1
Filipinas Marble Corpo v. IAC
FACTS:
On Jan19, 1983, petitioner Filipinas Marble Corporation filed an
action for nullification of deeds and damages with prayer for a
restraining order and a writ of preliminary injunction against the
private respondents.
In its complaint, the pet alleged that it applied for a loan in the
amount of $5 million with respondent Development Bank of the
Phil (DBP) in its desire to develop its mining claims and deposits;
that DBP granted the loan subject, however, to 60 onerous
conditions, among which are:
(a) petitioner shall have to enter into a management contract with
respondent Bancom Systems Control, Inc. [Bancom];
(b) DBP shall be represented by no less than 6 regular directors, 3
to be nominated by Bancom and 3 by DBP, in Filipinos Marble's
board, one of whom shall continue to be the chairman of the
board;
(c) the key officers/executives [the Pres and the officers for finance,
marketing and purchasing] to be chosen by Bancom for the
corporation shall be appointed only with DBP's prior approval
and all these officers are to be made directly responsible to
DBP; DBP shall immediately designate Mr. Alvaro Torio,
Assistant Manager of DBP's Accounting Department as DBP's
Comptroller in the firm whose compensation shall be borne by
Filipinas Marble; and
(d) the $5 Million loan shall be secured by:
1) a final mortgage on the following assets with a total approved
value of P48.6 million;
2) the joint and several signatures with Filipinas Marble of Mr.
Pelagio M. Villegas, Sr., Trinidad Villegas, and Jose E.
Montelibano and
3) assignment to DBP of the borrower firm's right over its mining
claims;
Pursuant to these above- mentioned and other conditions,
the pet entered into a management contract with Bancom
whereby the latter agreed to manage the plaintiff co. for a
period of 3 years;
that under the management agreement, the affairs of the
pet were placed under the complete control of DBP and
Bancom including the disposition and disbursement of the
$5 million or P37.6 million loan;
Respondents and their dir/officers mismanaged and
misspent the loan, after which Bancom resigned with the
approval of DBP even before the expiration date of the
management contract, leaving pet desolate and
devastated; that among the acts and omissions of the
respondents are the following.
(a) failure to purchase all the necessary machinery and equipment
needed by the petitioner's project for which the approved loan was
intended;
(b) failure to construct a processing plant;
(c) abandonment of imported machinery and equipment at the pier,
(d) purchase of unsuitable lot for the processing plant at Binan;
(e) failure to develop even a square meter of the quarries in
Romblon or Cebu; and
(f) nearly causing the loss of petitioner's rights over its Cebu claims;
and that instead of helping pet get back on its feet,
DBP completely abandoned the petitioner's project and
proceeded to foreclose the properties mortgaged to it by
petitioner without previous demand or notice.

In essence, the pet in its complaint seeks the annulment of the
deeds of mortgage and deed of assignment which it executed in
favor of DBP in order to secure the $5 million loan
PETTITIONERS CONTENTION:
- there was no loan at all to secure since what DBP "lent" to pet
with its right hand, it also got back with its left hand;
- and that, there was failure of consideration with regard to the
execution of said deeds as the loan was never delivered to
the petitioner.
- further prayed that the trial court immediately issue a
restraining order and then a writ of preliminary injunction
against the sheriffs to enjoin the latter from proceeding with
the foreclosure and sale of the petitioner's properties in Metro
Manila and in Romblon.
Resp DBP opposed the issuance of a writ of preliminary
injunction stating that under PD No. 385, DBP's right to foreclose
is mandatory as the arrearages of petitioner had already
amounted to P123.8 million as against its total obligation of
P151.9 million;
that under the same decree, no court can issue any restraining
order or injunction against it to stop the foreclosure since Filipinas
Marble's arrearages had already reached at least 20% of its total
obligations;
that the alleged non-receipt of the loan proceeds by the pet could,
at best, be accepted only in a technical sense bec the money was
received by the officers of the pet acting in such capacity and,
therefore, irrespective of whoever is responsible for placing them
in their positions, their receipt of the money was receipt by the pet
corp and that the complaint does not raise any substantial
controversy as to the amount due under the mortgage as the
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issues raised therein refer to the propriety of the manner by which
the proceeds of the loan were expended by the petitioner's
management,
the allegedly precipitate manner with which DBP proceeded with
the foreclosure, and the capacity of the DBP to be an assignee of
the mining lease rights.
RTC:
Adheres to the mandatory provisions of P.D. 385.
The Court believes that it cannot enjoin the defendant DBP from
complying with the mandatory provisions of the said PD 385.
