POLIAND vs NDC
 Asian Hardwood –> credit accommodations to Galleon  US$ 3.3 M
 advancements were used to augment its working capital
 To finance the vessels, Galleon obtained loans from 3 Japanese
Lenders  Galleon and DBP executed a Deed of Undertaking
whereby DBP guaranteed the payment of Galleon
 Security of Undertaking: 5 new vessels and 2 secondhand vessels 
Mortgage Contract
 FM  LOI  directed NDC to acquire the Galleon, and ordered DBP
to advance Galleon within 3 yrs from its effectivity the principal
amount and the interest of its maturing obligations  Memorandum
Agreement between Galleon and NDC as to the share purchase
agreement
 NDC  assumed management and operations  paid Asian
Hardwood US$1M
 LOI ordered the foreclosure of vessels  vessels were acquired by
DBP for PhP 539, 000, 000  later sold to NDC
 Asian Hardwood  assigned its rights to World Universal  Deed of
Assignment  assigned to Poliand
 Cory Aquino  AO  directed NDC and Trade Investment Corp to
transfer some of their assets to the Government  among those
transferred were the vessels
 Poliand  demands to Galleon, NDC and DBP  collection suit
LIABILITY ON LOAN ACCOMODATIONS: NDC, DBP and Galleon are not
solidarily liable; and PD 1521 is applicable on the concurrence and
preference of credits
- As to NDC: The MOA executed by GALLEON and NDC following
the issuance of LOI 1155 called for the execution of a formal
share purchase agreement and the transfer of all the
shareholdings of seller to Buyer. Since no such execution and
consequent transfer of shareholdings took place, NDC did not
acquire ownership of GALLEON. It merely assumed actual
control over the management and operations of GALLEON in the
exercise of which it, on January 15, 1982, after being satisfied
of the existence of GALLEONs obligation to ASIAN HARDWOOD,
partially paid the latter One Million ($1,000,000.00) US dollars
- As to DBP: Poliand failed to prove cause of action bc LOI cannot
be a valid source of obligation for it did not create any privity of
contract between DBP and Poliand
LIABILITY ON THE MARITIME LIEN: PD 1521 is applicable and not CC or
Code of Commerce
- The resolution of the instant case depends on the determination
as to which creditor is entitled to the proceeds of the foreclosure
sale of the vessels. Clearly, Article 578 of the Code of
Commerce is inapplicable
- Article 580, while providing for the order of payment of creditors
in the event of sale of a vessel, had been repealed by the
pertinent provisions of Presidential Decree (P.D.) No. 1521,
otherwise known as the Ship Mortgage Decree of 1978. In
particular, Article 580 provides that in case of the judicial sale
of a vessel for the payment of creditors, the debts shall be
satisfied in the order specified therein. On the other hand,
Section 17 of P.D. No. 1521[50] also provides that in the judicial
or extrajudicial sale of a vessel for the enforcement of a
preferred mortgage lien constituted in accordance with Section
2 of P.D. No. 1521, such preferred mortgage lien shall have
priority over all pre-existing claims against the vessel, save for
those claims enumerated under Section 17, which have
preference over the preferred mortgage lien in the order stated
therein. Since P.D. No. 1521 is a subsequent legislation and
since said law in Section 17 thereof confers on the preferred
mortgage lien on the vessel superiority over all other claims,
thereby engendering an irreconcilable conflict with the order of
preference provided under Article 580 of the Code of
Commerce, it follows that the Code of Commerce provision is
deemed repealed by the provision of P.D. No. 1521, as the
posterior law
- Whether or not the order of preference under Section 17, P.D.
No. 1521 may be properly applied in the instant case depends
on the classification of the mortgage on the GALLEON vessels,
that is, if it falls within the ambit of Section 2, P.D. No. 1521,
defining how a preferred mortgage is constituted.
- Sec. 2: The mortgage obtains a preferred status , if the
mortgage on the vessel is constituted for financing the
construction, acquisition, purchase of vessels or initial operation
of vessels unless there are superior liens, as enumerated under
Sec. 17
1) expenses and fees allowed and costs taxed by the
court and taxes due to the Government;
(2) crew's wages;
(3) general average;
(4) salvage including contract salvage;
(5) maritime liens arising prior in time to the recording
of the preferred mortgage;
(6) damages arising out of tort; and
(7) preferred mortgage registered prior in time.
- There is no question that the mortgage executed in favor of DBP
is covered by P.D. No. 1521. Contrary to NDCs assertion, the
mortgage constituted on GALLEONs vessels in favor of DBP may
appropriately be characterized as a preferred mortgage under
Section 2, P.D. No. 1521 because GALLEON constituted the
same for the purpose of financing the construction, acquisition,
purchase of vessels or initial operation of vessels. While it is
correct that GALLEON executed the mortgage in consideration
of DBPs guarantee of the prompt payment of GALLEONs
obligations to the Japanese lenders, DBPs undertaking to pay
the Japanese banks was a condition sine qua non to the
acquisition of funds for the purchase of the GALLEON vessels.
