G.R. No.

L-58469 May 16, 1983

MAKATI LEASING and FINANCE CORPORATION, petitioner,

vs.
WEAREVER TEXTILE MILLS, INC., and HONORABLE COURT OF APPEALS,
respondents.

Loreto C. Baduan for petitioner.

Ramon D. Bagatsing & Assoc. (collaborating counsel) for petitioner.

Jose V. Mancella for respondent.

DE CASTRO, J.:

Petition for review on certiorari of the decision of the Court of Appeals (now
Intermediate Appellate Court) promulgated on August 27, 1981 in CA-G.R. No. SP-
12731, setting aside certain Orders later specified herein, of Judge Ricardo J.
Francisco, as Presiding Judge of the Court of First instance of Rizal Branch VI, issued
in Civil Case No. 36040, as wen as the resolution dated September 22, 1981 of the said
appellate court, denying petitioner's motion for reconsideration.

It appears that in order to obtain financial accommodations from herein petitioner Makati
Leasing and Finance Corporation, the private respondent Wearever Textile Mills, Inc.,
discounted and assigned several receivables with the former under a Receivable
Purchase Agreement. To secure the collection of the receivables assigned, private
respondent executed a Chattel Mortgage over certain raw materials inventory as well as
a machinery described as an Artos Aero Dryer Stentering Range.

Upon private respondent's default, petitioner filed a petition for extrajudicial foreclosure
of the properties mortgage to it. However, the Deputy Sheriff assigned to implement the
foreclosure failed to gain entry into private respondent's premises and was not able to
effect the seizure of the aforedescribed machinery. Petitioner thereafter filed a
complaint for judicial foreclosure with the Court of First Instance of Rizal, Branch VI,
docketed as Civil Case No. 36040, the case before the lower court.

Acting on petitioner's application for replevin, the lower court issued a writ of seizure,
the enforcement of which was however subsequently restrained upon private
respondent's filing of a motion for reconsideration. After several incidents, the lower
court finally issued on February 11, 1981, an order lifting the restraining order for the
enforcement of the writ of seizure and an order to break open the premises of private
respondent to enforce said writ. The lower court reaffirmed its stand upon private
respondent's filing of a further motion for reconsideration.
On July 13, 1981, the sheriff enforcing the seizure order, repaired to the premises of
private respondent and removed the main drive motor of the subject machinery.

The Court of Appeals, in certiorari and prohibition proceedings subsequently filed by

herein private respondent, set aside the Orders of the lower court and ordered the
return of the drive motor seized by the sheriff pursuant to said Orders, after ruling that
the machinery in suit cannot be the subject of replevin, much less of a chattel mortgage,
because it is a real property pursuant to Article 415 of the new Civil Code, the same
being attached to the ground by means of bolts and the only way to remove it from
respondent's plant would be to drill out or destroy the concrete floor, the reason why all
that the sheriff could do to enfore the writ was to take the main drive motor of said
machinery. The appellate court rejected petitioner's argument that private respondent is
estopped from claiming that the machine is real property by constituting a chattel
mortgage thereon.

A motion for reconsideration of this decision of the Court of Appeals having been
denied, petitioner has brought the case to this Court for review by writ of certiorari. It is
contended by private respondent, however, that the instant petition was rendered moot
and academic by petitioner's act of returning the subject motor drive of respondent's
machinery after the Court of Appeals' decision was promulgated.

The contention of private respondent is without merit. When petitioner returned the
subject motor drive, it made itself unequivocably clear that said action was without
prejudice to a motion for reconsideration of the Court of Appeals decision, as shown by
the receipt duly signed by respondent's representative. 1 Considering that petitioner has
reserved its right to question the propriety of the Court of Appeals' decision, the
contention of private respondent that this petition has been mooted by such return may
not be sustained.

The next and the more crucial question to be resolved in this Petition is whether the
machinery in suit is real or personal property from the point of view of the parties, with
petitioner arguing that it is a personality, while the respondent claiming the contrary, and
was sustained by the appellate court, which accordingly held that the chattel mortgage
constituted thereon is null and void, as contended by said respondent.

A similar, if not Identical issue was raised in Tumalad v. Vicencio, 41 SCRA 143 where
this Court, speaking through Justice J.B.L. Reyes, ruled:

Although there is no specific statement referring to the subject house as

personal property, yet by ceding, selling or transferring a property by way
of chattel mortgage defendants-appellants could only have meant to
convey the house as chattel, or at least, intended to treat the same as
such, so that they should not now be allowed to make an inconsistent
stand by claiming otherwise. Moreover, the subject house stood on a
rented lot to which defendants-appellants merely had a temporary right as
lessee, and although this can not in itself alone determine the status of the
 property, it does so when combined with other factors to sustain the
interpretation that the parties, particularly the mortgagors, intended to treat
the house as personality. Finally, unlike in the Iya cases, Lopez vs. Orosa,
Jr. & Plaza Theatre, Inc. & Leung Yee vs. F.L. Strong Machinery &
Williamson, wherein third persons assailed the validity of the chattel
mortgage, it is the defendants-appellants themselves, as debtors-
mortgagors, who are attacking the validity of the chattel mortgage in this
case. The doctrine of estoppel therefore applies to the herein defendants-
appellants, having treated the subject house as personality.

Examining the records of the instant case, We find no logical justification to exclude the
rule out, as the appellate court did, the present case from the application of the
abovequoted pronouncement. If a house of strong materials, like what was involved in
the above Tumalad case, may be considered as personal property for purposes of
executing a chattel mortgage thereon as long as the parties to the contract so agree
and no innocent third party will be prejudiced thereby, there is absolutely no reason why
a machinery, which is movable in its nature and becomes immobilized only by
destination or purpose, may not be likewise treated as such. This is really because one
who has so agreed is estopped from denying the existence of the chattel mortgage.

In rejecting petitioner's assertion on the applicability of the Tumalad doctrine, the Court
of Appeals lays stress on the fact that the house involved therein was built on a land
that did not belong to the owner of such house. But the law makes no distinction with
respect to the ownership of the land on which the house is built and We should not lay
down distinctions not contemplated by law.

It must be pointed out that the characterization of the subject machinery as chattel by
the private respondent is indicative of intention and impresses upon the property the
character determined by the parties. As stated in Standard Oil Co. of New York v.
Jaramillo, 44 Phil. 630, it is undeniable that the parties to a contract may by agreement
treat as personal property that which by nature would be real property, as long as no
interest of third parties would be prejudiced thereby.

Private respondent contends that estoppel cannot apply against it because it had never
represented nor agreed that the machinery in suit be considered as personal property
but was merely required and dictated on by herein petitioner to sign a printed form of
chattel mortgage which was in a blank form at the time of signing. This contention lacks
persuasiveness. As aptly pointed out by petitioner and not denied by the respondent,
the status of the subject machinery as movable or immovable was never placed in issue
before the lower court and the Court of Appeals except in a supplemental memorandum
in support of the petition filed in the appellate court. Moreover, even granting that the
charge is true, such fact alone does not render a contract void ab initio, but can only be
a ground for rendering said contract voidable, or annullable pursuant to Article 1390 of
the new Civil Code, by a proper action in court. There is nothing on record to show that
the mortgage has been annulled. Neither is it disclosed that steps were taken to nullify
the same. On the other hand, as pointed out by petitioner and again not refuted by
respondent, the latter has indubitably benefited from said contract. Equity dictates that
one should not benefit at the expense of another. Private respondent could not now
therefore, be allowed to impugn the efficacy of the chattel mortgage after it has
benefited therefrom,

From what has been said above, the error of the appellate court in ruling that the
questioned machinery is real, not personal property, becomes very apparent. Moreover,
the case of Machinery and Engineering Supplies, Inc. v. CA, 96 Phil. 70, heavily relied
upon by said court is not applicable to the case at bar, the nature of the machinery and
equipment involved therein as real properties never having been disputed nor in issue,
and they were not the subject of a Chattel Mortgage. Undoubtedly, the Tumalad case
bears more nearly perfect parity with the instant case to be the more controlling
jurisprudential authority.

WHEREFORE, the questioned decision and resolution of the Court of Appeals are
hereby reversed and set aside, and the Orders of the lower court are hereby reinstated,
with costs against the private respondent.

G.R. No. 34385 September 21, 1931

ALEJANDRA TORRES, ET AL., plaintiff-appellees,

vs.
FRANCISCO LIMJAP, Special Administrator of the estate of the deceased Jose B.
Henson, defendant-appellant.

x---------------------------------------------------------x

G.R. No. 34386 September 21, 1931

SABINA VERGARA VDA. DE TORRES, ET AL., plaintiffs-appellees,

vs.
FRANCISCO LIMJAP, Special Administration of the estate of the deceased Jose B.
Henson, defendant-appellant.

Duran, Lim and Tuason for appellant.

Guevara, Francisco and Recto for appellees.

JOHNSON, J.:

These two actions were commenced in the Court of First Instance of Manila on April 16, 1930,
for the purpose of securing from the defendant the possession of two drug stores located in the
City of Manila, covered by two chattel mortgages executed by the deceased Jose B. Henson in
favor of the plaintiffs.
In the first case the plaintiffs alleged that Jose B. Henson, in his lifetime, executed in their favor
a chattel mortgage (Exhibit A) on his drug store at Nos. 101-103 Calle Rosario, known as
Farmacia Henson, to secure a loan of P7,000, although it was made to appear in the instrument
that the loan was for P20,000.

In the second case the plaintiffs alleged that they were the heirs of the late Don Florentino
Torres; and that Jose B. Henson, in his lifetime, executed in favor of Don Florentino Torres a
chattel mortgage (also Exhibit A) on his three drug stores known as Henson's Pharmacy,
Farmacia Henson and Botica Hensonina, to secure a loan of P50,000, which was later reduced to
P26,000, and for which, Henson's Pharmacy at Nos. 71-73 Escolta, remained as the only security
by agreement of the parties.

In both cases the plaintiffs alleged that the defendant violated the terms of the mortgage and that,
in consequence thereof they became entitled to the possession of the chattels and to foreclose
their mortgages thereon. Upon the petition of the plaintiffs and after the filing of the necessary
bonds, the court issued in each case an order directing the sheriff of the City of Manila to take
immediate possession of said drug stores.

The defendant filed practically the same answer to both complaints. He denied generally and
specifically the plaintiffs' allegations, and set up the following special defenses:

(1) That the chattel mortgages (Exhibit A, in G.R. No. 34385 and Exhibit A, in G.R. No. 34286)
are null and void for lack of sufficient particularity in the description of the property mortgaged;
and

(2) That the chattels which the plaintiffs sought to recover were not the same property described
in the mortgage.

The defendant also filed a counterclaim for damages in the sum of P20,000 in the first case and
P100,000 in the second case.

Upon the issue thus raised by the pleadings, the two causes were tried together by agreement of
the parties. After hearing the evidence adduced during the trial and on July 17, 1930, the
Honorable Mariano Albert, judge, in a very carefully prepared opinion, arrived at the conclusion
(a) that the defendant defaulted in the payment of interest on the loans secured by the mortgages,
in violation of the terms thereof; (b) that by reason of said failure said mortgages became due,
and (c) that the plaintiffs, as mortgagees, were entitled to the possession of the drug stores
Farmacia Henson at Nos. 101-103 Calle Rosario and Henson's Pharmacy at Nos. 71-73 Escolta.
Accordingly, a judgment was rendered in favor of the plaintiffs and against the defendant,
confirming the attachment of said drug stores by the sheriff of the City of Manila and the
delivery thereof to the plaintiffs. The dispositive part of the decision reads as follows:

En virtud de todo lo expuesto, el Juzgado dicta sentencia confirmado en todas sus partes
los ordenes de fechas 16 y 17 de abril de presente ano, dictadas en las causas Nos. 37096
y 37097, respectivamente, y declara definitiva la entrega hecha a los demandantes por el
 Sheriff de Manila de las boticas en cuestion. Se condena en costas al demandado en
ambas causas.

From the judgment the defendant appealed, and now makes the following assignments of error:

I. The lower court erred in failing to make a finding on the question of the sufficiency of
the description of the chattels mortgaged and in failing to hold that the chattel mortgages
were null and void for lack of particularity in the description of the chattels mortgaged.

II. The lower court erred in refusing to allow the defendant to introduce evidence tending
to show that the stock of merchandise found in the two drug stores was not in existence
or owned by the mortgagor at the time of the execution of the mortgages in question.

III. The lower court erred in holding that the administrator of the deceased is now
estopped from contesting the validity of the mortgages in question.

IV. The lower court erred in failing to make a finding on the counterclaims of the
defendant.

With reference to the first assignment of error, we deem it unnecessary to discuss the question
therein raised, inasmuch as according to our view on the question of estoppel, as we shall
hereinafter set forth in our discussion of the third assignment of error, the defendant is estopped
from questioning the validity of these chattel mortgages.

In his second assignment of error the appellant attacks the validity of the stipulation in said
mortgages authorizing the mortgagor to sell the goods covered thereby and to replace them with
other goods thereafter acquired. He insists that a stipulation authorizing the disposal and
substitution of the chattels mortgaged does not operate to extend the mortgage to after-acquired
property, and that such stipulation is in contravention of the express provision of the last
paragraph of section 7 Act No. 1508, which reads as follows:

A chattel mortgage shall be deemed to cover only the property described therein and not
like or substituted property thereafter acquired by the mortgagor and placed in the same
depository as the property originally mortgaged, anything in the mortgage to the contrary
notwithstanding.

In order to give a correct construction to the above-quoted provision of our Chattel Mortgage
Law (Act No. 1508), the spirit and intent of the law must first be ascertained. When said Act was
placed on our statute books by the United States Philippine Commission on July 2, 1906, the
primary aim of that law-making body was undoubtedly to promote business and trade in these
Islands and to give impetus to the economic development of the country. Bearing this in mind, it
could not have been the intention of the Philippine Commission to apply the provision of section
7 above quoted to stores open to the public for retail business, where the goods are constantly
sold and substituted with new stock, such as drug stores, grocery stores, dry-goods stores, etc. If
said provision were intended to apply to this class of business, it would be practically impossible
to constitute a mortgage on such stores without closing them, contrary to the very spirit about a
handicap to trade and business, would restrain the circulation of capital, and would defeat the
purpose for which the law was enacted, to wit, the promotion of business and the economic
development of the country.

In the interpretation and construction of a statute the intent of the law-maker should always be
ascertained and given effect, and courts will not follow the letter of a statute when it leads away
from the true intent and purpose of the Legislature and to conclusions inconsistent with the spirit
of the Act. On this subject, Sutherland, the foremost authority on statutory construction, says:

The Intent of Statute is the Law. — If a statute is valid it is to have effect according to the
purpose and intent of the lawmaker. The intent is the vital part, the essence of the law,
and the primary rule of construction is to ascertain and give effect to that intent. The
intention of the legislature in enacting a law is the law itself, and must be enforced when
ascertained, although it may not be consistent with the strict letter of the statute. Courts
will not follow the letter of a statute when it leads away from the true intent and purpose
of the legislature and to conclusions inconsistent with the general purpose of the act.
Intent is the spirit which gives life to a legislative enactment. In construing statutes the
proper course is to start out and follow the true intent of the legislature and to adopt that
sense which harmonizes best with the content and promotes in the fullest manner the
apparent policy and objects of the legislature. (Vol. II Sutherland, Statutory Construction,
pp. 693-695.)