It having been shown that plaintiff's outstanding obligation as of
Dec 31, 1982 amounted to P151.9 million and with arrearages
reaching up to 81 % against said total obligation, the Court finds
the provisions of P.D. 385 applicable to the instant case.
It is a settled rule that when the statute is clear and unambiguous,
there is no room for interpretation, and all that it has to do is to
apply the same.
CA: up held the ruling of the RTC
While pet concedes 'that PD. 385 applies only where it is clear
that there was a loan or where the loan is not denied' (p. 14-
petition), it disclaims receipt of the $5 million loan nor benefits
derived therefrom and bewails the onerous conditions imposed by
DBP Resolution No. 385 dated Dec 7, 1977, which allegedly
placed the petitioner under the complete control of the private
respondents DBP and Bancom.
The plausibility of petitioner's statement that it did not receive the
$5 million loan is more apparent than real.
At the hearing for injunction before the counsel for DBP stressed
that $2.6 million of the $5 million loan was earmarked to finance
the acquisition of machinery, equipment and spare parts for pet's

Diamond gangsaw which machineries were actually imported by
pet Filipinas Marble Corporation and arrived in the Phil.
Indeed, a summary of releases to petitioner covering the period
June 1978 to October 1979 (Exh. 2, Injunction) showed
disbursements amounting to millions of pesos for working capital
and opening of letter of credits for the acquisition of its
machineries and equipment.
Petitioner does not dispute that releases were made for the
purchase of machineries and equipment but claims that such
imported machineries were left to the mercy of the elements as
they were never delivered to it.
xxxxxxxxx
Apart from the foregoing, petitioner is patently not entitled to a
writ of preliminary injunction for it has not demonstrated that at
least 20% of its outstanding arrearages has been paid after the
foreclosure proceedings were initiated. Nowhere in the record is it
shown or alleged that petitioner has paid in order that it may fall
within the exception prescribed on Sec 2, PD No. 385.
ISSUE(S):
1. There being 'persuasive' evidence that the $5 million
proceeds of the loan were not received and did not
benefit the petitioner per finding of the lower court which
should not be disturbed unless there is grave abuse of
discretion, it must follow that PD 385 does not and cannot
apply;
2. If there was no valid loan contract for failure of
consideration, the mortgage cannot exist or stand by itself
being a mere accessory contract. Additionally, the chattel
mortgage has not been registered. Therefore, the same is
null and void under Art 2125 of the New Civil Code; and
3. PD 385 is unconstitutional as a 'class legislation', and
violative of the due process clause.
3
With regard to the first assignment of error, the petitioner
maintains that since the trial court found "persuasive
evidence" that there might have been a failure of
consideration on the contract of loan due to the manner in
which the amount of $5 million was spent, said court
committed grave abuse of discretion in holding that it had
no recourse but to apply P.D. 385 because the application
of this decree requires the existence of a valid loan which,
however, is not present in petitioner's case. It likewise
faults the appellate court for upholding the applicability of
the said decree.
Sections 1 and 2 of P.D. No. 385 respectively provide:
It shall be mandatory for government financial institutions after
the lapse of 60 days from the issuance of this Decree,
- to foreclose the collaterals and/or securities for any loan,
credit accommodation, and/or guarantees granted by them
whenever the arrearages on such account, including accrued
interest and other charges, amount to at least 20% of the total
outstanding obligations, including interest and other charges,
as appearing in the book of accounts and/or related records
of the financial institution concerned.
This shall be without prejudice to the exercise by the
government financial institution of such rights and/or
remedies available to them under their respective contracts
with their debtors, including the right to foreclose on loans,
credits, accommodations, and/or guarantees on which the
arrearages are less than 20%.
Sec 2. No restraining order, temporary or permanent injunction
shall be issued by the court against any government financial
institution in any action taken by such institution in compliance
with the mandatory foreclosure provided in Sec 1 hereof, whether
such restraining order, temporary or permanent injunction is
sought by the borrower(s) or any third party or parties, except
after due hearing in which it is established by the borrower, and

admitted by the government financial institution concerned that
20% of the outstanding arrearages has been paid after the filing
of foreclosure proceedings.
PD 385 was issued primarily to see to it that government financial
institutions are not denied substantial cash inflows, which are
necessary to finance development projects all over the country,
by large borrowers who, when they become delinquent, resort to
court actions in order to prevent or delay the government's
collection of their debts and loans.
The government, however, is bound by basic principles of
fairness and decency under the due process clause of the Bill of
Rights. P.D. 385 was never meant to protect officials of
government lending institutions who take over the management
of a borrower corporation, lead that corporation to bankruptcy
through mismanagement or misappropriation of its funds, and
who, after ruining it, use the mandatory provisions of the decree
to avoid the consequences of their misdeeds.
