REAL MORTGAGE

Art. 2124. Only the following property may be the object of a contract of mortgage:

(1) Immovables;
(2) Alienable real rights in accordance with the laws, imposed upon immovables.

Nevertheless, movables may be the object of a chattel mortgage.

Mortgage (def). A real estate mortgage is a contract whereby the debtor secures to the creditor the fulfillment of a principal
obligation, specially subjecting to such security immovable property or real rights over immovable property in case the principal
obligation is not complied with at the time stipulated.

What are the characteristics of the contract of mortgage?

Mortgage is a real, accessory, and subsidiary contract.

Who takes possession of the mortgaged property?

As a general rule, the mortgagor retains possession of the property mortgaged.

However, it is not an essential requisite of the contract of mortgage that the property remains in the possession of the mortgagor.
If the mortgagor delivers the property to the mortgagee, it can still be a contract of mortgage, plus some other contract.

What is the consideration in a contract of mortgage?

Since mortgage is an accessory contract, the consideration is the same as that of the principal contract.

What are the kinds of real mortgage?

1. Voluntary – Agreed to between the parties or constituted by the will of the owner of the property

2. Legal – Required by law to be executed in favor of certain persons

3. Equitable – Lacks the proper formalities of mortgage but shows the intention of the parties to make the property as
a security for a debt.

What is the subject matter of real mortgage

1. Immovables
2. Alienable rights imposed upon immovables
Can you mortgage future property?
Future property CANNOT be the object of a contract of mortgage. One cannot constitute a mortgage on “any other property he
might have now and those he might acquire in the future.” Remember that one of the essential requisites of mortgage is that the
mortgagor should be the absolute owner of the thing mortgaged.
But a stipulation which says that the mortgage covers future improvements upon real property already mortgaged is valid. This
is because these future improvements are deemed included in the real property by accession; they are not separate from the real
property already subject of the mortgage

Art. 2125. In addition to the requisites stated in Article 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.

The persons in whose favor the law establishes a mortgage have no other right than to demand the execution and
the recording of the document in which the mortgage is formalized.

Art. 1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the
following article, the contracting parties may compel each other to observe that form, once the contract has been
perfected. This right may be exercised simultaneously with the action upon the contract.

Art. 1358. The following must appear in a public document:

(1) Acts and contracts which have for their object the creation, transmission, modification, or
extinguishment of real rights over immovable property…

What are the requisites of real mortgage?

1. It must be constituted to secure a principal obligation.
2. The mortgagor must be the absolute owner of the thing mortgaged.
3. He must have free disposal of the thing or otherwise be authorized to do so.
 4. When the principal obligation becomes due, the property mortgaged may be alienated
for the payment to the creditor.
5. To prejudice third persons, the mortgage must be recorded in the Registry of Property.
If the first four requisites are present, there is already a valid mortgage between the parties – mortgagor and mortgagee.

But to affect third persons, there is a need to comply with the fifth requisite: The document of mortgage must be recorded in the
Registry of Property. This is because recording the document in the Registry of Property serves as notice to 3 rd persons. This is
similar to the requirement in pledge that the pledge be in a public document.

Can there be an oral mortgage?

As between the parties, YES. As long as the four essential requisites above are present, there is already a mortgage between
the parties. It need not be in writing in order to be enforceable since it is not covered by the Statute of Frauds.

But the oral mortgage is not binding against third persons. And the mortgagee cannot register the mortgage in the Registry of
Property if it is an oral mortgage. So his remedy is to invoke Art. 1357 and 1358. 1357 provides that if there is already a valid
contract, one party can compel the other party to observe the proper form. In this case, since there is already a valid mortgage
between the parties, the mortgagee can compel the mortgagor to execute a public document of mortgage, so that the mortgagee
can then register it in the Registry of Property.

Remember that 1357 is only for convenience. Its purpose is to compel the mortgagor to execute a public document, so that the
mortgagee can register the mortgage. It does not determine the validity or even the enforceability of the mortgage between the
parties. Before you can invoke it, there has to be a valid mortgage first.

Once the previously oral mortgage is in a public document and is subsequently registered in the Registry of Property, it becomes
binding on third persons.

Procedure: What happens when you enter into a contract of mortgage?

Step 1: Execute the document of mortgage

Step 2: Go to a notary public, who will notarize the document.

Step 3: Pay the documentary stamp tax within the first five days of the succeeding month. The doc
stamp tax is a percentage of the value of the property mortgaged.

Step 4: Go to the Office of the Register of Deeds and pay the registration fees. Before you pay the
registration fees, the government will require you to update payment of realty taxes on the property. After payment of
the registration fees, the mortgage will be annotated on the title.

Problem: Mortgagor mortgages a house and lot worth 500K to Mortgagee to secure a principal obligation of “100K and any and all
future indebtedness.” The mortgage is registered.
Meanwhile, Mortgagor owes another creditor, X, 500K. The total indebtedness of Mortgagor to Mortgagee eventually reaches
500K. On due date, Mortgagor fails to pay both X and Mortgagee. The house and lot is his only property. X is able to obtain a writ
or attachment on the house and lot. Who has a better right to the house and lot – X or mortgagee?

€ Mortgagee has a better right with respect only to 1/5 of the house and lot. This is because the mortgage was registered only to
the extent of 100K, and not to the “any and all future debts.” Therefore, the mortgage is binding on third persons only with respect
to the 100K debt, or 1/5 of the house. X can argue on two grounds:

1. That Mortgagee paid doc stamp taxes based only on the 100K debt, not on the succeeding 400K debt. So he even
cheated the government of its revenues in this case.
2. Besides, at the time of the mortgage, the 400K debt was non-existent.
Therefore, X has a better right with respect to the 4/5 which was not registered. How does mortgagee opt out of

this problem?

1. He can do a credit line arrangement in which he will give the debtor a ceiling up to which he can borrow. The mortgage
deed will say that the principal obligation is 500K, but debtor has the choice of asking for a release of funds below this
ceiling. This way, the mortgagee is sure that the entire 500K loan is registered. But this is costly, since the doc stamp tax
will be based on the ceiling and not on the actual amount released.

2. The better solution is that the mortgagee should execute and register a new document each time he releases funds to
the mortgagor/debtor.

What happens if the mortgage is void?

If for some reason, the mortgage is void, the principal obligation subsists. What is lost is only the right of the creditor to foreclose
the mortgage in order to satisfy the principal obligation.
Moreover, even if the mortgage itself is void, the mortgage deed remains as proof of the principal obligation.

Art. 2126. The mortgage directly and immediately subjects the property upon which it is imposed,
whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted.
In guaranty, the property of the guarantor is not subjected to a lien. The action of the creditor is against the guarantor himself and
not against his property. The creditor would still have to sue the guarantor, obtain judgment, execute it, etc.

On the other hand, in mortgage, the property is subjected to a lien. It creates a real right which is inseparable from the property
mortgaged. It is enforceable against the whole world (provided it is registered). Until the principal obligation is discharged, the
mortgage follows the property wherever it goes and subsists even if the ownership changes.

So if the mortgagor sells the mortgaged property, the property still remains subject to the fulfillment of the obligation secured by
it. All subsequent purchasers must respect the mortgage, as long as it is registered, or even if it is not registered, if the purchaser
knew that it was mortgaged.

The mortgagee has a right to rely in good faith on what appears on the certificate of title of the mortgagor. In the absence of anything
to excite suspicion, he is under no obligation to look beyond the certificate.

Does the mortgagor lose his title to the property mortgaged?

No. A mortgage does not involve a transfer, cession, or conveyance of property but only constitutes a lien thereon. It does not
extinguish the title of the debtor. The mortgagor/debtor continues to be the owner. The only right of the mortgagee is to foreclose
the mortgage and sell the property to satisfy the obligation. The mortgagor’s default does not operate to vest in the mortgagee
the ownership of the encumbered property.
Since the mortgagor retains ownership of the mortgaged property, he can even mortgage it again to another mortgagor (junior
lien/encumbrance).

Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and
rents or income not yet received when the obligation becomes due, and to the amount of the
indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue
of expropriation for public use, with the declarations, amplifications and limitations established by law,
whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third
person.
Future property, in themselves, cannot be the subject matter of mortgage. But, the future improvements, accessions, and fruits of
property already mortgaged are also covered by the mortgage. This is because they are deemed to be part of the principal thing which
was already existing at the time of the constitution of the mortgage.

To exclude these things, there must be an express stipulation to that effect.

Examples:

1. The mortgage deed contains a provision that “all property taken in exchange or replacement, as well as all buildings,
machineries, and, equipment, and others that the mortgagor may acquire, construct, install, attach, or use in its lumber
concession shall immediately become subject to the mortgage.”

This is a valid stipulation, especially where the property mortgaged is subject to deterioration (such as machinery and
equipment). The purpose of this stipulation is to maintain the value of the property mortgaged.

2. In the mortgage deed, Mortgagor mortgages house and lot #1 and another house and lot which he will acquire next
month. The deed is registered. Is this a valid mortgage?

€ Between mortgagor and mortgagee, the mortgage is valid with respect to both house and lot #1 and #2. The remedy of
the mortgagee, once mortgagor acquires the second house and lot, is to compel the mortgagor to execute a public
document evidencing the mortgage of the 2nd house and lot and to register it, so that it would be binding on third parties.

But, as against third parties, the mortgage is only valid with respect to the first house and lot but not to the second
house and lot, until the latter is registered.

What happens if the thing mortgaged is expropriated?

The security becomes the cash given by the government as indemnity. Upon default, the mortgagee can apply the cash as payment
for the obligation.
 Art. 2128. The mortgage credit may be alienated or assigned to a third person, in whole or in part, with
the formalities required by law.
The mortgage credit is a real right, and under property law, real rights over immovables are also considered immovables in
themselves. Thus, they may be alienated or assigned to third persons, in whole or in part, by the mortgagee who is the owner of
the right. The assignee may then foreclose the mortgage in case of nonpayment of the principal obligation.

The alienation or assignment of the mortgage credit is valid even if it is not registered. Registration is only necessary to affect
third persons.

Art. 2129. The creditor may claim from a third person in possession of the mortgaged property, the
payment of the part of the credit secured by the property which said third person possesses, in the
terms and with the formalities which the law establishes.

Art. 2129 does not really apply to all third persons in possession of the property. It only applies to those in possession of the
mortgaged property in the concept of owner. If the possession by a third person is only as lessee, the creditor may not collect
the credit from that third person.

When a mortgagor alienates/sells the mortgaged property to a third person, the creditor may demand from him the payment of
the principal obligation. This is because the mortgage credit is a real right, which follows the property wherever it goes, even if its
ownership changes.
However, before the creditor can collect from the third person, he must have made a demand on the debtor, and the latter should
have failed to pay.

Example: A mortgaged his land worth P5M in favor of B to secure a debt of P6M. A sold the land to C.

On due date, B should demand payment of the P6M from A. If A fails to pay, B may foreclose the mortgage. B may also choose
to collect P5M (not P6M) from C, which is the part of the principal obligation secured by the property sold to C. C is not liable for
the deficiency of P1M in the absence of a contrary stipulation. If C pays B, C can go after A for reimbursement.

Art. 2130. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void.

A stipulation forbidding the owner from alienating the mortgaged property is void for being contrary to public policy because it is an
undue impediment or interference on the transmission of property. However, if the mortgagor alienates the property, the transferee
must respect the mortgage because it is a real right.

A stipulation that requires the mortgagor to notify the mortgagee in writing before he sells the property is VALID. This is not a prohibition
but a mere regulation.

The mortgagee would want to regulate the disposition of the property by the mortgagor because first, he would want to know the
type of person from whom he might have to collect the credit later on. Second, any disposition of the mortgaged property by the
mortgagor is a red flag that may indicate that the mortgagor/debtor may not be able to pay the debt later on (Because why is he
suddenly disposing of his property? Maybe he doesn’t have money anymore.)

Art. 2131. The form, extent and consequences of a mortgage, both as to its constitution, modification
and extinguishment, and as to the other matters not included in this Chapter shall be governed by the
provisions of the Mortgage Law and of the Land Registration Law.

FORECLOSURE

The essence of a mortgage is that upon default, the mortgagee can foreclose – he can sell the property and apply the proceeds of the
sale to the payment of the principal obligation.

What is foreclosure?

It is the remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation. It
denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale
itself.

How do you foreclose?

There are two types of foreclosure – judicial and extra-judicial foreclosure.

The default rule is judicial foreclosure. You can only do extra-judicial foreclosure if the mortgage deed has a provision which gives
the mortgagee the special power of attorney to sell the mortgaged property in accordance with Act 3135.
But these are only default rules. The parties may also stipulate that the sale will be a private sale.

Mortgage to a Foreigner – RA 133 Can you mortgage to a

foreigner?

Yes, since foreigners are only prohibited from owning real property in the Philippines, not from
being mortgagees. The situation is governed by RA 133.

However, if the mortgagor defaults, the foreigner CANNOT foreclose extra-judicially. He can only foreclose judicially.
Moreover, he cannot bid or take part in any sale of the real property in case of foreclosure.

Can the foreigner take possession of the property during the mortgage?

Pursuant to the mortgage, the alien-mortgagee cannot take possession of the property during the mortgage. But, he can possess
it as lessee.

Can the foreigner take possession of the property upon default of the mortgagor?

The foreigner can take possession of the mortgaged property upon default but only for the purpose of foreclosure and receivership
in accordance with the prescribed judicial procedures, AND in no case exceeding five years.

When confronted with a foreclosure problem…

First, check if there’s a stipulation saying that there will be a private sale. If there is such a stipulation, the property can be sold at a
private sale. If there is no such stipulation, then there will be either judicial or extra-judicial foreclosure.

Second, look for the following tell-tale signs:

1. Is the mortgagee a foreigner? If it’s a foreigner, it’s automatically judicial foreclosure (Act 133).

2. If the mortgagee is not a foreigner, look for a stipulation in the mortgage agreement which gives the mortgagee the
special power of attorney to carry out the extra- judicial foreclosure in accordance with Act 3135. If you find this
stipulation, it is an extra-judicial foreclosure.

3. If there is no stipulation for extra-judicial foreclosure under Act 3135, it is a judicial foreclosure governed by Rule
68 of the Rules of Court.

Third, if it’s an extra-judicial foreclosure, look at the parties. Who is foreclosing?

1. If it is a bank, the governing law is Act 3135, but there will be certain exceptions applicable only to banking institutions,
provided in Section 47 of the General Banking Act.

2. If the mortgagee is not a bank, the extra-judicial foreclosure will be governed by Act 3135.
Fourth, now that you know whether it’s judicial or extra-judicial foreclosure, let’s go through each of the processes…

JUDICIAL FORECLOSURE UNDER RULE 68, RULES OF COURT

STEP 1: The mortgagee should file a petition for judicial foreclosure in the court which has jurisdiction over the area where the property
is situated

STEP 2: The court will conduct a trial. If, after trial, the court finds merit in the petition, it will render judgment ordering the
mortgagor/debtor to pay the obligation within a period not less than 90 nor more than 120 days from the finality of judgment.

STEP 3: Within this 90 to 120 day period, the mortgagor has the chance to pay the obligation to prevent his property from being sold.
This is called the EQUITY OF REDEMPTION PERIOD.

STEP 4: If mortgagor fails to pay within the 90-120 days given to him by the court, the property shall be sold to the highest
bidder at public auction to satisfy the judgment.

STEP 5: There will be a judicial confirmation of the sale. After the confirmation of the sale, the purchaser shall be entitled
to the possession of the property, and all the rights of the mortgagor with respect to the property are severed or
terminated.

The equity of redemption period actually extends until the sale is confirmed. Even after the lapse of the 90 to 120 day period,
the mortgagor can still redeem the property, so long as there has been no confirmation of the sale yet. Therefore, the
equity of redemption can be considered as the right of the mortgagor to redeem the property BEFORE the confirmation of the
sale.

IMPORTANT: After the confirmation of the sale, the mortgagor does not have a right to redeem the property anymore.
This is the general rule in judicial foreclosures
– there is no right of redemption after the sale is confirmed.

The exception to this rule is when the judicial foreclosure is done by a BANK. In such a case, there is still a right of
redemption within one year from the registration of the sale.

STEP 6: The proceeds of the sale of the property will be disposed as follows:

1. First, the costs of the sale will be deducted from the price at which the property was sold

2. The amount of the principal obligation and interest will be deducted

3. The junior encumbrances will be satisfied

4. If there is still an excess, the excess will go back to the mortgagor. In mortgage, the mortgagee DOES NOT get the
excess (unlike in pledge).

If there is a deficiency, the mortgagee can ask for a DEFICIENCY JUDGMENT which can be imposed on other
property of the mortgagor. This is unlike the rule in pledge, where the pledgee cannot collect any deficiency. This
is also unlike the rule in extra-judicial foreclosure where the mortgagee must go to court and file another action
for the collection of the deficiency. In this case, there is no need to file an action. The mortgagee just has to file a
motion in court for the deficiency judgment.

Why should you stay away from judicial foreclosure?

Judicial foreclosure is costly, since the parties would need to hire lawyers. Moreover, in judicial foreclosure, the parties have very
little control over the sale because there is court intervention. Judicial foreclosure is also more susceptible to stalling/dilatory
tactics by the mortgagor, since he can file all sorts of motions in court to prevent the sale.

EXTRA-JUDICIAL FORECLOSURE UNDER ACT 3135

When is extra-judicial foreclosure proper?

There must be a provision in the mortgage giving the mortgagee the special power of attorney to carry out the extra-judicial
foreclosure under Act 3135.

Where should the sale be made?

The sale can only be made in the province where the property is situated. So if several properties located in different provinces
are mortgaged to secure one principal obligation, the creditor must foreclose in each and every jurisdiction where the property
is located.
What is the procedure?

STEP 1: File a complaint for extra-judicial foreclosure with the Executive Judge

STEP 2: Notice of the sale

There are two kinds of notices required:

1. Posting in at least 3 public places 20 days before the sale – usually in the Sheriff’s office, the Assessor’s office,
and the Register of Deeds.

2. Publication in a newspaper of general circulation, once a week for at least three consecutive weeks if the value
of the property exceeds P400

€ This need not be done within a span of 21 days. For example, you can publish on August 30, which is a Friday, then
on September 2, which is a Monday, and then on September 9, which is also a Monday. In this case, publication for
three consecutive weeks is completed within 11 days.

The notice should contain the description of the property to be sold, date, time, and place of the sale, and the principal obligation to be
satisfied by the sale of the mortgaged property.

There is no need for personal notice to the mortgagor, unlike in a guaranty. This is because the mortgagor, having defaulted in
the principal obligation, should expect that a foreclosure is forthcoming. This is because the mortgagor, having defaulted in
the principal obligation, should expect that a foreclosure is forthcoming. If you’re the mortgagee, you would want to surpris e the
mortgagor so the he cannot employ dilatory tactics such as getting an injunction in order to delay the foreclosure. If you’re nasty,
you should publish it in Abante, which is a newspaper of general circulation, but which nobody consults for the purpose of checking
if their mortgaged property is about to be foreclosed.

STEP 3: Public Auction

Time for conducting the public sale: Between 9 am to 4 pm

Manner of conducting the sale: The sale should be under the direction of the sheriff of the province, the justice or auxiliary justice
of the peace of the municipality, or of a notary public of the municipality, who shall be compensated with FIVE PESOS for each day
of actual work performed (wow $$$).

Who may bid: Anyone may bid at the sale, unless there are exceptions stipulated in the mortgage deed. Even the
mortgagee/creditor may bid. And unlike in pledge, even if the mortgagee/creditor is the sole bidder, the sale is still valid.
This is because there is a right to redeem in extra-judicial foreclosure. Therefore, the lower the price at which it is sold, the better
the chances of the mortgagor/debtor to redeem the property.

Can the parties stipulate a minimum price at which the property shall be sold?
No, because the property must be sold to the highest bidder. Parties cannot, by agreement, contravene the law.
However, this rule may not apply where the purchaser happens to be the creditor or mortgagee himself. The mortgagor
can argue that the stipulation should be binding on the mortgagee on the principle of estoppel.

What is the effect of inadequacy of the price at which the property is sold at auction?

If there is a right to redeem, inadequacy of price is not material because the debtor may reacquire the property. It will even make it
easier for him to redeem it if it is sold at a low price.

Mere inadequacy of price will not be sufficient to set aside the sale unless the price is so inadequate as to shock the conscience.

What happens if there is an excess?

The excess should first be applied to satisfy the junior liens and encumbrances on the property. If there is still an excess, it goes to
the mortgagor.

What happens if there is a deficiency?

The mortgagee must go to court and file an action to collect the deficiency. He may file an action for a deficiency judgment even
during the period of redemption.

STEP 4: Possession of the Property

Upon foreclosure, if the mortgagor is in possession of the property, he will retain possession
during the redemption period (one year from the date of the sale).

However, if the winning bidder already wants possession of the property, he may file a petition in court to gain possession. He
must give a bond equivalent to the rent for the use of the property for 12 months. The bond will answer for any loss to the mortgagor
if it is later found that he was not in default in the mortgage obligation or that the conduct of the sale violated Act 3135. Upon
approval of the bond, the court will issue a writ of possession in favor of the purchaser.

Exception to this rule: If the party foreclosing is a BANK, Sec 47 of the General Banking Law provides that the purchaser
shall immediately have the right to take possession of the property upon confirmation of the sale.

Remedy of the Mortgagor

If the winning bidder is able to obtain the writ of possession even before the expiration of the one-year period, the mortgagor may
petition that the sale be set aside and the writ of possession be cancelled on the ground that he was not in default or that the sale
was not made in accordance with Act 3135. The petition must be filed within 30 days from the grant of the writ of possession.