Without DBPs guarantee, the Japanese lenders would not have
provided the funds utilized in the purchase of the GALLEON
vessels. The mortgage in favor of DBP was therefore constituted
to facilitate the acquisition of funds necessary for the purchase
of the vessels.
POLIAND’S MARITME LIEN IS SUPERIOR OVER DBP’S MORTGAGE LIEN
- Before POLIANDs claim may be classified as superior to the
mortgage constituted on the vessel, it must be shown to be one
of the enumerated claims which Section 17, P.D. No. 1521
declares as having preferential status in the event of the sale of
the vessel. One of such claims enumerated under Section 17,
P.D. No. 1521 which is considered to be superior to the
preferred mortgage lien is a maritime lien arising prior in time
to the recording of the preferred mortgage. Such maritime lien
is described under Section 21, P.D. No. 1521, which reads:
- SECTION 21. Maritime Lien for Necessaries; persons entitled to
such lien. Any person furnishing repairs, supplies, towage, use
of dry dock or marine railway, or other necessaries to any
vessel, whether foreign or domestic, upon the order of the
owner of such vessel, or of a person authorized by the owner,
shall have a maritime lien on the vessel, which may be enforced
by suit in rem, and it shall be necessary to allege or prove that
credit was given to the vessel.
- Under the aforequoted provision, the expense must be incurred
upon the order of the owner of the vessel or its authorized
person and prior to the recording of the ship mortgage. Under
the law, it must be established that the credit was extended to
the vessel itself.[57]
- The trial court found that GALLEONs advances obtained from
Asian Hardwood were used to cover for the payment of bunker
oil/fuel, unused stores and oil, bonded stores, provisions, and
repair and docking of the GALLEON vessels.These expenses
clearly fall under Section 21, P.D. No. 1521.
- The trial court also found that the advances from Asian
Hardwood were spent for ship modification cost and the crews
salary and wages. DBP contends that a ship modification cost is
omitted under Section 17, P.D. No. 1521, hence, it does not
have a status superior to DBPs preferred mortgage lien.
- As stated in Section 21, P.D. No. 1521, a maritime lien may
consist in other necessaries spent for the vessel. The ship
modification cost may properly be classified under this broad
category because it was a necessary expenses for the vessels
navigation. As long as an expense on the vessel is indispensable
to the maintenance and navigation of the vessel, it may properly
be treated as a maritime lien for necessaries under Section 21,
P.D. No. 1521.
- With respect to the claim for salary and wages of the crew, there
is no doubt that it is also one of the enumerated claims under
Section 17, P.D. No. 1521, second only to judicial costs and
taxes due the government in preference and, thus, having a
status superior to DBPs mortgage lien.
- All told, the determination of the existence and the amount of
POLIANDs claim for maritime lien is a finding of fact which is
within the province of the courts below.
ONLY NDC IS LIABLE ON THE MARITIME LIEN
- All things considered, however, the Court finds that only NDC is
liable for the payment of the maritime lien.
- A maritime lien is akin to a mortgage lien in that in spite of the
transfer of ownership, the lien is not extinguished. The maritime
lien is inseparable from the vessel and until discharged, it
follows the vessel.
- Considering that DBP subsequently transferred ownership of the
vessels to NDC, the Court holds the latter liable on the maritime
lien. Notwithstanding the subsequent transfer of the vessels to
NDC, the maritime lien subsists.
- This is a unique situation where the extrajudicial foreclosure of
the GALLEON vessels took place without the intervention of
GALLEONs other creditors including POLIANDs predecessors-in-
interest who were apparently left in the dark about the
foreclosure proceedings. At that time, GALLEON was already a
failing corporation having borrowed large sums of money from
banks and financial institutions. When GALLEON defaulted in the
payment of its obligations to DBP, the latter foreclosed on its
mortgage over the GALLEON ships.
 - The other creditors, including POLIANDs predecessors-in-
interest who apparently had earlier or superior rights over the
foreclosed vessels, could not have participated as they were
unaware and were not made parties to the case.
- On this note, the Court believes and so holds that the institution
of the extrajudicial foreclosure proceedings was tainted with
bad faith. It took place when NDC had already assumed the
management and operations of GALLEON. NDC could not have
pleaded ignorance over the existence of a prior or preferential
lien on the vessels subject of foreclosure
- As aptly held by the Court of Appeals:
NDCs claim that even if maritime liens existed over the proceeds
of the foreclosure sale of the vessels which it subsequently
purchased from DBP, it is not liable as it was a purchaser in
good faith fails, given the fact that in its actual control over the
management and operations of GALLEON, it was put on notice
of the various obligations of GALLEON including those secured
from ASIAN HARDWOOD as in fact it even paid ASIAN
HARDWOOD US$1,000,000.00 in partial settlement of
GALLEONs obligations, before it (NDC) mortgaged the 5 vessels
to DBP on January 25, 1982.