The designated officers of the government financing institution
cannot simply walk away and then state that since the loans were
obtained in the corporation's name, then P.D. 385 must be
peremptorily applied and that there is no way the borrower
corporation can prevent the automatic foreclosure of the
mortgage on its properties once the arrearages reach 20% of the
total obligation no matter who was responsible.
RULING:
In the case at bar, the respondents try to impress upon this Court
that the $5 million loan was actually granted and released to the
petitioner corporation and whatever the composition of the
management which received the loan is of no moment bec. this
management was acting in behalf of the corporation.
The respondents also argue that since the loan was extended to
the corporation, the releases had to be made to the then officers
of that borrower corporation.
4
Precisely, what the petitioner is trying to point out is that the DBP
and Bancom people who managed Filipinas Marble misspent the
proceeds of the loan by taking advantage of the positions that
they were occupying in the corporation which resulted in the
latter's devastation instead of its rehabilitation.
The petitioner does not question the authority under which the
loan was delivered but stresses that it is precisely this authority
which enabled the DBP and Bancom people to misspend and
misappropriate the proceeds of the loan thereby defeating its very
purpose, that is, to develop the projects of the corporation.
Therefore, it is as if the loan was never delivered to it and thus,
there was failure on the part of the respondent DBP to deliver the
consideration for which the mortgage and the assignment of deed
were executed.
We cannot, at this point, conclude that resp DBP together
with the Bancom people actually misappropriated and
misspent the $5 million loan in whole or in part although the
trial court found that there is "persuasive" evidence that such
acts were committed by the respondent.
This matter should rightfully be litigated below in the main
action. Pending the outcome of such litigation, P.D. 385
cannot automatically be applied for if it is really proven that
resp DBP is responsible for the misappropriation of the loan,
even if only in part, then the foreclosure of the petitioner's
properties under the provisions of P.D. 385 to satisfy the
whole amount of the loan would be a gross mistake.
It would unduly prejudice the petitioner, its employees and
their families.
Only after trial on the merits of the main case can the true amount
of the loan which was applied wisely or not, for the benefit of the
petitioner be determined.

Consequently, the extent of the loan where there was no failure of
consideration and which may be properly satisfied by foreclosure
proceedings under P.D. 385 will have to await the presentation of
evidence in a trial on the merits.
As we have ruled in the case of Central Bank of the Phil vs. CA, (1
39 SCRA 46, 5253; 56):
When Island Savings Bank and Sulpicio M. Tolentino entered into an
P80,000.00 loan agreement on April 28, 1965, they undertook reciprocal
obligations, the obligation or promise of each party is the consideration for
that of the othe. (Penacio vs. Ruaya, 110 SCRA 46 [1981]; ...
xxxxxxxxx
The fact that when Sulpicio M. Tolentino executed his real estate mortgage,
no consideration was then in existence, as there was no debt yet because
Island Savings Bank had not made any release on the loan, does not make
the real estate mortgage void for lack of consideration. It is not necessary
that any consideration should pass at the time of the execution of the
contract of real mortgage (Bonnevie vs. Court of Appeals, 125 SCRA 122
[1983].
It may either be a prior or subsequent matter. But when the
consideration is subsequent to the mortgage, the mortgage can
take effect only when the debt secured by it is created as a
binding contract to pay (Parks vs. Sherman, Vol. 2, pp. 5-6).
And, when there is partial failure of consideration, the mortgage
becomes unenforceable to the extent of such failure (Dow, et al. vs.
Poore Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. C.J.S. p. 138). ...
Under the admitted circumstances of this petition, we, therefore,
hold that until the trial on the merits of the main case, P.D. 385
cannot be applied and thus, this Court can restrain the
respondents from foreclosing on petitioner's properties pending
such litigation.
The resp, in addition, assert that even if the $5 million loan were
not existing, the mortgage on the properties sought to be
foreclosed was made to secure previous loans of the petitioner
5
with respondent and therefore, the foreclosure is still justified.
This contention is untenable. 2 of the conditions imposed by
respondent DBP for the release of the $5 million loan embodied
in its letter to petitioner dated Dec 21, 1977 state:
A. The interim loan of $289k plus interest due thereon which was
used for the importation of one Savage Diamond Gangsaw shall
be liquidated out of the proceeds of this $5 million loan. In
addition, FMC shall also pay DBP, out of the proceeds of above
foreign currency loan, the past due amounts on obligation with
DBP.
xxxxxxxxx
B. Conversion into preferred shares of P 2 million of FMCs total
obligations with DBP as of the date the legal documents for this
refinancing shall have been exempted or not later than 90 days
from date of advice of approval of this accommodation.