STEP 5: Redemption
The debtor has the right to redeem the property sold within one year from the date of the sale, reckoned from date of execution
of the certificate of sale since it is only from that date that the sale takes effect as a conveyance.
 Exception: If the mortgagee foreclosing is a BANK and the mortgagor is a JURIDICAL PERSON, the juridical person shall
have the right to redeem the property BEFORE the registration of the certificate of sale but NOT EXCEEDING 90 DAYS FROM
THE DATE OF THE FORECLOSURE.

What is the difference between the RIGHT OF REDEMPTION and EQUITY OF REDEMPTION?

The right of redemption is the right of the mortgagor to redeem the mortgaged property within a certain period (in most
cases, within 1 year) AFTER the sale of the property in satisfaction of the mortgage debt. It is available to the mortgagor
only when the mortgage is foreclosed extrajudicially. It is not available in judicial foreclosures, except when the mortgagee
foreclosing is a bank.

On the other hand, equity of redemption is the right of the mortgagor in a judicial foreclosure to pay the amount of his
obligation BEFORE the confirmation of the sale of the mortgaged property.

Who may redeem?

The debtor, his successors in interest, or any judicial creditor or judgment creditor of the debtor, or any person having a
junior encumbrance or lien on the property may exercise the right of redemption.

Example: Mortgagor mortgaged a house and lot to A. Later, Mortgagor also mortgaged it to B. A foreclosed the mortgage
and bought the house and lot at the auction. In this case, upon the sale of the property to A, the only right that B as
second mortgagee has is the right to redeem. He may exercise the right by paying off the debt secured by the first
mortgage. B’s exercise of Mortgagor’s equity of redemption is equivalent to foreclosure of the junior mortgage.

How much should the one exercising the right of redemption pay?

The mortgagor (or whoever is redeeming the property) should pay the PURCHASE PRICE of the property (not the amount
of the original obligation anymore) plus INTEREST OF 1% PER MONTH (this is according to De Leon, citing Rule 39
Section 28 of the Rules of Court. Interest is at 2% per month).

Exception: If the mortgagee foreclosing is a BANK, under Sec 47 of the General Banking Law, the mortgagor should pay
the amount of the ORIGINAL OBLIGATION (not the purchase price) plus INTEREST AT THE ORIGINAL RATE stipulated in
the mortgage contract plus all COSTS and expenses incurred by the bank from the sale of the property.

What happens if the debtor/mortgagor fails to redeem the property within the prescribed period?

If the debtor/mortgagor fails to redeem the property within the prescribed period, the purchaser has the absolute right to a writ of
possession. From then on, the mortgagor loses his right over the property

Title to the property sold under a mortgage foreclosure remains with the mortgagor until the expiration of the redemption period. The
right of the purchaser at the foreclosure sale is merely inchoate or contingent until after the period of redemption has expired without
the right being exercised. When the debtor/mortgagor fails to redeem within the period for redemption, the purchaser’s right becomes
final.

What is the effect of the timely exercise of the right of redemption?

If the debtor/mortgagor is able to exercise the right of redemption on time, he does not really recover property since he does not
lose ownership until after the expiration of the redemption period. He merely frees it of the encumbrance created by the
mortgage.

What happens if the mortgagor sells the property to a third person within the redemption period?

The third person, in buying the property, is actually buying not the property itself but the right to redeem the property and the
right to possess it within the redemption period.

X mortgaged property to a Bank to secure a P1M loan at 17% interest. The mortgage was foreclosed. At the sale, the property
was sold to the Bank as the highest bidder for P800K. The bank then sold the property to Y for P1.5M. If X wants to redeem the
property, to whom should he pay and how much?

X should pay to the Bank. He should pay only P1M - the amount of the principal obligation plus interest at 17%, plus costs (Sec 47
General Banking Law: Remember, this is the exception to the general rule that the mortgagor should pay the purchase price and
1% interest per month). Y would then have a right to seek reimbursement from the Bank.

The right of redemption may be exercised by the mortgagee under the same terms, even if the property is subsequently sold to a
third party. A different rule would make it easy for the buyer at the foreclosure sale to render the right of redemption nugatory
simply by making a conveyance of the property for an amount beyond the capacity of the mortgagor to pay.
Can the right of redemption be waived by the mortgagor in advance?

It depends if there is a fair exchange of value and information between the parties.

If the mortgagor is a farmer who mortgages his parcel of land and he waives the right to redeem, he can later argue that the waiver
was not valid for being contrary to the public policy of preserving the property in the hands of the owner.

But if the mortgagor is a businessman who waives the right to redeem in exchange for lower interest rates, this waiver is valid because
there is a fair exchange of value.

SUMMARY OF EXCEPTIONS UNDER SECTION 47 OF THE GENERAL BANKING LAW OF 2000

When the party foreclosing the mortgage is a BANK, the same procedure as in judicial or extra- judicial foreclosure, as the case
may be, is followed. However, the following are the exceptions to the general rules, applicable only to banks:

1. In judicial foreclosures, there is still a right to redeem

As a general rule, there is no right of redemption in judicial foreclosure. Upon confirmation of the sale, the mortgagor cannot
redeem the property anymore.

But if the mortgagor foreclosing judicially is a bank, the mortgagor shall have a right to redeem within one year from the
sale.

2. Redemption Price
In ordinary extra-judicial foreclosure, the redemption price is the purchase price plus interest at 1% (or 2%?) per month.

In extra-judicial foreclosure by a bank, the redemption price consists of:

a. the amount of the mortgage obligation

b. plus the interest on the loan at the rate stipulated in the mortgage contract
c. plus costs of the sale incurred by the bank

3. Automatic Right of Possession

In ordinary extra-judicial foreclosure, the mortgagor retains possession of the property within the redemption period. If the
purchaser wishes to have possession within the redemption period, he must file a petition for the issuance of a writ of
possession with a corresponding bond.

In extra-judicial foreclosure by a bank, the purchaser automatically has the right to take possession after the confirmation of the
sale.

4. Injunction
If anybody wants to enjoin the conduct of foreclosure proceedings instituted by a bank, the petitioner must file a bond fixed
by the court to satisfy whatever damage the bank may suffer by the injunction.

There is no such provision in the case of ordinary extra-judicial foreclosure.

5. Period of Redemption for Juridical Persons

In ordinary extra-judicial foreclosure, the mortgagor may redeem the property after it is sold within one year from the
execution of the certificate of sale. There is no distinction, whether the party redeeming is a natural or juridical person.

If the party foreclosing extrajudicially is a bank, the same rule as above is applicable to natural persons. BUT, juridical
persons may redeem the property subject only to the following conditions:

a. it must be BEFORE the registration of the sale

b. and, it must not be later than 90 days from the date of the sale
EFFECTS ON THE JUNIOR MORTGAGE

What happens if there was a second mortgage constituted on the property that was foreclosed?

If the property was mortgaged a second time, the second mortgage is subordinate to the first mortgage. The first
mortgagor has the right to foreclose the mortgage upon default by the debtor.
 The following are the rights of a junior mortgagee:

1. If the first mortgagee forecloses judicially, before the sale is effected, the junior mortgagee may exercise the
equity of redemption vested in the mortgagor. The junior mortgagee may satisfy the obligation of the
mortgagor to prevent the sale of the property.

What happens to the ownership of the property when the second mortgagee exercises the right of redemption?

There are two interpretations – one under the Rules of Court and another under the Civil Code.

When the second mortgagee exercises the equity of redemption by paying the obligation of the mortgagor/debtor,
the mortgagor/debtor has 60 days to reimburse the second mortgagee what he paid. If the original debtor fails to
pay within this period, ownership will be consolidated in the second mortgagee who paid. This interpretation is
according to Section 28 Rule 39 of the Rules of Court.

But according to the Civil Code rules on payment (oblicon), the effect should be like payment of an obligation by a
third person, in which case, the second mortgagee merely becomes subrogated in the right of the first mortgagee
to foreclose the mortgage.

2. When an extra-judicial sale is made, the junior mortgagee may exercise the mortgagor’s right to redeem within
one year from the sale. De Leon says that he should pay the amount of the original obligation. The junior
mortgagee exercising the right to redeem should follow Act 3135 – he should pay the price at which the property
was sold.

3. If the property is sold for more than the amount of the obligation to the first mortgagee, the excess should be
applied to the payment of the obligation to the second mortgagee.

But if there is no excess, the second mortgage is extinguished.

If you’re the second mortgagee, you can also foreclose, not the property (since you cannot do that because the right
of the first mortgagee is superior), but the right of redemption instead. This is so that you would be the only one who
can exercise it when the proper time comes.
CASES:
ISAGUIRRE VS DE LARA
Plaintiff: Cornelio M. Aguirre
Defendant: Felicitas De lara
Citation: GR No. 138053
Date of Promulgation: May 31, 2000
Ponente: Gonzaga-Reyes

FACTS:
 Alejandro De Lara
- Original applicant-claimant for a Miscellaneous Sales Application over a parcel of land identified as Lot 502, Guianga Cadastre
with the Bureau of Lands on Jan. 17, 1942
- Area of 2, 342 square meters
- When he died, he was succeeded by his wife. Felicitas De Lara as claimant
 November 19, 1954: Undersecretary of Agriculture and Natural Resources amended the Sales Application to cover only 1600 square
meters
 November 3, 1961: By virtue of a decision rendered by the Secretary, a subdivision survey was made and the area was further
reduced to 1000 square meters
 On this lot stands 2-storey residential-commerial apartment declared for taxation purposes in the name of Apolonio and Rodolfo
De Lara (sons)
 1953: Felicitas obtained several loans from PNB
 When she encountered financial difficulties, she approached Cornelio ISaguirre, who was married to her niece for assistance
 February 10, 1960: a document denominated as Deed of Sale and Special Cession of Rights and iNterests was executed by Cornelio
and Felicitas whereby the latter sold a 250 square meter portion of Lot 502,together with the 2-storey commercial and residential
structure to Cornelio for PhP 5, 000
 May 1968: Apolonio and Rodolfo a filed a complaint against Cornelio for Recovery of Ownership and Possession of the 2-storey
building. DISMISSED. Reason: Lack of Jurisdiction
 August 21, 1969: Cornelio filed a Sales Application over the subject property on the basis of Deed of Sale
 Application was approved on January 17, 1984, resulting in the issuance of OCT on February 13, 1984
 MEANWHILE, the Sales Application of Felicitas over the 1000 square meter property, including the 250 square meter, was also
given due course. Resulting in the issuance of OCT
 Cornelio: thereafter filed an Action for Quieting of Title and Damages due to the overlapping of titles
 RTC: in favor of Cornelio –sale
 CA: reversed – equitable mortgage; OCT of Cornelio = null and void
 - Felicitas: filed a Motion for Execution at RTC, praying for the immediate delivery of possession of the subject property –
GRANTED
- Cornelio: opposed asserting that he had the right of retention over the property until payment of the loan and the value of the
improvements he had introduced on the property.
- March 12, 1998: the trial court granted respondents motion for writ of possession.
- Petitioners motion for reconsideration was denied by the trial court on May 21, 1998.
- Consequently, a writ of possession dated June 16, 1998, together with the Sheriffs Notice to Vacate dated July 7, 1998, were
served upon petitioner.
 Cornelio: filed a Special Civil Action for Certiorari and Prohibition with Prayer for TRO or Preliminary Mandatory Injunction to annul
and set aside the March 12, 1998 and May 21, 1998 orders of RTC, including the Writ of Possession and Notice to Vacate
- Petitioner’s Contentions:
1. the transaction between petitioner and respondent was not a sale but an equitable mortgage;
2. OCT No. P-13038 in the name of respondent is valid; and
3. OCT No. P-11566 in the name of petitioner is null and void
- CA re: Certiorari
1. Cornelio has no right to retain possession of the property
2. The mortgagee merely has to annotate his claim at the back of the certificate of title in order to protect his rights against third
persons and thereby secure the debt.
3. It is unfortunate however, that the Court of Appeals, in declaring the transaction to be an equitable mortgage failed to specify in
its Decision the period of time within which the private respondent could settle her account, since such period serves as the
reckoning point by which foreclosure could ensue. As it is, petitioner is now in a dilemma as to how he could enforce his rights
as a mortgagee
 March 5, 1999: Cornelio filed an MR, re: Certiotari Decision. HENCE, THE PRESENT APPEAL

ISSUES:
1. W/N Cornelio has the right to retain the property prior to the payment of Felicitas’mortgage loan?

HELD:

A mortgage is a contract entered into in order to secure the fulfillment of a principal obligation. It is constituted by recording
the document in which it appears with the proper Registry of Property, although, even if it is not recorded, the mortgage is
nevertheless binding between the parties. Thus, the only right granted by law in favor of the mortgagee is to demand the
execution and the recording of the document in which the mortgage is formalized.

As a general rule, the mortgagor retains possession of the mortgaged property since a mortgage is merely a lien and title to the property
does not pass to the mortgagee. However, even though a mortgagee does not have possession of the property, there is no impairment
of his security since the mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may
be, to the fulfillment of the obligation for whose security it was constituted. If the debtor is unable to pay his debt, the mortgage creditor
may institute an action to foreclose the mortgage, whether judicially or extrajudicially, whereby the mortgaged property will then be sold
at a public auction and the proceeds therefrom given to the creditor to the extent necessary to discharge the mortgage loan.

Apparently, petitioners contention that "[t]o require [him] to deliver possession of the Property to respondent prior to the full
payment of the latters mortgage loan would be equivalent to the cancellation of the mortgage" is without basis. Regardless of
its possessor, the mortgaged property may still be sold, with the prescribed formalities, in the event of the debtors default in the payment
of his loan obligation.

Moreover, this Court cannot find any justification in the records to uphold petitioners contention that respondent delivered
possession of the subject property upon the execution of the "Deed of Sale and Special Cession of Rights and Interests" on
February 10, 1960 and that the transfer of possession to petitioner must therefore be considered an essential part of the
agreement between the parties. This self-serving assertion of petitioner was directly contradicted by respondent in her
pleadings.[22] Furthermore, nowhere in the Court of Appeals decisions promulgated on March 31, 1995 (G.R. CV No. 42065) and on
October 5, 1998 (G.R. SP No. 48310), or in our own decision promulgated on July 8, 1996 (G.R. No. 120832) was it ever established that
the mortgaged properties were delivered by respondent to petitioner.

In Alvano v. Batoon,[23] this Court held that "[a] simple mortgage does not give the mortgagee a right to the possession of the property
unless the mortgage should contain some special provision to that effect." Regrettably for petitioner, he has not presented any evidence,
other than his own gratuitous statements, to prove that the real intention of the parties was to allow him to enjoy possession of the
mortgaged property until full payment of the loan.

Therefore, we hold that the trial court correctly issued the writ of possession in favor of respondent. Such writ was but a necessary
consequence of this Courts ruling in G.R. No. 120832 affirming the validity of the original certificate of title (OCT No. P-13038) in the
name of respondent Felicitas de Lara, while at the same time nullifying the original certificate of title (OCT No. P-11566) in the name of
petitioner Cornelio Isaguirre. Possession is an essential attribute of ownership; thus, it would be redundant for respondent to go back to
court simply to establish her right to possess subject property. Contrary to petitioners claims, the issuance of the writ of possession by
the trial court did not constitute an unwarranted modification of our decision in G.R. No. 120832, but rather, was a necessary complement
thereto.[24] It bears stressing that a judgment is not confined to what appears upon the face of the decision, but also those necessarily
included therein or necessary thereto.[25]
With regard to the improvements made on the mortgaged property, we confirm the Court of Appeals characterization of petitioner as a
possessor in bad faith. Based on the factual findings of the appellate court, it is evident that petitioner knew from the very beginning that
there was really no sale and that he held respondents property as mere security for the payment of the loan obligation. Therefore,
petitioner may claim reimbursement only for necessary expenses; however, he is not entitled to reimbursement for any useful
expenses[26] which he may have incurred.[27]

Finally, as correctly pointed out by the Court of Appeals, this case should be remanded to the Regional Trial Court of Davao City for a
determination of the total amount of the loan, the necessary expenses incurred by petitioner, and the period within which respondent
must pay such amount.[28] However, no interest is due on the loan since there has been no express stipulation in writing. [29]

WHEREFORE, the assailed Decision of the Court of Appeals dated October 5, 1998 and its Resolution dated March 5, 1999 are hereby
AFFIRMED. Respondent is entitled to delivery of possession of the subject property. This case is hereby REMANDED to the trial court
for determination of the amount of the loan, the necessary expenses incurred by petitioner and the period within which the respondent
must pay the same.

SO ORDERED.
PEOPLE’S BANK vs DAHICAN
Plaintiff: People’s Bank
Defendant: Dahican Lumber Company
Citation: GR No. L-17500
Date of Promulgation: May 16, 1967
Ponente: Dizon

FACTS:
 September 8, 1948: Altantic Gulf and Pacific Company of Manila, a West Virginia corporation
- sold and assigned all its rights in the Dahican lumber concession to Dahican Lumber Company (DALCO) for $500, 000, of which
only $50, 000 was paid
 Thereafter, to develop the concession DALCO obtained various loans from:
1. People’s Bank and Trust Company (PBT): July 13, 1950 – P200,000
2. In addition, DALCO obtained through PBT, a loan of $250, 000 from the Export-Import Bank of Washington D.C, evidenced
by 5 PMs of $50, 000 each maturing on different dates. Executed by both DALCO and Dahican American Lumber
Corporation (DAMCO)
 As a security for payment of the above-mentioned loans, DALCO (on July 13, 1950), executed in favor of the PTB (acting for
itself and as trustee for the Export-Import Bank of Washington D.C.), a DEED OF MORTGAGE covering:
1. 5 parcels of land Situated in Camarines Norte, together with all the buildings and other improvements existing thereon and
2. all the personal properties of the mortgagor located in its place of business in the municipalities of Mambulao and
Capalonga, Camarines Norte
 On the same day, July 13, 1950: DALCO executed a second mortgage on the same properties in favor of ATLANTIC to secure
payment of the unpaid balance of the sale of the lumber concession amounting to $450, 000
 BOTH DEEDS: contained the ff. provision
"All property of every nature and description taken in exchange or replacement, and all buildings, machinery, fixtures, tools,
equipment and other property which the Mortgagor may hereafter acquire, construct, install, attach, or use in, to, upon, or in
connection with the premises, shall immediately be and become subject to the lien of this mortgage in the same manner and to the
same extent as if now included therein, and the Mortgagor shall from time to time during the existence of this mortgage furnish the
Mortgagee with an accurate inventory of such substituted and subsequently acquired property."
 Both mortgages: were registered in the RD
 DALCO and DAMCO: further pledged to the bank 7 296 shares of stocks of DALCO and 9, 286 shares of DAMCO to secure the
same obligation
 Upon DALCO’s and DAMCO’s failure to pay the 5th PM: PTB paid the same to the Export-Import Bank of Washington D.C and
the latter assigned to the former its credit and the first mortgage securing it
 PTB: gave DALCO and DAMCO up to April 1. 1953 to pay the overdue PM
 July 13, 1950 – DATE OF THE EXECUTION OF THE MORTGAGES
1. Dalco purchases various machineries, equipment, spare parts and supplies in addition to, or in replacement of some of those
already owned and used by it on the date aforesaid.
2. Pursuant to the provision of the mortgage deeds quoted heretofore regarding "after acquired properties", the BANK requested
DALCO to submit complete lists of said properties but the latter failed to do so. In connection with these purchases, there
appeared in the books of DALCO as due to Connell Bros. Company (Philippines) - a domestic corporation who was acting as
the general purchasing agent of DALCO - hereinafter called CONNELL - the sum of P452,860.55 and to DAMCO, the sum of
P2,151,678.34.
 December 6, 1952: Board of Directors of DALCO, in a special meeting called for the purpose, passed a resolution agreeing to
rescind the alleged sales of equipment, spare parts and supplies by CONNELL and DAMCO to it. Thereafter, the corresponding
agreements of rescission of sale were executed between DALCO and DAMCO, on the one hand, and between DALCO and
CONNELL, on the other.
 January 23, 1953: the BANK, in its own behalf and that of ATLANTIC, demanded that said agreements be cancelled but
CONNELL and DAMCO refused to do so.
  February 12, 1953: ATLANTIC and the BANK, commenced foreclosure proceedings in the Court of First Instance
of Camarines Norte against DALCO and DAMCO. On the same date they filed an ex parte application for the appointment of a
Receiver and/or for the issuance of a writ of preliminary injunction to restrain DALCO from removing its properties.
 CFI: granted both remedies, and appointed George Evans as receiver
- Upon defendants' motion, however, the court, in its order of February 21, 1953, discharged the Receiver
 On March 2, 1953, defendants filed their answer denying the material allegations of the complaint and alleging several affirmative
defenses and a counterclaim.
 On March 4 of the same year, CONNELL filed a motion for intervention alleging that it was the owner and possessor of some
of the equipments, spare parts and supplies which DALCO had acquired subsequent to the execution of the mortgages sought
to be foreclosed and which plaintiffs claimed were covered by their lien.
 In its order of March 18, 1953 the Court granted the motion, as well as plaintiffs' motion to set aside the order discharging the
Receiver. Consequently, Evans was reinstated.
 On April 1, 1953, CONNELL filed its answer denying the material averments of the complaint, and asserting affirmative defenses
and a counterclaim.
 Upon motion of the parties the Court, on September 30, 1953, issued an order transferring the venue of the action to the
Court of First Instance of Manila where it was docketed as Civil Case No. 20987.
 On August 30, 1958, upon motion of all the parties, the Court ordered the sale of all the machineries, equipment and
supplies of DALCO, and the same were subsequently sold for a total consideration of P175,000.00 which was deposited
in court pending final determination of the action. By a similar agreement one half (P87,500.00) of this amount was considered
as representing the proceeds obtained from the sale of the "undebated properties" (those not claimed by DAMCO and
CON-NELL), and the other half as representing those obtained from the sale of the "after acquired properties".
 RTC Decision
1. Condemns Dahican Lumber Co. to pay unto People's Bank, Atlantic Gulf, Connell Bros, and to pay unto Dahican American
Lumber Co. its respective amount of loans with interests
2. Orders that of the sum realized from the sale of the properties of P175,000.00, after deducting the recognized expenses, one-
half thereof be adjudicated unto plaintiffs, the Court no longer specifying the share of each because of their announced intention
under the stipulation of facts to 'pool their resources'; as to the other one half, the same should be adjudicated unto both plaintiffs,
and defendant Dahican American and Connell Bros, in the proportion already set forth on page 9, lines 21, 22 and 23 of the
body of this decision; but with the understanding that whatever plaintiffs and Dahican American and Connell Bros. should receive
from the P175,000.00 deposited in the Court shall be applied to the judgments particularly rendered in favor of each;
3. No other pronouncement as to costs; but the costs of the receivership as to the debated properties shall be borne by People's
Bank, Atlantic Gulf, Connell Bros., and Dahican American Lumber Co., pro-rata."