A stipulation in the mortgage, extending its scope and effect to after-acquired property, is valid
and binding —

. . . where the after-acquired property is in renewal of, or in substitution for, goods on

hand when the mortgage was executed, or is purchased with the proceeds of the sale of
such goods, etc. (11 C.J., p. 436.)

Cobbey, a well-known authority on Chattel Mortgages, recognizes the validity of stipulations

relating to after-acquired and substituted chattels. His views are based on the decisions of the
supreme courts of several states of the Union. He says: "A mortgage may, by express
stipulations, be drawn to cover goods put in stock in place of others sold out from time to time. A
mortgage may be made to include future acquisitions of goods to be added to the original stock
mortgaged, but the mortgage must expressly provide that such future acquisitions shall be held as
included in the mortgage. ... Where a mortgage covering the stock in trade, furniture, and fixtures
in the mortgagor's store provides that "all goods, stock in trade, furniture, and fixtures hereafter
purchased by the mortgagor shall be included in and covered by the mortgage," the mortgage
covers all after-acquired property of the classes mentioned, and, upon foreclosure, such property
may be taken and sold by the mortgagee the same as the property in possession of the mortgagor
at the time the mortgage was executed." (Vol. I, Cobbey on Chattel Mortgages, sec. 361, pp. 474,
475.)

In harmony with the foregoing, we are of the opinion (a) that the provision of the last paragraph
of section 7 of Act No. 1508 is not applicable to drug stores, bazaars and all other stores in the
nature of a revolving and floating business; (b) that the stipulation in the chattel mortgages in
question, extending their effect to after-acquired property, is valid and binding; and (c) that the
lower court committed no error in not permitting the defendant-appellant to introduce evidence
tending to show that the goods seized by the sheriff were in the nature of after-acquired property.

With reference to the third assignment of error, we agree with the lower court that, from the facts
of record, the defendant-appellant is estopped from contenting the validity of the mortgages in
question. This feature of the case has been very ably and fully discussed by the lower court in its
decision, and said discussion is made, by reference, a part of this opinion.

As to the fourth assignment of error regarding the counterclaims of the defendant-appellant, it

may be said that in view of the conclusions reached by the lower court, which are sustained by
this court, the lower court committed no error in not making any express finding as to said
counterclaims. As a matter of form, however, the counter-claims should have been dismissed,
but as the trial court decided both cases in favor of the plaintiffs and confirmed and ratified the
orders directing the sheriff to take possession of the chattels on behalf of the plaintiffs, there was,
in effect, a dismissal of the defendant's counterclaims.

For all of the foregoing, we are of the opinion and so hold that the judgment appealed from is in
accordance with the facts and the law, and the same should be and is hereby affirmed, with costs.
So ordered.

Avanceña, C.J., Street, Malcolm, Villamor, Ostrand, Romualdez, Villa-Real, and Imperial, JJ.,
concur.

G.R. No. L-30173 September 30, 1971

GAVINO A. TUMALAD and GENEROSA R. TUMALAD, plaintiffs-appellees,

vs.
ALBERTA VICENCIO and EMILIANO SIMEON, defendants-appellants.

Castillo & Suck for plaintiffs-appellees.

Jose Q. Calingo for defendants-appellants.

REYES, J.B.L., J.:

Case certified to this Court by the Court of Appeals (CA-G.R. No. 27824-R) for the reason that only questions of law are involved.

This case was originally commenced by defendants-appellants in the municipal court of Manila in Civil Case No. 43073, for ejectment.
Having lost therein, defendants-appellants appealed to the court a quo (Civil Case No. 30993) which also rendered a decision against them,
the dispositive portion of which follows:

WHEREFORE, the court hereby renders judgment in favor of the plaintiffs and against the defendants, ordering the
latter to pay jointly and severally the former a monthly rent of P200.00 on the house, subject-matter of this action, from
March 27, 1956, to January 14, 1967, with interest at the legal rate from April 18, 1956, the filing of the complaint, until
fully paid, plus attorney's fees in the sum of P300.00 and to pay the costs.

It appears on the records that on 1 September 1955 defendants-appellants executed a chattel mortgage in favor of plaintiffs-appellees over
their house of strong materials located at No. 550 Int. 3, Quezon Boulevard, Quiapo, Manila, over Lot Nos. 6-B and 7-B, Block No. 2554,
which were being rented from Madrigal & Company, Inc. The mortgage was registered in the Registry of Deeds of Manila on 2 September
1955. The herein mortgage was executed to guarantee a loan of P4,800.00 received from plaintiffs-appellees, payable within one year at
12% per annum. The mode of payment was P150.00 monthly, starting September, 1955, up to July 1956, and the lump sum of P3,150 was
payable on or before August, 1956. It was also agreed that default in the payment of any of the amortizations, would cause the remaining
unpaid balance to becomeimmediately due and Payable and —

the Chattel Mortgage will be enforceable in accordance with the provisions of Special Act No. 3135, and for this
purpose, the Sheriff of the City of Manila or any of his deputies is hereby empowered and authorized to sell all the
Mortgagor's property after the necessary publication in order to settle the financial debts of P4,800.00, plus 12% yearly
interest, and attorney's fees... 2

When defendants-appellants defaulted in paying, the mortgage was extrajudicially foreclosed, and on 27 March 1956, the house was sold at
public auction pursuant to the said contract. As highest bidder, plaintiffs-appellees were issued the corresponding certificate of sale.3
Thereafter, on 18 April 1956, plaintiffs-appellant commenced Civil Case No. 43073 in the municipal court of Manila, praying, among other
things, that the house be vacated and its possession surrendered to them, and for defendants-appellants to pay rent of P200.00 monthly
from 27 March 1956 up to the time the possession is surrendered.4 On 21 September 1956, the municipal court rendered its decision —

... ordering the defendants to vacate the premises described in the complaint; ordering further to pay monthly the
amount of P200.00 from March 27, 1956, until such (time that) the premises is (sic) completely vacated; plus attorney's
fees of P100.00 and the costs of the suit.5

Defendants-appellants, in their answers in both the municipal court and court a quo impugned the legality of the chattel mortgage, claiming
that they are still the owners of the house; but they waived the right to introduce evidence, oral or documentary. Instead, they relied on their
memoranda in support of their motion to dismiss, predicated mainly on the grounds that: (a) the municipal court did not have jurisdiction to try
and decide the case because (1) the issue involved, is ownership, and (2) there was no allegation of prior possession; and (b) failure to
prove prior demand pursuant to Section 2, Rule 72, of the Rules of Court.6

During the pendency of the appeal to the Court of First Instance, defendants-appellants failed to deposit the rent for November, 1956 within
the first 10 days of December, 1956 as ordered in the decision of the municipal court. As a result, the court granted plaintiffs-appellees'
motion for execution, and it was actually issued on 24 January 1957. However, the judgment regarding the surrender of possession to
plaintiffs-appellees could not be executed because the subject house had been already demolished on 14 January 1957 pursuant to the
order of the court in a separate civil case (No. 25816) for ejectment against the present defendants for non-payment of rentals on the land on
which the house was constructed.

The motion of plaintiffs for dismissal of the appeal, execution of the supersedeas bond and withdrawal of deposited rentals was denied for
the reason that the liability therefor was disclaimed and was still being litigated, and under Section 8, Rule 72, rentals deposited had to be
held until final disposition of the appeal.7

On 7 October 1957, the appellate court of First Instance rendered its decision, the dispositive portion of which is quoted earlier. The said
decision was appealed by defendants to the Court of Appeals which, in turn, certified the appeal to this Court. Plaintiffs-appellees failed to file
a brief and this appeal was submitted for decision without it.

Defendants-appellants submitted numerous assignments of error which can be condensed into two questions, namely: .

(a) Whether the municipal court from which the case originated had jurisdiction to adjudicate the same;

(b) Whether the defendants are, under the law, legally bound to pay rentals to the plaintiffs during the period of one (1)
year provided by law for the redemption of the extrajudicially foreclosed house.

We will consider these questions seriatim.

(a) Defendants-appellants mortgagors question the jurisdiction of the municipal court from which the case originated, and consequently, the
appellate jurisdiction of the Court of First Instance a quo, on the theory that the chattel mortgage is void ab initio; whence it would follow that
the extrajudicial foreclosure, and necessarily the consequent auction sale, are also void. Thus, the ownership of the house still remained with
defendants-appellants who are entitled to possession and not plaintiffs-appellees. Therefore, it is argued by defendants-appellants, the issue
of ownership will have to be adjudicated first in order to determine possession. lt is contended further that ownership being in issue, it is the
Court of First Instance which has jurisdiction and not the municipal court.

Defendants-appellants predicate their theory of nullity of the chattel mortgage on two grounds, which are: (a) that, their signatures on the
chattel mortgage were obtained through fraud, deceit, or trickery; and (b) that the subject matter of the mortgage is a house of strong
materials, and, being an immovable, it can only be the subject of a real estate mortgage and not a chattel mortgage.

On the charge of fraud, deceit or trickery, the Court of First Instance found defendants-appellants' contentions as not supported by evidence
and accordingly dismissed the charge,8 confirming the earlier finding of the municipal court that "the defense of ownership as well as the
allegations of fraud and deceit ... are mere allegations."9
It has been held in Supia and Batiaco vs. Quintero and Ayala10 that "the answer is a mere statement of the facts which the party filing it
expects to prove, but it is not evidence;11 and further, that when the question to be determined is one of title, the Court is given the authority
to proceed with the hearing of the cause until this fact is clearly established. In the case of Sy vs. Dalman,12 wherein the defendant was also
a successful bidder in an auction sale, it was likewise held by this Court that in detainer cases the aim of ownership "is a matter of defense
and raises an issue of fact which should be determined from the evidence at the trial." What determines jurisdiction are the allegations or
averments in the complaint and the relief asked for. 13

Moreover, even granting that the charge is true, fraud or deceit does not render a contract void ab initio, and can only be a ground for
rendering the contract voidable or annullable pursuant to Article 1390 of the New Civil Code, by a proper action in court. 14 There is nothing
on record to show that the mortgage has been annulled. Neither is it disclosed that steps were taken to nullify the same. Hence, defendants-
appellants' claim of ownership on the basis of a voidable contract which has not been voided fails.

It is claimed in the alternative by defendants-appellants that even if there was no fraud, deceit or trickery, the chattel mortgage was still null
and void ab initio because only personal properties can be subject of a chattel mortgage. The rule about the status of buildings as immovable
property is stated in Lopez vs. Orosa, Jr. and Plaza Theatre Inc.,15 cited in Associated Insurance Surety Co., Inc. vs. Iya, et al. 16 to the
effect that —

... it is obvious that the inclusion of the building, separate and distinct from the land, in the enumeration of what may
constitute real properties (art. 415, New Civil Code) could only mean one thing — that a building is by itself an
immovable property irrespective of whether or not said structure and the land on which it is adhered to belong to the
same owner.

Certain deviations, however, have been allowed for various reasons. In the case of Manarang and Manarang vs. Ofilada,17 this Court stated
that "it is undeniable that the parties to a contract may by agreement treat as personal property that which by nature would be real property",
citing Standard Oil Company of New York vs. Jaramillo. 18 In the latter case, the mortgagor conveyed and transferred to the mortgagee by
way of mortgage "the following described personal property." 19 The "personal property" consisted of leasehold rights and a building. Again,
in the case of Luna vs. Encarnacion,20 the subject of the contract designated as Chattel Mortgage was a house of mixed materials, and this
Court hold therein that it was a valid Chattel mortgage because it was so expressly designated and specifically that the property given as
security "is a house of mixed materials, which by its very nature is considered personal property." In the later case of Navarro vs. Pineda,21
this Court stated that —

The view that parties to a deed of chattel mortgage may agree to consider a house as personal property for the
purposes of said contract, "is good only insofar as the contracting parties are concerned. It is based, partly, upon the
principle of estoppel" (Evangelista vs. Alto Surety, No. L-11139, 23 April 1958). In a case, a mortgaged house built on a
rented land was held to be a personal property, not only because the deed of mortgage considered it as such, but also
because it did not form part of the land (Evangelists vs. Abad, [CA]; 36 O.G. 2913), for it is now settled that an object
placed on land by one who had only a temporary right to the same, such as the lessee or usufructuary, does not
become immobilized by attachment (Valdez vs. Central Altagracia, 222 U.S. 58, cited in Davao Sawmill Co., Inc. vs.
Castillo, et al., 61 Phil. 709). Hence, if a house belonging to a person stands on a rented land belonging to another
person, it may be mortgaged as a personal property as so stipulated in the document of mortgage. (Evangelista vs.
Abad, Supra.) It should be noted, however that the principle is predicated on statements by the owner declaring his
house to be a chattel, a conduct that may conceivably estop him from subsequently claiming otherwise. (Ladera vs.
C.N. Hodges, [CA] 48 O.G. 5374): 22

In the contract now before Us, the house on rented land is not only expressly designated as Chattel Mortgage; it specifically provides that
"the mortgagor ... voluntarily CEDES, SELLS and TRANSFERS by way of Chattel Mortgage23 the property together with its leasehold rights
over the lot on which it is constructed and participation ..." 24 Although there is no specific statement referring to the subject house as
personal property, yet by ceding, selling or transferring a property by way of chattel mortgage defendants-appellants could only have meant
to convey the house as chattel, or at least, intended to treat the same as such, so that they should not now be allowed to make an
inconsistent stand by claiming otherwise. Moreover, the subject house stood on a rented lot to which defendats-appellants merely had a
temporary right as lessee, and although this can not in itself alone determine the status of the property, it does so when combined with other
factors to sustain the interpretation that the parties, particularly the mortgagors, intended to treat the house as personalty. Finally unlike in the
Iya cases, Lopez vs. Orosa, Jr. and Plaza Theatre, Inc. 25 and Leung Yee vs. F. L. Strong Machinery and Williamson, 26 wherein third
persons assailed the validity of the chattel mortgage,27 it is the defendants-appellants themselves, as debtors-mortgagors, who are attacking
the validity of the chattel mortgage in this case. The doctrine of estoppel therefore applies to the herein defendants-appellants, having treated
the subject house as personalty.

(b) Turning to the question of possession and rentals of the premises in question. The Court of First Instance noted in its decision that nearly
a year after the foreclosure sale the mortgaged house had been demolished on 14 and 15 January 1957 by virtue of a decision obtained by
the lessor of the land on which the house stood. For this reason, the said court limited itself to sentencing the erstwhile mortgagors to pay
plaintiffs a monthly rent of P200.00 from 27 March 1956 (when the chattel mortgage was foreclosed and the house sold) until 14 January
1957 (when it was torn down by the Sheriff), plus P300.00 attorney's fees.

Appellants mortgagors question this award, claiming that they were entitled to remain in possession without any obligation to pay rent during
the one year redemption period after the foreclosure sale, i.e., until 27 March 1957. On this issue, We must rule for the appellants.

Chattel mortgages are covered and regulated by the Chattel Mortgage Law, Act No. 1508.28 Section 14 of this Act allows the mortgagee to
have the property mortgaged sold at public auction through a public officer in almost the same manner as that allowed by Act No. 3135, as
amended by Act No. 4118, provided that the requirements of the law relative to notice and registration are complied with. 29 In the instant
case, the parties specifically stipulated that "the chattel mortgage will be enforceable in accordance with the provisions of Special Act No.
3135 ... ." 30 (Emphasis supplied).

