Credit Transactions.notes

CREDIT TRANSACTIONS PLEDGE Pledge is a contract by virtue of which the debtor delivers to the creditor or to a third person a movable (Article 2094) or document evidencing incorporeal rights (Article 2095) for the purpose of securing the fulfillment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions. KINDS OF PLEDGE: 1. Voluntary or conventional- created by agreement of the parties 2. Legal- created by operation of law Characteristics 1. A real contract because it is perfected by the delivery of the thing pledged by the debtor who is called the pledgor to the creditor who is the pledge, or to a third person by common agreement; 2. An accessory contract because it has no independent existence of its own; 3. A unilateral contract because it creates an obligation solely on the part of the creditor to return the thing subject thereof upon the fulfillment of the principal obligation; 4. A subsidiary contract because the obligation incurred does not arise until the fulfillment of the principal obligation to which it is secured. CAUSE OR CONSIDERATION 1) Principal obligation – In so far as the pledgor is concerned. 2) Compensation stipulated for the pledge or mere liberality of the pledgor – If pledgor is not the debtor. PLEDGE Constituted on movables. Property is delivered to the pledgee, or by common consent to a 3rd person. Not valid against 3rd persons unless a description of the thing pledged and the date of the pledge appear in a public instrument.

MORTGAGE Constituted on immovables. Delivery not necessary. Not valid registered.

against

3rd

persons

PROVISIONS COMMON TO PLEDGE AND MORTGAGE (Art 2085-2123) ESSENTIAL REQUISITES TO CONTRACTS OF PLEDGE AND MORTGAGE: 1. constituted to secure the fulfillment of a principal obligation 2. pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged.

if

not

3. the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose 4. cannot exist without a valid obligation. Nevertheless, they may guarantee a voidable or an unenforceable obligation. It may also guarantee a natural obligation. 5. debtor retains the ownership of the thing given as a security and thus debtor-owner bears the risk of loss of the property. 6. when the principal obligation becomes due, the thing in which the pledge or mortgage consists may be alienated for the payment to the creditor. 7. The contract of pledge or mortgage may secure all kinds of obligations, be they pure or subject to a suspensive or resolutory condition. Common Provisions Governing Pledge or Mortgage 1. Contract may be constituted only by the absolute owner of the thing pledged or mortgaged otherwise, the pledge or mortgage is void, such as that constituted by an impostor. (see De Lara vs. Ayroso, 95 Phil. 185 [1954]; Parqui vs. Philippine National Bank, 96 Phil. 157 [1954]) 2. A mortgage of conjugal property by one of the spouses is valid only as to one-half (1/2) of the entire property. (Philippine National Bank vs. Court of Appeals, 98 SCRA 207 [1960]). 3. While it is true that under Article 2085 it is essential that the mortgagor be the absolute owner of the property mortgaged, a mortgagee has the right to rely upon what appears in the certificate of title and does not have to inquire further. Stated differently, an innocent purchaser for value (like a mortgagee) relying on a torrens title issued is protected. (Duran vs. Intermediate Appellate Court, 138 SCRA 491 [19685]) 4. A stipulation whereby the thing pledged or mortgaged or under antichresis (Article 2137) shall automatically become the property of the creditor in the event of nonpayment of the debt within the term fixed is known as pactum commisorium or pacto commissorio which is forbidden by law and declared null and void (article 2088) PROHIBITION AGAINST PACTUM COMMISSORIUM 1. Stipulation is null and void: Stipulation where thing or mortgaged shall automatically become the property of the creditor in the event of nonpayment of the debt within the term fixed. 2. Requisites of pactum commissorium: a) There should be a pledge or mortgage. b) There should be a stipulation for an automatic appropriation by the creditor of the property in the event of nonpayment. 3. Effect on security contract: Nullity of the stipulation does not affect validity and efficacy of the principal contract.

Cases: Hechanova v. Adil, 1986 No valid mortgage has been constituted in plaintiff's favor, the alleged deed of mortgage being a mere private document and not registered; moreover, it contains a stipulation (pacto comisorio) which is null and void under Article 2088 of Civil Code. Even assuming that the property was validly mortgaged to the plaintiff, his recourse was to foreclose the mortgage, not to seek annulment of the sale. Sps. Uy Tong v. CA, 1988 Article 2088, Civil Code furnishes the two elements for pactum commissorium to exist: (1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation; and (2) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the principal obligation within the stipulated period. In the case at bar, there is no indication of any contract of mortgage entered into by the parties. It is a fact that the parties agreed on the sale and purchase of trucks. Further, there was no automatic vesting of title because it took the intervention of the trial court to exact fulfillment of the obligation, which, by its very nature is ".. anathema to the concept of pacto commissorio".

