the date on which the mortgage fell due, Genoveva de Jayme assigned and transferred her rights and actions in the mortgage contract to Tan Chun Tic, for value received, the deed of assignment being signed by her husband, Antonio Jayme, and the debtor Go Chulian, Exhibit B. On March 7, 1927, Tan Chun Tic presented to the registrar of deeds of Occidental Negros an affidavit wherein he stated that the period granted to the debtor in the said mortgage had already elapsed without payment of its value (Exhibit C). The registrar of deeds then cancelled the certificates of title in the name of Go Chulian, and in lieu thereof issued others in the name of Tan Chun Tic, but preserved the annotation of the preliminary attachment in favor of the West Coast Life Insurance Company. The fundamental question raised by the appellant in his fourth assignment of error refers to the validity or nullity of the pactum commissorium contained in the mortgage contract in favor of Genoveva Gamboa de Jayme, in connection with the provisions of articles 1859 and 1884 of the Civil Code. These articles provide: ART. 1859. The creditor may not appropriate to himself the things given in pledge or mortgage, or dispose of them.

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ART. 1884. The non-payment of the debt within the term agreed upon does not vest the ownership of the property in the creditor. Any stipulation to the contrary shall be void. But in such case the creditor may demand, in the manner prescribed by the Law of Civil Procedure, the payment of the debt or the sale of the realty. Manresa, whose authority is undisputable, commenting upon article 1859 of the Civil Code, raises the following question: "May the creditor appropriate to himself the things pledged or mortgaged, when it is especially no stipulated in the contract?" And he answers it in the following terms: "Some have so contended, on the ground that the contract is the law between the contracting parties; but in our opinion, the answer cannot but be in the negative. With respect to the mortgage, there can be no question, for article 1884 expressly provides that non-payment of the debt within the term agreed upon does not vest the ownership of the property in the creditor, and even declares that any stipulation to the contrary shall be void. And with regard to the pledge, neither can the creditor appropriate the thing pledged, even if it be so stipulated, because in that case, such an agreement would be immoral, illicit, and contrary to law. It was so held by the Supreme Court in its judgment of November 3, 1902, which annulled an agreement so worded. The doctrine laid down by the Supreme Court of Spain in said judgment of November 3, 1902 is as follows: "While it is true that contracts are binding, whatever their form, provided they contain the conditions essential to their validity, and that the obligations arising therefrom have the force of law between the parties who must comply therewith according to the agreement, it is likewise evident that these two precepts of articles 1278 and 1091 of the Civil Code are subordinate to the provision of article 1255, which prohibits agreements contrary to law, morals, or public order. One of said agreements would be, pursuant to the general terms of article 1859, that wherein it is stipulated that the creditor may appropriate the thing pledged as if it had been sold to him, merely because the period for the payment of the loan had lapsed. That agreement, being void as to the mortgagee pursuant to article 1884 of that Code, there can be no rational basis, having in mind the precedents of our ancient law, to consider it lawful with respect to the pledgee, who, in the absence of other conditions which may have been validly stipulated, cannot disregard, in the alienation of the property pledged, the provisions of article 1872 conferring a right to the creditor, which, even though he may renounce, does also constitute a guaranty of the debtor which the latter cannot lose simply by the will of the former or by a stipulation which cannot be enforced in law." The same doctrine is held in this jurisdiction. In Perez vs. Cortes (15 Phil., 211), the following doctrine was laid down: When an obligation secured by the mortgage of real estate becomes due, the creditor is entitled to apply to the courts for the foreclosure of the mortgage, but he is not authorized to appropriate or dispose of the property in order to recover the amount due. In Mahoney vs. Tuason (39 Phil., 952), it was held: The creditor has no right to appropriate to himself the personal property and chattles pledged, nor can he make payment by himself and to himself for his own credit with the value of the said property, because he is only permitted to recover his credit from the proceeds of the sale at public auction of the chattels and personal property pledged not in

the manner prescribed by article 1872 of the Civil Code but in that provided for in section 14 of the said Act No. 1508, which is the one in force. The vice of nullity which vitiates the additional agreement entered into by the contracting parties authorizing the creditor to appropriate the property and effects pledged in payment of his credit does not affect substantially the principal contract of chattel mortgage with regard to its validity and efficacy, for the reason that the principal contract of pledge or chattel mortgage having been perfected it can subsist although the contracting parties have not agreed as to the manner the creditor could recover his credit from the value of the things pledged, in case of the insolvency of the debtor, inasmuch as the law has expressly established the procedure in order that the creditor may not be defrauded or deceived in his right to recover his credit from the proceeds of the chattels retained by him as a security, in case the debtor does not comply with his obligation, because, if the debtor could not pay his debt, there exists no just or legal reason which prevents the creditor from recovering his credit from the proceeds of the effects pledged sold at a sale effected in accordance with law. And in Puig vs. Sellner and Green (45 Phil., 286), it was stated: The pactum commissorium, that is, the additional stipulation to a contract of loan, whereby the thing pledged shall become the property of the creditor in the event of the non-payment of the debt within the term fixed, is void. The creditor has no right to appropriate the chattels and effects pledged, or to make payment to himself and by himself of his credit with the value thereof, for he is only allowed to collect the debt out of the proceeds of the sale of the effects and chattels pledged. And although that last two cases cited, dealt with a contract of pledge, nevertheless, the doctrine is also applicable to contracts of mortgage which include the stipulation referred to, since the prohibition contained in said article 1859 applies to both classes of contract. But the judge who decided the case, in attempting to construe the agreement in question, gives it such an interpretation that instead of said stipulation referring to the creditor's right to appropriate to himself the mortgaged property, in default of the payment of the debt, as agreed upon by the parties, it refers to the debtor's power to sell said property to the said mortgagee, should the credit not be satisfied within the period stated in the contract. In order that this aspect of the question may be clarified, we shall place the contract Exhibit A and the court's interpretation side by side for purposes of comparison:

According to Exhibit A: . . . if upon maturity the mortgagor shall be unable to satisfy the amount owed, he will authorize the mortgage to take over the aforesaid of land, and to dispose of them after the

According to court: ". . . what the parties agreed is and was that in case is and was that pay the debt within the period stipulated, the property given as security would be transferred to the creditor for the amount of

sugar-cane crop has been harvested for milling in the season of 1925-1926, the ownership of the aforesaid lots being thus transferred to the mortgagee who shall then be the owner thereof in fee simple, dispensing with expensive lawsuits."

the debt, the latter thereby becoming the owner, "without necessity of expensive judicial proceedings."

The fundamental difference between the two may be easily understood, and consists in that in one case the mortgagee may take over and dispose of the property mortgaged for the nonpayment, the debtor sells to the creditor the same property mortgaged, for the value of the mortgage. The doctrines invoked by the plaintiff in support of the judgment appealed from were rendered in cases where the question in dispute was whether a mortgagor could validly sell the thing mortgaged to the mortgagee for the amount of the mortgage, when the latter became due. The most interesting case expounded by Manresa in his commentaries upon article 1872 of the Civil Code, contained the following stipulation: "If upon the lapse of one year from this date, the amount loaned has not been returned, the borrower promises to execute a public deed of sale transferring to the lender the two parcels of land described in number 2 and 3, for the price of 4,000 pesetas; and in case of the nonfulfillment of this obligation, the parties may be compelled to do so by the courts." The board of registration in its resolution dated November 16, 1902, held that such an instrument (containing the stipulation quoted) can be registered, holding, among other grounds for such a resolution, that "what the law forbids is the appropriation or disposition of the mortgaged property by the mortgagee, and that if the debtor may legally sell to his creditor the mortgaged property for such price and subject to such conditions as he may deem fit, which has never been doubted, there is no reason whatsoever why he should not be able in like manner to make a promise to sell." And Manresa concludes: "That is to say, that if said parties agree in the mortgage deed upon the sale, or mere promise to sell, of the property mortgaged to the creditor, should the obligation secured by it not be complied with in time, stipulating the conditions of the alienation, the latter may be effectuated without any juridical objection upon the mere default in the payment, without the necessity of a prior auction sale, or any other requisite or formality; but, if instead of agreeing upon the alienation the agreement merely states that upon non-fulfillment of the obligation secured by the mortgage, the mortgagee may, when the mortgage falls due, sell the encumbered property, then the provisions of the law for the sale of the thing pledged, as given in the article under consideration, must be observed." But the doctrines which recognize the right of owners of mortgaged property to transmit freely the ownership thereof to the mortgagee in payment of his credit, are not applicable to the case at bar, where the additional stipulation in question is entirely different from that which the judge took into consideration as the ground of the judgment appealed from. This being so, it is held that the court below erred in upholding the validity of the additional stipulation in question, and in ordering the cancellation of the annotation of the preliminary attachment upon said lots in favor of the defendant West Coast Life Insurance Company.

It is true that by Exhibit B, Genoveva Gamboa de Jayme assigned her rights and actions to the plaintiff Tan Chun Tic, but such an assignment does not extend to the ownership of the mortgaged property, for, the additional stipulation in question, being void, the assignor could not have appropriated said property to herself. And as it is evident that the assignee Tan Chun Tic could not have acquired more rights to the mortgaged property than his assignor Genoveva Gamboa de Jayme had, it follows that neither could he have acquired the ownership of said lots, and hence, he had no right to ask for the cancellation of the annotation of the preliminary attachment levied thereon. Another ground of the appeal is that the contract Exhibit A is void as having been executed in favor of a married woman without her husband's authority. But it should be noted that although the contract thus entered into is voidable at the husband's instance, the latter, instead of asking for its annulment, ratified it, when, together with his wife, he executed the contract of assignment Exhibit B. It is also alleged that the court below erred in reversing the ruling upon the defendant's first demurrer, handed down by another judge of the same court. Supposing that such an error was committed, by itself alone, it is not a reversible error. By virtue of the foregoing, the judgment appealed from is reversed, and the instant complaint should be, as it is hereby, dismissed, without special pronouncement of costs. So ordered.

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