On the following day, the Court issued the following supplementary decision:

"IN VIEW WHEREOF, the dispositive part of the decision is hereby amended in order to add the following paragraph 6:
6. If the sums mentioned in paragraphs 1 and 2 are not paid within ninety (90) days, the Court orders the sale at public auction
of the lands object of the mortgages to satisfy the said mortgages and costs of foreclosure."
 ALL APPEALED

ISSUES:
1. W/N the “after acquired properties” covered by the Deeds of Mortgage subject to the foreclosure?
2. Are the mortgages valid and binding on the properties inspite of the fact that they were not registered in accordance
with the Chattel Mortgage Law?
3. W/N the proceeds obtained from the sale of the "after acquired properties" should have been awarded exclusively to
the plaintiffs or to DAMCO and CONNELL, and if in law they should be distributed among said parties, whether or not
the distribution should be pro-rata or otherwise; whether or not plaintiffs are entitled to damages; and, lastly, whether
or not the expenses incidental to the Receivership should be borne by all the parties on a pro-rata basis or exclusively
by one or some of them are of a secondary nature as they are already impliedly resolved by what has been said
heretofore
HELD:

1. YES

Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property of every nature and description taken in
exchange or replacement, as well as all buildings, machineries, fixtures, tools, equipments, and other property that the
mortgagor may acquire, construct, install, attach, or use in, to, upon, or in connection with the premises - that is, its lumber
concession - "shall immediately be and become subject to the lien" of both mortgages in the same manner and to the same
extent as if already included therein at the time of their execution. As the language thus used leaves no room for doubt as to
the intention of the parties, We see no useful purpose in discussing the matter extensively. Suffice it to say that the stipulation
referred to is common, and We might say logical, in all cases where the properties given as collateral are perishable or subject to inevitable
wear and tear or were intended to be sold, or to be used - thus becoming subject to the inevitable wear and tear - but with the
understanding - express or implied - that they shall be replaced with others to be thereafter acquired by the mortgagor. Such stipulation
is neither unlawful nor immoral, its obvious purpose being to maintain, to the extent allowed by circumstances, the original value of the
properties given as security. Indeed, if such properties were of the nature already referred to, it would be poor judgment on the part of
the creditor who does not see to it that a similar provision is included in the contract.

2. YES
 But defendants contend that, granting without admitting, that the deeds of mortgage in question cover the "after acquired properties" of
DALCO, the same are void and ineffectual because they were not registered in accordance with the Chattel Mortgage Law. In support
of this and of the proposition that, even if said mortgages were valid, they should not prejudice them, the defendants argue (1) that the
deeds do not describe the mortgaged chattels specifically, nor were they registered in accordance with the Chattel Mortgage Law; (2)
that the stipulation contained in the fourth paragraph thereof constitutes "mere executory agreements to give a lien" over the "after
acquired properties" upon their acquisition; and (3) that any mortgage stipulation concerning "after acquired properties" should not
prejudice creditors and other third persons - such as DAMCO and CONNELL.

The stipulation under consideration strongly belies defendants' contention. As adverted to hereinbefore, it states that all property of every
nature, buildings, machinery etc. taken in exchange or replacement by the mortgagor "shall immediately be and become subject to the
lien of this mortgage in the same manner and to the same extent as if now included therein". No clearer language could have been
chosen.

Conceding, on the other hand, that it is the law in this jurisdiction that, to affect third persons, a chattel mortgage must be
registered and must describe the mortgaged chattels or personal properties sufficiently to enable the parties and any other
person to identify them, We say that such law does not apply to this case.

As the mortgages in question were executed on July 13, 1950 with the old Civil Code still in force, there can be no doubt that
the provisions of said code must govern their interpretation and the question of their validity. It happens, however, that Articles
334 and 1877 of the old Civil Code are substantially reproduced in Articles 415 and 2127, respectively, of the new Civil Code. It is,
therefore, immaterial in this case whether we take the former or the latter as guide in deciding the point under consideration.

Article 415 does not define real property but enumerates what are considered as such, among them being machinery, receptacles,
instruments or replacements intended by the owner of the tenement for an industry or works which may be carried on in a building or on
a piece of land, and shall tend directly to meet the needs of the said industry or works.

On the strength of the above-quoted legal provisions, the lower court held that inasmuch as "the chattels were placed in the real properties
mortgaged to plaintiffs, they came within the operation of Art. 415, paragraph 5 and Art. 2127 of the New Civil Code".

We find the above ruling in agreement with our decisions on the subject:

(1) In Berkenkotter vs. Cu Unjieng, 61 Phil. 663, We held that Article 334, paragraph 5 of the Civil Code (old) gives the character of real
property to machinery, liquid containers, instruments or replacements intended by the owner of any building or land for use in connection
with any industry or trade being carried on therein and which are expressly adapted to meet the requirements of such trade or industry.

(2) In Cu Unjieng e Hijos vs. Mabalacat Sugar Co. 58 Phil. 439, We held that a mortgage constituted on a sugar central includes not only
the land on which it is built but also the buildings, machinery and accessories installed at the time the mortgage was constituted as well
as the buildings, machinery and accessories belonging to the mortgagor, installed after the constitution thereof.

It is not disputed in the case at bar that the "after acquired properties" were purchased by DALCO in connection with, and for use in the
development of its lumber concession and that they were purchased in addition to, or in replacement of those already existing in the
premises on July 13, 1950. In law, therefore, they must be deemed to have been immobilized, with the result that the real estate
mortgages involved herein - which were registered as such - did not have to be registered a second time as chattel mortgages in order
to bind the "after acquired properties" and affect third parties.

But defendants, invoking the case of Davao Sawmill Company vs. Castillo, 61 Phil. 709, claim that the "after acquired properties" did not
become immobilized because DALCO did not own the whole area of its lumber concession all over which said properties were scattered.

The facts in the Davao Sawmill case, however, are not on all fours with the ones obtaining in the present. In the former,
the Davao Sawmill Company, Inc. had repeatedly treated the machinery therein involved as personal property by executing chattel
mortgages thereon in favor of third parties, while in the present case the parties had treated the "after acquired properties"
as real properties by expressly and unequivocally agreeing that they shall automatically become subject to the lien of the real estate
mortgages executed by them. In the Davao Sawmill decision, it was, in fact, stated that "the characterization of the property as chattels
by the appellant is indicative of intention and impresses upon the property the character determined by the parties" (61 Phil. 712,
Underlines supplied). In the present case, the characterization of the "after acquired properties" as real property was made not only by
one but by both interested parties. There is, therefore, more reason to hold that such consensus impresses upon the properties the
character determined by the parties who must now be held in estoppel to question it.

Moreover, quoted in the Davao Sawmill case was that of Valdez vs. Central AltagraciaInc. (225 U.S. 58) where it was held that while
under the general law of Puerto Rico, machinery placed on property by a tenant does not become immobilized, yet, when the tenant
places it there pursuant to contract that it shall belong to the owner, it then becomes immobilized as to that tenant and even as against
his assignees and creditors who had sufficient notice of such stipulation. In the case at bar it is not disputed that DALCO purchased the
"after acquired properties" to be placed on, and be used in the development of its lumber concession, and agreed further that the same
shall become immediately subject to the lien constituted by the questioned mortgages. There is also abundant evidence in the record
that DAMCO and CORNELL had full notice of such stipulation and had never thought of disputing its validity until the present case was
filed. Consequently, all of them must be deemed barred from denying that the properties in question had become immobilized.

What We have said heretofore sufficiently disposes of all the arguments adduced by defendants in support of their contention that the
mortgages under foreclosure are void, and, that, even if valid, are ineffectual as against DAMCO and CONNELL.

Now to the question of whether or not DAMCO and CONNELL have rights over the "after acquired properties" superior to the mortgage
lien constituted thereon in favor of plaintiffs. It is defendants' contention that in relation to said properties they are "unpaid sellers"; that
as such they had not only a superior lien on the "after acquired properties" but also the right to rescind the sales thereof to DALCO.

This contention - it is obvious - would have validity only if it were true that DAMCO and CONNELL were the suppliers or vendors of the
"after acquired properties". According to the record, plaintiffs did not know their exact identity and description prior to the filing of the case
at bar because DALCO, in violation of its obligation under the mortgages, had failed and refused theretofore to submit a complete list
thereof. In the course of the proceedings, however, when defendants moved to dissolve the order of receivership and the writ of
preliminary injunction issued by the lower court, they attached to their motion the lists marked as Exhibits 1, 2 and 3 describing the
properties aforesaid. Later on, the parties agreed to consider said lists as identifying and describing the "after acquired properties", and
engaged the services of auditors to examine the books of DALCO so as to bring out the details thereof. The report of the auditors and
its annexes (Exhibits V, V-1 - V-4) show that neither DAMCO nor CONNELL had supplied any of the goods of which they respectively
claimed to be the unpaid seller; that all items were supplied by different parties, neither of whom appeared to be DAMCO or CONNELL;
that, in fact, CONNELL collected a 5% service charge on the net value of all items it claims to have sold to DALCO and which, in truth, it
had purchased for DALCO as the latter's general agent; that CONNELL had to issue its own invoices in addition to those of the real
suppliers in order to collect and justify such service charge.

Taking into account the above circumstances together with the fact that DAMCO was a stockholder and CONNELL was not only a
stockholder but the general agent of DALCO, their claim to be the suppliers of the "after acquired properties" would seem to be
preposterous. The most that can be claimed on the basis of the evidence is that DAMCO and CONNELL probably financed some of the
purchases. But if DALCO still owes them any amount in this connection, it is clear that, as financiers, they can not claim any right over
the "after acquired properties" superior to the lien constituted thereon by virtue of the deeds of mortgage under foreclosure. Indeed, the
execution of the rescission of sales mentioned heretofore appears to be but a desperate attempt to better or improve DAMCO
and CONNELL's position by enabling them to assume the role of "unpaid suppliers" and thus claim a vendor's lien over the "after acquired
properties". The attempt, of course, is utterly ineffectual, not only because they are not the "unpaid sellers" they claim to be but also
because there is abundant evidence in the record showing that both DAMCO and CONNELL had known and admitted from the beginning
that the "after acquired properties" of DALCO were meant to be included in the first and second mortgages under foreclosure.

The claim that Belden, of ATLANTIC, had given his consent to the rescission, expressly or otherwise, is of no consequence and does not
make the rescission valid and legally effective. It must be stated clearly, however, in justice to Belden, that, as a member of the Board of
Directors of DALCO, he opposed the resolution of December 16, 1952 passed by said Board and the subsequent rescission of the sales.

Finally, defendants claim that the action to foreclose the mortgages filed on February 12, 1953 was premature because the promissory
note sued upon did not fall due until April 1 of the same year, concluding from this that, when the action was commenced, the plaintiffs
had no cause of action. Upon this question the lower court says the following in the appealed judgment:

"The other is the defense of prematurity of the causes of action in that plaintiffs as a matter of grace, conceded an extension of time to
pay up to 1 April, 1953 while the action was filed on 12 February, 1953, but as to this, the Court taking it that there is absolutely no debate
that Dahican Lumber Co., was insolvent as of the date of the filing of the complaint, it should follow that the debtor thereby lost the benefit
to the period,
'. . . unless he gives a guaranty or security for the debt . . .' (Art. 1198, New Civil Code);

and as the guaranty was plainly inadequate since the claim of plaintiffs reached in the aggregate, P1,200,000 excluding interest while the
aggregate price of the 'after-acquired' chattels claimed by Connell under the rescission contracts was P1,614,675.94, Exh. 1, Exh. V,
report of auditors, and as a matter of fact, almost all the properties were sold afterwards for only P175,000.00, page 47, Vol. IV, and the
Court understanding that when the law permits the debtor to enjoy the benefits of the period notwithstanding that he is insolvent by his
giving a guaranty for the debt, that must mean a new and efficient guaranty, must concede that the causes of action for collection of the
notes were not premature."
Very little need be added to the above. Defendants, however, contend that the lower court had no basis for finding that, when the action
was commenced, DALCO was insolvent for purposes related to Article 1198, paragraph 1 of the Civil Code. We find, however, that the
finding of the trial court is sufficiently supported by the evidence, particularly the resolution marked as Exhibit K which shows that on
December 16, 1952 - in the words of the Chairman of the Board - DALCO was "without funds, neither does it expect to have any funds
in the foreseeable future" (p. 64, record on appeal).

3.

The remaining issues, namely, whether or not the proceeds obtained from the sale of the "after acquired properties" should have been
awarded exclusively to the plaintiffs or to DAMCO and CONNELL, and if in law they should be distributed among said parties, whether
or not the distribution should be pro-rata or otherwise; whether or not plaintiffs are entitled to damages; and, lastly, whether or not the
expenses incidental to the Receivership should be borne by all the parties on a pro-rata basis or exclusively by one or some of them are
of a secondary nature as they are already impliedly resolved by what has been said heretofore.

As regard the proceeds obtained from the sale of the "after acquired properties" and the "undebated properties", it is clear, in
view of our opinion sustaining the validity of the mortgages in relation thereto, that said proceeds should be awarded
exclusively to the plaintiffs in payment of the money obligations secured by the mortgages under foreclosure.

On the question of plaintiffs right to recover damages from the defendants, the law (Articles 1313 and 1314 of the New Civil Code)
provides that creditors are protected in cases of contracts intended to defraud them, and that any third person who induces another to
violate his contract shall be liable for damages to the other contracting party. Similar liability is demandable under Arts. 20 and 21 - which
may be given retroactive effect (Arts. 2252-53) - or under Arts. 1902 and 2176 of the Old Civil Code.

The facts of this case, as stated heretofore, clearly show that DALCO and DAMCO, after failing to pay the fifth promissory note upon its
maturity, conspired jointly with CONNELL to violate the provisions of the fourth paragraph of the mortgages under foreclosure by
attempting to defeat plaintiffs' mortgage lien on the "after acquired properties". As a result, the plaintiffs had to go to court to protect their
rights thus jeopardized. Defendants' liability for damages is therefore clear.

However, the measure of the damages suffered by the plaintiffs is not what the latter claim, namely, the difference between the alleged
total obligation secured by the mortgages amounting to around P1,200,000.00, plus the stipulated interest and attorney's fees, on the
one hand, and the proceeds obtained from the sale of the "after acquired properties", and of those that were not claimed neither by
DAMCO nor CONNELL, on the other. Considering that the sale of the real properties subject to the mortgages under foreclosure has not
been effected, and considering further the lack of evidence showing that the true value of all the properties already sold was not realized
because their sale was under stress, We feel that We do not have before Us the true elements or factors that should determine the
amount of damages that plaintiffs are entitled to recover from defendants. It is, however, our considered opinion that, upon the facts
established, all the expenses of the Receivership, which was deemed necessary to safeguard the rights of the plaintiffs, should be borne
by all the defendants, jointly and severally, in the same manner that all of them should pay to the plaintiffs, jointly and severally, the
attorney's fees awarded in the appealed judgment.

In consonance with the portion of this decision concerning the damages that the plaintiffs are entitled to recover from the defendants, the
record of this case shall be remanded below for the corresponding proceedings.

MODIFIED AS ABOVE INDICATED, the appealed judgment is affirmed in all other respects. With costs.
HEIRS OF THE LATE SPOUSES AURELIO AND ESPERANZA BALITE, vs. RODRIGO N. LIM,
Plaintiff: HEIRS OF THE LATE SPOUSES AURELIO AND ESPERANZA BALITE; Namely, ANTONIO T. BALITE, FLOR T. BALITE-
ZAMAR, VISITACION T. BALITE-DIFUNTORUM, PEDRO T. BALITE, PABLO T. BALITE, GASPAR T. BALITE, CRISTETA T. BALITE
and AURELIO T. BALITE JR., All Represented by GASPAR T. BALIT
Defendant: Rodrigo N. Lim
Citation: GR No. L-152168
Date of Promulgation: December 10, 2004
Ponente: Pangabiban

FACTS:
 SPS. Aurelio and Esperanza Balite: owners of a parcel of land located at Poblacion (Barangay Molave), Catarman, Northern Samar
- 17, 551 square meters
- OCT No 10824
 When Aurelio died intestate: Esperanza Balite and their children (Antonio, Flor, Vistacion, Pedro, Pablo, Cristeta. Aurelio), inherited
the subject property and became co-owners thereof, with Esperanza inheriting an undivided share of 9, 751 square meters
 In the meantime, Esperanza became ill
- in dire need of money for her hospital expenses
- Esperanza, through her daughter, Cristeta, offered Rodrigo Lim her undivided share for PhP 1Million
- Esperanza and Rodrigo agreed that under the Deed of Absolute Sale, it will be made to appear that the purchase price would
be PhP 150, 000
 April 16, 1996: Deed of Absolute Sale was executed
- Lot: 10, 000 square meters
- Price: PhP 150, 000
- On same day, they also executed a Joint Affidfavit under which they declared that the real price was PhP 1M, payable to
Esperanza on installment
 Only Esperanza and 2 of her children (Antonio and Cristeta) knew of the said transaction
- Geodetic Engr. Bonifacio Tasic – conducted a survey of the property and prepared a Sketch Plan showing a portion of the
property, identified as Lot 243 with an area of 10, 000 square meters under the name Rodrigo Lim
- Sketch Plan: signed by Rodrigo and Esperanza
- Thereafter, Rodrigo took actual possession of the property
 Gaspar, Visitacion, Flor, Pedro and Aurelio: learned of the sale on August 21, 1996, and they wrote a letter to RD Samar saying
that they were not informed of the sale of a portion of the said property by their mother nor did they give their consent thereto
- Requested RD to hold in abeyance any processal or approval of any application for registration of title of ownership in the name
of Rodrigo, as the lot has not yet been partitioned judicially or extrajudicially
 August 24, 1996: Antonio received from Rodrigo the amount of PhP 30, 000 as partial payment of [the] property and signed
a Receipt for the said amount, declaring therein that the remaining balance of P350,000.00 shall personally and directly be released
to my mother, Esperanza Balite, only. However, Rodrigo x x x drew and issued RCBC Check No. 309171, dated August 26, 1996,
[payable] to the order of Antonio Balite in the amount of P30,000.00 in partial payment of the property.
 October 1, 1996: Esperanza x x x executed a Special Power of Attorney appointing her son, Antonio, to collect and receive, from
Rodrigo, the balance of the purchase price of the x x x property and to sign the appropriate documents therefor.
 October 23, 1996: Esperanza signed a letter addressed to Rodrigo informing the latter that her children did not agree to the sale of
the property to him and that she was withdrawing all her commitments until the validity of the sale is finally resolved
 October 31, 1996: Esperanza died intestate and was survived by her aforenamed children
 MEANWHILE, Rodrigo caused to be published, in the Samar Reporter, on November 14, 21 and 28, 1996, the aforesaid Deed of
Absolute Sale. Earlier, on November 21, 1996, Antonio received the amount of P10,000.00 from Rodrigo for the payment of the
estate tax due from the estate of Esperanza.
 Also, the capital gains tax, in the amount of P14,506.25, based on the purchase price of P150,000.00 appearing on the Deed of
Absolute Sale, was paid to the Bureau of Internal Revenue which issued a Certification of said payments, on March 5, 1997,
authorizing the registration of the Deed of Absolute Sale
 However, the [RD] refused to issue a title over the property to and under the name of Rodrigo unless and until the owners duplicate
of OCT No. 10824 was presented to RD
 Rodrigo: filed a Petition for Mandamus against RD
 June 13, 1997: RTC issued an Order to RD to cancel OCT No. 10824 and to issue a Certificate of Title over Lot 243 in the name of
Rodrigo
 June 27, 1997: Petitioners filed a Complaint against Rodrigo for Annulment of Sale, Quieting of Title, Injunction and Damages
 Peitioners: had a Notice of Lis Pendens, dated June 23, 1997, annotated, on June 27, 1997, at the dorsal portion of OCT No.
10824.
 July 10, 1997: OCT No. 10824 was cancelled and TCT No. 6683 was issued to Rodrigo. Notice of lis pendes was carried to TCT
6683
 Rodrigo subsequently secured a loan from RCBC
- PhP 2, 000, 000
- Executed a Real Estate Mortgaged over the subject property as security
 On Motion, Petitioners were granted to file an Amended Complaint impleading RCBC as party defendant
 Rodrigo: opposed the Amended Complaint
 March 30, 1998: Court rejected teh Amended Complaint
 RTC: dismissed the Complaint and ordered the cancellation of the lis pendens annotated at the back of TCT No. 6683. It held that,
pursuant to Article 493 of the Civil Code, a co-owner has the right to sell his/her undivided share. The sale made by a co-owner is
not invalidated by the absence of the consent of the other co-owners. Hence, the sale by Esperanza of the 10,000-square-meter
portion of the property was valid; the excess from her undivided share should be taken from the undivided shares of Cristeta and
Antonio, who expressly agreed to and benefited from the sale.
 CA: sale was valid and binding insofar as Esperanza Balites undivided share of the property was concerned. It affirmed the trial
courts ruling

ISSUES:
1. W/N the sale was valid
2. W/N the transaction was a sale or an equitable mortgage
3. W/N the sale was valid only insofar as Esperanza’s shares are concern
4. W/N Esperanza has validly transferred the property to Rodrigo
5. W/N Rodrigo is liable to the Petitioners for the remaining balance of the sale?