Section 6 of the Act referred to 31 provides that the debtor-mortgagor (defendants-appellants herein) may, at any time within one year from
and after the date of the auction sale, redeem the property sold at the extra judicial foreclosure sale. Section 7 of the same Act 32 allows the
purchaser of the property to obtain from the court the possession during the period of redemption: but the same provision expressly requires
the filing of a petition with the proper Court of First Instance and the furnishing of a bond. It is only upon filing of the proper motion and the
approval of the corresponding bond that the order for a writ of possession issues as a matter of course. No discretion is left to the court. 33 In
the absence of such a compliance, as in the instant case, the purchaser can not claim possession during the period of redemption as a
matter of right. In such a case, the governing provision is Section 34, Rule 39, of the Revised Rules of Court 34 which also applies to
properties purchased in extrajudicial foreclosure proceedings.35 Construing the said section, this Court stated in the aforestated case of
Reyes vs. Hamada.

In other words, before the expiration of the 1-year period within which the judgment-debtor or mortgagor may redeem
the property, the purchaser thereof is not entitled, as a matter of right, to possession of the same. Thus, while it is true
that the Rules of Court allow the purchaser to receive the rentals if the purchased property is occupied by tenants, he
is, nevertheless, accountable to the judgment-debtor or mortgagor as the case may be, for the amount so received and
the same will be duly credited against the redemption price when the said debtor or mortgagor effects the redemption.
Differently stated, the rentals receivable from tenants, although they may be collected by the purchaser during the
redemption period, do not belong to the latter but still pertain to the debtor of mortgagor. The rationale for the Rule, it
seems, is to secure for the benefit of the debtor or mortgagor, the payment of the redemption amount and the
consequent return to him of his properties sold at public auction. (Emphasis supplied)

The Hamada case reiterates the previous ruling in Chan vs. Espe.36

Since the defendants-appellants were occupying the house at the time of the auction sale, they are entitled to remain in possession during
the period of redemption or within one year from and after 27 March 1956, the date of the auction sale, and to collect the rents or profits
during the said period.

It will be noted further that in the case at bar the period of redemption had not yet expired when action was instituted in the court of origin,
and that plaintiffs-appellees did not choose to take possession under Section 7, Act No. 3135, as amended, which is the law selected by the
parties to govern the extrajudicial foreclosure of the chattel mortgage. Neither was there an allegation to that effect. Since plaintiffs-appellees'
right to possess was not yet born at the filing of the complaint, there could be no violation or breach thereof. Wherefore, the original
complaint stated no cause of action and was prematurely filed. For this reason, the same should be ordered dismissed, even if there was no
assignment of error to that effect. The Supreme Court is clothed with ample authority to review palpable errors not assigned as such if it finds
that their consideration is necessary in arriving at a just decision of the cases. 37

It follows that the court below erred in requiring the mortgagors to pay rents for the year following the foreclosure sale, as well as attorney's
fees.

FOR THE FOREGOING REASONS, the decision appealed from is reversed and another one entered, dismissing the complaint. With costs
against plaintiffs-appellees.

G.R. No. 103576 August 22, 1996

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners,
vs.
HON. COURT OF APPEALS, BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN CITY, respondents.

VITUG, J.:p

Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its coverage to obligations yet to be
contracted or incurred? This question is the core issue in the instant petition for review on certiorari.

Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber & Plastic Corporation," executed on 27 June
1978, for and in behalf of the company, a chattel mortgage in favor of private respondent Producers Bank of the Philippines. The mortgage
stood by way of security for petitioner's corporate loan of three million pesos (P3,000,000.00). A provision in the chattel mortgage agreement
was to this effect —

(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform the full obligation or
obligations above-stated according to the terms thereof, then this mortgage shall be null and void. . . .
 In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the former note, as an
extension thereof, or as a new loan, or is given any other kind of accommodations such as overdrafts, letters of credit,
acceptances and bills of exchange, releases of import shipments on Trust Receipts, etc., this mortgage shall also stand
as security for the payment of the said promissory note or notes and/or accommodations without the necessity of
executing a new contract and this mortgage shall have the same force and effect as if the said promissory note or
notes and/or accommodations were existing on the date thereof. This mortgage shall also stand as security for said
obligations and any and all other obligations of the MORTGAGOR to the MORTGAGEE of whatever kind and nature,
whether such obligations have been contracted before, during or after the constitution of this mortgage. 1

In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it obtained from respondent bank additional
financial accommodations totalling P2,700,000.00. 2 These borrowings were on due date also fully paid.

On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one million pesos (P1,000,000.00) covered by
four promissory notes for P250,000.00 each. Due to financial constraints, the loan was not settled at maturity. 3 Respondent bank thereupon
applied for an extra judicial foreclosure of the chattel mortgage, herein before cited, with the Sheriff of Caloocan City, prompting petitioner
corporation to forthwith file an action for injunction, with damages and a prayer for a writ of preliminary injunction, before the Regional Trial
Court of Caloocan City (Civil Case No. C-12081). Ultimately, the court dismissed the complaint and ordered the foreclosure of the chattel
mortgage. It held petitioner corporation bound by the stipulations, aforequoted, of the chattel mortgage.

Petitioner corporation appealed to the Court of Appeals 4 which, on 14 August 1991, affirmed, "in all respects," the decision of the court a
quo. The motion for reconsideration was denied on 24 January 1992.

The instant petition interposed by petitioner corporation was initially dinied on 04 March 1992 by this Court for having been insufficient in
form and substance. Private respondent filed a motion to dismiss the petition while petitioner corporation filed a compliance and an
opposition to private respondent's motion to dismiss. The Court denied petitioner's first motion for reconsideration but granted a second
motion for reconsideration, thereby reinstating the petition and requiring private respondent to comment thereon. 5

Except in criminal cases where the penalty of reclusion perpetua or death is imposed 6 which the Court so reviews as a matter of course, an
appeal from judgments of lower courts is not a matter of right but of sound judicial discretion. The circulars of the Court prescribing technical
and other procedural requirements are meant to weed out unmeritorious petitions that can unnecessarily clog the docket and needlessly
consume the time of the Court. These technical and procedural rules, however, are intended to help secure, not suppress, substantial justice.
A deviation from the rigid enforcement of the rules may thus be allowed to attain the prime objective for, after all, the dispensation of justice is
the core reason for the existence of courts. In this instance, once again, the Court is constrained to relax the rules in order to give way to and
uphold the paramount and overriding interest of justice.

Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a suretyship, the faithful
performance of the obligation by the principal debt or is secured by the personal commitment of another (the guarantor or surety). In
contracts of real security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property — in
pledge, the placing of movable property in the possession of the creditor; in chattel mortgage, by the execution of the corresponding deed
substantially in the form prescribed by law; in real estate mortgage, by the execution of a public instrument encumbering the real property
covered thereby; and in antichresis, by a written instrument granting to the creditor the right to receive the fruits of an immovable property
with the obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal of his credit — upon the essential
condition that if the obligation becomes due and the debtor defaults, then the property encumbered can be alienated for the payment of the
obligation, 7 but that should the obligation be duly paid, then the contract is automatically extinguished proceeding from the accessory
character 8 of the agreement. As the law so puts it, once the obligation is complied with, then the contract of security becomes, ipso facto,
null and void. 9

While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are
accurately described, 10 a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although a
promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled
upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly
contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with the form
prescribed by the Chattel Mortgage Law. 11 Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred
obligation can constitute an act of default on the part of the borrower of the financing agreement whereon the promise is written but, of
course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage
sought to be foreclosed.

A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form prescribed by the Chattel Mortgage Law
itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith. While it is not doubted that if such an affidavit is
not appended to the agreement, the chattel mortgage would still be valid between the parties (not against third persons acting in
good faith 12), the fact, however, that the statute has provided that the parties to the contract must execute an oath that —

. . . (the) mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no
other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud. 13

makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely contemplated. In the chattel
mortgage here involved, the only obligation specified in the chattel mortgage contract was the P3,000,000.00 loan which petitioner
corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically
 rendered the chattel mortgage void or terminated. In Belgian Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al., 14 the
Court
said —

. . . 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. 15

The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had ceased to exist
coincidentally with the full payment of the P3,000,000.00 loan, 16 there no longer was any chattel mortgage that could cover the
new loans that were concluded thereafter.

We find no merit in petitioner corporation's other prayer that the case should be remanded to the trial court for a specific finding on the
amount of damages it has sustained "as a result of the unlawful action taken by respondent bank against it." 17 This prayer is not reflected in
its complaint which has merely asked for the amount of P3,000,000.00 by way of moral damages. 18 In LBC Express, Inc. vs. Court of
Appeals, 19 we have said:

Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial
person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot
experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous
system and it flows from real ills, sorrows, and griefs of life — all of which cannot be suffered by respondent bank as an
artificial person. 20

While Chua Pac is included in the case, the complaint, however, clearly states that he has merely been so named as a party in
representation of petitioner corporation.

Petitioner corporation's counsel could be commended for his zeal in pursuing his client's cause. It instead turned out to be, however, a
source of disappointment for this Court to read in petitioner's reply to private respondent's comment on the petition his so-called "One Final
Word;" viz:

In simply quoting in toto the patently erroneous decision of the trial court, respondent Court of Appeals should be
required to justify its decision which completely disregarded the basic laws on obligations and contracts, as well as the
clear provisions of the Chattel Mortgage Law and well-settled jurisprudence of this Honorable Court; that in the event
that its explanation is wholly unacceptable, this Honorable Court should impose appropriate sanctions on the erring
justices. This is one positive step in ridding our courts of law of incompetent and dishonest magistrates especially
members of a superior court of appellate jurisdiction. 21 (Emphasis supplied.)

The statement is not called for. The Court invites counsel's attention to the admonition in Guerrero vs. Villamor; 22 thus:

(L)awyers . . . should bear in mind their basic duty "to observe and maintain the respect due to the courts of justice and
judicial officers and . . . (to) insist on similar conduct by others." This respectful attitude towards the court is to be
observed, "not for the sake of the temporary incumbent of the judicial office, but for the maintenance of its supreme
importance." And it is through a scrupulous preference for respectful language that a lawyer best demonstrates his
observance of the respect due to the courts and judicial officers . . . 23

The virtues of humility and of respect and concern for others must still live on even in an age of materialism.

WHEREFORE, the questioned decisions of the appellate court and the lower court are set aside without prejudice to the appropriate legal
recourse by private respondent as may still be warranted as an unsecured creditor. No costs.

Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealing with the courts.

G.R. No. 116363 December 10, 1999

SERVICEWIDE SPECIALISTS, INCORPORATED, petitioner,

vs.
THE HON. COURT OF APPEALS, JESUS PONCE, and ELIZABETH PONCE, respondents.

YNARES-SANTIAGO, J.:
This controversy is between a mortgagor who alienated the mortgaged property without the consent of the mortgagee, on the one hand, and
the assignee of the mortgagee to whom the latter assigned his credit without notice to the mortgagor, on the other hand.

Sometime in 1975, respondent spouses Atty. Jesus and Elizabeth Ponce bought on installment a Holden Torana vehicle from C.R. Tecson
Enterprises. They executed a promissory note and a chattel mortgage on the vehicle dated December 24, 1975 in favor of the C.R. Tecson
Enterprises to secure payment of the note. The mortgage was registered both in the Registry of Deeds and the Land Transportation Office.
On the same date, C.R. Tecson Enterprises, in turn, executed a deed of assignment of said promissory note and chattel mortgage in favor of
Filinvest Credit Corporation with the conformity of respondent spouses. The latter were aware of the endorsement of the note and the
mortgage to Filinvest as they in fact availed of its financing services to pay for the car. In 1976, respondent spouses transferred and
delivered the vehicle to Conrado R. Tecson by way of sale with assumption of mortgage. Subsequently, in 1978, Filinvest assigned all its
rights and interest over the same promissory note and chattel mortgage to petitioner Servicewide Specialists Inc. without notice to
respondent spouses. Due to the failure of respondent spouses to pay the installments under the promissory note from October 1977 to
March 1978, and despite demands to pay the same or to return the vehicle, petitioner was constrained to file before the Regional Trial Court
of Manila on May 22, 1978 a complaint for replevin with damages against them, docketed as Civil Case No. 115567. In their answer,
respondent spouses denied any liability claiming they had already returned the car to Conrado Tecson pursuant to the Deed of Sale with
Assumption of Mortgage. Thus, they filed a third party complaint against Conrado Tecson praying that in case they are adjudged liable to
petitioner, Conrado Tecson should reimburse them.

After trial, the lower court found respondent spouses jointly and solidarily liable to petitioner, however, the third party defendant Conrado
Tecson was ordered to reimburse the respondent spouses for the sum that they would pay to petitioner. 1 On appeal, the Court of Appeals
reversed and set aside the judgment of the court a quo on the principal ground that respondent spouses were not notified of the assignment
of the promissory note and chattel mortgage to petitioner. 2 Hence, this petition for review.

The resolution of the petition hinges on whether the assignment of a credit requires notice to the debtor in order to bind him. More
specifically, is the debtor-mortgagor who sold the property to another entitled to notice of the assignment of credit made by the creditor to
another party such that if the debtor was not notified of the assignment, he can no longer be held liable since he already alienated the
property? Conversely, is the consent of the creditor-mortgagee necessary when the debtor-mortgagor alienates the property to a third
person?

Only notice to the debtor of the assignment of credit is required. His consent is not required. In contrast, consent of the creditor-mortgagee to
the alienation of the mortgaged property is necessary in order to bind said creditor. To evade liability, respondent spouses invoked Article
1626 of the Civil Code which provides that "the debtor who, before having knowledge of the assignment, pays his creditor shall be released
from the obligation." They argue that they were not notified of the assignment made to petitioner. This provision, however, is applicable only
where the debtor pays the creditor prior to acquiring knowledge of the latter's assignment of his credit. It does not apply, nor is it relevant, to
cases of non-payment after the debtor came to know of the assignment of credit. This is precisely so since the debtor did not make any
payment after the assignment.

In the case at bar, what is relevant is not the assignment of credit between petitioner and its assignor, but the knowledge or consent of the
creditor's assignee to the debtor-mortgagor's sale of the property to another.

When the credit was assigned to petitioner, only notice to but not the consent of the debtor-mortgagor was necessary to bind the latter.
Applying Article 1627 of the Civil Code, 3 the assignment made to petitioner includes the accessory rights such as the mortgage. Article
2141, on the other hand, states that the provisions concerning a contract of pledge shall be applicable to a chattel mortgage, such as the one
at bar, insofar as there is no conflict with Act No. 1508, the Chattel Mortgage Law. As provided in Article 2096 in relation to Article 2141 of
the Civil Code, 4 a thing pledged may be alienated by the pledgor or owner "with the consent of the pledgee." This provision is in accordance
with Act No. 1508 which provides that "a mortgagor of personal property shall not sell or pledge such property, or any part thereof,
mortgaged by him without the consent of the mortgagee in writing on the back of the mortgage and on the margin of the record thereof in the
office where such mortgage is recorded." 5 Although this provision in the chattel mortgage has been expressly repealed by Article 367 of the
Revised Penal Code, yet under Article 319 (2) of the same Code, the sale of the thing mortgaged may be made provided that the mortgagee
gives his consent and that the same is recorded. 6 In any case, applying by analogy Article 2128 of the Civil Code 7 to a chattel mortgage, it
appears that a mortgage credit may be alienated or assigned to a third person. Since the assignee of the credit steps into the shoes of the
creditor-mortgagee to whom the chattel was mortgaged, it follows that the assignee's consent is necessary in order to bind him of the
alienation of the mortgaged thing by the debtor-mortgagor. This is tantamount to a novation. As the new assignee, petitioner's consent is
necessary before respondent spouses' alienation of the vehicle can be considered as binding against third persons. Petitioner is considered
a third person with respect to the sale with mortgage between respondent spouses and third party defendant Conrado Tecson.