Indivisibility of Mortgage and Pledge Pledge or mortgage is indivisible. Every portion of the property pledged or mortgaged is answerable for the whole obligations. All the things pledged or mortgaged are liable for the totality of the debt and debtor or his heirs cannot ask for the proportionate extinction of the pledge or mortgage. Indivisibility is not the same as solidarity. The former refers to the object or prestation of the obligation while the latter, to the legal tie of the obligation. Exceptions: a) Where each of several things guarantees a determinate portion of the credit. b) Where only a portion of loan was released. c) Where there was failure of consideration. Notes:  

1

Rule that real property, consisting of several lots should be sold separately, applies to sales in execution, and not to foreclosure of mortgages. The mere embodiment of a real estate mortgage and a chattel mortgage in one document does not have the effect of fusing both securities into an indivisible whole1

CENTRAL BANK vs. CA: The consideration of the accessory contract of real estate mortgage is the same as that of the principal contract. For the debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in the accessory contract of real estate mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid, voidable, or unenforceable debt (Art. 2086, in relation to Art. 2052, of the Civil Code). It is not necessary that any consideration should pass at the time of the execution of the contract of real mortgage. It may either be a prior or subsequent matter. But when the consideration is subsequent to the mortgage, the mortgage can take effect only when the debt secured by it is created as a binding contract to pay. And, when there is partial failure of consideration, the mortgage becomes unenforceable to the extent of such failure. Where the

Cases: Dayrit v. CA, While it is true that the obligation is merely joint and each of the defendants is obliged to pay only his/her 1/3 share of the joint obligation, the undisputed fact remains that the intent and purpose of the Loan and Mortgage Agreement was to secure, inter alia, the entire loan of P150,000 that the respondent Mobil extended to the defendants. A mortgage directly and immediately subjects the property upon which it is imposed, the same being indivisible even though the debt may be divided, and such indivisibility likewise being unaffected by the fact that the debtors are not solidarily liable. "When several things are pledged or mortgaged, each thing for a determinate portion of the debt, the pledges or mortgages are considered separate from each other. But when the several things are given to secure the same debt in its entirety, all of them are liable for the debt, and the creditor does not have to divide his action by distributing the debt among the various things pledged or mortgaged. Even when only a part of the debt remains unpaid, all the things are still liable for such balance. Hence, a mortgage voluntarily constituted by the debtor on two or more parcels of land is one and indivisible, and the mortgagee has the right to have either or both parcels, jointly or singly, sold to satisfy his claim. In case the mortgaged properties are a house and lot, it cannot be claimed that the lot and the house should be sold separately and not together." Central Bank of the Philippines v. CA, 1985 The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is inapplicable to the facts of this case. Since Island Savings Bank failed to furnish the P63,000.00 balance of the P80,000.00 loan, the real estate mortgage of Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt.

Personal Action; Criminal Liability sets in only in case of Fraud/Misrepresentation  

A promise to constitute a pledge or mortgage, if accepted, gives rise only to a personal right binding upon the parties and creates no real right on the property. Estafa is committed by a person who, pretending to be the owner of any real property, shall convey, sell, encumber or mortgage the same or knowing that the real property is encumbered shall dispose of the same as unencumbered.

Provisions Applicable only to Pledge indebtedness actually owing to the holder of the mortgage is less than the sum named in the mortgage, the mortgage cannot be enforced for more than the actual sum due. The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of indivisibility of a mortgage cannot apply;



The pledgor retains his ownership of the thing pledged. He may, therefore, sell the same provided the pledgee consents to the sale. As soon as the pledgee gives his consent, the ownership of the thing pledged is transferred to the vendee subject to the rights of the pledgee, namely, that the thing sold may be alienated to satisfy the obligation (Article 2112) and that the pledgee must continue in possession during the existence of the pledge. (Article 2093, 2098).

Object of Pledge:  

All movables within the commerce of man may be pledged as long as they are susceptible of possession. Incorporeal rights may be pledged. The instruments representing the pledged rights shall be delivered to the creditor; if they be negotiable instruments, they must be indorsed.

Cases: Vda. De Bautista v. Marcos, 1961  As it is an essential requisite for the validity of a mortgage that the mortgagor be the absolute owner of the thing mortgaged (Art. 2085, N.C.C.), and it appearing that the mortgage was constituted before the issuance of the patent to the mortgagor, the mortgage in question is void and ineffective.  The invalidity of the mortgage contract does not imply the concomitant invalidity of the collateral agreement whereby possession of the land mortgaged was transferred to the mortgagee in usufruct, and the latter, not having been aware of any flaw in her mode of acquisition, is a possessor in good faith (Art. 526, N.C.C.) entitled to all the fruits received during the entire period of her possession in good faith (Art. 544, N.C.C.). DBP v. CA, 1996  With regard to the validity of the mortgage contracts entered into by the parties, Art. 2085, par. 2, of the New Civil Code specifically requires that the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged. Thus, since the disputed property was not owned by the Olidiana spouses (considering that it was still the subject of a Free Patent Application and no patent was granted to the Olidiana spouses and thus it remains to part of the public domain) when they mortgaged it to petitioner the contracts of mortgage and all their subsequent legal consequences as regards Lot No. 2029 (Pls-61) are null and void. In a much earlier case we held that it was an essential requisite for the validity of a mortgage that the mortgagor be the absolute owner of the property mortgaged, and it appearing that the mortgage was constituted before the issuance of the patent to the mortgagor, the mortgage in question must of necessity be void and ineffective. For, the law explicitly requires as imperative for the validity of a mortgage that the mortgagor be the absolute owner of what is mortgaged. Cavite Development Bank v. Sps. Lim, 2000  In this case, the sale by CDB to Lim of the property mortgaged in 1983 by Rodolgo Guansing must, therefore, be deemed a nullity for CDB did not have a valid title to the said property. To be sure, CDB never acquired a valid title to the property because the