The above conditions lend credence to the pet's contention that
the "original loan had been converted into 'equity shares', or
preferred shares; therefore, to all intents and purposes, the only
'loan' which is the subject of the foreclosure proceedings is the $5
million loan in 1978. "
As regards the second assignment of error, we agree with the
petitioner that a mortgage is a mere accessory contract and, thus,
its validity would depend on the validity of the loan secured by it.
We, however, reject the petitioner's argument that since the
chattel mortgage involved was not registered, the same is null
and void. Art 2125 of the Civil Code clearly provides that the non-
registration of the mortgage does not affect the immediate
parties. It states:
Art. 2125. In addition to the requisites stated in art 2085, it
is indispensable, in order that a mortgage may be validly
constituted that the document in which it appears be

recorded in the Registry of Property. If the instrument is
not recorded, the mortgage is nevertheless binding
between the parties.
xxxxxxxxx
The petitioner cannot invoke the above provision to nullify the
chattel mortgage it executed in favor of respondent DBP.
We find no need to pass upon the constitutional issue raised in
the third assignment of error. We follow the rule started in Alger
Electric, Inc. vs. Court of Appeals, (135 SCRA 37, 45).
We see no necessity of passing upon the constitutional issues
raised by respondent Northern. This Court does not decide
questions of a constitutional nature unless absolutely necessary
to a decision of a case. If there exists some other grounds of
construction, we decide the case on a non- constitutional
determination. (See Burton vs. United States, 196 U.S. 283; Siler vs.
Luisville & Nashville R. Co., 123 U.S. 175; Berta College vs. Kentucky, 211
U.S. 45).
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is GRANTED.
The orders of the Intermediate Appellate Court dated April 17, 1984 and July
3, 1984 are hereby ANNULLED and SET ASIDE. The trial court is ordered to
proceed with the trial on the merits of the main case. In the meantime, the
temporary restraining order issued by this Court on July 23, 1984 shall
remain in force until the merits of the main case are resolved.
SO ORDERED.
SUMMARY:
In its desire to develop the full potentials of its mining claims and
deposits, Filipinas Marbles Corporation (FMC) applied and was
granted a loan in the amount of $5,000,000 by respondent
Development Bank of the Philippines (DBP) on the conditions that
the management contract will be handled by Bancom System
Control and the DBP. and the loan shall be secured by a final
mortgage on the assets of petitioner with a total approved vale of
PhP 48,630,756. The chattel mortgage was not registered
pursuant to Article 2125 of the Civil Code.
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ISSUE: WON the non-registration of the mortgage will nullify the
contract between the parties, considering that a mortgage
contract is an accessory contract?
RULING:
The SC have to say this, we agree with the petitioner that a
mortgage is a mere accessory contract, and, thus its validity
would depend on the validity of the loan secured by it.
We, however, reject the petitioner's argument that since the
chattel mortgage involved was not registered, the same is null
and void. Art 2125 of the Civil Code clearly provides that non-
registration of the mortgage does not affect the immediate
parties.
The petitioner cannot invoke the mentioned provision to nullify the
mortgage (chattel).
G.R. No. L-18456 Nov 30, 1963
CONRADO P. NAVARRO, plaintiff-appellee, v. RUFINO G.
PINEDA, RAMONA REYES, ET AL., defendants-appellants.
.
PAREDES, J.:
On Dec 14, 1959, defendants Rufino G. Pineda and his mother
Juana Gonzales (married to Gregorio Pineda), borrowed from
plaintiff Conrado P. Navarro, the sum of P2.5k payable 6 months
after said date or on June 14, 1959.
To secure the indebtedness, Rufino executed a document
captioned "DEED OF REAL ESTATE and CHATTEL
MORTGAGES", whereby Juana Gonzales, by way of REM
subjected a parcel of land, belonging to her, registered with the
Register of Deeds of Tarlac, under TCT. 25776,
and Rufino G. Pineda, by way of Chattel Mortgage, mortgaged
his 2-story residential house, erected on a lot belonging to Atty.
Vicente Castro, located Tarlac; and 1 motor truck, registered in
his name, under Motor Vehicle Registration Certificate No. A-

171806.
Both mortgages were contained in 1 instrument, which was
registered in both the Office of the Register of Deeds and the
Motor Vehicles Office of Tarlac.
The defendants failed to pay when the mortgage debt became
due and payable.
However, they asked for an extention and the same was granted
to June 30, 1960, within which to pay.