In this case, however, since the alienation by the respondent spouses of the vehicle occurred prior to the assignment of credit to petitioner, it
follows that the former were not bound to obtain the consent of the latter as it was not yet an assignee of the credit at the time of the
alienation of the mortgaged vehicle.

The next question is whether respondent spouses needed to notify or secure the consent of petitioner's predecessor to the alienation of the
vehicle. The sale with assumption of mortgage made by respondent spouses is tantamount to a substitution of debtors. In such case, mere
notice to the creditor is not enough, his consent is always necessary as provided in Article 1293 of the Civil Code. 8 Without such consent by
the creditor, the alienation made by respondent spouses is not binding on the former. On the other hand, Articles 1625, 9 1626 10 and 1627
of the Civil Code on assignment of credits do not require the debtor's consent for the validity thereof and so as to render him liable to the
assignee. The law speaks not of consent but of notice to the debtor, the purpose of which is to inform the latter that from the date of
assignment he should make payment to the assignee and not to the original creditor. Notice is thus for the protection of the assignee
because before said date, payment to the original creditor is valid.
When Tecson Enterprises assigned the promissory note and the chattel mortgage to Filinvest, it was made with respondent spouses' tacit
approval. When Filinvest in turn, as assignee, assigned it further to petitioner, the latter should have notified the respondent spouses of the
assignment in order to bind them. This, they failed to do. The testimony of petitioner's witness that notice of assignment was sent to
respondent spouses was stricken off the record. Having asserted the affirmative on the issue of notice, petitioner should have substantiated
its allegations in order to obtain a favorable judgment. In civil cases, the burden is on the party who would be defeated if no evidence is given
on either side. 11 Being the plaintiff in the trial below, petitioner must establish its case, relying on the strength of its own evidence and not
upon the weakness of that of its opponent. 12 The consent to the assignment given by respondent spouses to Filinvest cannot be construed
as the spouses' knowledge of the assignment to petitioner precisely because at the time of the assignment to the latter, the spouses had
earlier sold the vehicle to another.

One thing, however, that militates against the posture of respondent spouses is that although they are not bound to obtain the consent of the
petitioner before alienating the property, they should have obtained the consent of Filinvest since they were already aware of the assignment
to the latter. So that, insofar as Filinvest is concerned, the debtor is still respondent spouses because of the absence of its consent to the
sale. Worse, Filinvest was not even notified of such sale. Having subsequently stepped into the shoes of Filinvest, petitioner acquired the
same rights as the former had against respondent spouses. The defenses that could have been invoked by Filinvest against the spouses can
be successfully raised by petitioner. Therefore, for failure of respondent spouses to obtain the consent of Filinvest thereto, the sale of the
vehicle to Conrado R. Tecson was not binding on the former. When the credit was assigned by Filinvest to petitioner, respondent spouses
stood on record as the debtor-mortgagor.

WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE. The decision of the Regional Trial Court is AFFIRMED
and REINSTATED. Respondents Jesus Ponce and Elizabeth Ponce are ORDERED to pay petitioner, jointly and severally, the following
sums:

a) P26,633,09, plus interest at 14% per annum from April 26, 1978 until fully paid;

b) 25% of the above sum in item (a) as liquidated damages;

c) P5,000.00 as attorney's fees; and

d) costs of suit.

In connection with the Third Party Complaint of the respondents, the third party defendant Conrado Tecson is hereby ordered to reimburse
respondents Ponce for all the sums the latter would pay to petitioner, and attorney's fees of P3,000.00.

G.R. No. 92989 July 8, 1991

PERFECTO DY, JR. petitioner,

vs.
COURT OF APPEALS, GELAC TRADING INC., and ANTONIO V. GONZALES,
respondents.

Zosa & Quijano Law Offices for petitioner.

Expedito P. Bugarin for respondent GELAC Trading, Inc.

GUTIERREZ, JR., J.:

This is a petition for review on certiorari seeking the reversal of the March 23, 1990 decision of
the Court of Appeals which ruled that the petitioner's purchase of a farm tractor was not validly
consummated and ordered a complaint for its recovery dismissed.

The facts as established by the records are as follows:

The petitioner, Perfecto Dy and Wilfredo Dy are brothers. Sometime in 1979, Wilfredo Dy
purchased a truck and a farm tractor through financing extended by Libra Finance and
Investment Corporation (Libra). Both truck and tractor were mortgaged to Libra as security for
the loan.

The petitioner wanted to buy the tractor from his brother so on August 20, 1979, he wrote a letter
to Libra requesting that he be allowed to purchase from Wilfredo Dy the said tractor and assume
the mortgage debt of the latter.

In a letter dated August 27, 1979, Libra thru its manager, Cipriano Ares approved the petitioner's
request.

Thus, on September 4, 1979, Wilfredo Dy executed a deed of absolute sale in favor of the
petitioner over the tractor in question.

At this time, the subject tractor was in the possession of Libra Finance due to Wilfredo Dy's
failure to pay the amortizations.

Despite the offer of full payment by the petitioner to Libra for the tractor, the immediate release
could not be effected because Wilfredo Dy had obtained financing not only for said tractor but
also for a truck and Libra insisted on full payment for both.

The petitioner was able to convince his sister, Carol Dy-Seno, to purchase the truck so that full
payment could be made for both. On November 22, 1979, a PNB check was issued in the amount
of P22,000.00 in favor of Libra, thus settling in full the indebtedness of Wilfredo Dy with the
financing firm. Payment having been effected through an out-of-town check, Libra insisted that
it be cleared first before Libra could release the chattels in question.

Meanwhile, Civil Case No. R-16646 entitled "Gelac Trading, Inc. v. Wilfredo Dy", a collection
case to recover the sum of P12,269.80 was pending in another court in Cebu.

On the strength of an alias writ of execution issued on December 27, 1979, the provincial sheriff
was able to seize and levy on the tractor which was in the premises of Libra in Carmen, Cebu.
The tractor was subsequently sold at public auction where Gelac Trading was the lone bidder.
Later, Gelac sold the tractor to one of its stockholders, Antonio Gonzales.

It was only when the check was cleared on January 17, 1980 that the petitioner learned about
GELAC having already taken custody of the subject tractor. Consequently, the petitioner filed an
action to recover the subject tractor against GELAC Trading with the Regional Trial Court of
Cebu City.

On April 8, 1988, the RTC rendered judgment in favor of the petitioner. The dispositive portion
of the decision reads as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant, pronouncing that the plaintiff is the owner of the tractor, subject matter of this
 case, and directing the defendants Gelac Trading Corporation and Antonio Gonzales to
return the same to the plaintiff herein; directing the defendants jointly and severally to
pay to the plaintiff the amount of P1,541.00 as expenses for hiring a tractor; P50,000 for
moral damages; P50,000 for exemplary damages; and to pay the cost. (Rollo, pp. 35-36)

On appeal, the Court of Appeals reversed the decision of the RTC and dismissed the complaint
with costs against the petitioner. The Court of Appeals held that the tractor in question still
belonged to Wilfredo Dy when it was seized and levied by the sheriff by virtue of the alias writ
of execution issued in Civil Case No. R-16646.

The petitioner now comes to the Court raising the following questions:

A.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS

MISAPPREHENDED THE FACTS AND ERRED IN NOT AFFIRMING THE TRIAL
COURT'S FINDING THAT OWNERSHIP OF THE FARM TRACTOR HAD
ALREADY PASSED TO HEREIN PETITIONER WHEN SAID TRACTOR WAS
LEVIED ON BY THE SHERIFF PURSUANT TO AN ALIAS WRIT OF EXECUTION
ISSUED IN ANOTHER CASE IN FAVOR OF RESPONDENT GELAC TRADING
INC.

B.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS EMBARKED ON

MERE CONJECTURE AND SURMISE IN HOLDING THAT THE SALE OF THE
AFORESAID TRACTOR TO PETITIONER WAS DONE IN FRAUD OF WILFREDO
DY'S CREDITORS, THERE BEING NO EVIDENCE OF SUCH FRAUD AS FOUND
BY THE TRIAL COURT.

C.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS

MISAPPREHENDED THE FACTS AND ERRED IN NOT SUSTAINING THE
FINDING OF THE TRIAL COURT THAT THE SALE OF THE TRACTOR BY
RESPONDENT GELAC TRADING TO ITS CO-RESPONDENT ANTONIO V.
GONZALES ON AUGUST 2, 1980 AT WHICH TIME BOTH RESPONDENTS
ALREADY KNEW OF THE FILING OF THE INSTANT CASE WAS VIOLATIVE OF
THE HUMAN RELATIONS PROVISIONS OF THE CIVIL CODE AND RENDERED
THEM LIABLE FOR THE MORAL AND EXEMPLARY DAMAGES SLAPPED
AGAINST THEM BY THE TRIAL COURT. (Rollo, p. 13)

The respondents claim that at the time of the execution of the deed of sale, no constructive
delivery was effected since the consummation of the sale depended upon the clearance and
encashment of the check which was issued in payment of the subject tractor.
In the case of Servicewide Specialists Inc. v. Intermediate Appellate Court. (174 SCRA 80
[1989]), we stated that:

xxx xxx xxx

The rule is settled that the chattel mortgagor continues to be the owner of the property,
and therefore, has the power to alienate the same; however, he is obliged under pain of
penal liability, to secure the written consent of the mortgagee. (Francisco, Vicente, Jr.,
Revised Rules of Court in the Philippines, (1972), Volume IV-B Part 1, p. 525). Thus, the
instruments of mortgage are binding, while they subsist, not only upon the parties
executing them but also upon those who later, by purchase or otherwise, acquire the
properties referred to therein.

The absence of the written consent of the mortgagee to the sale of the mortgaged property
in favor of a third person, therefore, affects not the validity of the sale but only the penal
liability of the mortgagor under the Revised Penal Code and the binding effect of such
sale on the mortgagee under the Deed of Chattel Mortgage.

xxx xxx xxx

The mortgagor who gave the property as security under a chattel mortgage did not part with the
ownership over the same. He had the right to sell it although he was under the obligation to
secure the written consent of the mortgagee or he lays himself open to criminal prosecution
under the provision of Article 319 par. 2 of the Revised Penal Code. And even if no consent was
obtained from the mortgagee, the validity of the sale would still not be affected.

Thus, we see no reason why Wilfredo Dy, as the chattel mortgagor can not sell the subject
tractor. There is no dispute that the consent of Libra Finance was obtained in the instant case. In
a letter dated August 27, 1979, Libra allowed the petitioner to purchase the tractor and assume
the mortgage debt of his brother. The sale between the brothers was therefore valid and binding
as between them and to the mortgagee, as well.

Article 1496 of the Civil Code states that the ownership of the thing sold is acquired by the
vendee from the moment it is delivered to him in any of the ways specified in Articles 1497 to
1501 or in any other manner signing an agreement that the possession is transferred from the
vendor to the vendee. We agree with the petitioner that Articles 1498 and 1499 are applicable in
the case at bar.

Article 1498 states:

Art. 1498. When the sale is made through a public instrument, the execution thereof shall
be equivalent to the delivery of the thing which is the object of the contract, if from the
deed the contrary does not appear or cannot clearly be inferred.

xxx xxx xxx

Article 1499 provides:

Article 1499. The delivery of movable property may likewise be made by the mere
consent or agreement of the contracting parties, if the thing sold cannot be transferred to
the possession of the vendee at the time of the sale, or if the latter already had it in his
possession for any other reason. (1463a)

In the instant case, actual delivery of the subject tractor could not be made. However, there was
constructive delivery already upon the execution of the public instrument pursuant to Article
1498 and upon the consent or agreement of the parties when the thing sold cannot be
immediately transferred to the possession of the vendee. (Art. 1499)

The respondent court avers that the vendor must first have control and possession of the thing
before he could transfer ownership by constructive delivery. Here, it was Libra Finance which
was in possession of the subject tractor due to Wilfredo's failure to pay the amortization as a
preliminary step to foreclosure. As mortgagee, he has the right of foreclosure upon default by the
mortgagor in the performance of the conditions mentioned in the contract of mortgage. The law
implies that the mortgagee is entitled to possess the mortgaged property because possession is
necessary in order to enable him to have the property sold.

While it is true that Wilfredo Dy was not in actual possession and control of the subject tractor,
his right of ownership was not divested from him upon his default. Neither could it be said that
Libra was the owner of the subject tractor because the mortgagee can not become the owner of or
convert and appropriate to himself the property mortgaged. (Article 2088, Civil Code) Said
property continues to belong to the mortgagor. The only remedy given to the mortgagee is to
have said property sold at public auction and the proceeds of the sale applied to the payment of
the obligation secured by the mortgagee. (See Martinez v. PNB, 93 Phil. 765, 767 [1953]) There
is no showing that Libra Finance has already foreclosed the mortgage and that it was the new
owner of the subject tractor. Undeniably, Libra gave its consent to the sale of the subject tractor
to the petitioner. It was aware of the transfer of rights to the petitioner.

Where a third person purchases the mortgaged property, he automatically steps into the shoes of
the original mortgagor. (See Industrial Finance Corp. v. Apostol, 177 SCRA 521 [1989]). His
right of ownership shall be subject to the mortgage of the thing sold to him. In the case at bar, the
petitioner was fully aware of the existing mortgage of the subject tractor to Libra. In fact, when
he was obtaining Libra's consent to the sale, he volunteered to assume the remaining balance of
the mortgage debt of Wilfredo Dy which Libra undeniably agreed to.

The payment of the check was actually intended to extinguish the mortgage obligation so that the
tractor could be released to the petitioner. It was never intended nor could it be considered as
payment of the purchase price because the relationship between Libra and the petitioner is not
one of sale but still a mortgage. The clearing or encashment of the check which produced the
effect of payment determined the full payment of the money obligation and the release of the
chattel mortgage. It was not determinative of the consummation of the sale. The transaction
between the brothers is distinct and apart from the transaction between Libra and the petitioner.
The contention, therefore, that the consummation of the sale depended upon the encashment of
the check is untenable.

The sale of the subject tractor was consummated upon the execution of the public instrument on
September 4, 1979. At this time constructive delivery was already effected. Hence, the subject
tractor was no longer owned by Wilfredo Dy when it was levied upon by the sheriff in
December, 1979. Well settled is the rule that only properties unquestionably owned by the
judgment debtor and which are not exempt by law from execution should be levied upon or
sought to be levied upon. For the power of the court in the execution of its judgment extends
only over properties belonging to the judgment debtor. (Consolidated Bank and Trust Corp. v.
Court of Appeals, G.R. No. 78771, January 23, 1991).

The respondents further claim that at that time the sheriff levied on the tractor and took legal
custody thereof no one ever protested or filed a third party claim.

It is inconsequential whether a third party claim has been filed or not by the petitioner during the
time the sheriff levied on the subject tractor. A person other than the judgment debtor who
claims ownership or right over levied properties is not precluded, however, from taking other
legal remedies to prosecute his claim. (Consolidated Bank and Trust Corp. v. Court of Appeals,
supra) This is precisely what the petitioner did when he filed the action for replevin with the
RTC.