foreclosure sale, by virtue of which the property had awarded to CDB as highest bidder, is likewise void since the mortgagor was not the owner of the property foreclosed.  A foreclosure sale, though essentially a "forced sale," is still a sale in accordance with Art. 1458 of the Civil Code, under which the mortgagor in default, the forced seller, becomes obliged to transfer the ownership of the thing sold to the highest bidder who, in turn, is obliged to pay therefor the bid price in money or its equivalent. Being a sale, the rule that the seller must be the owner of the thing sold also applies in a foreclosure sale. This is the reason Art. 2085 of the Civil Code, in providing for the essential requisites of the contract of mortgage and pledge, requires, among other things, that the mortgagor or pledgor be the absolute owner of the thing pledged or mortgaged, in anticipation of a possible foreclosure sale should the mortgagor default in the payment of the loan.  There is a situation where, despite the fact that the mortgagor is not the owner of the mortgaged property, his title being fraudulent, the mortgage contract and any foreclosure sale arising therefrom are given effect by reason of public policy. This is the doctrine of "the mortgagee in good faith" based on the rule that all persons dealing with property covered by a Torrens Certificate of Title, as buyers or mortgagees, are not required to go beyond what appears on the face of the title. The public interest in upholding the indefeasibility of a certificate of title, as evidence of the lawful ownership of the land or of any encumbrance thereon, protects a buyer or mortgagee who, in good faith, relied upon what appears on the face of the certificate of title.  Under the circumstances of the case, CDB cannot be considered a mortgagee in good faith. While petitioners are not expected to conduct an exhaustive investigation on the history of the mortgagor's title, they cannot be excused from the duty of exercising the due diligence required of banking institutions. In Tomas v. Tomas, we noted that it is standard practice for banks, before approving a loan, to send representatives to the premises of the land offered as collateral and to investigate who are the real owners thereof, noting that banks are expected to exercise more care and prudence than private individuals in their dealings, even those involving registered lands, for their business is affected with public interest. In this case, there is no evidence that CDB observed its duty of diligence in ascertaining the validity of Rodolfo Guansing's title. It appears that Rodolfo Guansing obtained his fraudulent title by executing an Extra-Judicial Settlement of the Estate With Waiver where he made it appear that he and Perfecto Guansing were the only surviving heirs entitled to the property, and that Perfecto had waived all his rights thereto. This selfexecuted deed should have placed CDB on guard against any possible defect in or question as to the mortgagor's title. Moreover, the alleged ocular inspection report by CDB's representative was never formally offered in evidence. Indeed, petitioners admit that they are aware that the subject land was being occupied by persons other than Rodolfo Guansing and that said persons, who are the heirs of Perfecto Guansing, contest the title of Rodolfo. Duran v. IAC, 1985 In the case at bar, private respondents, in good faith relied on the certificate of title in the name of Fe S. Duran and as aptly stated by respondent appellate court "[e]ven on the supposition that the sale was void, the general rule that the direct result of a previous illegal contract cannot be valid (on the theory that the spring cannot rise higher than its source) cannot apply here for We are confronted with the functionings of the Torrens System of Registration. The doctrine to follow is simple enough: a fraudulent or forged document of sale may become the ROOT of a valid title if the certificate of title has already been transferred from the name of the true owner to the name of the forger or the name indicated by the forger.

Thus, where innocent third persons relying on the correctness of the certificate of title issued, acquire rights over the property, the court cannot disregard such rights and order the total cancellation of the certificate for that would impair public confidence in the certificate of title; otherwise everyone dealing with property registered under the torrens system would have to inquire in every instance as to whether the title had been regularly or irregularly issued by the court. Indeed, this is contrary to the evident purpose of the law. Every person dealing with registered land may safely rely on the correctness of the certificate of title issued therefor and the law will in no way oblige him to go behind the certificate to determine the condition of the property. Stated differently, an innocent purchaser for value relying on a torrens title issued is protected. A mortgagee has the right to rely on what appears in the certificate of title and, in the absence of anything to excite suspicion, he is under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on the face of said certificate.

Additional Requisites for Pledge  Pledge shall take effect against 3rd persons only if the following appear in a public instrument: a) Description of the thing pledged. b) Date of the pledge.  Transfer of possession to the creditor or to third person by common agreement is essential in pledge. o Actual delivery is important. o Constructive or symbolic delivery of the key to the warehouse is sufficient to show that the depositary appointed by common consent of the parties was legally placed in possession. Alienation by Owner of Pledge Thing Allowed Subject to Pledge The thing pledged may be alienated by the pledgor or owner only with the consent of the pledgee. Ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledge consents to the alienation, but the latter shall continue to have possession.