- Parenthetically, LOI 1195 directed NDC to discharge such
maritime liens as may be necessary to allow the foreclosed
vessels to engage on the international shipping business.
- In fine, it is with respect to POLIANDs claim for payment of
US$1,930,298.56 representing part of the proceeds of
GALLEONs loan which was spent by GALLEON for ship
modification and salaries of crew that NDC is liable.[67]
- Thus, NDC cannot claim that it was a subsequent purchaser in
good faith because it had knowledge that the vessels were
subject to various liens. At the very least, to evince good faith,
NDC could have inquired as to the existence of other claims
against the vessels apart from DBPs mortgage lien. Considering
that NDC was also in a position to know or discover the financial
condition of GALLEON when it took over its management, the
lack of notice to GALLEONs creditors suggests that the
extrajudicial foreclosure was effected to prejudice the rights of
GALLEONs other creditors.
- NDC also cannot rely on Administrative Order No. 64,[68] which
directed the transfer of the vessels to the APT, on its hypothesis
that such transfer extinguished the lien. APT is a mere conduit
through which the assets acquired by the National Government
are provisionally held and managed until their eventual disposal
or privatization.
- Administrative Order No. 64 did not divest NDC of its ownership
over the GALLEON vessels because APT merely holds the
vessels in trust for NDC until the same are disposed. Even if
ownership was transferred to APT, that would not be sufficient
to discharge the maritime lien and deprive POLIAND of its
recourse based on the lien. Such denouement would smack of
denial of due process and taking of property without just
compensation.
STROCHECKER vs RAMIREZ
 In the lower court (Insolvency Proceedings) there were 3
mortagagees who claimed preference:
1. Fidelity and Surety Co., - registered in March 10, 1919
2. Ildelfonso Ramirez – registered in Sept. 22, 1919
3. Concepcion Ayala – rejected by the trial court - no longer
appealed
 Ramirez claims preference on the grounds:
a. 1st mortgage is invalid bc the subject property is not capable of
being mortgaged
b. Description is insufficient
c. Amount due to him is a purchase price, citing Article 1922
d. His mortgage is a modification of the security given by the
debtor on February 15, 1919; hence, a prior mortgage was
executed
FIRST GROUND: Thing mortage was half of his interests in the Antigua
Botica Ramirez, (owned by Srta. Dolores del Rosario and the mortgagor
herein referred to as the partnership), located at Calle Real Nos. 123 and
125, District of Intramuros, Manila, Philippine Islands.)
- Capable of being appropriated
- Personal property
- Act No. 1508, Sec. 2: All personal properties may be mortgaged
- Description was sufficient. Sec 7 requires only a description of
the following nature: The description of the mortgaged property
shall be such as to enable the parties to the mortgage, or any
other person, after reasonable inquiry and investigation, to
identify the same
SECOND GROUND: The mortgage executed on Sept. 22, 1919 cannot be
given effect as of February 15, 1919
- On the 15th of February of that year, there was a stipulation
about a persons security, but not a mortgage upon any
property, and much less upon the property in question
- The preferential character of Fidelity and Surety cannot be deny
because in the very document executed in his favor it was stated
that his mortgage was a second mortgage, subordinate to the
one made in favor of the Fidelity & Surety Co.
UNSON vs URQUIJO
 Urquijo. Suluoaga and Escubi  sold PP to Capiz Central for 210k 
only 50k was paid  Complaint against CC for recovery of 160k
(balance of the machinery)  prayed that their claims against CC be
given preference, but LC held that it was a matter of insolvency that
the court has to decide
 Timoteo Unson and Clara Lacson: Complaint against CC for the
recovery of 163k as indemnity for damages  writ of attachment
was issued in their favour, and levied upon the property of UZE
 Jose Altavas and Antonio Belo  each filed a complaint against CC
praying for an attachment which was issue, the same having been
levied on CC on separate dates
 While those 4 were pending  CC was adjudged insolvent  all of
their property was conveyed
 Before UZE filed their claim in the IP: all of the property of CC was
sold to the Pilar Sugar Central for 80k plus interest of 266  sums
were deposited to BPI to protect the interests of the preferred
creditors  assigned being enjoined from making payments out of
said funds without judicial authorization  UZE were not notified of
the sale
 ALL FOUR CREDITORS ENTERED INTO COMPROMISE AGREEMENT
WHICH WERE APPROVED BY THE COURT, (entered into with the
assignee)
1. UZE – 90k
2. Unson and Lacson – 30k  leaving it to the court of First
Instance of Iloilo to decide the question on the preference of
said claim in view of the attachment on all the personal property
of the Capiz Central secured by them on August 12, 1921, and
considering the judgment to be rendered as a claim duly
presented in accordance with the Insolvency Law
3. Altavas – 8k  reserving the right to the latter to raise in the
Court of First Instance of Iloilo the question of preference of
said claim in view of the attachment he had obtained in said
case on the property of the Capiz Central, through the
presentation of said judgment, which should be considered as a