Anent the second and third issues raised, the Court accords great respect and weight to the
findings of fact of the trial court.1âwphi1 There is no sufficient evidence to show that the sale of
the tractor was in fraud of Wilfredo and creditors. While it is true that Wilfredo and Perfecto are
brothers, this fact alone does not give rise to the presumption that the sale was fraudulent.
Relationship is not a badge of fraud (Goquiolay v. Sycip, 9 SCRA 663 [1963]). Moreover, fraud
can not be presumed; it must be established by clear convincing evidence.

We agree with the trial court's findings that the actuations of GELAC Trading were indeed
violative of the provisions on human relations. As found by the trial court, GELAC knew very
well of the transfer of the property to the petitioners on July 14, 1980 when it received summons
based on the complaint for replevin filed with the RTC by the petitioner. Notwithstanding said
summons, it continued to sell the subject tractor to one of its stockholders on August 2, 1980.

WHEREFORE, the petition is hereby GRANTED. The decision of the Court of Appeals
promulgated on March 23, 1990 is SET ASIDE and the decision of the Regional Trial Court
dated April 8, 1988 is REINSTATED.

G.R. No. 106435 July 14, 1999

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.

GONZAGA-REYES, J.:

Before Us for review on certiorari is the decision of the respondent Court of Appeals in C.A.
G.R. C.V. No. 27861, promulgated on April 23, 1992, 1 affirming in toto the decision of the
Regional Trial Court of Makati 2 to a 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 courtr. 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 foreclosire 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.

Sec. 14 of Act No. 1508, as amended, or the chattel Mortgage Law, states:

xxx xxx xxx

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.1âwphi1.nêt

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 xxx xxx

In case of default in the payment of any installment above, we bind

ourselves to pay DBP for advances . . .

xxx xxx xxx

We further bind ourselves to pay additional interest and penalty charges

on loan amortizations or portion thereof in arrears as follows:

xxx xxx xxx

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

xxx 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 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.

G.R. No. 150673 February 28, 2003

SUPERLINES TRANSPORTATION COMPANY, INC., and MANOLET LAVIDES,

petitioners,
vs.
ICC LEASING & FINANCING CORPORATION, respondent.

DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, of the Decision1 of the Court of Appeals in CA-G.R. No. 65126 reversing on appeal
the Decision2 of Branch 142 of the Regional Trial Court of Makati City in Civil Case No. 97-
816.

The Antecedents
In 1995, Superlines Transportation Co., Inc. (Superlines, for brevity) decided to acquire five new
buses from the Diamond Motors Corporation for the price of ₱10,873,582.00. However,
Superlines lacked financial resources for the purpose. By virtue of a board resolution, Superlines
authorized its President and General Manager, Manolet Lavides, a graduate of the Ateneo de
Manila School of Law and a businessman for twenty years, to look for and negotiate with a
financing corporation for a loan for the purchase of said buses.

Lavides negotiated with ICC Leasing & Financing Corporation (ICC, for brevity) through the
latter’s Assistant Vice-President for Operations Aida F. Albano, for a financial scheme for the
planned purchase. ICC agreed to finance the purchase of the new buses via a loan and proposed a
three-year term for the payment thereof at a fixed interest rate of 22% per annum. The new buses
to be purchased were to be used by Superlines as security for the loan. ICC required Superlines
to submit certificates of registration of the said buses under the name of Superlines before the
appropriate document was executed by the parties and their transactions consummated. On
October 19, 1995, Diamond Motors Corporation sold to Superlines five new buses under Vehicle
Invoice Nos. 9225 to 9229.3 Superlines, through Lavides, acknowledged receipt of the buses.

On November 22, 1995, the vehicle invoices were filed with the Land Transportation Office
which then issued certificates of registration covering the five buses under the name of
Superlines.4 With the buses now registered under its name, Superlines, through Lavides,
executed two documents, namely: a deed of chattel mortgage over the said buses as security for
the purchase price of the buses in the amount of ₱13,114,287.005 loaned by ICC to Superlines,
which deed was annotated on the face of said certificates of registration, and a promissory note
in favor of ICC binding and obliging itself to pay to the latter the amount of ₱10,873,582.00 in
monthly installments of ₱415,290.00, the first installment to start on December 23, 1995, with
interest thereon at the rate of 22% per annum until full payment of said amount6 in favor of
Superlines and ICC covenanted in said deed that:

Effective upon the breach of any condition of this mortgage, and in case of loss or damage of the
mortgaged property/ies and in addition to the remedies herein stipulated, the MORTGAGEE is
hereby appointed attorney-in-fact of the MORTGAGOR with full power and authority, by the
use of force if necessary, to take actual possession of the mortgaged property/ies without the
necessity of any judicial order or any other permission or power, to remove, sell or dispose of the
mortgaged property/ies, and collect rents therefor, to execute bill of sale, lease or agreements that
may be deemed convenient; to make repairs or improvements in the mortgaged property/ies and
pay the same and perform any other act which the MORTGAGEE may deem convenient for the
proper administration of the mortgaged property/ies; and to file, prove, justify, prosecute,
compromise or settle insurance claims with the insurance company, without the participation of
the MORTGAGOR, under such terms and conditions as the Mortgagee as attorney-in-fact may
consider fair and reasonable. The payment of any expenses advanced by the MORTGAGEE or
its assigns in connection with the purpose indicated herein is also guaranteed by this mortgage.
Any amount received from the sale, disposal or administration abovementioned may be executed
by the MORTGAGEE by virtue of this power and applied to the satisfaction of the obligations
hereby secured, which act is hereby ratified.
The MORTGAGEE shall have the option of selling the property/ies either at public or private
sale at the municipality or at the capital of the province where it may be situated at the time; or at
any municipality where the MORTGAGEE may have a branch, office, or at Metro Manila, the
MORTGAGOR hereby waiving all rights to any notice of such sale.

The MORTGAGOR hereby expressly waives the term of thirty (30) days or any other term
granted or which may hereafter be granted him/it by law as the period which must elapse before
the MORTGAGEE or its assigns shall be entitled to foreclose this mortgage, it being expressly
understood and agreed that the MORTGAGEE may foreclose this mortgage at any time after the
breach of any condition hereof.

It is further agreed that in case of the sale at public auction under foreclosure proceedings of the
property/ies herein mortgaged, or of any part thereof, the MORTGAGEE shall be entitled to bid
for the properties so sold, or for any part thereof, to buy the same, or any part thereof, and to
have the amount of his/its bid applied to the payment of the obligations secured by this mortgage
without requiring payment in cash of the amount of such bid.

The remedies of the MORTGAGEE under the powers hereby conferred upon him/it shall be and
are in addition to and cumulative with such right of action as the said MORTGAGEE or the
assigns may have in accordance with the present or any future laws of the Philippines.7

Superlines and Lavides executed a Continuing Guaranty to pay jointly and severally in favor of
ICC the amount of ₱13,114,285.00.8 ICC drew and delivered to Superlines Metrobank Check
No. 0661909113, dated November 23, 1995, payable to the account of Superlines in the amount
of ₱10,873,582.00,9 representing the net proceeds of the loan. The latter acknowledged receipt
of the check in Cash Voucher No. 0.0769.10 Superlines remitted the said check to Diamond
Motors Corporation in full payment of the purchase price of the new buses.

After paying only seven monthly amortizations for the period of December 1995 to June 1996,
Superlines defaulted in the payment of its obligation to ICC.11 On April 2, 1997, ICC wrote
Superlines demanding full payment of its outstanding obligation, which as of March 31, 1997
amounted to ₱12,606,020.55.12 However, Superlines failed to heed said demand.

ICC filed a complaint13 for collection of sum of money with prayer for a writ of replevin on
April 21, 1997 with Branch 142 of the Regional Trial Court of Makati City against Superlines
and Lavides. The case was entitled "ICC Leasing & Finance Corporation vs. Superlines
Transportation Co., Inc., et al." and docketed as Civil Case No. 97-816. ICC alleged, by way of
alternative cause of action, that:

xxx xxx xxx

13. In the event that the Plaintiff fails to locate and/or seize the above-described mortgaged
vehicles from Defendant, its agents and/or assigns, or any such person other than said Defendant
or its representatives, Defendant is obligated to pay Plaintiff the sum of P12,072,895.59, and an
amount equivalent to 5% of the total amount due from Defendant as and for attorney’s fees, plus
expenses of collection, the costs of suit and cost of Replevin Bond.
ICC prayed that after due proceedings, judgment be rendered in its favor, thus:

WHEREFORE, it is respectfully prayed that:

1. A Writ of Replevin be issued, ordering the Court Sheriff and/or any of his deputies, to
seize from Defendant, its agents and/or assigns, or any such person other than said
Defendant or its representatives in possession thereof at present, the above-described
vehicles wherever they may be found, to take and keep the same in custody and, to
dispose of them in accordance with Section 6, Rule 60 of the Revised Rules of Court.

2. Judgment be rendered in favor of the Plaintiff and against the Defendant, as follows:

a) Declaring that Plaintiff is entitled to the possession of the subject properties in

accordance with the terms and conditions of the Chattel Mortgage;

b) Ordering Defendant, in case the amount realized from the sale of the
mortgaged properties shall be insufficient to cover its total indebtedness, to pay
the Plaintiff the deficiency;

c) Ordering Defendant to pay Plaintiff the expenses of litigation and costs of suit,
including the costs of the Replevin Bond, plus the stipulated attorney’s fees.

As to the –

ALTERNATIVE CAUSE OF ACTION

Ordering Defendants to pay the outstanding principal balance of P12,072,895.59, to pay the costs
of suit, expenses of litigation and the costs of the Replevin Bond, plus an amount equivalent to
5% of the total amount due as and for attorney’s fees.

In the meantime, the trial court issued a writ of seizure for the five mortgaged buses.14 On May
29, 1997, the sheriff took possession of the five buses in compliance with the writ of seizure
issued by the trial court.15 Thereafter, ICC instituted extra-judicial foreclosure proceedings over
the subject buses. An auction sale was held on July 2, 1997. ICC offered a bid of ₱7,200,000.00
for the motor vehicles and was declared the winning bidder, resulting in a deficiency of
P5,406,029.55. In addition, ICC incurred necessary expenses in the amount of ₱920,524.62.
Superlines thus still owed ICC the amount of ₱6,326,556.17.

In their Answer with Counterclaim, Superlines and Lavides asserted that the real agreement of
the parties was one of financing a sale of personal property, the prices for which shall be payable
on installments. Relying on Article 1484(3) of the Civil Code, Superlines and Lavides claimed
that since the chattel mortgage on subject buses was already foreclosed by ICC, the latter had no
further action against Superlines and Lavides for the unpaid balance of the price. They
interposed compulsory damages in the total amount of ₱750,000.00 excluding costs of suit.
Leonardo Serrano, Jr., the Executive Vice-President and Chief Operations Officer of ICC,
testified that the transaction forged by ICC and Superlines was an amortized commercial loan
and not a consumer loan, because under the latter transaction, ICC should have paid the price of
the purchase of its customers (Superlines) directly to the suppliers. However, ICC did not do
business directly with Diamond Motors Corporation; it transacted directly with Superlines. ICC
remitted the purchase price of the buses directly to Superlines and not to Diamond Motors
Corporation. ICC had no contract with Diamond Motors Corporation.

On the other hand, Lavides testified that he and ICC’s Assistant Vice-President for Operations
Aida Albano agreed on a consumer loan for the financing of the purchase of the buses, with ICC
as the vendor, and Superlines as the vendee, of said buses; and that ICC had a special
arrangement with Diamond Motors Corporation on the purchase by Superlines of the buses.

On June 1, 1999, the trial court rendered a decision ordering the dismissal of the case and for
ICC to pay damages and litigation expenses to Superlines and Lavides, the decretal portion of
which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered DISMISSING the instant
complaint and ORDERING plaintiff to pay defendants the following:

1. The sum of P150,000.00 as and for attorney’s fees;

2. The sum of P300,000.00 as moderate damages;

3. The sum of P50,000.00 as litigation expenses and

4. The costs of suit.

SO ORDERED.16

The trial court found that, as testified to by Lavides, ICC and Superlines forged a consumer loan
agreement and not an amortized commercial loan. It further declared that, as testified to by
Lavides, there was a special arrangement for the purchase by ICC of said buses. The trial court
finally stated that Superlines purchased the buses from ICC, the purchase price therefor payable
in monthly installments. ICC appealed the trial court’s decision to the Court of Appeals. On July
30, 2001, the appellate court rendered a decision reversing the decision of the RTC and ordering
Superlines and Lavides to pay the deficiency claim of ICC. The decretal portion thereof reads:

In view of the foregoing, it is Our conclusion that plaintiff-appellant is entitled to the deficiency
claim of ₱5,376,543.96 (Exh. "F-1", p. 155 Record), plus costs of ₱71,807.22 for the Replevin
Bond (Exh. "H", p. 156, Record) and attorney’s fees of ₱508,000.00 (Exh. "G", p. 156, Record).

WHEREFORE, the appealed Decision is REVERSED and SET ASIDE and a new one is
rendered ordering defendants to pay jointly and severally the sum of P5,956,351.18 to the
plaintiff.
SO ORDERED.17

The Court of Appeals stated that ICC and Superlines entered into an amortized commercial loan
agreement with ICC as creditor-mortgagee and Superlines as debtor-mortgagor, and ordered
Superlines and Lavides to pay to ICC jointly and severally the sum of ₱5,956,351.18 as
deficiency.18

It further declared that it was Diamond Motors Corporation and not ICC which sold the subject
buses to Superlines. It held that no evidence had been presented by Superlines to show that ICC
bought the said buses from Diamond Motors Corporation under a special arrangement and that
ICC sold the buses to Superlines. The appellate court also ruled that Article 1484(3) is applicable
only where there is vendor-vendee relationship between the parties and since ICC did not sell the
buses to Superlines, the latter cannot invoke said law.

Hence, this petition.

Petitioners contend that the appellate court committed serious errors of law and/or grave abuse of
discretion amounting to excess or lack of jurisdiction:

1. In concluding that Article 1484 (3) of the Civil Code is inapplicable to the instant
transaction between the parties, and in holding that said transaction was an "amortized
commercial loan", the same being patently contrary to the unrebutted evidence as well as
the admissions of the respondent’s sole witness that the parties may "verbally" agree as
regards the financial scheme applied for and that the chattel mortgage, promissory note
and other documents executed in the case of a "commercial loan" are no different from
those documents executed in the case of a "consumer loan".