Northern Motors, Inc. v. Coquia, 1975  The contention that an unsecured judgment creditor's only recourse is to levy upon the mortgaged chattels in possession of the judgment debtor, while the unpaid seller and mortgagee has still an independent legal remedy against the mortgagor for recovery of the unpaid balance of the price, is not a justification for setting aside the holding that the said judgment creditor has no right to levy upon the mortgaged chattels and that he could levy only upon the mortgagor's equity of redemption.  The essence of the chattel mortgage is that the mortgaged chattels should answer for the mortgage credit and not for the judgment credit of the mortgagor's unsecured creditor. The mortgagee is not obligated to file an "independent action" for the enforcement of his credit. To require him to do so would be a nullification of his lien and would defeat the purpose of the chattel mortgage which is to give him preference over the mortgaged chattels for the satisfaction of his credit. (See Art. 1087, Civil Code)

 The breach by the chattel mortgagor of his obligation affects said mortgagor's unsecured judgment creditor, although the latter is not privy to the chattel mortgage contract. The registration of the chattel mortgage is an effective and binding notice to the unsecured judgment creditor. The mortgage creates a real right (derecho real, jus in re or jus ad rem) or a lien which, being recorded, follows the chattel wherever it goes.  The proposition that levy made by the chattel mortgagor's unsecured judgment creditor against the former should prevail over the chattel mortgage credit is devoid of any legal sanction and is glaringly contrary to nature of a chattel mortgage. To uphold that contention is to destroy the essence of a chattel mortgage as a paramount encumbrance on the mortgaged chattel.  The third-party claim filed by the unpaid seller and mortgagee should alert the purchasers of the chattels at the execution sale to the risk which they are taking when take part in the auction sale. They should realize that at an execution sale the buyers acquired only the right of the judgment debtor, which in the case of mortgaged chattels is the mere right of equity of redemption and that the sale does not extinguish the preexisting mortgage lien.  The argument of the judgment creditor that the installments already paid to the mortgagee by the judgment debtor on the chattels (levied on execution by the judgment creditor) should be deducted from the execution sale of said mortgaged chattels, is a point which the judgment creditor does not directly affect him. That matter should be raised by the judgment debtor in a replevin case filed by the chattel mortgagee against the former.  The mortgagee is entitled to the possession of the chattel mortgage, and the execution of the mortgaged chattels by the mortgagor's judgment creditor is not justified. Where the mortgaged chattels have been levied upon and sold at public auction to satisfy the judgment credit, which is inferior to the chattel mortgage, and the chattels could no longer be recovered because they had been transferred to persons whose addresses are unknown, the proceeds of the execution sale may be regarded as a partial substitute for the unrecoverable chattels, and the mortgagee is entitled to the entire proceeds without deduction of the expenses of execution. Right of Pledgee to Retain Pledged Thing until Payment of Debt 

The possession of the pledgee constitutes his security. Hence, the debtor cannot demand for its return until the debt secured by it is paid. (See Article 2105; Serrano vs. Court of Appeals, 196 SCRA 107 [1991]) But the right of retention is limited only to the fulfillment of the principal obligation for which the pledge was created. (Article 2098).

RIGHTS AND DUTIES OF CREDITOR IN A PLEDGE 1) Shall take care of the thing pledged with the diligence of a good father of a family. 2) Has right to reimbursement of the expenses made for preserving the thing. Shall be liable for loss or deterioration of the thing by reason of fraud, negligence, delay or violation of the terms of the contract, but not for fortuitous events. 3) May bring actions pertaining to the owner of the thing in order to recover it from, or defend it against, a 3rd person. 4) Cannot use the thing without the authority of the owner. If he uses the thing without authority, or if he misuses the thing when he was authorized to use it, the owner may ask that it be judicially or extrajudicially deposited. 5) May use the thing if necessary for its preservation. 6) May either claim another thing in pledge or demand immediate payment of the principal obligation if he is deceived on the substance or quality of the thing.

RIGHTS AND DUTIES OF THE PLEDGEE 1) Cannot deposit the thing pledged with a 3rd person, unless there is a contrary stipulation2  Exception: stipulation authorizing pledgee to transfer possession. 2) Is responsible for the acts of his agents or employees with respect to the thing pledged. 3) Has no right to use the thing or to appropriate its fruits without authority from the owner3 4) May cause the public sale of the thing pledged if, without fault on his part, there is danger of destruction, impairment or dimunition in value of the thing. The proceeds of the auction shall be a security for the principal obligation. PLEDGOR 1) Takes responsibility for the flaws of the thing pledged. 2) Cannot ask for the return of the thing against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in proper cases. 3) Is allowed to substitute the thing which is in danger of destruction or impairment without any fault on the part of the pledgee, with another thing of the same kind and quality. 4) May require that the thing be deposited with a 3rd person, if through the negligence or willful act of the pledgee the thing is in danger of being lost or impaired. EXTINGUISHMENT OF A PLEDGE 1) Ways to extinguish a pledge: a) Payment of the debt. b) Sale of the thing pledged at public auction. c) Thing pledged is returned by the pledgee to the pledgor or owner. d) Written statement by the pledgee that he renounces or abandons the pledge. For this purpose, neither the acceptance by the pledgor or owner nor the return of the thing pledged is necessary, and the pledgee becomes a depositary. 2) Presumptions4: a) If, subsequent to the perfection of the pledge, the thing is found in the possession of the pledgor or owner, there is prima facie presumption that the thing has been returned by the pledgee. b) If the thing is in the possession of a 3rd person who received it from the pledgor or owner after the constitution of the pledge, there is prima facie presumption that the thing has been returned by the pledgee. 2