claim duly presented in the insolvency proceeding
4. Belo – 11k  as full payment of all his claims, reserving the
right to said plaintiff to raise the question of preference in view
of the attachment, which had been obtained in said civil cause
against the property of the Capiz Central, through the
presentation of the said judgment which should be considered
as a claim duly presented in the insolvency proceeding
 All four presented their claim of preference during the insolvency
proceeding, but were objected by each other  RTC rendered a
judgement from which the appeal was taken
 The decision of the CFI re: the four claims was the that the assignee
in this insolvency proceeding, as soon as possible after this judgment
has become final, pay from the funds of the same which have been
deposited, the following amounts:
o P30,000 to Unson and Lacson
o P8,000 to Jose Altavas
o P11,000 to Antonio Belo
 UZE appealed  Unson, Lacson, Altavas and Belo lost their
preferential right to the price of the machinery and the grinder which
had been sold to the Capiz Central, from the moment that it was
installed on the estate and became real property by destination
The vendor of pp. which has become real, does not lose his preferential
right to the purchase price of the same
- Article 1922: (Preferred as to PP) Credits for the construction,
repair, preservation, or purchase price of personal property in
the possession of the debtor, to the extent of the value of the
same.
- the vendor of personal property converted into real by
destination but retaining its form, substance and identity, does
not lose the privilege to the purchase price granted him, as
against any other creditor, by article 1922, paragraph No. 1, of
the Civil Code, notwithstanding said metaphysical change.
The sale of the CC for a lump sum without the machinery in question does
not deprive the vendor of such lien bc even though the said machinery
was sold together with CC for a lump sum, its proportional value may still
be determined
- Since the machinery in question has not lost its identity either
before, during, or after its sale as an integral part of the Capiz
Central for the lump sum of P80,266 its proportional value in
the sale can be determined and the appellants have a
preferential right to said proportional value for the unpaid price.
- The fifth assignment of error is a corollary of the former, and
having arrived at the conclusion that the appellants have
preferential right to a proportional part of the proceeds of the
sale of the Capiz Central, corresponding to the machinery in
question, the lower court erred in not permitting the appellants
 to introduce evidence in order to determine such proportional
part of the proceeds of the sale, which amounted to P80,266.
The lien established under Art. 1922, par 1 of the CC on the personal
property sold in possession of the purchaser for the price thereof is
superior to any real right of lien, such as mortgage and attachment
In view of the foregoing the order appealed from is reversed; the credit
of the appellants Urquijo, Zuloaga and Escubi to the proportional part of
the proceeds of the sale of the Capiz Central corresponding to the
proportional part of the machinery not paid for is declared preferential,
and it is ordered that the record be remanded to the court of origin for the
determination of said proportional part to which the appellants have
preferential right.
FILIPINAS COLLEGES vs TIMBANG
 This is an appeal taken from an ORDER of CFI Manila declaring:
1. Sheriff’s Certificate of Sale, covering a school building sold at a
public auction null and void unless within 15 days, SPS. Timbang
pays Maria Blas the sum of 5, 750
2. Filipinas Colleges was declared as owner of 24, 500/3, 285, 934
undivided interests in Lot 2 on which the building sold in the
auction sale was situated
3. Ordering the sale in public auction of the undivided interests of
FC to satisfy the unpaid portion of the judgment in favour of
Blas and against FC in the amount of 8, 200 less 5, 750
 Appealed order is the result of 3 motions filed in court in the course
of the execution of final judgment by CA rendered in 2 cases where
SPS. Timbang, FC and Blas were the parties. In that judgment, the
rights of the litigants were adjudicated as follows:
1. Fc was declared to have acquired the rights of SPS. Timbang to
Lot No. 2, and in consideration thereof, FC was ordered to pay
SPS the amount of PhP 15, 807.90 plus such other amounts
which said spouses might have paid or had to pay after
February, 1953, to Hoskins and Co. Inc., agent of the Urban
Estates, Inc., original vendor of the lot. Filipinas Colleges, Inc.
original vendor of the total amount with the court within 90 days
after the decision shall have become final.
2. Blas was ordered to be a builder in GF of the school building
constructed in the lot, and entitled to be paid 19k. FC was
ordered to deliver a stock cert for 108 shares of FC with a par
value of PhP 10, 800, and to pay Blas the sum of 8, 200
3. In case FC failed to pay, the latter will lose its rights to the land,
and SPS would become owners thereof
 FC  failed to pay or deposit the sum of 32k within the time
prescribed  SPS, in compliance with the Order made known to the
court their decision that they had chosen not of appropriate the
building but to compel Filipinas Colleges, Inc., for the payment of the
sum of P32,859,34  a writ of execution was issued on January 8,
1957.