Came June 30, defendants again failed to pay and, for the
second time, asked for another extension, which was given, up to
July 30, 1960.
In the second extension, defendant Pineda in a document entitled
"Promise", categorically stated that in the remote event he should
fail to make good the obligation on such date (July 30, 1960), the
defendant would no longer ask for further extension and there
would be no need for any formal demand, and plaintiff could
proceed to take whatever action he might desire to enforce his
rights, under the said mortgage contract.
In spite of said promise, defendants, failed and refused to pay the
obligation.
On Aug 10, 1960, plaintiff filed a complaint for foreclosure of the
mortgage and for damages, which consisted of liquidated
damages in the sum of P500.00 and 12% per annum interest on
the principal, effective on the date of maturity, until fully paid.
Defendants, answering the complaint,
Defendants admit that the loan is overdue but deny that portion of
paragraph 4 of the 1st Cause of Action which states that the
defendants unreasonably failed and refuse to pay their obligation
to the plaintiff because they are hard up these days and pleaded
to the plaintiff to grant them more time within which to pay their
obligation and the plaintiff refused;
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Defendants prayed to the RTC to render judgment granting the
defendants until January 31, 1961, within which to pay their
obligation to the plaintiff.
On Sept 30, 1960, plaintiff presented a Motion for summary
Judgment, claiming that the Answer failed to tender any genuine
and material issue.
The motion was set for hearing, but the record is not clear what
ruling the lower court made on the said motion.
On Nov 11, 1960, however, the parties submitted a Stipulation of
Facts, wherein the defendants admitted the indebtedness, the
authenticity and due execution of the Real Estate and Chattel
Mortgages; that the indebtedness has been due and unpaid since
June 14, 1960; that a liability of 12% per annum as interest was
agreed, upon failure to pay the principal when due and P500.00
as liquidated damages; that the instrument had been registered in
the Registry of Property and Motor Vehicles Office, both of the
province of Tarlac;
that the only issue in the case is whether or not the
residential house, subject of the mortgage therein, can be
considered a Chattel and the propriety of the attorney's
fees.
RTC: On Feb 24, 1961,it held
... WHEREFORE, this Court renders decision in this Case:
(a) Dismissing the complaint with regard to defendant Gregorio Pineda;
(b) Ordering defendants Juana Gonzales and the spouses Rufino
Pineda and Ramon Reyes, to pay jointly and severally to the
plaintiff Conrado P. Navarro the principal sum of P2.5k. with 12%
compounded interest per annum from June 14, 1960, until said
principal sum and interests are fully paid, plus P500.00 as
liquidated damages and the costs of this suit, with the warning that
in default of said payment of the properties mentioned in the deed
of real estate mortgage and chattel mortgage (Annex "A" to the
complaint) be sold to realize said mortgage debt, interests,
liquidated damages and costs, in accordance with the pertinent
provisions of Act 3135, as amended by Act 4118, and Art. 14 of the
Chattel Mortgage Law, Act 1508; and

(c) Ordering the defendants Rufino Pineda and Ramona Reyes, to
deliver immediately to the Provincial Sheriff of Tarlac the personal
properties mentioned in said Annex "A", immediately after the lapse
of the 90 days above-mentioned, in default of such payment.
The above judgment was directly appealed to this Court, the
defendants therein assigning only a single error, allegedly
committed by the lower court, to wit
In holding that the deed of real estate and chattel mortgages
appended to the complaint is valid, notwithstanding the fact that
the house of the defendant Rufino G. Pineda was made the
subject of the chattel mortgage, for the reason that it is erected on
a land that belongs to a third person.
Appellants contend that article 415 of the New Civil Code, in
classifying a house as immovable property, makes no distinction
whether the owner of the land is or not the owner of the building;
the fact that the land belongs to another is immaterial, it is
enough that the house adheres to the land.
In other words, it is claimed that "a building is an immovable
property, irrespective of whether or not said structure and the land
on which it is adhered to, belong to the same owner" (Lopez v.
Orosa, G.R. Nos. L-10817-8, Feb. 28, 1958).
Appellants argue that since only movables can be the subject of a
chattel mortgage (sec. 1, Act No. 3952) then the mortgage in
question which is the basis of the present action, cannot give rise
to an action for foreclosure, because it is nullity.
The trial court did not predicate its decision declaring the deed of
chattel mortgage valid solely on the ground that the house
mortgaged was erected on the land which belonged to a third
person, but also and principally on the doctrine of estoppel, in that
"the parties have so expressly agreed" in the mortgage to
consider the house as chattel "for its smallness and mixed
8
materials of sawali and wood".