YULIONGSIU vs. PNB: There is authority supporting the proposition that the pledgee can temporarily entrust me physical possession of the chattels pledged to the pledgor without invalidating the pledge. In such a case, the pledgor is regarded as holding the pledged property merely as trustee for the pledgee. The type of delivery will depend upon the nature and the peculiar circumstances of each case. 3 PNB vs. ATENDIDO: according to law, a pledgee cannot become the owner of, nor appropriate to himself, the thing given in pledge. If by the contract of pledge the pledgor continues to be the owner of the thing pledged during the pendency of the obligation, it stands to reason that in case of loss of the property, the loss should be borne by the pledgor. 4 MANILA BANKING v TEODORO: In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and interests (as earlier established in Lopez v. Court of Appeals)

REQUIREMENTS IN SALE OF THE THING PLEDGED BY A CREDITOR, IF CREDIT IS NOT PAID ON TIME 1) 2) 3) 4)

Debt is due and unpaid. Sale must be at a public auction. Notice to the pledgor and owner, stating the amount due. Sale must be made with the intervention of a notary public.

EFFECT OF THE SALE OF THE THING PLEDGED 1) Extinguishes the principal obligation, whether the price of the sale is more or less than the amount due. 2) if the price is more than amount due, the debtor is not entitled to the excess unless the contrary is provided. 3) If the price of the sale is less, neither is the creditor entitled to recover the deficiency. A contrary stipulation is void.

Manila Surety and Fidelity Co., Inc. v. Velayo, 1967  The accessory character is of the essence of pledge and mortgage. Under Art. 2085 of the Civil Code of 1950, an essential requisite of these contracts is that they be constituted to secure the fulfillment of a principal obligation.  Where the pieces of jewelry were delivered to a surety company "as collateral security and by way of pledge" in a contract of guaranty, and sold at a lower price than the amount of surety, the principal obligation was extinguished and the guarantor cannot recover the deficiency, because Art. 2115 of the Civil Code, in its last portion, clearly establishes that the extinction of the principal obligation supervenes by operation of imperative law that the parties cannot override: "If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary." The effect of this provision cannot be evaded. By electing to sell the articles pledged, instead of suing on the principal obligation, the creditor has waived any other remedy, and must abide by the results of the sale.

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Pledgee has the obligation to take care of the thing pledged with the diligence of a good father of the family. He is entitled to reimbursement of the expenses incurred for its preservation and he is liable for loss or deterioration by reason of fraud, negligence, delay or violation of the terms of the contract. (Articles 1174, 1170). Pledgee is not authorized to transfer possession of the thing pledged to a third person. o Exception: stipulation authorizing pledgee to transfer possession. (Article 2100) The pledgee has no right to use the thing pledged or to appropriate the fruits thereof without the authority of the owner (Article 2104; see Article 1977). But the pledgee can apply the fruits, income, dividends, or interest, if owing and thereafter to the principal of his credit. (see Article 2132).

o

Exception: contrary stipulation

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The pledgor may ask that the thing pledged be deposited judicially or extrajudicially. o if the creditor uses the thing without authority; o if he misuses the thing in any other way (Article 2104); o if the thing is in danger of being lost or impaired because of the negligence or willful act of the pledge.

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Pledgor cannot ask for the return of the thing pledged until said obligation is fully paid including interest due thereon and expenses incurred for its preservation (Article 2099). o Exception: Pledgor is allowed to substitute the thing pledged which is in danger of destruction or impairment with another thing of the same kind and quality (Article 2107).

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The possession of the thing pledged by the debtor or owner subsequent to the perfection of the pledge gives rise to a prima facie presumption that the thing has been returned and, therefore, that the pledge has been extinguished. When the thing pledged is later found in the hands of the pledgor or the owner, only the accessory obligation of pledge is presumed remitted, not the principal obligation itself (Article 1274). The sale of the thing pledged extinguishes the principal obligation whether the price of the sale is more or less than the amount due. o If the price of the sale is more than the amount due the creditor, the debtor is not entitled to the excess unless the contrary is provided; o In the same way, if the price of the sale is less, neither is the creditor entitled to recover the deficiency. A contrary stipulation is void (Article 2115).

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Other Important Matters:    

Third parties who has any right in or to the thing pledged may pay the debt as soon as it becomes due and demandable and the creditor cannot refuse to accept payment. If credit is due before pledge is redeemed, pledge may collect amount due on the credit pledged and apply the same to the obligation and return the excess to pledgor. If two or more things are pledged, pledgee has the right of choice to which of the things pledged he shall cause to be sold, unless there is a stipulation to the contrary. A third person who is not a party to the principal obligation may secure the latter by pledging his own property. The law grants him the same rights as a guarantor and he cannot be prejudiced by any waiver of defense by the principal debtor.