 Blas  filed a MoE for her judgment of 8, 200, representing the
unpaid portion of the price of the house sold to FC granted 
thereafter sent a letter to the Sheriff of Manila advising him of her
preferential claim or lien on the house to satisfy the unpaid balance
of the purchase price under Art. 2242, and to withhold from the
proceed of the auction sale the sum of 8, 200  Sheriff sold the
building in favour of SPS. Timbang in the amount of 5, 750  PP of
FC were also sold at 245
 As a result – 3 motions were subsequently filed in court:
1. By Blas: praying that the Sheriff and/or SPS pay her 5, 750,
representing the proceeds of the auction sale of the building of
Filipinas Colleges, Inc. over which she has a lien of P8,200.00
for the unpaid balance of the purchase price thereof
2. Blas: praying that there being still two unsatisfied executions,
one for the sum of P32,859.34 in favor the land involved, Lot
No. 2-a, be sold at public auction
3. FC: praying that because its properties, the house and some
personal properties, have been auctioned for P5,750.00 and
P245.00 respectively in favor of the Timbang spouses who
applied the proceeds to the partial payment of the sum of
P32,859.34 value of the land, Lot No. 2-a, it (Filipinas Colleges,
Inc.) be declared part owner of said lot to the extent of the total
amount realized from the execution sale of its properties.
 SPS. Timbang  opposed to each other
 LC: rendered its resolution in the manner indicated at the beginning
of the decision
There is nothing in the language of these two article, 448 and 546, which
would justify the conclusion of appellants that, upon the failure of the
builder to pay the value of the land, when such is demanded by the land-
owner, the latter becomes automatically the owner of the improvement
under Article 445
- Remedy when the builder fails to pay:
a. assume the relation of a lessor-lessee
b. LO is entitled to remove the improvement
c. Sale
- SPS. Chose to seek recovery of the value of their land, instead
of seeking the alternatives, by a WoE, levying on the house of
the builder; and selling the same in public auction. Sand
because they are the highest bidder in their own auction sale,
they now claim they acquired title to the building without
necessity of paying in cash on account of their bid. In other
words, they in effect pretend to retain their land and acquire
the house without paying a cent therefor.
- SUCH IS WITHOUT MERIT. In the instant case, the Court of
Appeals has already adjudged that appellee Blas is entitled to
the payment of the unpaid balance of the purchase price of the
school building. Blas is actually a lien on the school building are
concerned. The order of the lower court directing the Timbang
spouses, as successful bidders, to pay in cash the amount of
their bid in the sum of P5,750.00 is therefore correct.
With respect to the order of the court declaring appellee Filipinas
Colleges, Inc. part owner of the land to the extent of the value of its
personal properties sold at public auction in favor of the Timbang,
- this Court Likewise finds the same as justified, for such amount
represents, in effect, a partial payment of the value of the land.
If this resulted in the continuation of the so-called involuntary
partnership questioned by the difference between P8,200.00 —
the unpaid balance of the purchase price of the building and the
sum of P5,750.00 — amount to be paid by the Timbangs, the
order of the court directing the sale of such undivided interest
of the Filipinas Colleges, Inc. is likewise justified to satisfy the
claim of the appellee Blas.
Considering that the appellant spouses Marcelino Timbang and Maria
Garcia Timbang may not voluntarily pay the sum of P5,750.00 as ordered,
thereby further delaying the final termination of this case,
- the first part of the dispositive portion of the order appealed
from is modified in the sense that upon failure of the Timbang
spouses to pay to the Sheriff or to Manila Gervacio Blas said
sum of P5,750.00 within fifteen (15) days from notice of the
final judgment, an order of execution shall issue in favor of
Maria Gervasio Blas to be levied upon all properties of the
Timbang spouses not exempt from execution for the satisfaction
of the said amount.
DE BARRETO vs VILLANUEVA
 Rosario Cruzaldo sold all her rights, title and interest, and that of
her children in the h&l to Pura Villanueva for 19k
 Villanueva paid 1, 500 in advance  executed PM for 17.5k 
However, she could only pay 5, 500  Cruzaldo obtained judgment
for the balance
 In the meantime, Villanueva was able to secure a clean title 
mortgage tehe property to Magdalena Barreto married to Jose, to
secure a loan of 30k  recorded mortgage
 Villanueva defaulted in the payment of loan  Barreto foreclosed
in her favour  a month after Barreto filed a MoE  Cruzado filed a
Motion for Recognition of her Vendor’s Lien in the amount of 12k plus
interests
 LC: ordered the lien annotated on the back of TCT with the proviso
that in case of sale under the foreclosure decree the vendor's lien
and the mortgage credit of appellant Barretto should be paid pro rata
from the proceeds. Our original decision affirmed this order of the
Court of First Instance of Manila.