HELD:

1. YES

Petitioners contend that the Deed of Absolute Sale is null and void, because the undervalued consideration indicated therein was intended
for an unlawful purpose -- to avoid the payment of higher capital gains taxes on the transaction. According to them, the appellate courts
reliance on Article 1353 of the Civil Code was erroneous. They further contend that the Joint Affidavit is not proof of a true and lawful
cause, but an integral part of a scheme to evade paying lawful taxes and registration fees to the government.

We have before us an example of a simulated contract. Article 1345 of the Civil Code provides that the simulation of a contract may either
be absolute or relative. In absolute simulation, there is a colorable contract but without any substance, because the parties have no
intention to be bound by it. An absolutely simulated contract is void, and the parties may recover from each other what they may have
given under the contract.[8] On the other hand, if the parties state a false cause in the contract to conceal their real agreement, such a
contract is relatively simulated. Here, the parties real agreement binds them.[9]

In the present case, the parties intended to be bound by the Contract, even if it did not reflect the actual purchase price of the
property. That the parties intended the agreement to produce legal effect is revealed by the letter of Esperanza Balite to
respondent dated October 23, 1996[10] and petitioners admission that there was a partial payment of P320,000 made on the
basis of the Deed of Absolute Sale. There was an intention to transfer the ownership of over 10,000 square meters of the property
. Clear from the letter is the fact that the objections of her children prompted Esperanza to unilaterally withdraw from the
transaction.

Since the Deed of Absolute Sale was merely relatively simulated, it remains valid and enforceable. All the essential requisites prescribed
by law for the validity and perfection of contracts are present. However, the parties shall be bound by their real agreement for a
consideration of P1,000,000 as reflected in their Joint Affidavit.[11]

The juridical nature of the Contract remained the same. What was concealed was merely the actual price. Where the essential requisites
are present and the simulation refers only to the content or terms of the contract, the agreement is absolutely binding and enforceable[12]
between the parties and their successors in interest.

Petitioners cannot be permitted to unmake the Contract voluntarily entered into by their predecessor, even if the stated consideration was
included therein for an unlawful purpose. The binding force of a contract must be recognized as far as it is legally possible to do so.[13]
However, as properly held by the appellate court, the government has the right to collect the proper taxes based on the correct purchase
price.

Being onerous, the Contract had for its cause or consideration the price of P1,000,000. Both this consideration as well as the
subject matter of the contract -- Esperanzas share in the property covered by OCT No. 10824 -- are lawful. The motives of the
contracting parties for lowering the price of the sale -- in the present case, the reduction of capital gains tax liability -- should not be
confused with the consideration.[14] Although illegal, the motives neither determine nor take the place of the consideration
 2. DEED OF SALE

Petitioner further posits that even assuming that the deed of sale is valid it should only be deemed an equitable mortgage pursuant to
Articles 1602 and 1604 of the Civil Code, because the price was clearly inadequate. They add that the presence of only one of the
circumstances enumerated under Article 1602 would be sufficient to consider the Contract an equitable mortgage. We disagree.

For Articles 1602 and 1604 to apply, two requisites must concur: one, the parties entered into a contract denominated as a contract of
sale; and, two, their intention was to secure an existing debt by way of mortgage.[16]

Indeed, the existence of any of the circumstances enumerated in Article 1602, not a concurrence or an overwhelming number thereof,
suffices to give rise to the presumption that a contract purporting to be an absolute sale is actually an equitable mortgage.[17] In the
present case, however, the Contract does not merely purport to be an absolute sale. The records and the documentary evidence
introduced by the parties indubitably show that the Contract is, indeed, one of absolute sale. There is no clear and convincing evidence
that the parties agreed upon a mortgage of the subject property.

Furthermore, the voluntary, written and unconditional acceptance of contractual commitments negates the theory of equitable mortgage.
There is nothing doubtful about the terms of, or the circumstances surrounding, the Deed of Sale that would call for the application of
Article 1602. The Joint Affidavit indisputably confirmed that the transaction between the parties was a sale.

When the words of a contract are clear and readily understandable, there is no room for construction. Contracts are to be interpreted
according to their literal meaning and should not be interpreted beyond their obvious intendment.[18] The contract is the law between the
parties.

Notably, petitioners never raised as an issue before the trial court the fact that the document did not express the true intent and agreement
of the contracting parties. They raised mere suppositions on the inadequacy of the price, in support of their argument that the Contract
should be considered as an equitable mortgage.

We find no basis to conclude that the purchase price of the property was grossly inadequate. Petitioners did not present any witness to
testify as to the market values of real estate in the subjects locale. They made their claim on the basis alone of the P2,000,000 loan that
respondent had been able to obtain from the Rizal Commercial Banking Corporation. This move did not sufficiently show the alleged
inadequacy of the purchase price. A mortgage is a mere security for a loan. There was no showing that the property was the only security
relied upon by the bank; or that the borrowers had no credit worthiness, other than the property offered as collateral.

3. YES

The appellate court was correct in affirming the validity of the sale of the property insofar as the pro indiviso share of Esperanza Balite
was concerned.

Article 493 of the Civil Code[19] gives the owner of an undivided interest in the property the right to freely sell and dispose of such interest.
The co-owner, however, has no right to sell or alienate a specific or determinate part of the thing owned in common, because such right
over the thing is represented by an aliquot or ideal portion without any physical division. Nonetheless, the mere fact that the deed purports
to transfer a concrete portion does not per se render the sale void.[20] The sale is valid, but only with respect to the aliquot share of the
selling co-owner. Furthermore, the sale is subject to the results of the partition upon the termination of the co-ownership.

Hence, the transaction between Esperanza Balite and respondent could be legally recognized only in respect to the formers pro
indiviso share in the co-ownership. As a matter of fact, the Deed of Absolute Sale executed between the parties expressly
referred to the 10,000-square-meter portion of the land sold to respondent as the share of Esperanza in the conjugal property.
Her clear intention was to sell merely her ideal or undivided share in it. No valid objection can be made against that intent.
Clearly then, the sale can be given effect to the extent of 9,751 square meters, her ideal share in the property as found by both
the trial and the appellate courts.

4. YES

During her lifetime, Esperanza had already sold to respondent her share in the subject parcel; hence her heirs could no longer inherit it.
The property she had transferred or conveyed no longer formed part of her estate to which her heirs may lay claim at the time of her
death. The transfer took effect on April 16, 1996 (the date the Deed of Absolute Sale was executed), and not on May 30, 1997,
when the Deed of Absolute Sale was registered. Thus, petitioners claim that the property became theirs upon the death of their mother
is untenable.

5. .

Petitioners insist that the appellate court erred in holding that respondents outstanding liability on the Deed of Sale was P120,000, when
the Receipts on record show payments in the total amount of P320,000 only. They argue that the August 24, 1996 Receipt, on which the
appellate court based its conclusion, was unreliable.

To begin with, this Court is not a trier of facts. [21] It is not its function to examine and determine the weight of the evidence. Well-
entrenched is the doctrine that only errors of law,[22] and not of facts, are reviewable by this Court in a petition for review on certiorari
under Rule 45 of the Revised Rules of Court. Philippine Airlines, Inc. v. Court of Appeals[23] has held that factual findings of the Court of
Appeals are binding and conclusive upon the Supreme Court. These findings may be reviewed[24] only under exceptional circumstances
such as, among others, when the inference is manifestly mistaken;[25] the judgment is based on a misapprehension of facts;[26] findings
of the trial court contradict those of the CA;[27] or the CA manifestly overlooked certain relevant and undisputed facts that, if properly
considered, would justify a different conclusion.[28]

Although the factual findings of the two lower courts were not identical, we hold that in the present case, the findings of the CA are in
accord with the documents on record. The trial court admitted in evidence the August 24, 1996 Receipt signed by Antonio Balite.
Interestingly, he was never presented in the lower court to dispute the veracity of the contents of that Receipt, particularly the second
paragraph that had categorically stated the outstanding balance of respondent as of August 24, 1996, to be P350,000. Furthermore, the
evidence shows that subsequent payments of P30,000 and P200,000 were made by the latter. Thus, we affirm the CAs Decision holding
that the remaining unpaid balance of the price was P120,000.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against the petitioners.
MOBIL OIL vs DIOCARES
Plaintiff: Mobil Oil Philippines
Defendant: Ruth Diocares
Citation: GR No. L-26731
Date of Promulgation: September 30, 1969
Ponente: Fernando

FACTS:
 February 9, 1965: Ruth Diocares and Lope Diocares entered into a Contract of Loan and Real Estate Mortgage with Mobil Oil for
the amount of PhP 45, 000
- Ruth and Lope: also agreed to buy from Mobil Oil on cash basis their petroleum requirements in an amount of not less than 50,
000 liters per month
 Ruth and Lope
1. Will pay to Mobil Oil 9 1/2 % per annum on the diminishing balance of the amount of their loan
2. They will repay the loan in monthly installments of PhP 950.88 for 5 years from February 9, 1965
3. To secure the performance of the said obligation, they executed a first mortgage on 2 parcels of land covered by TCT Nos.
27136 and T-27946, both issued by RD Bacolod City
4. The agreement further provided that in case of failure of the defendants to pay any of the installments due and pur-chase their
petroleum requirements in the minimum amount of 50,000 liters per month from the plaintiff, the latter has the right to foreclose
the mortgage or recover the payment of the entire obligation or its remaining unpaid balance; that in case of foreclosure the
plaintiff shall be entitled to 12% of the indebtedness as damages and attorney's fees.
 Complaint further alleges THAT:
1. defendant paid only the amount of P1,901.76 to the plaintiff, thus leaving a balance of P43,098.24, excluding interest, on their
indebtedness.
2. The said defendants also failed to buy on cash basis the minimum amount of petroleum which they agreed to purchase from
the plaintiff.
3. The plaintiff, therefore, prayed that the defendants be ordered to pay the amount of P43,098.24, with interest at 9-1/2% per
annum from the date it fell due, and in default of such payment that the mortgaged properties be sold and the proceeds applied
to the payment of defendants' obligation."
 Ruth and Lope: admitted their indebtedness, denying merely the refusal to pay, the truth, according to them, being that they sought
for an extension of time to do so, inasmuch as they were not in a position to comply with their obligation. They further set forth that
they did request plaintiff to furnish them with the statement of accounts with the view of paying the same on installment basis, which
request was, however, turned down by the plaintiff.
 Mobil Oil: filed a Motion for Judgment on the Pleadings, which was favorably acted upon by the court
 HOWEVER, foreclosure was denied
- REASONS:
1. No allegation in the complaint nor does it appear from the mortgage contract that it had been registered
2. Mortgage only created a personal obligation
 Mobil Oil: appealed

ISSUE: W/N the lower court erred in holding that there was no real estate mortgage, and in not ordering foreclosure?

HELD:

YES

The lower court predicated its inability to order the fore-closure in view of the categorical nature of the opening sentence of the governing
article[10] that 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." Not that it ignored the succeeding sentence: "If the instrument is not recorded, the mortgage is nevertheless
binding between the parties." Its conclusion, however, is that what was thus created was merely "a personal obligation but did not establish
a real estate mortgage."

Such a conclusion does not commend itself for approval. The codal provision is clear and explicit. Even if the instrument were not
recorded, "the mortgage is nevertheless binding between the parties." The law cannot be any clearer. Effect must be given to
it as written. The mortgage subsists; the parties are bound. As between them, the mere fact that there is as yet no compliance
with the requirement that it be recorded cannot be a bar to fore-closure.
A contrary conclusion would manifest less than full respect to what the codal provision ordains. The liability of the mortgagor is therein
explicitly recognized. To hold, as the lower court did, that no foreclosure would lie under the circumstances would be to render the
provision in question nugatory. That we are not allowed to do. What the law requires in unambigous language must be lived up to. No
interpretation is needed, only its application, the un-disputed facts calling for it.[11]

Moreover to rule as the lower court did would be to show less than fealty to the purpose that animated the legislators in giving expression
to their will that the failure of the instrument to be recorded does not result in the mortgage being any the less "binding between the
parties." In the language of the Report of the Code Commission: "In article [2125] an additional provision is made that if the instrument
of mortgage is not recorded, the mortgage, is nevertheless binding between the parties." [12] We are not free to adopt then an
interpretation, even assuming that the codal provision lacks the forthrightness and clarity that this particular norm does and therefore
requires construction, that would frustrate or nullify such legislative objective.

Nor is the reason difficult to discern why such an exception should be made to the rule that is indispensable for a mortgage to be validly
constituted that it be recorded. Equity so demands, and justice is served. There is thus full acknowledgment of the binding effect of a
promise, which must be lived up to otherwise the freedom a contracting party is supposed to possess becomes meaningless. It could be
said of course that to allow foreclosure in the absence of such a formality is to offend against the demands of jural symmetry. What is
"indispensable" may be dispensed with. Such an objection is far from fatal. This would not be the first time when logic yields to what is
fair and what is just. To such an overmastering requirement, law is not immune.

WHEREFORE, the lower court order of February 25, 1966 is affirmed with the modification that in default of the payment of the above
amount of P43,028.94 with interests at the rate of 9-1/2% per annum from the date of the filing of the complaint, that the mortgage be
foreclosed with the properties subject thereof being sold and the proceeds of the sale applied to the payment of the amounts due the
plaintiff in accordance with law. With costs against defendants-appellees.
G.R. No. L-48696 November 28, 1942
FELIZA ZUBIRI, petitioner,
vs.
LUCIO QUIJANO, respondent.
PARAS, J.:

(FULL TEXT, guys. OA sa ikli nito.)

This is an appeal from a decision of the Court of Appeals holding that the contract dated May 15, 1934, purporting to be a two-year pacto
de retro sale of three parcels of land from the petitioner, Feliza Zubiri, to the respondent, Lucio Quijano, is an equitable mortgage,
sentencing the former to pay to the latter, within three months, the alleged purchase price of P700, with legal interest from the date of the
filing of the complaint (November 15, 1937), and ordering that, in default of payment, the land be sold at public auction and the proceeds
of the sale applied to the satisfaction of the judgment, without special pronouncement as to costs.

Under the first assignment, the petitioner contends that the Court of Appeals erred in ordering the sale of the land in case of non-payment
of the judgment, on the ground that the contract relied upon by the respondent, not having been registered in accordance with the Land
Registration Act, cannot operate as a mortgage so as to justify its foreclosure. There is no merit in the contention. The contract, evidencing
a pacto de retro sale which is unquestionably more disadvantageous to the petitioner, has been held to be an equitable mortgage and,
from its very nature, the lien thereby created ought not to be defeated by requiring compliance with the formalities necessary to the validity
of a voluntary real estate mortgage, as long as the land remains in the hands of the petitioner and the rights of innocent third parties are
not affected. In the case of Correa vs. Mateo and Icasiano (55 Phil., 79), wherein an unrecorded pacto de retro sale was construed as an
equitable mortgage, it was held that the plaintiff had the right "within sixty days after final judgment, for a failure to pay the amount due
and owing him, to foreclose his mortgage in a proper proceeding and sell all or any part of the ten parcels of land to satisfy his debt."

Under the second assignment, the petitioner alleges that the Court of Appeals erred in not finding that he had paid to the respondent
usurious interest amounting (as found by the Court of First Instance of Mindoro) to P950. The pronouncements of the Court of Appeals,
to wit, "pero rechazamos la pretension de la demandada, aceptada por el Tribunal a quo, de que el demandante percibio interes
usurarios" and "Con respeto a la alegacion sobre usura, la misma nos parece insostenible," being conclusions of fact, must be accepted
for the purposes of the present appeal, since we cannot make contrary findings without re-examining the evidence, and we are not
authorized to do this.

It results that the Court of Appeals did not commit any error. In the exercise, however, of our equity jurisdiction, and especially considering
that the present complaint did not originally seek the recovery of a debt, that the petitioner obtained a favorable judgment in the Court of
First Instance and that the vote in the Court of Appeals was three to two, we are inclined to hold that the petitioner should be sentenced
to pay interest only from the date our decision becomes final. As thus modified, the appealed decision is affirmed, with costs against the
petitioner.
G.R. No. L-22331 June 6, 1967
IN RE: PETITION FOR CONSOLIDATION OF TITLE IN THE VENDEES OF A HOUSE AND THE RIGHTS TO A LOT.
MARIA BAUTISTA VDA. DE REYES, ET AL., vendees-petitioners-appellees.
RODOLFO LANUZA, vendor,
vs.
MARTIN DE LEON, intervenor-appellant.
REGALA, J.:
FACTS:
 RODOLFO LANUZA and wife BELEN - owners of a two-story house built on a lot of the Maria Guizon Subdivision in Tondo, Manila,
which the spouses leased from the Consolidated Asiatic Co.
o Jan. 12, 1961 - Lanuza executed a document entitled "Deed of Sale with Right to Repurchase" whereby he conveyed to
Maria Bautista Vda. de Reyes and Aurelia R. Navarro the house, together with the leasehold rights to the lot, a television
set and a refrigerator in consideration of the sum of P3,000.
o When the original period of redemption expired, the parties extended it to July 12, 1961 by an annotation to this effect on
the left margin of the instrument. Lanuza's wife, who did not sign the deed, this time signed her name below the annotation.
o After the execution of the instrument, Lanuza and his wife mortgaged the same house in favor of Martin de Leon to secure
the payment of P2,720 within one year.
 The Lanuzas failed to pay on their obligation and De Leon filed in the sheriff's office on October 5, 1962 a petition for the extra-judicial
foreclosure of the mortgage. On the other hand, Reyes and Navarro followed suit by filing in the Court of First Instance of Manila a
petition for the consolidation of ownership of the house on the ground that the period of redemption expired on July 12, 1961 without
the vendees exercising their right of repurchase.
o Oct 23, 1962 - the house was sold to De Leon as the only bidder at the sheriffs sale. De Leon immediately took possession
of the house, secured a discharge of the mortgage on the house in favor of a rural bank by paying P2,000
o Oct 29 – he intervened in court and asked for the dismissal of the petition filed by Reyes and Navarro on the ground that
the unrecorded pacto de retro sale could not affect his rights as a third party.

 TRIAL COURT – TC said that in this case, “it appears, however, that no other instrument was executed between the parties extending
the period of redemption. What was done was simply to annotate on the deed of sale with right to repurchase that "the period to
repurchase, extended as requested until July 12, 1961." Needless to say, the purchasers a retro, in the exercise of their freedom to
make contracts, have the power to extend the period of repurchase. Such extension is valid and effective as it is not contrary to any
provision of law.”
 De Leon appealed to the SC contending that:
o that the sale in question is not only voidable but void ab initio for having been made by Lanuza without the consent of his
wife
o that the pacto de retro sale is in reality an equitable mortgage and therefore can not be the basis of a petition for consolidation
of ownership; and
o that at any rate the sale, being unrecorded, cannot affect third parties.

 SUPREME COURT – affirmed the TC ruling that a conveyance of real property of the conjugal partnership made by the husband
without the consent of his wife is merely voidable. This is clear from article 173 of the Civil Code which gives the wife ten years within
which to bring an action for annulment. As such it can be ratified as Lanuza's wife in effect did in this case when she gave her
conformity to the extension of the period of redemption by signing the annotation on the margin of the deed.
o Also agreed with the lower court that between an unrecorded sale of a prior date and a recorded mortgage of a later date
the former is preferred to the latter for the reason that if the original owner had parted with his ownership of the thing sold
then he no longer had the ownership and free disposal of that thing so as to be able to mortgage it again. Registration of
the mortgage under Act No. 3344 would, in such case, be of no moment since it is understood to be without prejudice to
the better right of third parties.2 Nor would it avail the mortgagee any to assert that he is in actual possession of the property
for the execution of the conveyance in a public instrument earlier was equivalent to the delivery of the thing sold to the
vendee.

 Different conclusion about the nature of the Deed of Sale with Right to Repurchase:
o We refer to the nature of the so-called "Deed of Sale with Right to Repurchase" and the claim that it is in reality an equitable
mortgage.
o While De Leon raised the question below and again in this Court in his second assignment of error, he has not demonstrated
his point; neither has he pursued the logical implication of his argument beyond stating that a petition for consolidation of
ownership is an inappropriate remedy to enforce a mortgage.
 The Supreme Court laid down 3 circumstances which indubitably show that what was intended was a mortgage and not a sale.
1. The gross inadequacy of the price
2. The non-transmission of ownership to the vendees
3. The delay in filing of the petition for consolidation

 Under these circumstances we cannot but conclude that the deed in question is in reality a mortgage. This conclusion is of far-
reaching consequence because it means not only that this action for consolidation of ownership is improper, as De Leon
claims, but, what is more that between the unrecorded deed of Reyes and Navarro which we hold to be an equitable
mortgage, and the registered mortgage of De Leon, the latter must be preferred. Preference of mortgage credits is determined
by the priority of registration of the mortgages,8 following the maxim "Prior tempore potior jure" (He who is first in time is preferred in
right.)9 Under article 2125 of the Civil Code, the equitable mortgage, while valid between Reyes and Navarro, on the one hand, and
the Lanuzas, on the other, as the immediate parties thereto, cannot prevail over the registered mortgage of De Leon.
G.R. No. L-4373 February 2, 1909
SAMUEL BISCHOFF, plaintiff-appellant,
vs.
JUAN D. POMAR and THE COMPAÑIA GENERAL DE TABACOS DE FILIPINAS, defendants-appellees.
TORRES, J.
FACTS:
 December 27, 1905 - counsel for Samuel Bischoff filed a complaint, alleging that – the following are the contents of the complaint:
o the latter was the owner of the steam sugar mill fitted with a portable 8-horse-power boiler with its attachments, a complete
tramway with rails and other fittings for a distance of not less than 3 kilometers, and fifteen small cars, all of which were at
the Hacienda San Jose, of San Carlos, occidental Negros.
o that the defendant Compañia de Tabacos had asked and obtained from the Court of First Instance, in or about the month
of October of the same year, the appointment of a receive for the property of Romana Ganzon, among which property that
the described above was included at the instance of the defendant as belonging to the debtor Ganzon
o that at the designation of the Compañia de Tabacos Juan Pomar was appointed receiver and upon taking charge of the
property of the said Romana Ganzon he did not confine himself thereto, but unlawfully and without any right whatever took
possession, as receive, of the property of the plaintiff herein before described
o that notwithstanding the repeated demands made by the plaintiff, Bischoff, the latter was unable to secure from the
defendants the return of the said property
o that they refused to deliver the said property to him and continued to use the same to the prejudice of the plaintiff, whose
loss and damages amounted to P30 a day
o the plaintiff therefore prayed that judgment be entered in his favor, declaring that the property described in the first paragraph
of the complaint belonged to him
o that the said defendants be ordered to pay the said losses and damages with costs.