Bank of America v. American Realty Corp., 1999  In the absence of express statutory provisions, a mortgage creditor may institute against the mortgage debtor either a personal action for debt or a real action to foreclose the mortgage. In other words, he may pursue either of the two remedies, but not both. By such election, his cause of action can by no means be impaired, for each of the two remedies is complete in itself. Thus, an election to bring a personal action will leave open to him all the properties of the debtor for attachment and execution, even including the mortgaged property itself. And, if he waives such personal action and pursues his remedy against the mortgaged property, an unsatisfied judgment thereon would still give him the

right to sue for a deficiency judgment, in which case, all the properties of the defendant, other than the mortgaged property, are again open to him for the satisfaction of the deficiency. In either case, his remedy is complete, his cause of action undiminished, and any advantages attendant to the pursuit of one or the other remedy are purely accidental and are all under his right of election. On the other hand, a rule that would authorize the plaintiff to bring a personal action against the debtor and simultaneously or successively another action against the mortgaged property, would result not only in multiplicity of suits so offensive to justice and obnoxious to law and equity, but also in subjecting the defendant to the vexation of being sued in the place of his residence or of the residence of the plaintiff, and then again in the place where the property lies." The rule is now settled that a mortgage creditor may elect to waive his security and bring, instead, an ordinary action to recover the indebtedness with the right to execute a judgment thereon on all the properties of the debtor, including the subject matter of the mortgage . . ., subject to the qualification that if he fails in the remedy by him elected, he cannot pursue further the remedy he has waived. Anent real properties in particular, the Court has laid down the rule that a mortgage creditor may institute against the mortgage debtor either a personal action for debt or a real action to foreclose the mortgage.  The remedies available to the mortgage creditor are deemed alternative and not cumulative. Notably, an election of one remedy operates as a waiver of the other. For this purpose, a remedy is deemed chosen upon the filing of the suit for collection or upon the filing of the complaint in an action for foreclosure of mortgage, pursuant to the provision of Rule 68 of the 1997 Rules of Civil Procedure. As to extra-judicial foreclosure, such remedy is deemed elected by the mortgage creditor upon filing of the petition not with any court of justice but with the Office of the Sheriff of the province where the sale is to be made, in accordance with the provisions of Act No. 3135, as amended by Act No. 4118. In Cerna vs. Court of Appeals, we agreed with the petitioner in said case, that the filing of a collection suit barred the foreclosure of the mortgage. Hence, by the mere filing of the ordinary action for collection against the principal debtors, the petitioner in the present case is deemed to have elected a remedy, as a result of which a waiver of the other necessarily must arise. Corollarily, no final judgment in the collection suit is required for the rule on waiver to apply.  Private respondent ARC constituted real estate mortgages over its properties as security for the debt of the principal debtors. By doing so, private respondent subjected itself to the liabilities of a third party mortgagor. Under the law, third persons who are not parties to a loan may secure the latter by pledging or mortgaging their own property. Notwithstanding, there is no legal provision nor jurisprudence in our jurisdiction which makes a third person who secures the fulfillment of another's obligation by mortgaging his own property, to be solidarily bound with the principal obligor. The signatory to the principal contract — loan — remains to be primarily bound. It is only upon default of the latter that the creditor may have recourse on the mortgagors by foreclosing the mortgaged properties in lieu of an action for the recovery of the amount of the loan. LEGAL PLEDGES 1) Necessary expenses shall be refunded to every possessor, but only a possessor in good faith may retain the thing until he has been reimbursed. 

Useful expenses shall be refunded only to the possessor in good faith with the same right of retention, the person who has defeated him in the possession having the option of refunding the amount of the expenses or of paying the increase in value which the thing may have acquired and by reason thereof (Art. 546)

2) He who has executed work upon a movable has a right to retain it by way of pledge until he is paid. (Art. 1731) 3) The agent may retain the things which are the objects of agency until the principal effects the reimbursement and pays the indemnity. (Art. 1914) 4) The laborer’s wages shall be a lien on the goods manufactured or the work done. (Art. 1707) NOTES:   

Unlike in conventional pledge where the debtor is not entitled to the excess unless it is agreed otherwise, in legal pledge, the remainder of the price of the sale after payment of the debt and expenses, shall be delivered to the debtor. In legal pledge, the pledge must make a demand of the amount due him because without such demand, he cannot exercise the right of sale at public auction. The pledge must proceed with the sale within one month after demand otherwise, the debtor may require him to return the thing retained.

Special Laws apply to pawnshops and establishments engaged in making loans secured by pledges. Provisions of the Civil Code shall apply subsidiarily to them.

MORTGAGE Definition Real 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 stipulated5. Characteristics 1. It is an accessory and subsidiary contract. 2. It is also unilateral because it creates only an obligation on the part of the creditor who must free the property from the encumbrance once the obligation is fulfilled. 3. The mortgagor, as a general rule, retains possession of the property mortgaged as security for the payment of the sum borrowed from the mortgagee, and pays the latter a certain percent thereof as interest on his principal by way of compensation for his sacrifice 5