 Barreto insisted:
1. Vendor’s Lien applies only in the event of insolvency of the
vendee
2. Cruzado is not a true vendor
SC protracted its decision
a. The previous decision failed to take fully account the radical changes
brought by CC into the system of priorities among creditors ordained
by CC of 1889
- Old CC: conflicts among creditors entitled to preference as to
specific real property under Article 1923 were to be resolved
according to an order of priorities established by Article 1927,
whereby one class of creditors could exclude the creditors of
lower order until the claims of the former were fully satisfied out
of the proceeds of the sale of the real property subject of the
preference, and could even exhaust such proceeds if necessary.
- New CC: only taxes enjoy a similar absolute preference. All the
remaining thirteen classes of preferred creditors under Article
2242 enjoy no priority among themselves but must be paid pro
rata, i.e., in proportion to the amount of the respective credits.
- Pro-rata application applie sonly when there’s an insolvency
proceedings
- In the absence of insolvency proceedings (or other equivalent
general liquidation of the debtor's estate), the conflict between
the parties now before us must be decided pursuant to the well
established principle concerning register lands; that a purchaser
in good faith and for value (as the appellant concededly is) takes
registered property free from liens and encumbrances other
than statutory liens and those recorded in the certificate of title.
There being no insolvency or liquidation, the claim of the
appellee, as unpaid vendor, did not acquire the character and
 rank of a statutory lien co-equal to the mortgagee's recorded
encumbrance, and must remain subordinate to the latter.
- No argument is needed to stress that if a person dealing with
registered land were to be held to take it in every instance
subject to all the fourteen preferred claims enumerate in Article
2242 of the new Civil Code, even if the existence and import
thereof can not be ascertained from the records, all confidence
in Torrens titles would be destroyed, and credit transactions on
the faith of such titles would be hampered, if not prevented,
with incalculable results. Loans on real estate security would
become aleatory and risky transactions, for no prospective
lender could accurately estimate the hidden liens on the
property offered as security, unless he indulged in complicated,
tedious investigations. The logical result might well be
contraction of credit to unforeseable proportions that could lead
to economic disaster.lawphil.net
- Upon the other hand, it does not appear excessively
burdensome to require the privileged creditors to cause their
claims to be recorded in the books of the Register of Deeds
should they desire to protect their rights even outside of
insolvency or liquidation proceedings.
b. The close study of the facts disclosed by the records casts
strong doubt on the proposition that appelle Cruzados should be regarded
as unpaid vendors of the property (land, buildings, and improvements)
involved in the case at bar so as to be entitled to preference under Article
2242.
- The record on appeal establishes that after her husband's death,
Rosario Cruzado, for herself and as administratrix of her
husband's estate, mortgaged the property to the Rehabilitation
Finance Corporation (RFC) to secure repayment of a loan of
P11,000, in installments, but that the debtor failed to pay some
of the installment wherefore the RFC, on 24 August 1949,
foreclosed the mortgage, and acquired the property, subject to
the debtors right to redeem or repurchase the said property;
and that on 25 September 1950, the RFC consolidated its
ownership, and the certificate of title of the Cruzados
was cancelled and a new certificate issued in the name
of the RFC.
- RFC did execute a deed selling back the property to the
erstwhile mortgagors and former owners Cruzados in
installments, subject to the condition (among others) that the
title to the property and its improvements "shall remain in the
name of the Corporation (RFC) until after said purchase price,
advances and interest shall have been fully paid", as of 27
September 1952, Cruzado had only paid a total of P1,360, and
had defaulted on six monthly amortizations; for which reason
the RFC rescinded the sale, and forfeited the payments made,
in accordance with the terms of the contract of 26 July 1951.
- It was only on 10 March 1953 that the Cruzados sold to Pura L.
Villanueva all "their rights, title, interest and dominion on and
over" the property, lot, house, and improvements for
P19,000.00, the buyer undertaking to assume payment of the
obligation to the RFC, and by resolution of 30 April 1953, the
RFC approved "the transfer of the rights and interests of Rosario
P. Cruzado and her children in their property herein above-
described in favor of Pura L. Villanueva"; and on 7 May 1953
the RFC executed a deed of absolute sale of the property to said
party, who had fully paid the price of P14,269.03. Thereupon,
the spouses Villanueva obtained a new Transfer Certificate of
Title No. 32526 in their name.
- It is clear from the facts above-stated that ownership of the
property had passed to the Rehabilitation Finance Corporation
since 1950, when it consolidated its purchase at the foreclosure
sale and obtained a certificate of title in its corporate name. The
subsequent contract of resale in favor of the Cruzados did not
revest ownership in them, since they failed to comply with its
terms and conditions, and the contract itself provided that the
title should remain in the name of the RFC until the price was
fully paid.