In construing arts. 334 and 335 of the Spanish Civil Code
(corresponding to arts. 415 and 416, N.C.C.), for purposes of the
application of the Chattel Mortgage Law, it was held that under
certain conditions, "a property may have a character different
from that imputed to it in said articles. It is undeniable that the
parties to a contract may by agreement, treat as personal
property that which by nature would be real property" ( Standard Oil
Co. of N.Y. v. Jaranillo, 44 Phil. 632-633).
"There can not be any question that a building of mixed materials
may be the subject of a chattel mortgage, in which case, it is
considered as between the parties as personal property. ...
The matter depends on the circumstances and the intention of the
parties".
"Personal property may retain its character as such where it is so
agreed by the parties interested even though annexed to the
realty ...".
The view that parties to a deed of chattel mortgagee 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 principles of estoppel ..."
(Evangelista v. Alto Surety, No. L-11139, Apr. 23, 1958).
In a case, a mortgage 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 (Evangelista v. Abad [CA];36 O.G. 2913), for it is now well settled
that an object placed on land by one who has only a temporary
right to the same, such as a lessee or usufructuary, does not
become immobilized by attachment (Valdez v. Central Altagracia, 222
U.S. 58, cited in Davao Sawmill Co., Inc. v. 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 is so stipulated in the document of mortgage. (Evangelista
v. 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, et al.. v. C. N. Hodges, et al., [CA]; 48 O.G.
5374).
The doctrine, therefore, gathered from these cases is that
although in some instances, a house of mixed materials has been
considered as a chattel between them, has been recognized, it
has been a constant criterion nevertheless that, with respect to
third persons, who are not parties to the contract, and specially in
execution proceedings, the house is considered as an immovable
property (Art. 1431, New Civil Code).
RULING:
In the case at bar, the house in question was treated as personal
or movable property, by the parties to the contract themselves. In
the deed of chattel mortgage, appellant Rufino G. Pineda
conveyed by way of "Chattel Mortgage" "my personal properties",
a residential house and a truck. The mortgagor himself grouped
the house with the truck, which is, inherently a movable property.
The house which was not even declared for taxation purposes
was small and made of light construction materials: G.I. sheets
roofing, sawali and wooden walls and wooden posts; built on land
belonging to another.
The cases cited by appellants are not applicable to the present
case. The Iya cases (L-10837-38, supra), refer to a building or a
house of strong materials, permanently adhered to the land,
belonging to the owner of the house himself. In the case of Lopez
v. Orosa, (L-10817-18), the subject building was a theatre, built of
materials worth more than P62,000, attached permanently to the
soil. In these cases and in the Leung Yee case, supra, third
9
persons assailed the validity of the deed of chattel mortgages; in
the present case, it was one of the parties to the contract of
mortgages who assailed its validity.
CONFORMABLY WITH ALL THE FOREGOING, the decision
appealed from, should be, as it is hereby affirmed, with costs
against appellants.
NAVARRO v. PINEDA
With regard to third persons who are not parties to the
contract, a house is still considered as an immovable
property.
FACTS:
Pineda and his mother secured a loan from Navarro. In line with
this, they executed a REM over the land owned by his mother,
and a Chattel Mortgage over the residential house. They
defaulted on the payment of the loan, but they were able to ask
for an extension. However, they still defaulted, which caused
Navarro to file for a foreclosure of the mortgages.
ISSUE:
Whether or not the house should be considered as a movable or
immovable property?
RULING:
The stipulation of the parties still govern. Thus, with regard to a
building erected on a lot belonging to another, this may be the
subject matter of a chattel mortgage if the parties so stipulate.
However, with regard to third persons who are not parties to the
contract, the house is still considered as an immovable property.
G.R. No. L-40018 Dec 15, 1975
NORTHERN MOTORS, INC., petitioner, v.HON. JORGE R.
COQUIA, etc., et al., respondents, FILINVEST CREDIT

CORPORATION, intervenor.
AQUINO, J.:
Respondent Honesto Ong and City Sheriff of Manila filed a
motion for the reconsideration of this Court's resolution of Aug 29,
1975.
In that resolution, it was held that the lien of Northern Motors,
Inc., as chattel mortgagee, over certain taxicabs is superior to the
levy made on the said cabs by Honesto Ong, the assignee of the
unsecured judgment creditor of the chattel mortgagor, Manila
Yellow Taxicab Co., Inc.
On the other hand, Northern Motors, Inc. in its motion for the
partial reconsideration of the same Aug 29 resolution, prayed for
the reversal of the lower court's orders cancelling the bond filed
by Filwriters Guaranty Assurance Corporation.