 TRIAL COURT
o rendered judgment, holding that the steam sugar mill and 8-horsepower portable boiler and fittings, the tramway, rails and
cars upon the Hacienda of San Jose, should be considered as included in the mortgage executed by Romana Ganzon in
favor of Lazaro Mota, which mortgage was transferred to the Compañia General de Tabacos and ratified in favor of the
latter by the debtor
o the defendants were therefore absolved of the complaint without costs, and such right of action was reserved to Samuel
Bischoff as he may be entitled for the return from Romana Ganzon of whatever sum he paid for the said property.

 ISSUE as submitted by the plaintiff by appeal: Supposing that the steam sugar mill and portable boiler, and the tramway with fifteen
small wagons, rail, and other fittings, mounted at the Hacienda San Jose and in use thereon, were improvements upon said hacienda,
are they to be considered for this sole reason as necessarily included in the mortgage of the said hacienda, even though not
specifically described in the instruments as included therein?

 SUPREME COURT - (buong held, hindi maiintindihan kapag ni-cut ko pa.)

The plaintiff avers, without proof, that the said articles were excluded from the mortgage of the Hacienda San Jose were they are to be
found, because in the instruments wherein the Hacienda San Jose was repeatedly mortgaged, far from it being stated that, by agreement
between the contracting parties, the objects claimed the complaint should be understood to be positively excluded, in the successive
mortgage deeds executed by Romana Ganzon in favor of Lazaro Mota y Ayo on July 20 and October 8, 1900, and September 6, 1902,
Exhibit D, as security for the increasing loans made by the latter, the debtor mortgaged her Hacienda San Jose with the improvements
thereon to guarantee the payment of the total sum of 21,423.93 pesos; in the last instrument, as well as in the previous ones, it is stated
that the warehouse, farmhouse, furnaces, machinery, and the described land that constitutes the said hacienda shall be liable for the
payment of her total indebtedness, the legal interest thereon, and loss and damages and costs in case of judicial proceedings having to
be instituted; said instrument, like the previous ones, was recorded in the registry of property, and is should be noted that by express
desire of the contracting parties, in the successive documents of indebtedness of 1900, the mortgage of the hacienda with the
improvements thereon was maintained, and was afterwards repeated in the last instrument.

Owing to the non -payment of the said sum of P21,423.93, notwithstanding the demands made upon and extensions of time granted to
the debtor, on September 30, 1904, the creditor, Lazaro Mota, assigned and transferred the said Tabacos by means of a public instrument
which was recorded in the registry, and appears as Exhibit B herein.

In the private document marked as Exhibit A, dated September 10, 1902, it appears that the Compañia General de Tabacos opened an
anual credit of P15,000 under the conditions therein stated, the debtor having offered as security the said hacienda with the cattle,
buildings, and two steam engines, and stating in addition, that the said hacienda with its buildings, machinery, and cattle had already
been mortgaged by her to Lazaro Mota.

Moreover, even in the instrument on the 10th of December, 1904, when Romana Ganzon created a mortgaged in favor of the Compañia
General de Tabacos to guarantee her debt of P53,042.53, she designated the said hacienda with all the improvements, buildings,
machinery, and carabaos thereon, and in addition declared that the same hacienda and its dependencies were already mortgaged to the
said Lazaro Mota.

So that in the instruments of mortgage above referred to, three of which are anterior to the sale a retro, effected on the 8th of November,
1904, upon which the plaintiff bases his claim, the improvements on the Hacienda San Jose, among which is the machinery that was
already mounted, appear as expressly mortgaged at the time of executing the instrument of mortgage of September 6, 1902, and later
on, that of transfer of the mortgage credit on the 30th of September, 1904, to the Compañia General de Tabacos.
From none of the said instruments does it appear that the contracting parties had expressly agreed to exclude the said machinery and
tramway from the repeated mortgages, of said hacienda, so that no value would be given to the words written therein proving in an
unquestionable manner that it was the will of the contracting parties to include the lien all the improvements upon the hacienda, among
which was the machinery mounted thereon for the needs of the said hacienda:

Article 110 of the Mortgage Law in force reads:

A mortgage extends to natural increase, improvements, growing crop, and rents not collected when the obligation falls due, and
the value of indemnities allowed or due the owner for insurance on the property mortgaged, or by virtue of condemnation by
right of eminent domain.

The same precept is repeated in detail and more extensively in the following article 111 of said law.

Article 1877 of the Civil Code contains the same precept but treats as greater length than in the preinserted article 110 of the Mortgage
Law; it is as follows:

A mortgage includes the natural accessions, improvements, growing fruits, and rents not collected when the obligation is due,
and the amount of the indemnities granted or due the owner by the underwriters of the property mortgaged or by virtue of the
exercise of eminent domain by reason of public utility, with the declarations, amplifications, and limitations established by law,
in case the estate continues in the possession of the person who mortgaged it, as well as when it passes into the hands of a
third person.

As may be seen from the doctrine established by the Supreme Court of Washington in its decision in the matter of The Royal Insurance
Company vs. R. Miller, liquidator, and Amadeo (26 Sup. Ct. Rep., 46 1) the above quoted legal precepts in force in these Islands are in
accord with the American laws:

3. Mortgage — Right of Mortgagee to Insurance on Harvested Crop. — The avails of insurance on sugar and molasses coming
into the sugar house on a sugar plantation as the result of the manufacture of a crop growing thereon when the insurance was
effected inure to the benefit of the mortgagee in a mortgage of the realty and the fruits thereof if the loss occurred after the
execution of the mortgage, under the Porto Rico Mortgage Law of 1880, which subjects to a mortgage of real property the crops
growing or harvested when the mortgage fails due, "but not yet removed or warehoused," and the indemnities awarded or due
the owner of the realty either for the insurance or for the crops, provided the damage occurred after the creation of the mortgage.

4. Mortgage — Right of Mortgage to Sue for Insurance without Exhausting Other Remedies. — The mortgage creditor in a
mortgage governed by the civil law may sue for the avails of the insurance subject to his mortgage without first exhausting his
remedies against other property embraced by the mortgaged.

So that even though no mention had been made of said machinery and tramway in the mortgage instrument, the mortgage of the property
whereon they are located is understood by law to extend to them and they must be considered as included therein, as well as all other
improvements, unless there was an express stipulation between the parties that they should be excluded. Such exclusion, however,
certainly does not appear in the record; on the contrary, they are manifestly included in the mortgage.

It has already been stated that the machinery in question was already mounted on said property and was in use thereon when the
mortgage given to secure the debt of Romana Ganzon to the original creditor, Lazaro Mota was created; but even if these were not so,
article 111 of the Mortgage Law, hereinbefore cited, provides that the following shall be considered as mortgaged with the estate, provided
they belong to the owner of said estate, although they not be mentioned in the contract:

1. Chattels permanently located in a building, either useful or ornamental, or for the service of some industry even though they
were placed there after the creation of the mortgage.

It should be noted that the said machinery and tramway were exclusively owned by Romana Ganzon, the owner of the hacienda, and
that at the time when the mortgage was made they had not yet been sold a retro to the plaintiff Bischoff; this sale was effected on
November 8, 1904, long after the property was mortgaged.

Given the rights of dominion possessed by Romana Ganzon over the articles in question it is not possible to deny that she had the right
to dispose of them, as she did, by sale under pacto de retro to the plaintiff, but the alienation thereof does not release them from the
encumbrance to which they are subjected until the redeemed from the mortgage that weighs upon them, since the right of the creditor
limits that the owner of the thing mortgaged, and the purchaser, is necessarily bond to acknowledge and respect the encumbrance to
which is subjected the purchased thing and which is at the disposal of the said creditor in order that he, under the terms of the contract,
may recover the amount of his credit therefrom.

If it be true and inconvertible fact that at the time the plaintiff Bischoff acquired under pacto de retro the machinery and the tramway in
question, they were already affected by and included in the mortgaged of the Hacienda San Jose, the placing of the said hacienda,
together with all of the property existing thereon in the hands of a receiver at the instance of the creditor, the Compañia General de
Tabacos, has not occasioned any damage to the plaintiff, inasmuch as the defendant limited itself to the duty of the plaintiff to respect
the encumbrance that burdens of the property acquired by him under these conditions, and therefore, he cannot acquired any right to
indemnity for loss and damages, for the reason that he purchased goods that were already liable to the credit of the company that was
the creditor of Romana Ganzon and which latter sold them on pacto de retro; he therefore did not obtain possession of the same.

For the above considerations, and accepting the conclusion contained in the judgment appealed from so far as they agree with the
foregoing, it is our opinion that the same should be affirmed, without any ruling as to the costs of this instance.

G.R. No. L-11990 May 29, 1959

JOSE MOVIDO, plaintiff-appellant,
vs.
REHABILITATION FINANCE CORPORATION and THE PROVINCIAL SHERIFF OF SAMAR, defendants-appellees.
PADILLA, J.

FACTS:
 July 1, 1946 - the Vet. Bros. & Company, Inc. mortgaged to Jose S. Movido its rights, title, interest and participation "in a complete
sawmill in barrio Mauo, Allen, Samar, with all its machineries, tools and equipment in good running condition" to secure the payment
of a loan of P15,000 and interest at the rate of 12% per annum obtained by the former from the latter. Same was registered in the
Office of Registrar of Deeds in Samar.
 July 28, 1948 - Jose S. Movido brought an action against Vet. Bros. & Company, Inc. in the Court of First Instance of Leyte to recover
the sum of P13,494.35 with the interest at the rate of 12% per annum from 1 July 1948 until the principal is fully paid and P2,000 by
way of damages and expenses of litigation
 February 7, 1949 - the parties thereto, assisted by their respective counsel, entered into and submitted to the Court a compromise
agreement terminating their dispute and renouncing their respective claims for damages and for any other claim in connection with
the subject matter of the case which was approved and the court rendered judgment in accordance therewith.

 March 3, 1949 - Vet Bros. & Company, Inc. and the spouses Simeon G. Toribio and Maximiana Escobar de Toribio mortgaged the
real estate and chattels therein enumerated and described in favor of the Rehabilitation finance Corporation to secure the payment
of a loan of P46,000

 March 1, 1955 - Jose S. Movido brought in the Court of First Instance of Leyte an action against the Rehabilitation Finance
Corporation and the Provincial Sheriff of Samar charging the latter with having unlawfully, fraudulently and maliciously disregarded
his third party claim on the chattels and sold them at public auction on 11 June 1953, upon the request and for the benefit of the
former, thereby causing him actual damages in the sum of P5,000 in addition to the expense of P2,000 for attorney's fee.
 The defendants filed separate answers. The Rehabilitation Finance Corporation set up the defense:
o that by filing a complaint against the Vet Bros & Company, Inc. in the Court of First Instance of Leyte (civil No. 441), to
recover the sum due from it, the plaintiff waived his right to foreclose the mortgage and for that reason abandoned his
mortgage lien on the chattels
o that the plaintiff's third party claim was not valid and sufficient in form and substance to stop and frustrate the public auction
sale in question, it being a mere claim for preference in the distribution of the proceeds of the public auction sale
o that the alleged chattel mortgage of the plaintiff was invalid and did not bind the chattels
o that its mortgage lien in the real estate and chattels was prior, preferred and superior to that of the plaintiff's; and that it had
not done or caused to be done any actionable wrong or harm to the plaintiff to make it liable for damages claimed to have
been sustained by the plaintiff.

 TRIAL COURT - rendered judgment holding that the compromise agreement entered into by and between the parties in civil case
No. 441 and the judgment rendered by the Court pursuant thereto novated the plaintiff's credit secured by the chattel mortgage, and
that when the Vet. Bros. Company, Inc. and the spouses Simeon G. Toribio and Maximiana Escobar de Toribio mortgaged to the
Rehabilitation Finance Corporation the same chattels and other properties enumerated in Exhibits 8, RFC and 9, RFC, the plaintiff's
lien on the chattels no longer existed; and dismissing the plaintiff's complaint with costs against him but without awarding damages
to the defendants.
 Plaintiff’s motion and amended motion for new trial and motion for reconsideration were denied. Hence this appeal originally to the
Court of Appeals but certified to this Court on the ground that only questions of law are involved.

 SUPREME COURT – (buong ruling also, one paragraph lang.)

A mortgage who sues and obtains a personal judgment against a mortgagor upon his credit waives thereby his right to enforce the
mortgage securing it.1 By instituting civil case No. 441 in the Court of First Instance of Leyte to recover the sum of P13,494.35 from
the Vet. Bros & Company, Inc., on 28 July 1948 and by securing a judgment in his favor upon the compromise agreement entered
into by and between him and the defendant therein on 7 February 1949, the appellant abandoned his mortgage lien in the chattels
in question. When on 3 March 1949 and on 17 May 1949, therefore, Vet. Bros & Company, Inc. and the spouses Simeon G. Toribio
and Maximiana Escobar de Toribio mortgaged the chattels and other properties described in Exhibit 8, RFC 9, RFC to the appellee,
the appellant had no longer any lien on the chattels. The rule in Tizon vs. Valdez, 48 Phil., 910 and Matienzo vs. San Jose, G.R. No.
39510, 16 June 1934, relied upon by the appellants, has been abandoned in Bachrach Motor Company vs. Icarañgal, supra.
Moreover, the appellant secured a writ of execution of the judgment rendered in civil case No. 441 on 26 June 1953 only (Exhibits
1-F, Sabarre; 1-F, RFC), or fifteen days after the public auction sale had been carried out. The judgment appealed from is affirmed,
with cost against the appellant.
REHABILITATION FINANCE CORP. VS ALTO
Plaintiff-appellant: REHABILITATION FINANCE CORPORATION
Oppositor-appellee: ALTO SURETY and INSURANCE COMPANY, INC. G.R. No. L-
14303 March 24, 1960
BARRERA, J.:

FACTS:
 This is an appeal from an order of CFI Camarines Sur, sitting as a land registration court denying appellant's petition under
Section 112 of Act No. 496 for cancellation of the annotation of appellee's second mortgage on appellant's TCT.
 Eustaquio Palma registered owner of a parcel of land with its improvements, located in San Agustin, Iriga, Camarines Sur,
covered by TCT No. 12—Camarines Sur, executed a first mortgage to secure a loan of P20,000.00, in favor of the
Rehabilitation Finance Corporation (RFC),
 Subsequently, with the consent of the RFC, a second mortgage over the same property, in favor of Alto Surety & Insurance
Company, Inc. (Alto).
 Both mortgages were duly registered in the Office of the Register of Deeds of Camarines Sur and annotated on the
corresponding certificate of title.
 Upon failure of the mortgagor to settle the P20,000.00 loan on its maturity, RFC foreclosed the mortgage extrajudicially
under Act 3135 as authorized in the deed of mortgage and the property was sold in public auction under the direction of
the Provincial Sheriff of Camarines Sur on April 17, 1951 in favor of mortgagee RFC as the highest bidder for the sum of
P11,211.68.
 Six months later, mortgagor Palma, by a deed of assignment, transferred and conveyed all his rights, title and interest in and to
the mortgaged property to the spouses Anacleto Trinidad and Rosa S. de Trinidad, the assignees assuming the obligation of
paying the repurchase price of the auctioned property.
 Within the year of redemption, that is, on December 29, 1951, the assignee-spouses and the RFC executed a "Deed of Resale"
whereby the mortgaged property was resold and reconveyed in favor of the "redemptioners, their heirs, assignees and
successors in interest".
 However, instead of paying the whole redemption price, only P5,500 was paid on hand and the sum of P21,505.11, balance of
the total indebtedness including 6% interest was agreed to be paid in ten annual amortizations.
 On April 3, 1952, Alto, as junior encumbrancer, wrote the RFC inquiring as to the actual status of the property subject
to redemption expiring on April 17, 1952.
 In its reply dated April 9, 1952, RFC advised Alto that the auctioned property had already been sold to the Trinidad spouses
"under a deed of redemption on the installment plan".
 The RFC, executed an affidavit consolidating ownership on the purchased property, stating therein that the period of redemption
had expired on April 18, 1952 without the debtor or any lien-holder thereon exercising said right of redemption or repurchase.
 This affidavit, together with the deed of sale evidencing its (RFC's) purchase of the property at public auction were registered
on December 16, 1953, by virtue of which, RFC was able to secure the cancellation of Transfer Certificate of Title No. 12,
in the name of the owner-mortgagor Eustaquio Palma, and the issuance of a new title in its name (T.C.T. No. 1155).
 The second mortgage in favor of Alto, however, was carried and annotated at the back of the new title.
 It is this annotation on its certificate of title No. 1155 that the RFC sought to have cancelled, alleging that with the consolidation
and transfer to it as the first mortgagee of the mortgagee's rights on the property, the junior encumbrancer's lien on the same
property had ceased.
 Alto, the second mortgagee, opposed the petition contending that with the execution of the Deed of Resale between
RFC and the spouses Anacleto Trinidad and Rosa S. de Trinidad, assignees of the mortgagor, the mortgaged property
had been completely released from the first mortgage and the second mortgage had been automatically transformed
into a first lien on the property.
 From the order denying the petition for cancellation, RFC appealed to the Court of Appeals. The case, however, was certified to
this Court, the questions raised therein being purely of law.

ISSUE: WON the annotation of the second mortgage in favor of the oppositor on the back of Transfer Certificate of Title No.
1155 was made in accordance with law".

HELD: YES. The petition for cancellation was filed by the RFC and the original registration case, under Section 112 of Act 496, on the
alleged ground that the lien in favor of Alto had already ceased. In opposing this petition, Alto claimed that with the execution of the deed
of resale between RFC and the Spouses Anacleto and Rosa S. de Trinidad, (Exhibit J), there had been a valid exercise by the latter, as
the mortgagor's successors-in-interest, of the right of redemption, thus justifying the retention of the encumbrance in favor of the junior
mortgagee in the certificate of title covering the property.

The court a quo acted correctly in denying, under the circumstances, the petition to cancel the annotation of the second mortgage at the
back of the title covering the property originally owned by Eustaquio Palma. It has been consistently held by this Court, that the relief
afforded by Section 112 of the Land Registration Act may only be allowed if "there is a unanimity among the parties, or there is no adverse
claim or serious objection on the part of any party in interest; otherwise, the case becomes controversial and should be threshed out in
an ordinary case.1In another case, this Court2 has held that "Section 112 authorizes, in our opinion, only alterations which do not impair
rights recorded in the decree, or alterations which, if they do prejudice such rights, are consented to by all parties concerned or alterations
to correct obvious mistakes". This doctrine is but sound and proper. The proceedings provided in the Land Registration Act being summary
in nature, they are inadequate for the litigation of issues properly pertaining to ordinary civil actions, 3 thus, questions involving ownership
of or title to a real property,4 or relating to the validity or cancellation or discharge of a mortgage should properly be ventilated in an
ordinary proceeding."5
There is another reason why the petition must be denied. Granting arguendo that the extrajudicial foreclosure proceeding instituted by
the RFC is proper and justified, since the junior encumbrancer was admittedly not notified thereof, the foreclosure of the first
mortgage cannot be considered to have terminated or extinguished the rights of said junior encumbrancer over the property.

An interest in the mortgaged property acquired subsequent to the (first) mortgage may be divested or barred only

by making the holder thereof a party to the proceedings to foreclose (Kurz vs. Pappas, 146 So. 100, 107 Fla. 861; Mediterranean Corp. vs.
Pappas, 146 So. 106, 107 Fla. 876). (Emphasis supplied.)

While as a general rule, the junior encumbrancer is not a necessary party to a suit to foreclose by a senior mortgagee, it is always proper
and prudent to join him as a defendant, both to give an opportunity to defend and to extinguish his right of redemption (Lee vs. Slemons,
150 So. 792, 112 Fla. 675; Woodward vs. Householder, 289 S.W. 571, 315 Mo. 1155).

When a senior mortgagee forecloses and becomes the purchaser at his own foreclosure sale, but the holder of a subsequent mortgage
or other subordinate interest has not been joined or has been eliminated from the proceeding, equity will keep the senior mortgage alive
against the subsequent encumbrance and the senior mortgagee will be entitled to an action de novo to reforeclose the mortgage as to
the omitted persons (Van Metervs. Field, 159 P. 2d 546, 195 Okl. 55; Rives vs. Stanford, 106 P. 2d 1101).