- Therefore, when after defaulting in their payments due under
the resale contract with the RFC the appellant Cruzados sold to
Villanueva "their rights, title, interest and dominion" to the
property, they merely assign whatever rights or claims they
might still have thereto; the ownership of the property rested
with the RFC. The sale from Cruzado to Villanueva, therefore,
was not much a sale of the land and its improvements as it was
a quitclaim deed in favor of Villanueva. In law, operative sale
was that from the RFC to the latter, and it was the RFC that
should be regarded as the true vendor of the property. At the
most, the Cruzados transferred to Villanueva an option to
acquire the property, but not the property itself, and their credit,
therefore, can not legally constitute a vendor's lien on the
corpus of the property that should stand on an equal footing
with mortgaged credit held by appellants Barretto
MANABAT vs FACOMAS
 Laguna Federation  filed a suit against Nieves De ROxas 
Judgment in favour of LF was rendered  WoE  Sheriff Manabat
sold to a public auction all rights, titles and interests of Nieves in 10
parcels of land for 37k
 Upon discovering that the lands were subject to registered liens, such
as WoE and Attachment  Sheriff filed an Interpleader for the
different creditors or lienholders to litigate among themselves the
proceeds of 37k  proportionately divided, and was distributed
based on the dates of registration of their credits  9 creditors
 LF: 17, 448
 CFI: defendants-claimants are entitled to the proceeds of the sale in
the order of preference in accordance with the dates of the
registration of their credits.
 Appellants (Cayco and Zorilia): pro-rata under Art. 2249
Preference according to priority of the credits in the order of time
- Nonetheless, even under the new system, not all credits
referring to the same specific real property come under the pro
rata rule. Article 2249 itself, supra, expressly provides that taxes
and assessments upon the real property are to be paid first.
- Rule on pro rata does not apply under 2242(7):
- ART. 2242. With reference to specific immovable property and
real rights of the debtor, the following claims, mortgages and
liens shall be preferred, and shall constitute an encumbrance on
the immovable or real right:
xxx xxx xxx
(7) Credits annotated in the Registry of Property, in virtue of a
judicial order, by attachments or executions, upon the property
affected, and only as to later credits.
- It being expressly provided that said credits are preferred "only
as to later credits", it follows that the same limitation applies as
to their preference among themselves; i.e., for purposes of
satisfying several credits annotated by attachments or
executions, the rule is still preference according to priority of
the credits in the order of time. For, otherwise, the result would
be absurd: the preference of an attachment or execution lien
over later credits, as above provided for, could easily be
defeated by simply obtaining writs of attachment or execution,
and annotating them, no matter how much later.
It not being disputed that appellants' credit is "later" than those of
appellees Laguna Federation of Facomas, Inc., Valeriana Lim-aco de
Almeda and Cosmopolitan Insurance Co., Inc., the appellees' (LF)
credits must be deemed preferred to that of appellants. To satisfy
them pro rata would erase the difference between earlier and later
credits provided for by subpar. (7) of Article 2242 aforementioned
CARRIED LUMBER COMPANY vs ACCF
LUMBER COMPANY’S MATERIAL LIEN
 Sta. Barbara Farmers’ Cooperative Marketing Assoc (FACOMA) 
purchased a credit from the Carried Lumber Company lumber and
materials which were used in the construction of Facoma’s
warehouse  Carried Lumber extended credit to the Facoma after
having been informed by the ACCFA's General Manager in a telegram
dated October 23, 1954 that a loan of P27,200 had been approved
for the construction of the Facoma's warehouse
 October 1954  After the company had supplied the Facoma with
lumber and construction materials worth P4,999.40  Contract
the company would sell lumber and construction materials to the
Facoma with a value not exceeding P27,200
 Lumber and construction valued at 8, 233.55 were delivered
Facoma made partial payments  it had not paid the balance of 4.7k
as of January 1955  sued  compromise  Facoma to pay 5, 500
in monthly installments, subject to an acceleration clause  Facoma
failed
 Carried Lumber  WoE  Sheriff levied upon Facoma’s lease rights,
warehouse and ricemill building  Sheriff issued a notice scheduling
the sale
 ACCFA: filed a 3rd party claim  properties levied were sold to ACCFA
on November 1960  Sheriff proceeded to the sale as scheduled on
January 31, 1961 sold at 5, 610.50 to Carried Lumber  Certificate
of Sale  no redemption made
ACCFA’S MORTAGE LIEN
 Facoma  obtained to ACCFA a loan of 27, 200 for the construction
of its warehouse  security: mortgage its lease rights over a parcel
of land in Sta. Barbara, Pangasinan and the warehouse contructed
on said land with its improvements  recorded on November 13,
1954
 2 supplementary mortgages dated Feb. 19 and Oct. 19, 1955 were
executed in favor of ACCFA as security for 11, 600 and 15, 408 
other loans were used by Facoma for the construction of the ricemill
building and for the purchase of a ricemill which were also mortgaged
to ACCFA  recorded on Feb. 22 and Nov. 17, 1955
 Facome defaulted  ACCFA requested the sheriff to foreclose  Sale
was scheduled on Nov. 5, 1960
 Letter dtd October 20, 1960: Carried Lumber Company notified the
sheriff and the Facoma that pursuant to article 2242(4) of the Civil
Code, it had a preferential lien over the warehouse of the Facoma for
 having furnished the lumber and materials used in its construction
and the cost of which had not been fully paid for. The company
specified that its unpaid claim amounted to P5,500 and that it was
evidenced by a judgment dated September 26, 1960
 Sheriff proceeded with the sale on November 5, 1960  ACCFA was
the highest bidder for 68, 067.35  Certificate of Sale  ACCFA was
placed in possessionof the property by a Writ of Possession 4 days
before the auction sale which the sheriff conducted at the instance
of Carried Lumber
 March 1, 1961 or after the execution of the Carried Lumber
Company's judgment against the Facoma and the issuance of the
certificate of sale in its favor, the company sued the ACCFA for the
purpose of asserting its preferential lien over the Facoma's
warehouse and ricemill building and in order to obtain possession
thereof. One of ACCFA's defenses was that the company waived its
lien when it filed an ordinary action to recover its claim instead of
enforcing its lien.