2. In concluding that the respondent is in any event entitled to deficiency judgment as it is

deemed to have chosen the remedy of exacting fulfillment of the obligation under
paragraph (1) of Article 1484 of the Civil Code, the same being patently contrary to
incontestable fact that what respondent availed of in the instant case is foreclosure of the
chattel mortgage and not the alternative prayer contained in the relief portion of its
complaint.19

Anent the first assignment of error, petitioners aver that the findings of the Court of Appeals that
the transaction forged by petitioners and private respondent was an amortized commercial loan
and not a consumer loan are belied by the evidence on record, more specifically the testimony of
Lavides and that of respondent’s witness Leonardo Serrano, Jr. The Promissory Note and Chattel
Mortgage executed by petitioner Superlines and the Continuing Guaranty executed by both
petitioners are not conclusive of the nature of the transaction concluded by them, private
respondent and Diamond Motors Corporation. Petitioners further claim that the appellate court
also ignored the unrebutted testimony of Lavides that respondent and Diamond Motors
Corporation forged a special arrangement under which the latter will expedite the issuance of the
certificates of registration over the buses under the name of Superlines. Petitioners also argue
that the word "vendee" in Article 1484(3) of the New Civil Code is used in its generic term, and
hence, it may mean an assignee or a mortgagee such as respondent.
For its part, respondent contends that the findings and conclusions of the Court of Appeals were
buttressed by the documentary and testimonial evidence on record which should prevail over
those of the trial court:

We do not agree with the lower court that Art. 1484 (3) of the New Civil Code is applicable to
the instant case. DIAMOND is the seller of the five units of buses and not the plaintiff. No
convincing evidence, except the self-serving testimony of defendant Manolet Lavides, was
presented to prove that there was an internal arrangement between the plaintiff, as financing
agent, and Diamond, as seller of the buses. In fact, defendant Lavides admitted under oath that
DIAMOND and plaintiff did not enter into transaction over the sale of the buses (TSN, February
26, 1999, p. 12). The conclusion of the lower court that the parties entered into a financing
scheme covered by Article 1484 (3) of the New Civil Code is therefore unsubstantiated.

The evidence shows that the transaction between the parties was an "amortized commercial loan"
to be paid in installments. Defendants failed to prove that a "special arrangement" regarding the
nature of the transaction was agreed upon between the plaintiff and the defendants. Aida Albano,
plaintiff’s employee who allegedly agreed with the request of defendant Manolet Lavides for a
special arrangement, was not presented. It bears emphasizing that whoever alleges fraud or
mistake affecting a transaction must substantiate his allegation, since it is presumed that a person
takes ordinary care of his concerns and private transactions have been fair and regular
(Mangahas vs. CA, 304 SCRA 375). If indeed defendant Manolet Lavides, a law graduate from a
prestigious law school (TSN, February 26, 1999, p. 3) and a successful businessman for twenty
(20) years ...., who admits to having meticulously examined the subject documents ... intended a
financing scheme covered by Art. 1484 of the New Civil Code, he should have objected to the
contents of the documents and incorporated therein his true intent.20

At the core of petitioners’ case is their claim that the findings of facts of the Court of Appeals
and its conclusions anchored thereon are belied by the evidence on record in contrast to those of
the trial court. It bears stressing, however, that in a petition for review on certiorari, only
questions of law may be raised in said petition. The jurisdiction of this Court in cases brought to
it from the Court of Appeals is confined to reviewing and reversing the errors of law ascribed to
it, findings of facts being conclusive on this Court. The Court is not tasked to calibrate and assess
the probative weight of evidence adduced by the parties during trial all over again.21 In those
instances where the findings of facts of the trial court and its conclusions anchored on said
findings are inconsistent with those of the Court of Appeals, this Court does not automatically
delve into the record to determine which of the discordant findings and conclusions should
prevail and to resolve the disputed facts for itself. This Court is tasked to merely determine
which of the findings of the two tribunals are conformable to the facts at hand.22 So long as the
findings of facts of the Court of Appeals are consistent with or are not palpably contrary to the
evidence on record, this Court shall decline to embark on a review on the probative weight of the
evidence of the parties. Indeed, in Tan vs. Lim,23 this Court, citing its ruling in Hermo vs. Court
of Appeals,24 held that it is the findings of the Court of Appeals and not those of the trial court
which are final and conclusive on this Court. The rule is not without exception. This Court may
review the findings of facts of the Court of Appeals and its conclusions based thereon if the
inference made by the appellate court from its findings of facts is manifestly erroneous, absurd or
impossible, or when the judgment of the said court is premised on a misappreciation of facts.25
In this case, the findings of facts of the Court of Appeals and its conclusions anchored thereon
are in terra firma, buttressed as they are by the evidence on record. The Court of Appeals
correctly ruled that the findings of facts, deductions, and conclusions of the trial court are not
warranted by the evidence on record.

Petitioners failed to adduce a preponderance of evidence to prove that respondents and Diamond
Motors Corporation entered into a special arrangement relative to the issuance of certificates of
registration over the buses under the name of petitioner Superlines. Petitioners were also unable
to prove that respondent purchased from Diamond Motors Corporation the new buses. In
contrast, the vehicle invoices of Diamond Motors Corporation26 irrefragably show that it sold
the said buses to petitioner Superlines. The net proceeds of the loan were remitted by respondent
to petitioner Superlines and the latter remitted the same to Diamond Motors Corporation in
payment of the purchase price of the buses. In fine, respondent and Diamond Motors Corporation
had no direct business transactions relative to the purchase of the buses and the payment of the
purchase price thereof.

As aptly observed by the Court of Appeals, petitioner Lavides is a graduate of the Ateneo de
Manila University School of Law. He had been in business for twenty years or so. It is incredible
that petitioner Superlines through petitioner Lavides never required respondent and Diamond
Motors Corporation to execute a deed evidencing their special agreement or arrangement if
indeed they had one.

The trial court indulged in a non sequitur when it quoted part of the testimony of Leonardo
Serrano, Jr. out of context and used it as anchor for its finding that respondent and Diamond
Motors Corporation forged a special arrangement. The testimony of Leonardo Serrano, Jr. is as
follows:

ATTY. FABIE

Q Now, on page 12 of the transcript of stenographic notes of October 9, 1998, to the

question of Atty. Agcaoili, the question is this and I quote:

Q - Now, after that visit to the office of Superlines Inc. in Atimonan, Quezon what other
circumstances or events transpired in connection with the evaluation or approval of the
loan of the defendants Superlines?"

And your answer was this:

A - The regular paper requirements, meaning the way the loan proposal and the approval
report inclusive of credit showing credit checking was presented for approval by our
Executive Committee."

ATTY. FABIE

What is this ‘regular papers requirement’ you are referring to, Mr. Witness?
WITNESS

A Those papers that are presented to the Executive Committee, Sir.

ATTY. FABIE

Q Papers that are presented to the Executive Committee?

WITNESS

A This will include evaluation report of the corporations financial statement credit
checking from his creditors and this will include evidence of the collaterals being
presented for the loan, Sir.

ATTY. FABIE

Q In this particular case of Superlines Transportation Company, those requirements were

complied with, Mr. Witness?

WITNESS

A Yes, Sir.

ATTY. FABIE

Q By way, in consumer loan, these papers are practically the same, am I correct, Mr.
Witness?

WITNESS

A In consumer loan, sometimes we have additional requirements, Sir.

ATTY. FABIE

Q What is that, Mr. Witness?

WITNESS

A Because they are individual applicants, we require them to submit their certificate of
employment with the corresponding amount of their salary, Sir.

ATTY. FABIE

Q You mean to say that consumer loan are specifically for individual and entities are not
supposed to apply in consumer loans, is that what you mean, Mr. Witness?
WITNESS

A As a matter of practice, we classify them as consumer loan, loans for individuals, Sir.

ATTY. FABIE

Q For individuals only?

WITNESS

A Yes, sir.

ATTY. FABIE

Q So, you did not extend consumer loans to corporations other than individuals, Mr.
Witness?

WITNESS

A For companies or corporations, we classified them as commercial loan already, Sir.

ATTY. FABIE

Q Although the scheme adopted on both loans are the same or would be the same, Mr.
Witness?

WITNESS

A In consumer loan, Sir, usually it is for purposes of buying a car or a motor vehicle, Sir.

ATTY. FABIE

Q That is the normal practice, Mr. Witness?

WITNESS

A Yes, Sir. That is the normal practice.

ATTY. FABIE

Q But arrangement can be made by your company regarding the nature of the transaction,
am I correct? Specific arrangement?

WITNESS

A What do you mean?

ATTY. FABIE

Q That you may depart from certain requirements between your company and the
applicant? Mr. Witness?

WITNESS

A When the company ......

ATTY. FABIE

Q In special cases?

WITNESS

A When the company is presented with a loan proposal, we require them to submit
documents depending on the loan proposal, Sir.

ATTY. FABIE

Q Now, did Superlines Transportation Company or Mr. Lavides present to you a loan
proposal and where is that now, Mr. Witness?

WITNESS

A The loan proposal of Mr. Lavides, Mr. Witness?

ATTY. FABIE

Q Yes, in writing?

WITNESS

A No, not in writing?

ATTY. FABIE

Q No written loan proposal, Mr. Witness?

WITNESS

A It was verbally told to us the purpose of his loan, Sir.

ATTY. FABIE

Q Now, is that normal in your corporation, Mr. Witness?

WITNESS

A In the practice?

ATTY. FABIE

Q I am asking you whether that is normal in your corporation that you do not require any
written loan proposal from the applicants, Mr. Witness?

WITNESS

A We do not, Sir.

ATTY. FABIE

Q Even in consumer loan, Mr. Witness?

WITNESS

A We only require when the consumer or individual is applying. Then we require him to
submit the application form.

ATTY. FABIE

Q So, there is an application form, Mr. Witness?

WITNESS

A For consumer loan, yes.

ATTY. FABIE

Q And in commercial loan, you don’t require the applicant to submit a written loan
proposal, Mr. Witness?

WITNESS

A As a matter of (loan) marketing consideration, anybody who wants ....

ATTY. FABIE

Q I am asking you whether that is normal in your operation like Superlines?

WITNESS

A This .....
ATTY. AGCAOILI

Already answered, Your Honor.

ATTY. FABIE

I am asking him now to specific, Your Honor.

COURT

Witness may answer.

WITNESS

A That is not normal. Sorry. That is normal. We do not require them. That is the regular
practice.

ATTY. FABIE

Q And why not?

ATTY. AGCAOILI

Objection, misleading. It was already answered that that was the normal practice, Your
Honor.

ATTY. FABIE

Q Why do you not require the applicants to submit papers or written loan proposal, Mr.
Witness?

WITNESS

A Because in our business marketing consideration, we finance companies after

evaluation of a particular account and if this account is credit worthy, we sometimes do
away with it, Sir.

ATTY. FABIE

Q So, what is normal is that you ask for written loan proposal and what is sometimes not
normal is that you do not require them to submit any loan proposal, Mr. Witness?

WITNESS

A We....
 ATTY. AGCAOILI

I think counsel is already (arguing) with the witness, Your Honor. The question has been
asked several times and the witness consistently answered in the same fashion.

ATTY. FABIE

The Court will know ....

COURT

The answer he gave was that with marketing considerations, we do not require papers in
consumer loan because the client is credit worthy risk. Sometimes we do not require
submission of papers anymore. That is the answer. Alright, proceed.

ATTY. FABIE

I think that is all for the witness, Your Honor.27

Leonardo Serrano, Jr. never testified that respondent and Diamond Motors Corporation had a
special arrangement relative to the registration of the new buses. The mere admission of the
witness that respondent in the course of its business transactions allowed special arrangements
does not constitute proof that it in fact had a special arrangement with Diamond Motors
Corporation relative to the registration of the new buses.

The evidence on record shows that under the Promissory Note, Chattel Mortgage and Continuing
Guaranty, respondent was the creditor-mortgagee of petitioner Superlines and not the vendor of
the new buses. Hence, petitioners cannot find refuge in Article 1484(3) of the New Civil Code.
As correctly held by the Court of Appeals, what should apply was the Chattel Mortgage executed
by petitioner Superlines and respondent in relation to the Chattel Mortgage Law.28 This Court
had consistently ruled that if in an extra-judicial foreclosure of a chattel mortgage a deficiency
exists, an independent civil action may be instituted for the recovery of said deficiency. To deny
the mortgagee the right to maintain an action to recover the deficiency after foreclosure of the
chattel mortgage would be to overlook the fact that the chattel mortgage is only given as security
and not as payment for the debt in case of failure of payment.29 Both the Chattel Mortgage Law
and Act 3135 governing extra-judicial foreclosure of real estate mortgage, do not contain any
provision, expressly or impliedly, precluding the mortgagee from recovering deficiency of the
principal obligation.

In a case of recent vintage, this Court held that if the proceeds of the sale are insufficient to cover
the debt in an extra-judicial foreclosure of the mortgage, the mortgagee is still entitled to claim
the deficiency from the debtor:

To begin with, it is settled that if the proceeds of the sale are insufficient to cover the debt in an
extrajudicial foreclosure of the mortgage, the mortgagee is entitled to claim the deficiency from
the debtor. For when the legislature intends to deny the right of a creditor to sue for any
deficiency resulting from foreclosure of security given to guarantee an obligation it expressly
provides as in the case of pledges [Civil Code, Art. 2115] and in chattel mortgages, while silent
as to the mortgagee’s right to recover, does not, on the other hand, prohibit recovery of
deficiency. Accordingly, it has been held that a deficiency claim arising from the extrajudicial
foreclosure is allowed.30

In the case of PAMECA Wood Treatment Plant, Inc. vs. Court of Appeals,31 this Court declared
that under Section 14 of the Chattel Mortgage Law, the mortgagor is entitled to recover the
balance of the proceeds, upon satisfaction of the principal obligation and costs, thus there is a
corollary obligation on the part of the debtor-mortgagor to pay the deficiency in case of a
reduction in the price at public auction.

In fine then, the Court of Appeals correctly ruled that respondent is entitled to a deficiency
judgment against the petitioners.

IN LIGHT OF THE FOREGOING, the petition is DENIED. The Decision of the Court of
Appeals dated July 30, 2001 appealed from is AFFIRMED in toto. With costs against petitioners.

G.R. No. 147950 December 11, 2003

CALIFORNIA BUS LINES, INC., petitioner,

vs.
STATE INVESTMENT HOUSE, INC., respondent.

DECISION

QUISUMBING, J.:

In this petition for review, California Bus Lines, Inc., assails the decision,1 dated April 17, 2001,
of the Court of Appeals in CA-G.R. CV No. 52667, reversing the judgment2 , dated June 3,
1993, of the Regional Trial Court of Manila, Branch 13, in Civil Case No. 84-28505 entitled
State Investment House, Inc. v. California Bus Lines, Inc., for collection of a sum of money. The
Court of Appeals held petitioner California Bus Lines, Inc., liable for the value of five
promissory notes assigned to respondent State Investment House, Inc.

The facts, as culled from the records, are as follows:

Sometime in 1979, Delta Motors Corporation—M.A.N. Division (Delta) applied for financial
assistance from respondent State Investment House, Inc. (hereafter SIHI), a domestic corporation
engaged in the business of quasi-banking. SIHI agreed to extend a credit line to Delta for
₱25,000,000.00 in three separate credit agreements dated May 11, June 19, and August 22,
1979.3 On several occasions, Delta availed of the credit line by discounting with SIHI some of
its receivables, which evidence actual sales of Delta’s vehicles. Delta eventually became
indebted to SIHI to the tune of ₱24,010,269.32.4
Meanwhile, from April 1979 to May 1980, petitioner California Bus Lines, Inc. (hereafter
CBLI), purchased on installment basis 35 units of M.A.N. Diesel Buses and two (2) units of
M.A.N. Diesel Conversion Engines from Delta. To secure the payment of the purchase price of
the 35 buses, CBLI and its president, Mr. Dionisio O. Llamas, executed sixteen (16) promissory
notes in favor of Delta on January 23 and April 25, 1980.5 In each promissory note, CBLI
promised to pay Delta or order, ₱2,314,000 payable in 60 monthly installments starting August
31, 1980, with interest at 14% per annum. CBLI further promised to pay the holder of the said
notes 25% of the amount due on the same as attorney’s fees and expenses of collection, whether
actually incurred or not, in case of judicial proceedings to enforce collection. In addition to the
notes, CBLI executed chattel mortgages over the 35 buses in Delta’s favor.