Northern Motors, Inc. further prayed that the sheriff should be
required to deliver to it the proceeds of the execution sale of the
mortgaged taxicabs without deducting the expenses of execution.
1. Respondents' motion for reconsideration. Honesto Ong in
his motion invokes his supposed "legal and equity status" vis-a-
vis the mortgaged taxicabs. He contends that his only recourse
was to levy upon the taxicabs which were in the possession of the
judgment debtor, Manila Yellow Taxicab Co. Inc., whereas,
Northern Motors, Inc., as unpaid seller and mortgagee, "has still
an independent legal remedy" against the mortgagor for the
recovery of the unpaid balance of the price.
That contention is not a justification for setting aside the holding
that Ong had no right to levy upon the mortgaged taxicabs and
that he could have levied only upon the mortgagor's equity of
redemption.
The essence of the chattel mortgage is that the mortgaged
chattels should answer for the mortgage credit and not for the
judgment credit of the mortgagor's unsecured creditor.
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The mortgagee is not obligated to file an "independent action" for
the enforcement of his credit.
To require him to do so would be a nullification of his lien and
would defeat the purpose of the chattel mortgage which is to give
him preference over the mortgaged chattels for the satisfaction of
his credit. (See art. 2087, Civil Code).
It is relevant to note that intervenor Filinvest Credit Corporation,
the assignee of a portion of the chattel mortgage credit, realized
that to vindicate its claim by independent action would be illusory.
For that pragmatic reason, it was constrained to enter into a
compromise with Honesto Ong by agreeing to pay him P145,000.
That amount was characterized by Northern Motors, Inc. as the
"ransom" for the taxicabs levied upon by the sheriff at the behest
of Honesto Ong.
Honesto Ong's theory that Manila Yellow Taxicab's breach of the
chattel mortgage should not affect him because he is not privy of
such contract is untenable. The registration of the chattel
mortgage is an effective and binding notice to him of its existence
(Ong Liong Tiak vs. Luneta Motor Company, 66 Phil 459).
The mortgage creates a real right (derecho real, jus in re or jus
ad rem, XI Enciclopedia Juridica Espaola 294) or a lien which,
being recorded, follows the chattel wherever it goes.
Honesto Ong's contention that Northern Motors, Inc., was
negligent because it did not sue the sheriff within the 120-day
period provided for in section 17, Rule 39 of the Rules of Court is
not correct. Such action was filed on April 14, 1975 in the Court of
First Instance of Rizal, Pasig Branch XIII, in Civil Case No. 21065
entitled "Northern Motors, Inc. vs. Filwriters Guaranty Assurance

Corporation, et al.". However, instead of Honesto Ong, his
assignor, Tropical Commercial Corporation, was impleaded as a
defendant therein. That might explain his unawareness of the
pendency of such action.
The other arguments of Honesto Ong in his motion may be boiled
down to the proposition that the levy made by mortgagor's
judgment creditor against the chattel mortgagor should prevail
over the chattel mortgage credit. That proposition is devoid of any
legal sanction and is glaringly contrary to the nature of a chattel
mortgage. To uphold that contention is to destroy the essence of
chattel mortgage as a paramount encumbrance on the mortgaged
chattel.
Respondent Ong admits "that the mortgagee's right to the
mortgaged property is superior to that of the judgment creditor".
But he contends that the rights of the purchasers of the cars at
the execution sale should be respected. He reasons out they
were not parties to the mortgage and that they acquired the cars
prior to the mortgagee's assertion of its rights thereto.
That contention is not well-taken. The third-party claim filed by
Northern Motors, Inc. should have alerted the purchasers to the
risk which they were taking when they took part in the auction
sale. Moreover, at an execution sale the buyers acquire only the
right of the judgment debtor which in this case was a mere right
or equity of redemption. The sale did not extinguish the pre-
existing mortgage lien (See sec. 25, Rule 39, Rules of Court;
Potenciano vs. Dineros and Provincial Sheriff of Rizal, 97 Phil,
196; Lara vs. Bayona, 97 Phil. 951; Hacbang vs. Leyte Autobus
Co., Inc., L-7907, May 30, 1963, 8 SCRA 103).
Some arguments adduced by Honesto Ong in his motion were
intended to protect the interests of the mortgagor, Manila Yellow
Taxicab Co., Inc., which he erroneously characterized as a
"respondent" (it is not a respondent in this case). Ong argues that
the proceeds of the execution sale, which was held on December
18, 1974, should be delivered to Northern Motors, Inc. "only to
such extent as has exceeded the amount paid by respondent
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Manila Yellow Taxicab to" Northern Motors, Inc. That argument is
not clear. Ong probably means that the installments already paid
by Manila Yellow Taxicab Co., Inc. to Northern Motors, Inc. should
be deducted from the proceeds of the execution sale. If that is the
point which Ong is trying to put across, and it is something which
does not directly affect him, then, that matter should be raised by
Manila Yellow Taxicab Co., Inc. in the replevin case, Civil Case
No. 20536 of the Court of First Instance of Rizal, Pasig Branch VI,
entitled "Northern Motors, Inc. versus Manila Yellow Taxicab Co.,
Inc. et al."