In view of the foregoing, the decision appealed from denying the first mortgagee's petition to cancel the annotation of the second mortgage
at the back of Transfer Certificate of Title No. 1155, is hereby affirmed.
BPI VS VELOSO
Petitioner: BPI FAMILY SAVINGS BANK, INC. Respondents: SPS. JANUARIO
ANTONIO VELOSO AND NATIVIDAD VELOSO G.R. No. 141974. August 9, 2004]
CORONA, J.:

FACTS:
 This is a petition for review of the decision of the CA affirming the RTC QC which upheld the validity of the extra-judicial
foreclosure proceedings initiated by Family Bank and Trust Company (Family Bank) on the mortgaged properties of respondent
spouses Januario Antonio Veloso and Natividad Veloso but allowed the latter to redeem the same properties.
 On January 8, 1983, respondent spouses obtained a loan of P1,300,000 from petitioners predecessor-in-interest Family Bank
and Trust Company. To secure payment of the loan, respondent spouses executed in favor of the bank a deed of mortgage
over three parcels of land, with improvements, registered in their names under TCT Nos. 272227, 272228 and 272229 of
the Registry of Deeds of Quezon City.
 On February 9, 1983, respondents, for value received, executed a promissory note for P1,300,000.
 Subsequently, however, respondents defaulted in the monthly installments due on their loan.
 When efforts to update the account failed, Family Bank instituted extra-judicial foreclosure proceedings on the respondents
mortgaged properties.
 On July 1, 1985, the properties were sold at public auction with Family Bank as the highest bidder for P2,782,554.66.
 On August 5, 1985, Family Bank assigned all its rights and interests in the foreclosed properties to petitioner BPI Family Bank,
Inc. (BPI).
 On August 28, 1985, the sheriffs certificate of sale was registered with the Registry of Deeds of Quezon City.
 On July 24, 1986, respondents, through counsel, wrote BPI offering to redeem the foreclosed properties for P1,872,935. This
was, however, rejected by petitioner.
 Respondents filed a complaint for annulment of foreclosure, with consignation and prayer for damages.
 On motion of respondents, the trial court, allowed respondents to deposit with the clerk of court the sum of P1,500,000
representing the redemption price. Thereafter, trial on the merits ensued.
 Meanwhile, in Branch 76 of the RTC QC, BPI was able to secure a writ of possession over the foreclosed properties. This
prompted respondents to file with the Court of Appeals a petition for certiorari with preliminary injunction. The Court of
Appeals resolved to grant respondents motion for preliminary mandatory injunction.
 The Court of Appeals, resolved the issue of possession in favor of BPI and accordingly lifted the preliminary mandatory injunction
it had earlier issued, denying altogether respondents petition. From this decision, respondents came to this Court via a petition
for review which was, however, denied in a resolution dated January 13, 1992. The resolution affirmed, in effect, petitioners
right to the possession of the subject properties.
 Branch 94 ordered the release of P1,400,000 of the consigned amount to respondents, with the balance of P100,000 to take the
place of the injunction bond to answer for whatever damages petitioner might suffer because of the issuance of the preliminary
injunction (previously issued and later lifted) in favor of respondents.
 After almost a decade of protracted litigation, the trial court rendered a decision declaring the validity of the extra-
judicial foreclosure of the mortgaged properties of respondents but allowed the redemption of the same at a redemption
price of P2,140,000.
 BPI elevated the matter to the Court of Appeals which affirmed the trial courts decision, with modification
declaring P2,678,639.80 as the redemption price due.
ISSUE: WON Respondents complied with the proper redemption of the property. No
HELD: The fact is that, at the time of the foreclosure sale on July 1, 1985, respondent spouses Veloso had already defaulted on
their loan to petitioners predecessor-in-interest family bank. In a real estate mortgage, when the principal obligation is not paid when
due, the mortgagee has the right to foreclose on the mortgage and to have the property seized and sold, and to apply the
proceeds to the obligation. foreclosure is proper if the debtor is in default in the payment of his obligation, and in this case,
the validity of the extra-judicial foreclosure on July 1, 1985 was confirmed by both the trial court and the court of appeals. We
find no reason to question it.
The sole question therefore that remains to be resolved is: did respondent spouses comply with all the requirements for the
redemption of the subject properties?
We answer in the negative.
The general rule in redemption is that it is not sufficient that a person offering to redeem manifests his desire to do so. The
statement of intention must be accompanied by an actual and simultaneous tender of payment. This constitutes the exercise
of the right to repurchase.
In several cases decided by the Court where the right to repurchase was held to have been properly exercised, there was an
unequivocal tender of payment for the full amount ofthe repurchase price. Otherwise, the offer to redeem is ineffectual. Bona
fide redemption necessarily implies a reasonable and valid tender of the entire repurchase price, otherwise the rule on the
redemption period fixed by law can easily be circumvented. As explained by this Court in Basbas vs. Entena:

x x x the existence of the right of redemption operates to depress the market value of the land until the period expires, and to render
that period indefinite by permitting the tenant to file a suit for redemption, with either party unable to foresee when final judgment
will terminate the action, would render nugatory the period of two years fixed by the statute for making the redemption and virtually
paralyze any efforts of the landowner to realize the value of his land. No buyer can be expected to acquire it without any certainty
as to the amount for which it may be redeemed, so that he can recover at least his investment in case of redemption. In the
meantime, the landowners needs and obligations cannot be met. It is doubtful if any such result was intended by the statute, absent
clear wording to that effect.

Consequently, in this case, the offer by respondents on July 24, 1986 to redeem the foreclosed properties for P1,872,935 and the
subsequent consignation in court of P1,500,000 on August 27, 1986, while made within the period of redemption, was ineffective since
the amount offered and actually consigned not only did not include the interest but was in fact also way below the P2,782,554.66
paid by the highest bidder/purchaser of the properties during the auction sale.
In Bodiongan vs. Court of Appeals, we held:

In order to effect a redemption, the judgment debtor must pay the purchaser the redemption price composed of the following: (1) the price
which the purchaser paid for the property; (2) interest of 1% per month on the purchase price; (3) the amount of any assessments or
taxes which the purchaser may have paid on the property after the purchase; and (4) interest of 1% per month on such assessments and
taxes x x x.

Furthermore, Article 1616 of the Civil Code of the Philippines provides:

The vendor cannot avail himself of the right to repurchase without returning to the vendee the price of the sale x x x.

It is not difficult to understand why the redemption price should either be fully offered in legal tender or else validly consigned in
court. Only by such means can the auction winner be assured that the offer to redeem is being made in good faith.
The sum of P1,400,000 consigned by respondents in Branch 94 was subsequently withdrawn by them, leaving only P100,000 to
take the place of the injunction bond. This would have been tantamount to requiring petitioner to accept payment by installments as there
would have necessarily been an indefinite extension of the redemption period. If a partial payment can bind the winning bidder or
purchaser in an auction sale, by what rule can the payment of the balance be determined? Petitioner could not be expected to entertain
an offer of redemption without any assurance that respondents could pay the repurchase price immediately. A contrary rule would leave
the buyers at foreclosure sales open to harassment by expectedly angry debtors and cause unnecessary prolongation of the redemption
period, contrary to the policy of the law.
Redemption within the period allowed by law is not a matter of intent but a question of payment or valid tender of the full redemption
price within said period.
The disposition of the instant case in the trial court unnecessarily dragged for almost a decade. Now, it is on its 18th year and still
respondents have not tendered the full redemption price.
The law granted respondents the right of redemption. But in so granting that right, the law intended that their offer to
redeem be valid and effective, accompanied by an actual tender of the redemption price. Fixing a definite term within which the
property should be redeemed is meant to avoid prolonged economic uncertainty over the ownership of the thing sold. In the
case at bar, the offer was not a legal and effective exercise of the right of redemption contemplated by law, hence, refusal of
the offer by petitioner was completely justified.
WHEREFORE, the appealed decision of the Court of Appeals is hereby REVERSED and SET ASIDE. The complaint filed by
respondents, the spouses Veloso, is hereby dismissed.
ROSARIO VS TAYUG RURAL BANK
Plaintiffs-appellees, MELECIO ROSARIO and ROMEO C. RAMIREZ,
Defendants: TAYUG RURAL BANK, INC., ET AL
Defendant-Appellant: TAYUG RURAL BANK, INC. G.R. No. L-
26538
March 21, 1968 CASTRO, J.:
(Note: Procedural issues sa Foreclosure)

FACTS:
 This case was certified to us by the CApursuant to section 17 of Republic Act 296, as amended, because the appellant raises
only questions of law.
 The antecedent facts are not disputed. Romeo C. Ramirez borrowed P440 from the Tayug Rural Bank
 To secure which Melecio Rosario mortgaged in favor of the bank his 15,000-square meter land covered by TCT 9562.
 Ramirez made several payments on the loan so that on maturity date (February 15, 1955), his remaining indebtedness was
only P170.
 But because he failed to settle his obligation in full, the bank, after giving the required notices, extrajudicially foreclosed the
mortgage.
 The provincial sheriff, sold the land at public auction for the unpaid amount of P208.53 in favor of the bank, to which the
corresponding certificate of sale was issued on the same day.
 The certificate of sale was, however, recorded in the Registry of Deeds only on November 16, 1962.
 Five days thereafter, or on November 21, 1962, the bank sold the land to the defendant Nenita Vergara for P1,600.
 Ramirez remitted the sum of P100 to the bank as a deposit for redemption. And on November 7, 1963, he wrote the bank,
offering to redeem the property by paying the unpaid balance together with interests and expenses.
 He enclosed a money order for P108.53; this sum plus what he had previously deposited amounted to P208.53.
 The bank, however, refused to accept the offer, contending that the one year redemption period began to run on July 21,
1961 and, therefore, had already slipped away.
 Hence, Melecio Rosario and Romeo Ramirez sued the bank and Nenita Vergara, to compel these two defendants to accept
payment and to reconvey the property. Nenita Vergara defaulted.
 RTC ordered the Tayug Rural Bank and defendant Nenita Vergara to permit Melecio Rosario to redeem the property in question
by paying the amount of indebtedness remaining on July 21, 1961, plus interest at the rate of 1% a month from said date until
the day of redemption. And the redemption shall have to be done within thirty (30) days from the time the present decision shall
have become final and executor. The Tayug Rural Bank and defendant Nenita Vergara are also sentenced to pay the plaintiffs
by way of attorney's fees and litigation expenses the amount of P100.00.

ISSUE: WON the period for redemption of property sold at public auction by virtue of an extrajudicial foreclosure under Act 3135, as
amended, is to be reckoned from the date the sheriff executes the certificate of sale or from the date the certificate of sale is recorded in
the Registry of Deeds.

Answer: Redemption period should be reckoned from the date of registration of the certificate of sale and not from the date of
the auction sale.

HELD: This Court has already spelled out with sufficient clarity its position on this matter.1 And in the most recent case of Arsenio Reyes
vs. Antonio Noblejas, L-23691, November 25, 1967, 1967D PHILD 520, we rejected the very same theory now espoused by the appellant.
There, we explicitly and emphatically stated that the redemption period should be reckoned from the date of registration of the
certificate of sale and not from the date of the auction sale.

In that case, the provincial sheriff, on the strength of an extrajudicial foreclosure under Act 3135, sold at public auction, on February
6, 1963, certain properties mortgaged to the Philippine National Bank. The corresponding certificate of sale was issued to the highest
bidder on February 21, 1963, which certificate fixed the date of the auction sale as the starting point of the one-year redemption period.
The certificate of sale was not, however, recorded in the office of the Register of Deeds. When the affidavit of consolidation of
ownership was sought to be registered on February 10, 1963, the Register of Deeds refused for the reason that the redemption period
had not yet expired. The Land Registration Commission sustained the Register of Deeds.

The question upon which the case turned was: In an extrajudicial foreclosure of real estate mortgage under Act 3135, when does
the period of redemption of the auctioned property start? We resolved this question in this wise:

It is the theory of petitioner that in sales of property at public auction pursuant to an extrajudicial foreclosure of real estate
mortgage under Act 3135, as amended by Act No. 4118, the period of redemption should be reckoned from the date of the
auction sale which, he contends, is the express mandate of Section 6 of Act No. 3135:

Section 6. In all cases in which the extrajudicial sale is made under the special power hereinbefore
referred to, the debtor, his successors in interest, or any judicial creditor or judgment creditor of said debtor,
or any person having a lien on the property subsequent to the mortgage or deed of trust under which the
property is sold, may redeem the same at any time within the term of one year from and after the date of sale;
and such redemption shall be governed by the provisions of sections 464 to 466, inclusive, of the Code of Civil
Procedure, insofar as these are not inconsistent with the provisions of this Act.
 On the other hand the Land Registration Commissioner is of the opinion that the above-quoted provision is not the only
pertinent and controlling law on the matter, especially when it is taken into consideration that the land involved is registered land
under the Torrens system. He maintains, and so held in the resolution appealed from, that Section 6 of Act 3135 should be
applied to the present case together with: (1) sections 30 to 35 of Rule 39 of the Revised Rules of Court with regard to
redemption; (2) Section 27, Rule 39 of the said Rules and Section 71 of Act 496 with regard to the filing (registration) of
the sheriff's certificate of sale; and (3) Section 50 of Act 496, with regard to the registration of the certificate of sale so
as to consider the land conveyed and affected under the Land Registration Act.

The ruling of the Land Registration Commissioner must be sustained. Section 27, Rule 39 of the Revised Rules of Court
provides that the certificate of sale executed by the sheriff in a public auction sale must be filed (registered) in the Office of the
Register of Deeds of the province where the land is situated. This is a mandatory requirement. Failure to register the certificate
of sale violates the said provision of law and, construed in relation with Section 50 of the Land Registration Law (Act 496), shall
not take effect as conveyance or bind the land covered by a torrens title because "the act of registration is, the operative act to
convey and affect the land." So the redemption period, for purposes of determining the time when a final deed of sale may be
executed or issued and the ownership of the registered land consolidated in the purchaser at an extrajudicial foreclosure sale
under Act 3135, should be reckoned from the date of registration of the certificate of sale in the office of the register of deeds
concerned and not from the date of the public auction sale.

The appellant in the case at bar argues, however that actual notice is equivalent to registration, and that as between the immediate
parties registration is not necessary to give effect to the deed of sale since registration is intended only to protect the buyer from claims
of third persons who subsequently acquire the property. This argument does not bail out the appellant. We have examined the cases
cited, and we note that they involved voluntary transactions such as contract of sale, 2 pacto de retro, 3 quitclaim, 4 and not forced transfers
such as execution or foreclosure sales.

This argument was embellished in Reyes vs. Noblejas, supra, but this Court was not impressed. Thus,

But it is further argued by the petitioner that the rules could not be applied to this case where there are no third parties
involved. He cites a number of authorities . . . to the effect that as between the parties, registration is not necessary to bind the
immediate parties to a transaction involving registered land. He would then conclude that since the only purpose of registration
is to protect the buyer from third party claims, it stands to reason that when as in this case, there are no third party claimants to
the land, registration is not necessary and the sale between the parties should be made to take effect from the date of the auction
sale. We are not impressed by the argument. Apparently, herein petitioner failed to see the "other side of the coin" and
overlooked the doctrine, also well settled, that the registration required by Section 50 of the Land Registration Law is intended
primarily for the protection of innocent third persons, i.e., persons who, without knowledge of the sale and in good faith, have
acquired rights to the property. . . . The same protection to third parties is obviously one of the objects of Section 27, Rule 39 of
the Revised Rules of Court in requiring that the certificate of sale issued by the sheriff in the auction sale be registered in the
office of the register of deeds, for the purpose of the legislature in providing for our present system of registration is to afford
some means of publicity so that persons dealing with real property may reach the records and thereby acquire security against
instruments the execution of which has not been revealed. Redemption is not the concern merely of the auction vendee and the
mortgagor, but also of the latter's successors in interest or any judicial creditor or judgment creditor of said mortgagor, or any
person having a lien on the property subsequent to the mortgage under which the property has been sold. It is precisely for this
reason that the certificate of sale should be registered, for only upon such registration may it legally be said that proper notice,
though constructive, has been served unto possible redemptioners contemplated in the law. We have to conclude, therefore,
that the date of sale mentioned in Section 6 of Act 3135, as amended, should be construed to mean the date of registration of
the certificate of sale in the office of the Register of Deeds concerned. Only after the lapse of the twelve-month redemption
period from the date of registration of the certificate of sale and in the absence of any redemptioner within the said period may
the deed of final sale be executed in favor of the purchaser who may then consolidate the title of the property in his favor.
Consequently, we have to declare that the Land Registration Commissioner was right in ordering the Register of Deeds of Rizal
to deny the registration of the deed of sale and the affidavit of consolidation of ownership, the simultaneous registration of which
documents was sought by herein petitioner even before the certificate of sale issued by the sheriff was registered.

Finally, the appellant bank objects to the redemption on the ground that the amount tendered is inadequate to meet the redemption
price. Considering, however, that the sum tendered was the amount of the purchase price paid at the auction sale and that the tender
was timely made and in good faith, we believe that the ends of justice would be better served by affording the appellees the opportunity
to redeem the property by paying the bank the auction purchase price plus 1% interest per month thereon up to the time of redemption.
This Court laid down the correct formula in Castillo vs. Nagtalon, L-17079, January 29, 1962, as follows:

The procedure for the redemption of properties sold at execution sale is prescribed in Section 26, Rule 39, of the Rules
of Court. Thereunder, the judgment debtor or redemptioner may redeem the property from the purchaser, within 12 months after
the sale, by paying the purchaser the amount of his purchase, with 1% per months interest thereon up to the time of redemption,
together with the taxes paid by the purchaser after the purchase, if any. In other words, in the redemption of properties sold at
an execution sale, the amount payable is no longer the judgment debt but the purchase price. Considering that appellee tendered
payment only of the sum of P317.44 whereas the three parcels of land she was seeking to redeem were sold for the sums of
P1,240, P21,00, and P30,00, respectively the aforementioned amount of P317.44 is insufficient to effectively release the
properties. However, the tender of payment was timely made and in good faith; in the interest of justice we incline to give the
appellee opportunity to complete the redemption purchase of the three parcels, as provided in Section 26, Rule 39 of the Rules
of Court, within fifteen (15) days from the time this decision becomes final and executory. In this wise, justice is done to the
 appellee who had been made to pay more than her share in the judgment, without doing an injustice to the purchaser who shall
get the corresponding interest of 1% per month on the amount of his purchase up to the time of redemption.

ACCORDINGLY, the judgment a quo is affirmed, at appellant's cost.

BONNEVIE VS CA
Petitioners: RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE
Respondents: THE HONORABLE COURT OF APPEALS and THE PHILIPPINE BANK OF COMMERCE
G.R. No. L-49101 October 24, 1983 GUERRERO, J:

FACTS:
 Complaint filed by petitioner Honesto Bonnevie with the Court of First Instance of Rizal against respondent Philippine Bank of
Commerce sought the annulment of the Deed of Mortgage dated December 6, 1966 executed in favor of the Philippine
Bank of Commerce by the spouses Jose M. Lozano and Josefa P. Lozano as well as the extrajudicial foreclosure made
on September 4, 1968.
 It alleged among others that (a) the Deed of Mortgage lacks consideration and (b) the mortgage was executed by one who was
not the owner of the mortgaged property. It further alleged that the property in question was foreclosed pursuant to Act No. 3135
as amended, without, however, complying with the condition imposed for a valid foreclosure. Granting the validity of the mortgage
and the extrajudicial foreclosure, it finally alleged that respondent Bank should have accepted petitioner's offer to redeem the
property under the principle of equity said justice.
 Answer of defendant Bank, now private respondent herein, specifically denied most of the allegations in the complaint and raised
the following affirmative defences.
 December 6, 1966: Spouses Jose M. Lozano and Josefa P. Lozano secured their loan of P75K from Philippine Bank of
Commerce (PBC) by mortgaging their property
 December 8, 1966: Executed Deed of Sale with Mortgage to Honesto Bonnevie where P75K is payable to PBC and P25K is
payable to Spouses Lanzano.
 April 28, 1967 to July 12, 1968: Honesto Bonnevie paid a total of P18,944.22 to PBC
 May 4, 1968: Honesto Bonnevie assigned all his rights under the Deed of Sale with Assumption of Mortgage to his brother,
intervenor Raoul Bonnevie
 June 10, 1968: PBC applied for the foreclosure of the mortgage, and notice of sale was published
 January 26, 1971: Honesto Bonnevie filed in the CFI of Rizal against Philippine Bank of Commerce for the annulment of the
Deed of Mortgage dated December 6, 1966 as well as the extrajudicial foreclosure made on September 4, 1968.
 CFI: Dismissed the complaint with costs against the Bonnevies
 CA: Affirmed

ISSUES:
1. Whether the real estate mortgage executed by the spouses Lozano in favor of respondent bank was validly and legally executed. Yes
2. Whether the extrajudicial foreclosure of the said mortgage was validly and legally effected. Yes
3. Whether petitioners had a right to redeem the foreclosed property. No
4. Granting that petitioners had such a right, whether respondent was justified in refusing their offers to repurchase the property. Yes

From the recitals of the mortgage deed itself, it is clearly seen that the mortgage deed was executed for and on condition of the loan
granted to the Lozano spouses. The fact that the latter did not collect from the respondent Bank the consideration of the mortgage on the
date it was executed is immaterial. A contract of loan being a consensual contract, the herein contract of loan was perfected at
the same time the contract of mortgage was executed. The promissory note executed on December 12, 1966 is only an evidence
of indebtedness and does not indicate lack of consideration of the mortgage at the time of its execution.

Petitioners admit that they did not secure the consent of respondent Bank to the sale with assumption of mortgage. Coupled with the fact
that the sale/assignment was not registered so that the title remained in the name of the Lozano spouses, insofar as respondent Bank
was concerned, the Lozano spouses could rightfully and validly mortgage the property. Respondent Bank had every right to rely on the
certificate of title. It was not bound to go behind the same to look for flaws in the mortgagor's title, the doctrine of innocent purchaser for
value being applicable to an innocent mortgagee for value. (Roxas vs. Dinglasan, 28 SCRA 430; Mallorca vs. De Ocampo, 32 SCRA 48).

Another argument for the respondent Bank is that a mortgage follows the property whoever the possessor may be and subjects the
fulfillment of the obligation for whose security it was constituted. Finally, it can also be said that petitioners voluntarily assumed the
mortgage when they entered into the Deed of Sale with Assumption of Mortgage. They are, therefore, estopped from impugning its validity
whether on the original loan or renewals thereof.

Petitioners next assail the validity and legality of the extrajudicial foreclosure on the following grounds:
a) petitioners were never notified of the foreclosure sale.
b) The notice of auction sale was not posted for the period required by law.
c) publication of the notice of auction sale in the Luzon Weekly Courier was not in accordance with law.