When CBLI defaulted on all payments due, it entered into a restructuring agreement with Delta
on October 7, 1981, to cover its overdue obligations under the promissory notes.6 The
restructuring agreement provided for a new schedule of payments of CBLI’s past due
installments, extending the period to pay, and stipulating daily remittance instead of the
previously agreed monthly remittance of payments. In case of default, Delta would have the
authority to take over the management and operations of CBLI until CBLI and/or its president,
Mr. Dionisio Llamas, remitted and/or updated CBLI’s past due account. CBLI and Delta also
increased the interest rate to 16% p.a. and added a documentation fee of 2% p.a. and a 4% p.a.
restructuring fee.

On December 23, 1981, Delta executed a Continuing Deed of Assignment of Receivables7 in

favor of SIHI as security for the payment of its obligations to SIHI per the credit agreements. In
view of Delta’s failure to pay, the loan agreements were restructured under a Memorandum of
Agreement dated March 31, 1982.8 Delta obligated itself to pay a fixed monthly amortization of
₱400,000 to SIHI and to discount with SIHI ₱8,000,000 worth of receivables with the
understanding that SIHI shall apply the proceeds against Delta’s overdue accounts.

CBLI continued having trouble meeting its obligations to Delta. This prompted Delta to threaten
CBLI with the enforcement of the management takeover clause. To pre-empt the take-over,
CBLI filed on May 3, 1982, a complaint for injunction9 , docketed as Civil Case No. 0023-P,
with the Court of First Instance of Rizal, Pasay City, (now Regional Trial Court of Pasay City).
In due time, Delta filed its amended answer with applications for the issuance of a writ of
preliminary mandatory injunction to enforce the management takeover clause and a writ of
preliminary attachment over the buses it sold to CBLI.10 On December 27, 1982,11 the trial
court granted Delta’s prayer for issuance of a writ of preliminary mandatory injunction and
preliminary attachment on account of the fraudulent disposition by CBLI of its assets.

On September 15, 1983, pursuant to the Memorandum of Agreement, Delta executed a Deed of
Sale12 assigning to SIHI five (5) of the sixteen (16) promissory notes13 from California Bus
Lines, Inc. At the time of assignment, these five promissory notes, identified and numbered as
80-53, 80-54, 80-55, 80-56, and 80-57, had a total value of ₱16,152,819.80 inclusive of interest
at 14% per annum.

SIHI subsequently sent a demand letter dated December 13, 1983,14 to CBLI requiring CBLI to
remit the payments due on the five promissory notes directly to it. CBLI replied informing SIHI
of Civil Case No. 0023-P and of the fact that Delta had taken over its management and
operations.15

As regards Delta’s remaining obligation to SIHI, Delta offered its available bus units, valued at
₱27,067,162.22, as payment in kind.16 On December 29, 1983, SIHI accepted Delta’s offer, and
Delta transferred the ownership of its available buses to SIHI, which in turn acknowledged full
payment of Delta’s remaining obligation.17 When SIHI was unable to take possession of the
buses, SIHI filed a petition for recovery of possession with prayer for issuance of a writ of
replevin before the RTC of Manila, Branch 6, docketed as Civil Case No. 84-23019. The Manila
RTC issued a writ of replevin and SIHI was able to take possession of 17 bus units belonging to
Delta. SIHI applied the proceeds from the sale of the said 17 buses amounting to ₱12,870,526.98
to Delta’s outstanding obligation. Delta’s obligation to SIHI was thus reduced to
₱20,061,898.97. On December 5, 1984, Branch 6 of the RTC of Manila rendered judgment in
Civil Case No. 84-23019 ordering Delta to pay SIHI this amount.

Thereafter, Delta and CBLI entered into a compromise agreement on July 24, 1984,18 in Civil
Case No. 0023-P, the injunction case before the RTC of Pasay. CBLI agreed that Delta would
exercise its right to extrajudicially foreclose on the chattel mortgages over the 35 bus units. The
RTC of Pasay approved this compromise agreement the following day, July 25, 1984.19
Following this, CBLI vehemently refused to pay SIHI the value of the five promissory notes,
contending that the compromise agreement was in full settlement of all its obligations to Delta
including its obligations under the promissory notes.

On December 26, 1984, SIHI filed a complaint, docketed as Civil Case No. 84-28505, against
CBLI in the Regional Trial Court of Manila, Branch 34, to collect on the five (5) promissory
notes with interest at 14% p.a. SIHI also prayed for the issuance of a writ of preliminary
attachment against the properties of CBLI.20

On December 28, 1984, Delta filed a petition for extrajudicial foreclosure of chattel mortgages
pursuant to its compromise agreement with CBLI. On January 2, 1985, Delta filed in the RTC of
Pasay a motion for execution of the judgment based on the compromise agreement.21 The RTC
of Pasay granted this motion the following day.22

In view of Delta’s petition and motion for execution per the judgment of compromise, the RTC
of Manila granted in Civil Case No. 84-28505 SIHI’s application for preliminary attachment on
January 4, 1985.23 Consequently, SIHI was able to attach and physically take possession of
thirty-two (32) buses belonging to CBLI.24 However, acting on CBLI’s motion to quash the writ
of preliminary attachment, the same court resolved on January 15, 1986,25 to discharge the writ
of preliminary attachment. SIHI assailed the discharge of the writ before the Intermediate
Appellate Court (now Court of Appeals) in a petition for certiorari and prohibition, docketed as
CA-G.R. SP No. 08378. On July 31, 1987, the Court of Appeals granted SIHI’s petition in CA-
GR SP No. 08378 and ruled that the writ of preliminary attachment issued by Branch 34 of the
RTC Manila in Civil Case No. 84-28505 should stay.26 The decision of the Court of Appeals
attained finality on August 22, 1987.27
Meanwhile, pursuant to the January 3, 1985 Order of the RTC of Pasay, the sheriff of Pasay City
conducted a public auction and issued a certificate of sheriff’s sale to Delta on April 2, 1987,
attesting to the fact that Delta bought 14 of the 35 buses for ₱3,920,000.28 On April 7, 1987, the
sheriff of Manila, by virtue of the writ of execution dated March 27, 1987, issued by Branch 6 of
the RTC of Manila in Civil Case No. 84-23019, sold the same 14 buses at public auction in
partial satisfaction of the judgment SIHI obtained against Delta in Civil Case No. 84-23019.

Sometime in May 1987, Civil Case No. 84-28505 was raffled to Branch 13 of the RTC of Manila
in view of the retirement of the presiding judge of Branch 34. Subsequently, SIHI moved to sell
the sixteen (16) buses of CBLI which had previously been attached by the sheriff in Civil Case
No. 84-28505 pursuant to the January 4, 1985, Order of the RTC of Manila.29 SIHI’s motion
was granted on December 16, 1987.30 On November 29, 1988, however, SIHI filed an urgent
ex-parte motion to amend this order claiming that through inadvertence and excusable
negligence of its new counsel, it made a mistake in the list of buses in the Motion to Sell
Attached Properties it had earlier filed.31 SIHI explained that 14 of the buses listed had already
been sold to Delta on April 2, 1987, by virtue of the January 3, 1985 Order of the RTC of Pasay,
and that two of the buses listed had been released to third party, claimant Pilipinas Bank, by
Order dated September 16, 198732 of Branch 13 of the RTC of Manila.

CBLI opposed SIHI’s motion to allow the sale of the 16 buses. On May 3, 1989,33 Branch 13 of
the RTC of Manila denied SIHI’s urgent motion to allow the sale of the 16 buses listed in its
motion to amend. The trial court ruled that the best interest of the parties might be better served
by denying further sales of the buses and to go direct to the trial of the case on the merits.34

After trial, judgment was rendered in Civil Case No. 84-28505 on June 3, 1993, discharging
CBLI from liability on the five promissory notes. The trial court likewise favorably ruled on
CBLI’s compulsory counterclaim. The trial court directed SIHI to return the 16 buses or to pay
CBLI ₱4,000,000 representing the value of the seized buses, with interest at 12% p.a. to begin
from January 11, 1985, the date SIHI seized the buses, until payment is made. In ruling against
SIHI, the trial court held that the restructuring agreement dated October 7, 1981, between Delta
and CBLI novated the five promissory notes; hence, at the time Delta assigned the five
promissory notes to SIHI, the notes were already merged in the restructuring agreement and
cannot be enforced against CBLI.

SIHI appealed the decision to the Court of Appeals. The case was docketed as CA-G.R. CV No.
52667. On April 17, 2001, the Court of Appeals decided CA-G.R. CV No. 52667 in this manner:

WHEREFORE, based on the foregoing premises and finding the appeal to be meritorious, We
find defendant-appellee CBLI liable for the value of the five (5) promissory notes subject of the
complaint a quo less the proceeds from the attached sixteen (16) buses. The award of attorney’s
fees and costs is eliminated. The appealed decision is hereby REVERSED. No costs.

SO ORDERED.35

Hence, this appeal where CBLI contends that

 I. THE COURT OF APPEALS ERRED IN DECLARING THAT THE
RESTRUCTURING AGREEMENT BETWEEN DELTA AND THE PETITIONER DID
NOT SUBSTANTIALLY NOVATE THE TERMS OF THE FIVE PROMISSORY
NOTES.

II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPROMISE

AGREEMENT BETWEEN DELTA AND THE PETITIONER IN THE PASAY CITY
CASE DID NOT SUPERSEDE AND DISCHARGE THE PROMISSORY NOTES.

III. THE COURT OF APPEALS ERRED IN UPHOLDING THE CONTINUING

VALIDITY OF THE PRELIMINARY ATTACHMENT AND EXONERATING THE
RESPONDENT OF MALEFACTIONS IN PRESERVING AND ASSERTING ITS
RIGHTS THEREUNDER.36

Essentially, the issues are (1) whether the Restructuring Agreement dated October 7, 1981,
between petitioner CBLI and Delta Motors, Corp. novated the five promissory notes Delta
Motors, Corp. assigned to respondent SIHI, and (2) whether the compromise agreement in Civil
Case No. 0023-P superseded and/or discharged the subject five promissory notes. The issues
being interrelated, they shall be jointly discussed.

CBLI first contends that the Restructuring Agreement did not merely change the incidental
elements of the obligation under all sixteen (16) promissory notes, but it also increased the
obligations of CBLI with the addition of new obligations that were incompatible with the old
obligations in the said notes.37 CBLI adds that even if the restructuring agreement did not totally
extinguish the obligations under the sixteen (16) promissory notes, the July 24, 1984,
compromise agreement executed in Civil Case No. 0023-P did.38 CBLI cites paragraph 5 of the
compromise agreement which states that the agreement between it and CBLI was in "full and
final settlement, adjudication and termination of all their rights and obligations as of the date of
(the) agreement, and of the issues in (the) case." According to CBLI, inasmuch as the five
promissory notes were subject matters of the Civil Case No. 0023-P, the decision approving the
compromise agreement operated as res judicata in the present case.39

Novation has been defined as the extinguishment of an obligation by the substitution or change
of the obligation by a subsequent one which terminates the first, either by changing the object or
principal conditions, or by substituting the person of the debtor, or subrogating a third person in
the rights of the creditor.40

Novation, in its broad concept, may either be extinctive or modificatory.41 It is extinctive when
an old obligation is terminated by the creation of a new obligation that takes the place of the
former; it is merely modificatory when the old obligation subsists to the extent it remains
compatible with the amendatory agreement.42 An extinctive novation results either by changing
the object or principal conditions (objective or real), or by substituting the person of the debtor or
subrogating a third person in the rights of the creditor (subjective or personal).43 Novation has
two functions: one to extinguish an existing obligation, the other to substitute a new one in its
place.44 For novation to take place, four essential requisites have to be met, namely, (1) a
previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the
extinguishment of the old obligation; and (4) the birth of a valid new obligation.45

Novation is never presumed,46 and the animus novandi, whether totally or partially, must appear
by express agreement of the parties, or by their acts that are too clear and unequivocal to be
mistaken.47

The extinguishment of the old obligation by the new one is a necessary element of novation
which may be effected either expressly or impliedly.48 The term "expressly" means that the
contracting parties incontrovertibly disclose that their object in executing the new contract is to
extinguish the old one.49 Upon the other hand, no specific form is required for an implied
novation, and all that is prescribed by law would be an incompatibility between the two
contracts.50 While there is really no hard and fast rule to determine what might constitute to be a
sufficient change that can bring about novation, the touchstone for contrariety, however, would
be an irreconcilable incompatibility between the old and the new obligations.

There are two ways which could indicate, in fine, the presence of novation and thereby produce
the effect of extinguishing an obligation by another which substitutes the same. The first is when
novation has been explicitly stated and declared in unequivocal terms. The second is when the
old and the new obligations are incompatible on every point. The test of incompatibility is
whether the two obligations can stand together, each one having its independent existence.51 If
they cannot, they are incompatible and the latter obligation novates the first.52 Corollarily,
changes that breed incompatibility must be essential in nature and not merely accidental. The
incompatibility must take place in any of the essential elements of the obligation, such as its
object, cause or principal conditions thereof; otherwise, the change would be merely
modificatory in nature and insufficient to extinguish the original obligation.53

The necessity to prove the foregoing by clear and convincing evidence is accentuated where the
obligation of the debtor invoking the defense of novation has already matured.54

With respect to obligations to pay a sum of money, this Court has consistently applied the well-
settled rule that the obligation is not novated by an instrument that expressly recognizes the old,
changes only the terms of payment, and adds other obligations not incompatible with the old
ones, or where the new contract merely supplements the old one.55

In Inchausti & Co. v. Yulo56 this Court held that an obligation to pay a sum of money is not
novated in a new instrument wherein the old is ratified, by changing only the term of payment
and adding other obligations not incompatible with the old one. In Tible v. Aquino57 and
Pascual v. Lacsamana58 this Court declared that it is well settled that a mere extension of
payment and the addition of another obligation not incompatible with the old one is not a
novation thereof.

In this case, the attendant facts do not make out a case of novation. The restructuring agreement
between Delta and CBLI executed on October 7, 1981, shows that the parties did not expressly
stipulate that the restructuring agreement novated the promissory notes. Absent an unequivocal
declaration of extinguishment of the pre-existing obligation, only a showing of complete
incompatibility between the old and the new obligation would sustain a finding of novation by
implication.59 However, our review of its terms yields no incompatibility between the
promissory notes and the restructuring agreement.

The five promissory notes, which Delta assigned to SIHI on September 13, 1983, contained the
following common stipulations:

1. They were payable in 60 monthly installments up to July 31, 1985;

2. Interest: 14% per annum;

3. Failure to pay any of the installments would render the entire remaining balance due
and payable at the option of the holder of the notes;

4. In case of judicial collection on the notes, the maker (CBLI) and co-maker (its
president, Mr. Dionisio O. Llamas, Jr) were solidarily liable of attorney’s fees and
expenses of 25% of the amount due in addition to the costs of suit.