DAYRIT v CA: Well-entrenched in law is the rule that a mortgage directly and immediately subjects the property upon which it is imposed, the same being indivisible even though the debt may be divided, and such indivisibility likewise being unaffected by the fact that 'the debtors are not solidarity liable. "When several things are pledged or mortgaged, each thing for a determinate portion of the debt, the pledges or mortgage, are considered separate from each other. But when the several things are given to secure the same debt in its entirety, all of them are liable for the debt, and the creditor does not have to divide his action by distributing the debt among the various things pledged or mortgaged. Even when only a part of the debt remains unpaid, all the things are still liable for such balance." (Tolentino)

in depriving himself of the use of said money and the enjoyment of its fruits, in order to give them to the mortgagor. 4. The objects of a real mortgage are immovable (Article 415) and alienable real rights imposed upon immovables. Note: While a mortgage of land necessarily includes, in the absence of stipulation, the improvements thereon, a building by itself may be mortgaged apart from the land on which it is built. Possessory rights over said property before title is vested on the grantee may be validly transferred or conveyed as in a deed of mortgage. (prudential Bank vs. Panis, 153 SCRA 390 [1967]); Nartales vs. GSIS, 156 SCRA 205 [1987]). 5. In order that a mortgage may be validly constituted, it must appear in a public document duly recorded in the Registry of Property (see Gaotian vs. Gaffud, 24 SCRA 706 [1969]) Note: If the instrument of mortgage is not recorded, the mortgage is nevertheless binding between the parties. 6. A mortgage creates a real right (see Tuazon vs. Grosco, 5 Phil. 596 [1905]), a lien inseparable from the property mortgaged, which is enforceable against the whole world. Until discharged, it follows the property wherever it goes and subsists notwithstanding changes of ownership. Note: a.) If the mortgagor sells the mortgaged property, the property remains subject to the fulfillment of the obligation secured by it. (see Bonnevie vs. Court of Appeals, 125 SCRA 122 [1983]) All subsequent purchasers of the property must respect the mortgage, whether the transfer to them be with or without the consent of the mortgagee. But the mortgage must be registered (Article 2125) or, if not registered, the buyer must know of its existence. (see Phil. National Bank & Trust Corp. vs. Court of Appeals, 193 SCRA 158 [1991]) The mortgagor may not be the principal debtor (Article 2085, 2nd par.). b.) The right or lien of an innocent mortgagee for value upon the mortgaged property must be respected and protected, even if the mortgagor obtained his title through fraud. The remedy of the persons prejudiced is to bring an action for damages against the person who caused the fraud and if the latter is insolvent, an action against the Treasurer of the Philippines may be filed for the recovery of damages against the Assurance Fund (Philippine National Bank vs. Court of Appeals, 187 SCRA 735 [1990]) KINDS 1) Voluntary 2) Legal 3) Equitable – One which, although lacking the proper formalities of a mortgage, shows the intention of the parties to make the property as a security for a debt. - Provisions governing equitable mortgage: Arts. 1365, 1450, 1454, 1602, 1603, 1604 and 1607. CAUSE OR CONSIDERATION



As mortgage is an accessory contract, its consideration is the same as of the principal contract. Therefore it will be valid if the principal obligation is valid and cannot be avoided on the ground of lack of consideration.

Filipinas Marble Corporation v. IAC  A mortgage is a mere accessory contract and, thus, its validity would depend on the validity of the loan secured by it.  Article 2125 of the Civil Code clearly provides that the non-registration of the mortgage does not affect the immediate parties. It states: "Art. 2125. In addition to the requisites stated in 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. OBJECTS OF REAL MORTGAGE: 1. immovables (Art. 415) 2. alienable real rights in accordance with the laws, imposed upon immovables * future property cannot be object of mortgage

People’s Bank and Tust Co. v. Dahican Lumber Co.  A stipulation including in the mortgage lien after acquired properties is common and 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 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 securities.  Under Articles 334 and 1877 of the old Civil Code substantially reproduced in Articles 415 and 2127 respectively of the new Civil Code, the properties in question 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, are classified as immovable properties, therefore not covered by the Chattel Mortgage Law.  Unpaid sellers who were the suppliers or vendors of the after acquired properties and not the financiers, like the defendants herein can claim a right superior to the lien constituted on said properties by virtue of the deeds of mortgage under foreclosure.  Although an extension of time was given to the debtor, considering that when this complaint was filed the debtor was insolvent, it follows that the debtor thereby lost the benefit of the period unless he gives a guaranty or security for the debt (Art. 1198, New Civil Code). Whereas in this case the guaranty given was plainly inadequate, then the foreclosure was proper because the collection of the notes were not premature.

ESSENTIAL REQUISITES (SOFVAP) 1) Constituted to secure the fulfillment of a principal obligation6. 2) Mortgagor must be the absolute owner of the thing mortgaged. 3) The persons constituting the mortgage have free disposal of the property; in the absence thereof, they should be legally authorized for the purpose. 4) Cannot exist without a valid obligation. 5) When the principal obligation becomes due, the thing in which the mortgage consists may be alienated for payment to the creditor. 6) Must appear in a public document duly recorded in the Registry of Property, to be validly constituted. - In a legal mortgage, the persons in whose favor the law establishes a mortgage have the right to demand the execution and recording of a document formalizing the mortgage. Tan v. Valdehueza,  Under Article 1875 of the Civil Code of 1889 registration was a necessary requisite for the validity of a mortgage even as between the parties, but under Article 2125 of the New Civil Code, this is no longer so. "If the instrument is not recorded the mortgage is nevertheless binding between the parties.  Where the supposed vendor a retro remained in possession of the land and paid the realty tax thereon, the contract which purports to be a pacto de retro transaction is presumed to be equitable mortgage under Art. 1602 of the New Civil Code, whether registered or not, where no third parties are involved.