The lack of notice of the foreclosure sale on petitioners is a flimsy ground. Respondent Bank not being a party to the Deed of Sale with
Assumption of Mortgage, it can validly claim that it was not aware of the same and hence, it may not be obliged to notify petitioners.
Secondly, petitioner Honesto Bonnevie was not entitled to any notice because as of May 14, 1968, he had transferred and assigned all
his rights and interests over the property in favor of intervenor Raoul Bonnevie and respondent Bank not likewise informed of the same.
For the same reason, Raoul Bonnevie is not entitled to notice. Most importantly, Act No. 3135 does not require personal notice on the
mortgagor. The requirement on notice is that:

Section 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public
places of the municipality or city where the property is situated, and if such property is worth more than four hundred
pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general
circulation in the municipality or city

In the case at bar, the notice of sale was published in the Luzon Courier on June 30, July 7 and July 14, 1968 and notices of the sale
were posted for not less than twenty days in at least three (3) public places in the Municipality where the property is located. Petitioners
were thus placed on constructive notice.

Whether or not the notice of auction sale was posted for the period required by law is a question of fact. It can no longer be entertained
by this Court. (see Reyes, et al. vs. CA, et al., 107 SCRA 126). Nevertheless, the records show that copies of said notice were posted in
three conspicuous places in the municipality of Pasig, Rizal and posted also where the property was located.

On the question of whether or not the petitioners had a right to redeem the property, We hold that the Court of Appeals did not err in ruling
that they had no right to redeem. No consent having been secured from respondent Bank to the sale with assumption of mortgage by
petitioners, the latter were not validly substituted as debtors. In fact, their rights were never recorded and hence, respondent Bank is
charged with the obligation to recognize the right of redemption only of the Lozano spouses. But even granting that as purchaser or
assignee of the property, as the case may be, the petitioners had acquired a right to redeem the property, petitioners failed to exercise
said right within the period granted by law. Thru certificate of sale in favor of appellee was registered on September 2, 1968 and the one
year redemption period expired on September 3, 1969. It was not until September 29, 1969 that petitioner Honesto Bonnevie first wrote
respondent and offered to redeem the property. Moreover, on September 29, 1969, Honesto had at that time already transferred his rights
to intervenor Raoul Bonnevie.

The claim of appellants that the collection of interests on the loan up to July 12, 1968 extends the maturity of said loan up to said date
and accordingly on June 10, 1968 when defendant applied for the foreclosure of the mortgage, the loan was not yet due and demandable,
is totally incorrect and misleading. The undeniable fact is that the loan matured on December 26, 1967. On June 10, 1968, when
respondent Bank applied for foreclosure, the loan was already six months overdue. Petitioners' payment of interest on July 12, 1968 does
not thereby make the earlier act of respondent Bank inequitous nor does it ipso facto result in the renewal of the loan. In order that a
renewal of a loan may be effected, not only the payment of the accrued interest is necessary but also the payment of interest for the
proposed period of renewal as well. Besides, whether or not a loan may be renewed does not solely depend on the debtor but more so
on the discretion of the bank. Respondent Bank may not be, therefore, charged of bad faith.

WHEREFORE, the appeal being devoid of merit, the decision of the Court of Appeals is hereby AFFIRMED.
LORBES v CA

ANTICHRESIS
Art. 2132. By the contract of antichresis the creditor acquires the right to receive the fruits of an immovable of his
debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of
his credit.

What is antichresis?

Antichresis is a contract by which the creditor acquires the right to receive the fruits of an immovable belonging to the debtor, with
the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit.

What are the characteristics of antichresis?

1. Accessory – It secures the performance of a principal obligation. Manresa, however, believes that it is an
independent contract.

2. Formal Contract – It must be in specified form to be valid (in writing).

Is delivery of the property to the creditor required?

Delivery is not required for the validity of the contract itself. BUT, it is required in order that the creditor may receive the fruits.

Does antichresis apply to all of the fruits of the immovable concerned?

GENERAL RULE: The general rule is that the contract of antichresis covers ALL the fruits of the encumbered property.

If the parties do not want all of the fruits to be subject to the antichresis, they must STIPULATE otherwise.
Is it essential for the contract to have a stipulation for interest in order to have an accessory contract of antichresis?

No. It is not essential to the contract of antichresis that the loan that it guarantees should have interest. There is nothing in the law
that says that antichresis can only guarantee interest- bearing loans.

What are the differences between antichresis and real mortgage?

ANTICHRESIS REAL MORTGAGE

Property is delivered to the creditor
Creditor acquires only the right to receive the fruits of the
property; not a real right
General rule is that creditor must pay the taxes and
charges upon the estate; parties
must stipulate otherwise
Expressly stipulated that the creditor shall apply the fruits
to the payment of interest, if
owing, and thereafter to the principal
Debtor usually retains possession of the
property
Creditor has no right to receive the fruits, but
mortgage creates a real right over the property which is
enforceable against the world
Creditor has no obligation to pay taxes and charges
No obligation on the part of the mortgagee to apply the
fruits to interest and principal

Antichresis and real mortgage are similar in that the subject matter is real property.

Like pledge and mortgage, antichresis gives a real right if it is registered in the Registry of Property.

Example: A borrowed P1M from B. To secure the loan, A delivered a parcel of land with coconut trees to B, giving B the power
to administer it and harvest the coconuts. What is the nature of the contract?

Answer: The contract is one of mortgage, not antichresis. In order for it to be a contract of antichresis, it must be expressly agreed
between creditor and debtor that the creditor, having been given possession of the property, is to apply the fruits to the payment of
interest, if owing, and thereafter, to the principal.

Art. 2133. The actual market value of the fruits at the time of the application thereof to the interest and
principal shall be the measure of such application.
When it is time to apply the fruits to the payment of the interest or the principal, the creditor must base the value of the fruits on
their market value at the time of the application.

Example:

The property subject of the contract of antichresis has mango trees. In January, one kilo of mangoes costs P50/kilo. But in May,
when mangoes are in season, one kilo costs 25/kilo. If interest is due in January, the creditor must apply the fruits to the payment
of interest based on the price of P50/kilo. If interest is due in May, he should compute at the price of P35/kilo.

Art. 2134. The amount of the principal and of the interest shall be specified in writing; otherwise, the
contract of antichresis shall be void.
Is there a form required for the contract of antichresis?

Yes. The contract must state the amount of the principal and the interest IN WRITING. If this form is not followed, the
contract of antichresis is VOID. The requirement that it be in writing is necessary not merely to bind third persons but to make
the contract valid.

But even if the antichresis is void, the principal obligation is still valid.

Art. 2135. The creditor, unless there is a stipulation to the contrary, is obliged to pay the taxes and
charges upon the estate.

He is also bound to bear the expenses necessary for its preservation and repair.

The sums spent for the purposes stated in this article shall be deducted from the fruits.

What are the obligations of the creditor under the contract of antichresis?

1. Pay the taxes and charges upon the estate –

 If the creditor does not pay the taxes, he is required by law to pay indemnity for damages to the debtor.

If the debtor pays the taxes on the property which the creditor should have paid, the amount is to be applied to the payment of
the debt. If the amount of taxes paid by the debtor is enough to satisfy the principal obligation, then the loan and the
antichresis are extinguished; the creditor must return the property to the debtor.

What if the creditor does not want to pay the taxes and charges? They must so stipulate in their agreement OR see the next
article.

2. Apply the fruits

The creditor must apply the fruits of the property tothe payment of interest, if owing, and thereafter to the principal.

Art. 2136. The debtor cannot reacquire the enjoyment of the immovable without first having totally
paid what he owes the creditor.

But the latter, in order to exempt himself from the obligations imposed upon him by the
preceding article, may always compel the debtor to enter again upon the enjoyment of the property,
except when there is a stipulation to the contrary.

When can the debtor get back the property subject of the antichresis?

The debtor can get it back only when he has totally paid the principal obligation. This is because the property stands as a
security for the payment of the principal obligation.

Is there an exception?

Yes. The exception to this rule is if the creditor does not want to pay the taxes and charges upon the estate. In such a case, the
creditor may compel the debtor to get the property back, UNLESS there is a contrary stipulation (exception to the exception).

But this has the effect of extinguishing the contract of antichresis.

Art. 2137. The creditor does not acquire the ownership of the real estate for nonpayment of the debt
within the period agreed upon.

Every stipulation to the contrary shall be void. But the creditor may petition the court for the
payment of the debt or the sale of the real property. In this case, the Rules of Court on the foreclosure
of mortgages shall apply.

What happens when the debtor defaults on the principal obligation?

The creditor DOES NOT acquire ownership of the real estate. Any stipulation to the contrary shall be void. This is because the
contract of antichresis covers only the right to receive the fruits from the estate, and not its ownership. Also, this is pactum
commisorium, which is void.

The creditor has the following remedies in case of default:

1. Bring an action for specific performance.

2. Petition for the sale of the real property in judicial foreclosure proceedings under Rule 68 of the Rules of Court.
Can the parties stipulate on an extra-judicial foreclosure? Yes, in the same manner that they are allowed in pledge and
mortgage.

Can the creditor acquire the property given in antichresis by prescription?

No, and any stipulation to the contrary shall be void. In order to acquire property be prescription, possession must be in the
concept of owner. The antichretic creditor possesses the property merely as a holder.
 Exception: Just like in a co-ownership, if the creditor repudiates the antichresis, he can acquire the property by prescription.

Art. 2138. The contracting parties may stipulate that the interest upon the debt be compensated with
the fruits of the property which is the object of the antichresis, provided that if the value of the fruits
should exceed the amount of interest allowed by the laws against usury, the excess shall be applied to
the principal.
The creditor must first apply the fruits to the payment of the interest. If the value of the fruits exceeds the value of the interest due,
then the creditor should apply the excess to the principal.

The second part of this provision is no longer applicable, since there is no Usury Law anymore.

Art. 2139. The last paragraph of article 2085, and articles 2089 to 2091, are applicable to this contract.

Other characteristics of Antichresis:

1. A third person, who is not a party to the principal contract, may offer his immovable under the contract of
antichresis to secure the debt of another. (2085)

2. The contract of antichresis is indivisible. (2089)

3. The indivisibility of the antichresis is not affected by the fact that the debtors are not solidarily liable. (2090)

4. The contract of antichresis may secure all kinds of obligations – pure or conditional. (2091)
CASE:
ZOTOMAYOR v RUBIO

CHATTEL MORTGAGE

Art. 2140. By a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a
security for the performance of an obligation. If the movable, instead of being recorded, is delivered to
the creditor or a third person, the contract is a pledge and not a chattel mortgage.

What is chattel mortgage?

Chattel mortgage is the contract by virtue of which personal property is recorded in the Chattel Mortgage Register as a
security for the performance of an obligation.

This definition under the Chattel Mortgage Law is no longer applicable. It is the definition under Art. 2140 of the Civil
Code that applies now.

What are the characteristics of the contract of chattel mortgage?

1. It is an accessory contract because it secures performance of a principal obligation
2. It is a formal contract because it requires registration in the Chattel Mortgage Register for its validity (but only
against third persons)
3. It is a unilateral contract because it produces only obligations on the part of the creditor to free the thing from
the encumbrance on fulfillment of the obligation.

What is the subject matter of chattel mortgage?

The subject matter of chattel mortgage is personal or movable property.

What are the requisites for a valid chattel mortgage?

1. It must be constituted to secure a principal obligation.
2. The mortgagor must be the absolute owner of the thing mortgaged.
3. He must have free disposal of the thing or otherwise be authorized to do so.
4. When the principal obligation becomes due, the property mortgaged may be alienated for the payment to the
creditor.
5. To prejudice third persons, the mortgage must be recorded in the Chattel Mortgage Registry.
If the first four requisites are present, there is already a valid mortgage between the parties – mortgagor and mortgagee.
But to affect third persons, there is a need to comply with the fifth requisite: The document of mortgage must be recorded in
the Chattel Mortgage Registry. This is because recording the document in the Chattel Mortgage Registry serves as notice to
3rd persons. This is similar to the requirement in pledge that the pledge be in a public document and the requirement in Real
Estate Mortgage that it must be recorded in the Registry of Property.

Note that unlike in pledge, there is no need for actual delivery of the personal property to the mortgagee.

DISTINCTIONS BETWEEN CHATTEL MORTGAGE AND PLEDGE

CHATTEL MORTGAGE PLEDGE

DELIVERY OF THE PERSONAL
PROPERTY
REGISTRATION IN THE REGISTRY
OF PROPERTY
PROCEDURE FOR SALE
RIGHT TO EXCESS OF PROCEEDS
OF SALE
RIGHT TO RECOVER DEFICIENCY
Not necessary
Necessary for validity of the
chattel mortgage
against third persons
Governed by Section 14 of the
Chattel Mortgage Law
Excess goes to the
debtor/mortgagor
Creditor/mortgagee can recover
deficiency from the
debtor/mortgagor, except if
covered by Recto Law
Delivery is necessary for validity of
the pledge
Not necessary; public
document is enough to
bind third persons
Governed by Article 2112 of the
Civil Code
Excess goes to the
pledgee/creditor unless
otherwise stipulated
Creditor/pledgee is not entitled
to recover any deficiency after
the property is sold,
notwithstanding any contrary
stipulation

THE CHATTEL MORTGAGE LAW

Art. 2141. The provisions of this Code on pledge, insofar as they are not in conflict with the Chattel
Mortgage Law, shall be applicable to chattel mortgage.

How do you constitute a chattel mortgage?

To constitute a chattel mortgage, the parties must register the personal property mortgaged in the Chattel Mortgage
Register as security for the performance of an obligation. However, if the chattel mortgage is not registered, it is still
valid and binding as between the parties. The requirement of registration is not for validity but only for binding third
parties.

What is the effect of registration?

The registration of the chattel mortgage creates a real right or lien which follows the personal property wherever it
goes. Registration gives the mortgagee symbolic possession.

What is the form required for a chattel mortgage?

According to Sec. 5 of the Chattel Mortgage Law, the following form should be sufficient:

FORM OF CHATTEL MORTGAGE AND AFFIDAVIT

This mortgage made this Fifth day of October 2002 by Sheryl Tanquilut, a resident of municipality of
Taytay, Province of Rizal Philippines, mortgagor, to Anna del Castillo a resident of the municipality of Cainta,
Province of Rizal Philippines, mortgagee, witnesseth:

That the said mortgagor hereby conveys and mortgages to the said mortgagee all of the following-
described personal property situated in the municipality of Taytay Province of Rizal, and now in the
possession of said mortgagor, to wit:

A PAIR OF SKY BLUE NIKE PRESTO SNEAKERS, SIZE 3XS

This mortgage is given as security for the payment to the said Anna del Castillo, mortgagee, of the sum
of fifty pesos, with interest thereon at the rate of twenty-five per centum per annum due on 25 December 2002.

The conditions of this obligation are such that if the mortgagor, his heirs, executors, or administrators
shall well and truly perform the full obligation above stated according to the terms thereof, then this obligation
shall be null and void.
 Executed at the municipality of Taytay in the Province of Rizal this Fifth day of October 2002.

Sgd. Sheryl Tanquilut

In the presence of:

Sgd. Xilca Alvarez Sgd. Helen Arevalo

FORM OF OATH (affidavit of good faith)

[Tip: know the contents of an affidavit of good faith.]

We severally swear that the foregoing 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.

FORM OF CERTIFICATE OF OATH

In the Province of Rizal, personally appeared Sheryl Tanquilut, Xilca Alvarez, and Helen Arevalo, the
parties who signed the foregoing affidavit and made oath to the truth thereof before me.
Sgd. Bhoy-B Notary public
What happens if there is no affidavit of good faith?

The mortgage is still valid between the parties, but it will not bind third persons, such as creditors and subsequent
encumbrancers. If there is no affidavit of good faith, the mortgage will not be preferred as against these third persons.

Can you constitute a chattel mortgage to secure a future obligation or “a current obligation plus any and all obligations hereinafter
contracted by the mortgagor in favor of the mortgagee”?

No. You can only constitute a chattel mortgage to secure debts or obligations that are existing at the time the mortgage
is constituted. If it is constituted to secure an obligation that is not yet existent, it is void. The affidavit of good faith
executed by the mortgagor states that the mortgage is constituted to secure the obligation specified therein and for no other
purpose.

What the parties should do is to execute a new document/ deed of chattel mortgage to cover the newly
contracted obligation.

Can you mortgage future property?

Section 7 of the Chattel Mortgage Law provides that as a general rule, you cannot mortgage property that you do not
own at the time of the constitution of the mortgage. Therefore, you cannot mortgage future property.

But as an exception to this rule, the inventory of retail stores can be the subject of chattel mortgage, even if technically,
they may be acquired by the mortgagor after the mortgage is constituted. This is because the after-acquired property is
actually in renewal or in replenishment of goods on hand when the mortgage was executed. The SC came up with this
exception in order not to hamper the circulation of capital in the industry.

What happens when the mortgagor pays the obligation?

If the mortgagor pays the obligation, he gets a discharge from the mortgagee so that he can then cancel the lien
annotated on the title and in the Chattel Mortgage Registry.

What happens when the mortgagor defaults on the obligation?

1. Right of Redemption

In case of default, the following persons may redeem the property before it is sold, by paying the amount of the
obligation plus costs and expenses incurred from the breach:

a. the mortgagor
b. a subsequent mortgagee
c. a subsequent attaching creditor

If an attaching creditor redeems, he is subrogated to the rights of the mortgagor. He can foreclose the
mortgage.
But once the property is sold at auction, there can be no redemption anymore.
 2. Right of Mortgagee to Possession

If the creditor/mortgagee wants to foreclose upon default, he has the implied right to take the mortgaged
property. If the debtor/mortgagor refuses to surrender the property, the creditor should file an action for
replevin to take possession or for judicial foreclosure.

3. Foreclosure

The parties can stipulate for a private sale upon default.

If there is no stipulation, the applicable rule is Section 14 of the Chattel Mortgage Law.

According to Section 14, the creditor/mortgagee can cause the property to be sold at public auction thirty days
after default. This is a minimum grace period given to the mortgagor to redeem the property before it is sold at
auction. There is no maximum time period for holding the sale.

The procedure is the same as that for extra-judicial foreclosure of a real estate mortgage, except for the notice
requirements. In chattel mortgage, the only notice requirement is posting at two or more public places in the
municipality and personal notice to the mortgagor and junior mortgagees at least ten days before the date of
the sale (no publication).

The proceeds of the sale will be applied as follows:

a. Costs and expenses of the sale

b. Payment of the obligation secured by the mortgage
c. Claims of persons holding subsequent mortgages in their order; and
d. The balance, if any, shall be given to the mortgagor

Can the mortgagee recover any deficiency after the sale of the property?

Unlike in pledge, the creditor can still file an action for recovery of any deficiency in case the proceeds
of the sale do not satisfy the entire obligation, unless the situation is covered by the Recto Law.

PROBLEMS ON REAL AND CHATTEL MORTGAGE

Mortgagor mortgaged property worth 120K to secure a 100K loan. Mortgagor defaulted. Mortgagee foreclosed. The property was
sold to X for 70K. Should mortgagor redeem the property?

Yes, because he can sell it for more than 70K and realize more than the amount of the principal obligation.

But if, in the example above, the mortgagor has creditors running after him for debts worth 300K, should he redeem?

No, he should not redeem. If he redeems, he spends 70K in order to re-acquire property, which he may thereafter
lose again to his other creditors.

Borrower borrows P1M from Lender. Borrower executes a deed of assignment by way of security over the shares of stock in favor
of Lender in order to secure payment of the loan. It is stipulated that upon payment of the loan by Borrower, Lender will re-convey
the shares of stock to Borrower. What is this arrangement?

This can either be a PLEDGE or an IMPLIED TRUST.

It’s not really a pledge because there is an absolute conveyance of ownership by the supposed pledgor in favor of the
pledgee. But the Supreme Court has treated this in several cases as a pledge.

The implied trust theory is said to be better because there is a statutory basis. Art. 1454 of the Civil Code provides that if
an absolute conveyance of property is made in order to secure the performance of an obligation of the grantor toward the
grantee, a TRUST by virtue of law is established. If the fulfillment of the obligation is offered by the grantor when it
becomes due, he may demand the reconveyance of the property to him.

If it’s a trust, there is no need to foreclose (actually, there’s no right to foreclose).

What happens if there’s default? Art. 1454 does not cover this situation, which is probably why the Supreme Court has
characterized this type of transaction as a pledge instead. If there’s default, ownership will be consolidated in the
lender/trustee. But if the parties don’t want any problem, they should stipulate the precise effect of default.

Borrower borrows P10M from Lender. Borrower offers the following securities to Lender:
 (1) a GUARANTY by X who is worth P100M
(2) a PLEDGE of shares of stock worth P10M
(3) a REAL ESTATE MORTGAGE worth P15M Which one should

Lender choose?

It really depends on the circumstances, but here are the considerations:

1. If he chooses the pledge, it is easier to foreclose, and he can get the excess in case the shares of stock are
sold for more than P10M.

2. If he chooses the guaranty, it is good only if he is sure that the guarantor will pay. If the guarantor is any of
the following, persons, the guaranty would be a good choice:

a. the Government – because it is never insolvent

b. a Bank – in the form of a bank guaranty through a letter of credit
c. Insurance Company – though in some cases, it is also hard to collect from an insurance company
(also, take note that they would be governed, not by the Civil Code provisions on guaranty, but by
the Insurance Code).

But the disadvantage of choosing the guaranty is that the guarantor who is worth P100M can afford to hire
good lawyers who can stall the Lender’s claim.

3. In the case of the real estate mortgage, it depends on how easy it would be to dispose of the property. If it’s
property at a prime spot in Makati, this might be a good choice since it can probably be sold at a good price
right away. But if it’s located in the boondocks, the Lender may have a very difficult time selling it.