Ong's contention, that the writ of execution, which was enforced
against the seven taxicabs (whose sale at public auction was
stopped) should have precedence over the mortgage lien, cannot
be sustained. Those cabs cannot be sold at an execution sale
because, as explained in the resolution under reconsideration,
the levy thereon was wrongful.
The motion for reconsideration of Ong and the sheriff should be
denied.
2. Petitioners motion for partial reconsideration. The lower
court in its order of January 3, 1975 cancelled the indemnity
bonds for P480,000 filed on December 18, 1975 by Filwriters
Guaranty Assurance Corporation for Tropical Commercial Co.,
Inc. The bonds were cancelled without notice to Northern Motors,
Inc. as third-party claimant.
We already held that the cancellation of the bonds constituted a
grave abuse of discretion but we previously denied petitioner's
prayer for the reinstatement of the bonds because Northern
Motors Inc. had given the impression that it had not filed any
action for damages against the sheriff within the one hundred
twenty-day period contemplated in Section 17, Rule 39 of the
Rules of Court.
As already noted above, the truth is that such an action for
damages was filed on April 14, 1975 against the surety, the sheriff
and the judgment creditor in Civil Case No. 21065 of the Court of
First Instance of Rizal, Pasig Branch XIII. The action involves the
indemnity bond for P240,000 (No. 0032 posted on December 18,
1974).
It may also be noted that in a prior case, Civil Case No. 20536 of

the Court of First Instance of Rizal at Pasig, entitled "Northern
Motors, Inc. vs. Manila Yellow Taxicab Co., Inc., et al.", a replevin
case (where an amended complaint dated January 15, 1975 was
filed), the surety, Filwriters Guaranty Assurance Corporation, was
impleaded as a defendant by reason of its bond for P240,000.
Northern Motors, Inc. in that case prayed that the surety be
ordered to pay to it damages in the event that the eight taxicabs
could not be surrendered to the mortgagee.
Northern Motors, Inc., in its instant motion for partial
reconsideration, reiterates its petition for the reinstatement of the
bond filed by Filwriters Guaranty Assurance Corporation. If the
said bond is not reinstated or if the lower court's orders cancelling
it are allowed to stand, the aforementioned Civil Cases Nos.
20536 and 21065 would be baseless or futile actions against the
surety. That injustice should be corrected. Hence, our resolution
of August 29, 1975, insofar as it did not disturb the lower court's
orders cancelling the indemnity bonds, should be reconsidered.
Northern Motors. Inc. further prays for the reconsideration of that
portion of our resolution allowing the sheriff to deduct expenses
from the proceeds of the execution sale for the eight taxicabs
which sale was held on December 18, 1974. It argues that
Honesto Ong or Manila Yellow Taxicab Co., Inc. should shoulder
such expenses of execution.
We already held that the execution was not justified and that
Northern Motors, Inc., as mortgagee, was entitled to the
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possession of the eight taxicabs. Those cabs should not have
been levied upon and sold at public auction to satisfy the
judgment credit which was inferior to the chattel mortgage. Since
the cabs could no longer be recovered because apparently they
had been transferred to persons whose addresses are unknown
(see par. 12, page 4, Annex B of motion), the proceeds of the
execution sale may be regarded as a partial substitute for the
unrecovarable cabs (See arts. 1189[2] and 1269, Civil Code;
Urrutia & Co. vs. Baco River Plantation Co., 26 Phil. 632).
Northern Motors, Inc. is entitled to the entire proceeds without
deduction of the expenses of execution.
WHEREFORE, private respondents' motion for reconsideration is
denied and petitioner's motion for partial reconsideration is
granted. The resolution of August 29, 1975 is modified in the
sense that the lower court's orders of January 3 and 6, 1975,
cancelling the indemnity bond for P240,000 (as reaffirmed in its
order of January 17, 1975), are set aside. The said indemnity
bond for P240,000 is regarded as in full force and Respondent
Sheriff of Manila is further directed to deliver to Northern Motors,
Inc. the entire proceeds of the execution sale held on December
18, 1974 for the eight taxicabs which were mortgaged to that firm.
SO ORDERED.