The restructuring agreement, for its part, had the following provisions:

WHEREAS, CBL and LLAMAS admit their past due installment on the following promissory
notes:

a. PN Nos. 16 to 26 (11 units)

Past Due as of September 30, 1981 – ₱1,411,434.00

b. PN Nos. 52 to 57 (24 units)

Past Due as of September 30, 1981 – ₱1,105,353.00

WHEREAS, the parties agreed to restructure the above-mentioned past due installments under
the following terms and conditions:

a. PN Nos. 16 to 26 (11 units) – 37 months

PN Nos. 52 to 57 (24 units) – 46 months

b. Interest Rate: 16% per annum

c. Documentation Fee: 2% per annum

d. Penalty previously incurred and Restructuring fee: 4% p.a.

e. Mode of Payment: Daily Remittance

NOW, THEREFORE, for and in consideration of the foregoing premises, the parties hereby
agree and covenant as follows:
1. That the past due installment referred to above plus the current and/or falling due amortization
as of October 1, 1981 for Promissory Notes Nos. 16 to 26 and 52 to 57 shall be paid by CBL
and/or LLAMAS in accordance with the following schedule of payments:

Daily payments of ₱11,000.00 from<>October 1 to December 31, 1981

Daily payments of ₱12,000.00 from<>January 1, 1982 to March 31, 1982

Daily payments of ₱13,000.00 from<>April 1, 1982 to June 30, 1982

Daily payments of ₱14,000.00 from<>July 1, 1982 to September 30, 1982

Daily payments of ₱15,000.00 from<>October 1, 1982 to December 31, 1982

Daily payments of ₱16,000.00 from<>January 1, 1983 to June 30, 1983

Daily payments of ₱17,000.00 from<>July 1, 1983

2. CBL or LLAMAS shall remit to DMC on or before 11:00 a.m. everyday the daily cash
payments due to DMC in accordance with the schedule in paragraph 1. DMC may send a
collector to receive the amount due at CBL’s premises. All delayed remittances shall be charged
additional 2% penalty interest per month.

3. All payments shall be applied to amortizations and penalties due in accordance with paragraph
of the restructured past due installments above mentioned and PN Nos. 16 to 26 and 52 to 57.

4. DMC may at anytime assign and/or send its representatives to monitor the operations of CBL
pertaining to the financial and field operations and service and maintenance matters of M.A.N.
units. Records needed by the DMC representatives in monitoring said operations shall be made
available by CBL and LLAMAS.

5. Within thirty (30) days after the end of the terms of the PN Nos. 16 to 26 and 52 to 57, CBL or
LLAMAS shall remit in lump sum whatever balance is left after deducting all payments made
from what is due and payable to DMC in accordance with paragraph 1 of this agreement and PN
Nos. 16 to 26 and 52 to 57.

6. In the event that CBL and LLAMAS fail to remit the daily remittance agreed upon and the
total accumulated unremitted amount has reached and (sic) equivalent of Sixty (60) days, DMC
and Silverio shall exercise any or all of the following options:

(a) The whole sum remaining then unpaid plus 2% penalty per month and 16% interest
per annum on total past due installments will immediately become due and payable. In
the event of judicial proceedings to enforce collection, CBL and LLAMAS will pay to
DMC an additional sum equivalent to 25% of the amount due for attorney’s fees and
expenses of collection, whether actually incurred or not, in addition to the cost of suit;
 (b) To enforce in accordance with law, their rights under the Chattel Mortgage over
various M.A.N. Diesel bus with Nos. CU 80-39, 80-40, 80-41, 80-42, 80-43, 80-44 and
80-15, and/or

(c) To take over management and operations of CBL until such time that CBL and/or
LLAMAS have remitted and/or updated their past due account with DMC.

7. DMC and SILVERIO shall insure to CBL continuous supply of spare parts for the M.A.N.
Diesel Buses and shall make available to CBL at the price prevailing at the time of purchase, an
inventory of spare parts consisting of at least ninety (90%) percent of the needs of CBL based on
a moving 6-month requirement to be prepared and submitted by CBL, and acceptable to DMC,
within the first week of each month.

8. Except as otherwise modified in this Agreement, the terms and conditions stipulated in PN
Nos. 16 to 26 and 52 to 57 shall continue to govern the relationship between the parties and that
the Chattel Mortgage over various M.A.N. Diesel Buses with Nos. CM No. 80-39, 80-40, 80-41,
80-42, 80-43, 80-44 and CM No. 80-15 as well as the Deed of Pledge executed by Mr. Llamas
shall continue to secure the obligation until full payment.

9. DMC and SILVERIO undertake to recall or withdraw its previous request to Notary Public
Alberto G. Doller and to instruct him not to proceed with the public auction sale of the shares of
stock of CBL subject-matter of the Deed of Pledge of Shares. LLAMAS, on the other hand,
undertakes to move for the immediate dismissal of Civil Case No. 9460-P entitled "Dionisio O.
Llamas vs. Alberto G. Doller, et al.", Court of First Instance of Pasay, Branch XXIX.60

It is clear from the foregoing that the restructuring agreement, instead of containing provisions
"absolutely incompatible" with the obligations of the judgment, expressly ratifies such
obligations in paragraph 8 and contains provisions for satisfying them. There was no change in
the object of the prior obligations. The restructuring agreement merely provided for a new
schedule of payments and additional security in paragraph 6 (c) giving Delta authority to take
over the management and operations of CBLI in case CBLI fails to pay installments equivalent
to 60 days. Where the parties to the new obligation expressly recognize the continuing existence
and validity of the old one, there can be no novation.61 Moreover, this Court has ruled that an
agreement subsequently executed between a seller and a buyer that provided for a different
schedule and manner of payment, to restructure the mode of payments by the buyer so that it
could settle its outstanding obligation in spite of its delinquency in payment, is not tantamount to
novation. 62

The addition of other obligations likewise did not extinguish the promissory notes. In Young v.
CA63 , this Court ruled that a change in the incidental elements of, or an addition of such
element to, an obligation, unless otherwise expressed by the parties will not result in its
extinguishment.

In fine, the restructuring agreement can stand together with the promissory notes.
Neither is there merit in CBLI’s argument that the compromise agreement dated July 24, 1984,
in Civil Case No. 0023-P superseded and/or discharged the five promissory notes. Both Delta
and CBLI cannot deny that the five promissory notes were no longer subject of Civil Case No.
0023-P when they entered into the compromise agreement on July 24, 1984.

Having previously assigned the five promissory notes to SIHI, Delta had no more right to
compromise the same. Delta’s limited authority to collect for SIHI stipulated in the September
13, 1985, Deed of Sale cannot be construed to include the power to compromise CBLI’s
obligations in the said promissory notes. An authority to compromise, by express provision of
Article 187864 of the Civil Code, requires a special power of attorney, which is not present in
this case. Incidentally, Delta’s authority to collect in behalf of SIHI was, by express provision of
the Continuing Deed of Assignment,65 automatically revoked when SIHI opted to collect
directly from CBLI.

As regards CBLI, SIHI’s demand letter dated December 13, 1983, requiring CBLI to remit the
payments directly to SIHI effectively revoked Delta’s limited right to collect in behalf of SIHI.
This should have dispelled CBLI’s erroneous notion that Delta was acting in behalf of SIHI, with
authority to compromise the five promissory notes.

But more importantly, the compromise agreement itself provided that it covered the rights and
obligations only of Delta and CBLI and that it did not refer to, nor cover the rights of, SIHI as
the new creditor of CBLI in the subject promissory notes. CBLI and Delta stipulated in
paragraph 5 of the agreement that:

5. This COMPROMISE AGREEMENT constitutes the entire understanding by and between the
plaintiffs and the defendants as well as their lawyers, and operates as full and final settlement,
adjudication and termination of all their rights and obligations as of the date of this agreement,
and of the issues in this case.66

Even in the absence of such a provision, the compromise agreement still cannot bind SIHI under
the settled rule that a compromise agreement determines the rights and obligations of only the
parties to it.67 Therefore, we hold that the compromise agreement covered the rights and
obligations only of Delta and CBLI and only with respect to the eleven (11) other promissory
notes that remained with Delta.

CBLI next maintains that SIHI is estopped from questioning the compromise agreement because
SIHI failed to intervene in Civil Case No. 0023-P after CBLI informed it of the takeover by
Delta of CBLI’s management and operations and the resultant impossibility for CBLI to comply
with its obligations in the subject promissory notes. CBLI also adds that SIHI’s failure to
intervene in Civil Case No. 0023-P is proof that Delta continued to act in SIHI’s behalf in
effecting collection under the notes.

The contention is untenable. As a result of the assignment, Delta relinquished all its rights to the
subject promissory notes in favor of SIHI. This had the effect of separating the five promissory
notes from the 16 promissory notes subject of Civil Case No. 0023-P. From that time, CBLI’s
obligations to SIHI embodied in the five promissory notes became separate and distinct from
CBLI’s obligations in eleven (11) other promissory notes that remained with Delta. Thus, any
breach of these independent obligations gives rise to a separate cause of action in favor of SIHI
against CBLI. Considering that Delta’s assignment to SIHI of these five promissory notes had
the effect of removing the said notes from Civil Case No. 0023-P, there was no reason for SIHI
to intervene in the said case. SIHI did not have any interest to protect in Civil Case No. 0023-P.

Moreover, intervention is not mandatory, but only optional and permissive.68 Notably, Section
2,69 Rule 12 of the then 1988 Revised Rules of Procedure uses the word ‘may’ in defining the
right to intervene. The present rules maintain the permissive nature of intervention in Section 1,
Rule 19 of the 1997 Rules of Civil Procedure, which provides as follows:

SEC. 1. Who may intervene.—A person who has a legal interest in the matter in litigation, or in
the success of either of the parties, or an interest against both, or is so situated as to be adversely
affected by a distribution or other disposition of property in the custody of the court or of an
officer thereof may, with leave of court, be allowed to intervene in the action. The court shall
consider whether or not the intervention will unduly delay or prejudice the adjudication of the
rights of the original parties, and whether or not the intervenor's rights may be fully protected in
a separate proceeding.70

Also, recall that Delta transferred the five promissory notes to SIHI on September 13, 1983 while
Civil Case No. 0023-P was pending. Then as now, the rule in case of transfer of interest pendente
lite is that the action may be continued by or against the original party unless the court, upon
motion, directs the person to whom the interest is transferred to be substituted in the action or
joined with the original party.71 The non-inclusion of a necessary party does not prevent the
court from proceeding in the action, and the judgment rendered therein shall be without prejudice
to the rights of such necessary party.72

In light of the foregoing, SIHI’s refusal to intervene in Civil Case No. 0023-P in another court
does not amount to an estoppel that may prevent SIHI from instituting a separate and
independent action of its own.73 This is especially so since it does not appear that a separate
proceeding would be inadequate to protect fully SIHI’s rights.74 Indeed, SIHI’s refusal to
intervene is precisely because it considered that its rights would be better protected in a separate
and independent suit.

The judgment on compromise in Civil Case No. 0023-P did not operate as res judicata to prevent
SIHI from prosecuting its claims in the present case. As previously discussed, the compromise
agreement and the judgment on compromise in Civil Case No. 0023-P covered only Delta and
CBLI and their respective rights under the 11 promissory notes not assigned to SIHI. In contrast,
the instant case involves SIHI and CBLI and the five promissory notes. There being no identity
of parties and subject matter, there is no res judicata.

CBLI maintains, however, that in any event, recovery under the subject promissory notes is no
longer allowed by Article 1484(3)75 of the Civil Code, which prohibits a creditor from suing for
the deficiency after it has foreclosed on the chattel mortgages. SIHI, being the successor-in-
interest of Delta, is no longer allowed to recover on the promissory notes given as security for
the purchase price of the 35 buses because Delta had already extrajudicially foreclosed on the
chattel mortgages over the said buses on April 2, 1987.

This claim is likewise untenable.

Article 1484(3) finds no application in the present case. The extrajudicial foreclosure of the
chattel mortgages Delta effected cannot prejudice SIHI’s rights. As stated earlier, the assignment
of the five notes operated to create a separate and independent obligation on the part of CBLI to
SIHI, distinct and separate from CBLI’s obligations to Delta. And since there was a previous
revocation of Delta’s authority to collect for SIHI, Delta was no longer SIHI’s collecting agent.
CBLI, in turn, knew of the assignment and Delta’s lack of authority to compromise the subject
notes, yet it readily agreed to the foreclosure. To sanction CBLI’s argument and to apply Article
1484 (3) to this case would work injustice to SIHI by depriving it of its right to collect against
CBLI who has not paid its obligations.

That SIHI later on levied on execution and acquired in the ensuing public sale in Civil Case No.
84-23019 the buses Delta earlier extrajudicially foreclosed on April 2, 1987, in Civil Case No.
0023-P, did not operate to render the compromise agreement and the foreclosure binding on
SIHI. At the time SIHI effected the levy on execution to satisfy its judgment credit against Delta
in Civil Case No. 84-23019, the said buses already pertained to Delta by virtue of the April 2,
1987 auction sale. CBLI no longer had any interest in the said buses.1âwphi1 Under the
circumstances, we cannot see how SIHI’s belated acquisition of the foreclosed buses operates to
hold the compromise agreement—and consequently Article 1484(3)—applicable to SIHI as
CBLI contends. CBLI’s last contention must, therefore, fail. We hold that the writ of execution
to enforce the judgment of compromise in Civil Case No. 0023-P and the foreclosure sale of
April 2, 1987, done pursuant to the said writ of execution affected only the eleven (11) other
promissory notes covered by the compromise agreement and the judgment on compromise in
Civil Case No. 0023-P.

In support of its third assignment of error, CBLI maintains that there was no basis for SIHI’s
application for a writ of preliminary attachment.76 According to CBLI, it committed no fraud in
contracting its obligation under the five promissory notes because it was financially sound when
it issued the said notes on April 25, 1980.77 CBLI also asserts that at no time did it falsely
represent to SIHI that it would be able to pay its obligations under the five promissory notes.78
According to CBLI, it was not guilty of fraudulent concealment, removal, or disposal, or of
fraudulent intent to conceal, remove, or dispose of its properties to defraud its creditors;79 and
that SIHI’s bare allegations on this matter were insufficient for the preliminary attachment of
CBLI’s properties.80

The question whether the attachment of the sixteen (16) buses was valid and in accordance with
law, however, has already been resolved with finality by the Court of Appeals in CA-G.R. SP
No. 08376. In its July 31, 1987, decision, the Court of Appeals upheld the legality of the writ of
preliminary attachment SIHI obtained and ruled that the trial court judge acted with grave abuse
of discretion in discharging the writ of attachment despite the clear presence of a determined
scheme on the part of CBLI to dispose of its property. Considering that the said Court of Appeals
decision has already attained finality on August 22, 1987, there exists no reason to resolve this
question anew. Reasons of public policy, judicial orderliness, economy and judicial time and the
interests of litigants as well as the peace and order of society, all require that stability be
accorded the solemn and final judgments of courts or tribunals of competent jurisdiction.81

Finally, in the light of the justness of SIHI’s claim against CBLI, we cannot sustain CBLI’s
contention that the Court of Appeals erred in dismissing its counterclaim for lost income and the
value of the 16 buses over which SIHI obtained a writ of preliminary attachment. Where the
party who requested the attachment acted in good faith and without malice, the claim for
damages resulting from the attachment of property cannot be sustained.82

WHEREFORE, the decision dated April 17, 2001, of the Court of Appeals in CA-G.R. CV No.
52667 is AFFIRMED. Petitioner California Bus Lines, Inc., is ORDERED to pay respondent
State Investment House, Inc., the value of the five (5) promissory notes subject of the complaint
in Civil Case No. 84-28505 less the proceeds from the sale of the attached sixteen (16) buses. No
pronouncement as to costs.