Borrower borrows P10M from Lender. The loan is secured by a guaranty by X, who is worth P100M, a real estate mortgage worth
P8M, and a pledge worth P8M. If Borrower defaults, what is the best way for Lender to proceed?

1. Foreclose the real estate mortgage first. Then get a deficiency judgment for the remaining P2M.

2. Then, foreclose the pledge because in pledge, he gets to keep the excess – resulting in an upside of P6M.

3. The Guarantor is not yet an option since he has the benefit of excussion. The Lender must first go through
steps 1 and 2 and other remedies before running after X.

Borrower borrows P10M from Lender. The loan is secured by a pledge worth P8M and a guaranty by X. How should the Lender
proceed in case of default by Borrower?

If Lender forecloses the pledge, he will have a deficiency of P2M, which he cannot collect anymore. On the other hand,
he cannot proceed against the guarantor without foreclosing the pledge first.

So what should he do? He should sue Borrower in his capacity as debtor, not as a pledgor, for collection of the debt.
Then, he should attach the property pledged. When judgment in his favor is rendered, he can then execute it against
the attached shares. The shares can be sold at an ordinary execution sale, not a foreclosure sale. In this way, the
shares will be taken out of the context of the pledge, and any deficiency in the sale can still be recovered by the
lender. After the execution of the judgment on the shares, the Lender can then go after the Guarantor for the
deficiency.
CASES:
BORLOUGH v FORTUNE

GIBERSON v JUREDINI

SUPERLINES v ICC
PETITIONERS: Superlines Transportation Company, Inc., And Manolet Lavides
RESPONDENT: ICC Leasing & Financing Corporation
DOCKET NO.: G.R. No. 150673
DATE OF PROMULGATION: February 28, 2003
PONENTE: Callejo, Sr., J.

FACTS:
 1995 - Superlines decided to acquire five new buses from the Diamond Motors Corporation for the price of ₱10,873,582.00.
 o Superlines lacked financial resources for the purpose.
o 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 through the latter’s Asst. VP-Ops Aida F. Albano, for a financial scheme for the planned purchase.
o 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.
o The new buses to be purchased were to be used by Superlines as security for the loan.
o 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.
 October 19, 1995 - Diamond Motors Corporation sold to Superlines five new buses under Vehicle Invoice Nos. 9225 to 9229.
o Superlines, through Lavides, acknowledged receipt of the buses.
 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.
o 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, 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.
 Superlines and Lavides executed a Continuing Guaranty to pay jointly and severally in favor of ICC.
 ICC drew and delivered to Superlines a Metrobank Check dated November 23, 1995, payable to the account of Superlines,
representing the net proceeds of the loan.
o The latter acknowledged receipt of the check.
o 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.
 April 2, 1997 - ICC wrote Superlines demanding full payment of its outstanding obligation, which as of March 31, 1997 but
Superlines failed to heed said demand.
 April 21, 1997 - ICC filed a complaint for collection of sum of money with prayer for a writ of replevin with Branch 142 of RTC
Makati against Superlines and Lavides.
 RTC issued a writ of seizure for the five mortgaged buses.
 May 29, 1997 - the sheriff took possession of the five buses in compliance with the writ of seizure issued by the trial court.
 Thereafter, ICC instituted extra-judicial foreclosure proceedings over the subject buses and an auction sale was held on July 2,
1997.
o 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.
 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.
o 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.
 Leonardo Serrano, Jr., the EVP and COO 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.
o 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.
 Lavides testified that he and ICC’s Asst. VP-Ops 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.
 June 1, 1999 – RTC rendered a decision ordering the dismissal of the case and for ICC to pay damages and litigation expenses
to Superlines and Lavides (consumer loan).
 July 30, 2001 – CA rendered a decision reversing the decision of the RTC and ordering Superlines and Lavides to pay the
deficiency claim of ICC (amortized commercial loan).

ISSUES:
1. Whether or not the transaction was an amortized commercial loan rather than a consumer loan.
2. Whether or not ICC is entitled to the deficiency from the auction sale.

HELD:
1. Amortized commercial loan
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. 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 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.
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 Corporation 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.
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.
2. Yes, ICC is entitled to the deficiency from the auction sale.
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. 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. 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.
In the case of PAMECA Wood Treatment Plant, Inc. vs. Court of Appeals, 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.
LUNA v ENCARNACION
PETITONER: Jose A. Luna
RESPONDENTS: Demetrio B. Encarnacion, Judge of First Instance of Rizal, Trinidad Reyes and The Provincial Sheriff of Rizal
DOCKET NO.: G.R. No. L-4637
DATE OF PROMULGATION: June 30, 1952
PONENTE: Bautista Angelo, J.

FACTS:
 September 25, 1948 - a deed designated as chattel mortgage was executed by Jose A. Luna in favor of Trinidad Reyes
conveying by way of first mortgage to the latter a certain house of mixed materials stated in San Nicolas, Pasig, Province of
Rizal, to secure the payment of a promissory note in the amount of P1,500, with interest at 12 per cent per annum.
 o The document was registered in the RD of Rizal
 Luna having filed to pay the promissory note when it fell due, Reyes requested the sheriff of said province to sell the house at
public auction so that with its proceeds the amount indebted may be paid notifying the mortgagor in writing of the time and place
of the sale as required by law.
o The sheriff acceded to the request and sold the property to the mortgagee for the amount covering the whole
indebtedness with interest and costs.
o The certificate of sale was issued by the sheriff on May 28, 1949.
 After the period for the redemption of the property had expired without the mortgagor having exercised his right to repurchase,
Reyes demanded from Luna to surrender of the possession of the property, but the later refused.
 October 13, 1950 - Reyes filed a petition in CFI Rizal praying that the provincial sheriff be authorized to place her in possession
of the property invoking in her favor the provisions of Act No. 3135, as amended by Act No. 4118.
 October 25, 1950 hearing - Jose A. Luna, the mortgagor, opposed the petition on the following grounds: (1) that Act No. 3135
as amended by Act No. 4118 is applicable only to a real estate mortgage; (2) that the mortgage involved herein is a chattel
mortgage; and (3) that even if the mortgage executed by the parties herein be considered as real estate mortgage, the extra-
judicial sale made by the sheriff of the property in question was valid because the mortgage does not contain an express
stipulation authorizing the extra-judicial sale of the property.
 CFI – Judge Encarnacion overruled the opposition of Luna and granted the petition ordering the provincial sheriff of Rizal, or
any of this disputives, to immediately place petitioner in possession of the property in question while at the same time directing
the mortgagor Jose A. Luna to vacate it and relinquish it in favor of petitioner.
 It is from this order that Jose A. Luna desires now to obtain relief by filing this petition for certiorari contending that the respondent
judge has acted in excess of his jurisdiction.

ISSUE: Whether or not the extra-judicial sale having been conducted under the provisions of Act No. 3135, as amended by Act No. 4118
is valid given that mortgage is one of a chattel mortgage.

HELD:
No but the sale itself is valid.
The first question which petitioner poses in his petition for certiorari is that which relates to the validity of the extra-judicial sale made by
the provincial sheriff of Rizal of the property in question in line with the request of the mortgagee Trinidad Reyes. It is contended that said
extra-judicial sale having been conducted under the provisions of Act No. 3135, as amended by Act No. 4118, is invalid because the
mortgage in question is not a real estate mortgage and, besides, it does not contain an express stipulation authorizing the mortgagee to
foreclose the mortgage extra-judicially.
There is merit in this claim. As may be gleaned from a perusal of the deed signed by the parties (Annex "C"), the understanding executed
by them is a chattel mortgage, as the parties have so expressly designated, and not a real estate mortgage, specially when it is considered
that the property given as security is a house of mixed materials which by its very nature is considered as personal property.
Such being the case, it is indeed a mistake for the mortgagee to consider this transaction in the light of Act No. 3135, as amended by Act
No. 4118, as was so considered by her when she requested to provincial sheriff to sell it extra-judicially in order to secure full satisfaction
of the indebtedness still owed her by the mortgagor. It is clear that Act No. 3135, as amended, only covers real estate mortgages
and is intended merely to regulate the extra-judicial sale of the property mortgaged if and when the mortgagee is given a special
power or express authority to do so in the deed itself, or in a document annexed thereto. These conditions do not here obtain. The
mortgage before us is not a real estate mortgage nor does it contain an express authority or power to sell the property extra-judicially.
But regardless of what we have heretofore stated, we find that the validity of the sale in question may be maintained, it appearing
that the mortgage in question is a chattel mortgage and as such it is covered and regulated by the Chattel Mortgage Law, Act
No. 1508. Section 14 of this Act allows the mortgagee 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.
In the supposition that the sale of the property made by the sheriff has been made in accordance with law, and the question he is
confronted is how to deliver the possession of the property to the purchaser in case of refusal to surrender its possession on the part of
the debtor or mortgagor, the remedy of the purchaser according to the authorities, is to bring an ordinary action for recovery of possession.
The purchaser cannot take possession of the property by force either directly or through the sheriff. And the reason for this is "that the
creditor's right of possession is conditioned upon the fact of default, and the existence of this fact may naturally be the subject of
controversy" The creditor cannot merely file a petition for a writ of possession as was done by Trinidad Reyes in this case. Her remedy
is to file an ordinary action for recovery of possession in ordered that the debtor may be given an opportunity to be heard not only in
regarding possession but also regarding the obligation covered by the mortgage. The petition she has filed in the lower court, which was
not even docketed, is therefore improper and should be regarded.
Wherefore, the order subject of the present petition for certiorari is hereby set aside, with costs against respondent Trinidad Reyes.
PNB v MANILA INVESTMENT
PETITIONER: Philippine National Bank
RESPONDENTS: Manila Investment & Construction, Inc. and Cipriano S. Allas
DOCKET NO.: G.R. No. L-27132
DATE OF PROMULGATION: April 29, 1971
PONENTE: Dizon, J.
FACTS:
 In Civil Case No. 33074 of the Court of First Instance of Manila, Branch XV entitled "Philippine National Bank vs. Manila
Investment & Construction, Inc., et al.," decision was rendered on December 26, 1957, its dispositive portion being partly as
follows:
IN VIEW WHEREOF, judgment is rendered condemning defendants, jointly and severally, to pay plaintiff:
(1) Under the first cause of action the sum of P88,939.48 with daily interest of P12,77385 plus 1/4% commission or P194.6689
for every 30 days or a fraction thereof, plus 10% on the principal as attorney's fees and the cost;
(2) On the second cause of action the sum of P356,913.01, plus P48,464 03 and 1/4% or P629.31 for every 30 days or
fraction thereof that the amount remain outstanding and unpaid plus 10% of the principal as attorney's fees, and the cost.
 In case of non-payment of the amounts adjudged, the decision also provided for the sale at public auction of the personal
properties covered by the chattel mortgage executed by the defendants in favor of the plaintiff Bank, and for the disposition of
the proceeds in accordance with law.
 After the decision had become executory, instead of having the mortgaged personal properties sold at public auction, the
parties agreed to have them sold, and were in fact sold, at a private sale. The net proceeds obtained therefrom amounting to
P256,941.70 were applied to the partial satisfaction of the above judgment.
 August 11, 1964 - more than five years but less than ten years from the date when the decision aforesaid became executory,
the Philippine National Bank filed in the same Court of First Instance of Manila an action to revive it.
 October 21, 1964 - the defendants filed their answer in which, after admitting some of the allegations of the complaint and
denying others, they interposed the following affirmative defenses.
 August 30, 1966 - after the parties had submitted their respective memorandum, the court rendered on the appealed decision
whose dispositive portion reads as follows:
WHEREFORE, the Court renders judgment ordering the defendants to pay the plaintiff, jointly and severally, the amount of
THREE HUNDRED EIGHTY TWO THOUSAND THREE HUNDRED THIRTY EIGHT AND 47/100 (P382,338.47) PESOS,
with interest at the legal rate from August 12, 1964 until fully paid. Costs against the defendants.
 The defendants appealed to secure a reversal of the above decision claiming firstly, that the action instituted below is not the
proper remedy; secondly, that the private sale of the mortgaged personal properties was null and void, and lastly, that the
appellee is not entitled to a deficiency judgment.

ISSUE:
1. Whether or not the private sale of the mortgage property is null and void.
2. Whether or not PNB is entitled to deficiency from the private sale.

HELD:
1. NO, private sale is valid.
It is true that the decision rendered in Civil Case 33074 of the Court of First Instance of Manila provided for the sale at public auction of
the personal properties covered by the chattel mortgage executed in favor of the Bank, but it is likewise true that said personal properties
were sold at a private sale by agreement between the parties. Besides, we see nothing illegal, immoral or against public order in such
agreement entered into freely and voluntarily.
In line with the provisions of the substantive law giving the contracting parties full freedom to contract provided their agreement is not
contrary to law, morals, good customs, public order or public policy (Article 1306, Civil Code of the Philippines), We held in Philippine
National Bank vs. De Poli thus:
Under article 1255 of the Civil Code (Art. 1306 New Civil Code), the contracting parties may stipulate that in case of violation
of the conditions of the mortgage contract, the creditor may sell, at private sale and without previous advertisement or
notice, the whole or part of the good mortgaged for the purpose of applying the proceeds thereof on the payment of the
debt. Said stipulation is not contrary to law or public order, and therefore it is valid.
As the disposition of the mortgaged personalities in a private sale was by agreement between the parties, it is clear that appellants are
now in estoppel to question it except on the ground of fraud or duress — pleas that they do not invoke. They do not even claim that
the private sale agreed upon had caused them substantial prejudice.
2. YES, PNB is entitled to deficiency.
Lastly, it is appellants' contention that the appellee Bank is not entitled to a deficiency judgment, invoking the provisions of Article 2115
of the new Civil Code. The issue thus raised was already resolved in the negative in Ablaza vs. Ignacio, G.R. No. L-11466, promulgated
on March 23, 1958 where We said, inter alia, the following:
We are of the opinion that the trial court is in error. It is clear from Article 2141 that the provisions of the New Civil Code on pledge
shall apply to a chattel Mortgage only in so far as they are not counter to any provision of the Chattel Mortgage Law, otherwise
the provisions of the latter will not apply. Here we find that the provisions of the Chattel Mortgage with regard to the effects of the
foreclosure of a chattel mortgage are precisely contrary to the provisions of Article 2115 which were applied by the trial Court.
xxx xxx xxx
Mr. Justice Kent, in the 12th Edition of his Commentaries, as well as other authors in 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. (Manila Trading and Supply Co., vs. Tamaraw Plantation Co., 47 Phil. 513; Emphasis
supplied.)
It is clear, therefore, that the proceeds of the sale of the mortgaged personal properties of the herein appellants constitute only a pro
tanto satisfaction of the monetary award made by the court and the appellee Bank is entitled to collect the balance.
WHEREFORE, the decision appealed from is hereby affirmed, with costs.
PAMECA v CA
PETITIONERS: Pameca Wood Treatment Plant, Inc., Herminio G. Teves, Victoria V. Teves and Hiram Diday R. Pulido
RESPONDENTS: Hon. Court Of Appeals and Development Bank of the Philippines
DOCKET NO.: G.R. No. 106435
DATE OF PROMULGATION: July 14, 1999
PONENTE: Gonzaga-Reyes, J.

SYNOPSIS
This is a review on certiorari of a judgment of the Court of Appeals affirming in toto the decision of the Regional Trial Court of Makati
to award respondent banks deficiency claim, arising from a loan secured by a chattel mortgage.
The Court denied the petition. It held that 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 to petitioners’ contention that the public auction sale is void on ground of fraud and inadequacy of price, the Court ruled that
parties may not bring on appeal issues that were not raised on trial. 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. Moreover, fraud is a serious allegation that requires full and
convincing evidence and may not be inferred from the lone circumstance that it was only respondent bank that bid in the sale of the
foreclosed properties.

FACTS:
 April 17, 1980 - PAMECA obtained a loan of US$267,881.67, or the equivalent of P2,000,000.00 from DBP.
o PAMECA, through its President, petitioner Herminio C. Teves, executed a promissory note for the said amount,
promising to pay the loan by installment.
o 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.
 January 18, 1984 - and upon PAMECA's failure to pay, DBP extrajudicially foreclosed the chattel mortgage, and, as sole bidder
in the public auction, purchased the foreclosed properties for a sum of P322,350.00.
 June 29, 1984 - DBP filed a complaint for the collection of the balance of P4,366,332.46 with Branch 132of RTC Makati against
PAMECA and private petitioners herein, as solidary debtors with PAMECA under the promissory note.
 February 8, 1990 - the RTC of Makati rendered a decision on the case in favor of DBP.
 Court of Appeals affirmed the RTC decision.
o Disregarded documents (inventory dated March 1980) for failure to present them in evidence, or allude to them before
the LC and said that it is not unlikely that the chattels deteriorated as thereby fetching a low price at the auction sale.
o Did not find anything fraudulent in the circumstance that DBP was the sole bidder, as all legal procedures for the
conduct of a foreclosure sale were complied with, thus giving rise to the presumption of regularity in the performance
of public duties.
 Petition in SC, PAMECA argues:
o Public auction sale was tainted with fraud. Claims the chattels were bought by DBP as sole bidder in only 1/6 of the
market value, hence unconscionable and inequitable, and so it is null and void. (claims the market value was for more
than P2mil) --- evidenced from an inventory dated March 1980 (valued at around P2.5mil), in accordance with the terms
of the chattel mortgage contract that required that the inventories "be maintained at a level no less than P2 mil".
o NCC 1484 and 2115 should be applied by analogy reading the spirit of the law, and taking into consideration that the
contract of loan was a contract of adhesion
o Teves, Teves, and Pulido were not solidarily liable with PAMECA because the intention was that the loan is only for
the Corporation’s benefit

ISSUES:
1. Can an action be instituted for deficiency of a debt after foreclosure of the chattel mortgage? – YES
2. Whether or not NCC 1484 and 2115 should be applied by analogy (PAMECA invokes the equity jurisdiction of the SC to preclude
the recovery of the deficiency) – NO
3. Whether or not public auction was tainted with fraud – NO
4. Whether or not Teves, Teves, Pulido are solidarily liable with PAMECA – YES

HELD:
1. Article 2115 in relation to the Chattel Mortgage Law - INCONSISTENT
 Ablaza vs. Ignacio:
o Lower court dismissed the complaint for collection of deficiency in view of Article 2141, 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 LC’s opinion that, by virtue of Article 2141, the provisions of Article 2115 (which deny
the creditor-pledgee the right to recover deficiency in case the proceeds of the foreclosure sale are less than the amount
of the principal obligation) will apply
o SC reversed LC 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, 2115, in relation to 2141, may NOT be applied.
 It is clear from Sec. 14 of the Chattel Mortgage Law that the effects of foreclosure run inconsistent with those of pledge under
Article 2115.
 o 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.
o Sec. 14 of the Chattel Mortgage Law expressly ENTITLES the mortgagor (debtor) 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.
o Manila Trading v. Tamaraw Plantation cited in Ablaza v. Ignacio:
 Sec. 3 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."
The LC overlooked that the chattels included in the mortgage are only given as security and not as a payment
of the debt, in case of a failure.
 Theory of the lower court would lead to the absurdity that if the chattels given as security should sell for more
than the indebtedness, that the creditor would be entitled to the full amount for which it was sold, even though
that amount was greatly in excess of the indebtedness.
 Such a result was not contemplated by the legislature when it adopted the law.
 The value of the chattels changes greatly from time to time, and sometimes very rapidly. If for example, the
chattels should 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 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 that the law permits a private sale, such sale is not 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, always requiring
good faith, is only a payment, and an action may be maintained for a deficiency in the debt.

 NCC 1484 applies solely to the sale of personal property the price of which is payable in installments.
o Although Article 1484, par (3) bars any action against the purchaser to recover an unpaid balance of the price, where
the seller opts to foreclose the chattel mortgage, should the buyer’s failure to pay cover 2 or more installments, this
provision is specifically applicable to a sale on installments.
o To accommodate PAMECA’s 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.
o Equity, "justice outside legality", is applied only in the absence of, and never against, statutory law or judicial rules of
procedure.

2. Supreme Court was unable to find merit that the public auction sale is void on grounds of fraud and inadequacy of price.
o PAMECA never assailed the validity of the sale in the RTC, only in the CA. Basic is the rule that parties may not bring
on appeal issues that were not raised on trial.
o In any case, inventory and chattel mortgage document do not prove that the mortgaged properties had a market value
of at least P2,000,000 on January 1984, the date of the foreclosure sale. At best, the chattel mortgage contract only
indicates the obligation of the mortgagor-debtor to maintain the inventory at a value of at least P2,000,000.
o The inventory was as of March 1980, or even prior to April 1980, the date of the contracts of loan and chattel mortgage.
It is far from being an accurate estimate of the market value of the properties.
 The mere fact that DBP was the sole bidder does not warrant the conclusion that the transaction was attended with fraud.
o Fraud is a serious allegation that requires full and convincing evidence, and may not be inferred from the lone
circumstance that it was only DBP that bid. The sparseness of evidence leaves the SC no discretion but to uphold the
presumption of regularity in the conduct of the public sale.

3. Affirm the Teveses’ liability with Pameco in the loan.

 As found by the RTC and CA, the terms of the promissory note unmistakably set forth the solidary nature of the Teveses’
commitment:
o “we hereby bind ourselves, jointly and severally, to make partial payments as follows”
o “in case of default in the payment of any installment above, we bind ourselves to pay DBP for advances”
o “bind ourselves to pay additional interest and penalty charges on loan amortizations or portion thereof in arrears as
follows”
o “bind ourselves to pay for bank advances for insurance premiums, taxes”
o “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”
o “jointly and severally bind ourselves to pay for attorney's fees as provided for in the mortgage contract”
o Promissory note was signed: “PAMECA by: (followed by the) sgd. Teveses and Pulido”
 Clear that Teveses intended to bind themselves solidarily with PAMECA in the loan.
 They are not made to answer for the corporate act of PAMECA, but are made liable because they made themselves comakers
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.