The trial court erred in holding that the lumber company's lien over the
warehouse is superior to the ACCFA's mortgage lien
- It was mistaken in assuming that the enumeration of ten claims,
mortgages and liens in article 2242 creates an order of
preference.
- It is not correct to say that the materialman's (mechanic's) lien
or refectionary credit of the lumber company, being listed as
No. 4 in article 2242, is superior to the ACCFA's mortgage credit
which is listed as No. 5. The enumeration in article 2242 is not
an order of preference. That article lists the credits which may
concur with respect to specific real properties and which would
be satisfied pro rata according to article 2249.
- There is no dispute that the Facoma warehouse was constructed
by means of the materials supplied by Carried Lumber Company
and that the construction was financed by the ACCFA which had
loaned P27,200 to the Facoma (Exh. 1). Therefore, it is just and
proper that the two creditors should have pro rata shares in that
warehouse.
- The lower court's solution of awarding the warehouse to the
lumber company was an unwarranted disregard of the ACCFA's
claim. On the other hand, the sheriff's adjudication of the whole
warehouse to the ACCFA nullifies the lumber company's claim.
Neither solution is just because it results in unjust enrichment
by one party at the expense of the other.
- As in this case, it appears that there are no other creditors aside
from the Carried Lumber Company and the ACCFA, the
requirement that the pro rata dividend should be ascertained in
an insolvency or similar proceeding should not be enforced.
- The instant case has features that easily distinguish it from the
Barretto case. Here, the lumber company, before the
registration of the mortgage, inquired from the ACCFA whether
it would extend a loan to the Facoma. The lumber company
continued to supply lumber to the Facoma after the ACCFA had
made the telegraphic assurance that it would extend a loan of
P27,200 to the Facoma. In effect, the ACCFA had prior notice of
the lumber company materialman's lien.
- As already noted, the ACCFA has been in possession of the
warehouse since January 27, 1961. The trial court should
ascertain whether the warehouse has yielded any income during
the time that the ACCFA has been in possession thereof. In any
event, the rental value of the warehouse should be determined.
The ACCFA is entitled to deduct from the earnings of the
warehouse or its rental value the taxes and necessary and
useful expenses which it had incurred for the said warehouse.
By reason of its lien, the Carried Lumber Company has a pro
rata share in the net earnings or rental value of the warehouse.
- The lumber company in its original complaint asserted a lien not
only over the Facoma's warehouse but also over its ricemill
building. The trial court sustained the lumber company's lien
over the Facoma's ricemill building. That is an error.
- The evidence for the lumber company shows that it supplied
materials only for the construction of the warehouse (Exh. F, F-
1). The company in its letter to the sheriff specified that it was
asserting a lien only over the warehouse (Exh. B). It did not
mention the ricemill building. It has no materialman's lien on
the ricemill building. On the other hand, the ACCFA had a
mortgage lien on the ricemill building (Exh. 2). It foreclosed its
mortgage and bought the ricemill building at the auction sale
held on November 5, 1960
- WHEREFORE, the trial court's judgment is reversed. It is hereby
adjudged that the Carried Lumber Company and the ACCFA
have concurrent liens on the Sta. Barbara Facoma warehouse in
the proportion of their credits amounting to P5,655.50
(including the sheriff's fee of P45) and P41,370.11 (Exh. 4),
respectively.
- Should the parties within a period of thirty (30) days from the
finality of this judgment be unable to agree as to how their liens
over the Facoma warehouse should be satisfied, then the
Warehouse may be sold at public auction by the sheriff to the
highest bidder, and the net proceeds of the sale should be
allocated pro rata to the lumber company and the ACCFA