Lanuza v. De Leon  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 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. (Rivera vs. Moran, 48 Phil. 836 [1926]. Nor would it avail the mortgagee for the execution of the conveyance in a public instrument earlier was equivalent to the delivery of the thing sold to the vendee. (Civil Code, Article 1948; see also Lichauco vs. Berenguer, 39 Phil., 643 [1919]; Bautista vs. Sioson, 39 Phil., 615 [1919]).  The stipulation in deed denominated by the parties as a "Deed of Sale With Right to Repurchase" to the effect that if the vendor fails to pay the amount agreed upon within the stipulated period, his right to repurchase the property shall be forfeited and the ownership 6

MOJICA v CA: Mortgages given to secure future advancements are valid and legal contracts; that the amounts named as consideration in said contract do not limit the amount for which the mortgage may stand as security if from the 4 corners of the instrument the intent to secure future and other indebtedness can be gathered. A mortgage given to secure advancements is a continuing security and is not discharged by repayment of the amount named in the mortgage, until the full amount of the advancements are paid (as established earlier in Lim Julian v. Lutero).

over the same would automatically pass to the vendee without need of court intervention, is contrary to the nature of a true pacto de retro sale, under which a vendee acquires ownership of the thing sold immediately upon execution of the sale, subject only to the vendor's right of redemption. (See e.g., Guerrero vs. Yñigo, 96 Phil., 37 [1954]; Floro vs. Granada, 83 Phil., 486 (1949). Indeed, the stipulation which enables the mortgagee to acquire ownership of the mortgaged property without need of foreclosure proceedings establishes a pactum commissorium, and, being contrary to the provisions of Article 2080 of the Civil Code, is a nullity. Its insertion in the contract is an avowal of an intention to mortgage rather than to sell. (Alcantara vs. Alinea, 8 Phil., 111 [1907]).  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, following the maxim "Prior tempore potior jure".

State Investment House, Inc. v. CA  As a general rule, where there is nothing in the certificate of title to indicate any cloud or vice in the ownership of the property, or any encumbrance thereon, the purchaser is not required to explore further than what the Torrens Title upon its face indicates in quest for any hidden defect or inchoate right that may subsequently defeat his right thereto. This rule, however, admits of an exception as where the purchaser or mortgagee, has knowledge of a defect or lack of title in his vendor, or that he was aware of sufficient facts to induce a reasonably prudent man to inquire into the status of the title of the property in litigation.  In this case, petitioner was well aware that it was dealing with SOLID, a business entity engaged in the business of selling subdivision lots. In fact, the OAALA found that "at the time the lot was mortgaged, respondent State Investment House, Inc., [now petitioner] had been aware of the lot's location and that said lot formed part of Capital Park/Homes Subdivision." In Sunshine Finance and Investment Corp. v. Intermediate Appellate Court, the Court, noting petitioner therein to be a financing corporation, deviated from the general rule that a purchaser or mortgagee of a land is not required to look further than what appears on the face of the Torrens Title. The above-enunciated rule should apply in this case as petitioner admits of being a financing institution. We take judicial notice of the uniform practice of financing institutions to investigate, examine and assess the real property offered as security for any loan application especially where, as in this case, the subject property is a subdivision lot located at Quezon City, M.M. It is a settled rule that a purchaser or mortgagee cannot close its eyes to facts which should put a reasonable man upon his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor or mortgagor. Petitioner's constructive knowledge of the defect in the title of the subject property, or lack of such knowledge due to its negligence, takes the place of registration of the rights of respondents-spouses. Respondent court thus correctly ruled that petitioner was not a purchaser or mortgagee in good faith; hence petitioner can not solely rely on what merely appears on the face of the Torrens Title.

Taningco v. Register of Deeds  The interest of the wife in a parcel of land owned by the spouses ceases to be inchoate and becomes actual and vested with respect to her undivided one-half share after the dissolution of the conjugal partnership, as by death of the husband.  The mortgage by the wife, after the death of her husband, of her rights, interest and participation in an undivided one-half share of the conjugal property, is legal and valid, and

should, therefore, be allowed to be registered, registration being an essential requirement in order that the mortgage may be validly constituted, Article 2125, Civil Code. The registration will in no way affect the rights of the deceased husband's creditors, if any, or of his heirs, for their interest is limited to the husband's half of the estate not covered by the mortgage. As far as the debts, if any, of the conjugal partnership are concerned, their payment is provided for by law before the one-half share of the wife-mortgagor is finally determined, and therefore would not be affected by the mortgage, Articles 182 and 185, Civil Code.

EFFECT OF INVALIDITY OF MORTGAGE ON THE PRINCIPAL OBLIGATION 1) Principal obligation remains valid. 2) Mortgage deed remains evidence of a personal obligation. EFFECTS OF MORTGAGE 1) Creates real rights, a lien inseparable from the property mortgaged, enforceable against the whole world.  The only right of a mortgagee in case of non-payment of a debt secured by real mortgage would be to foreclose the mortgage and have the encumbered property sold to satisfy the outstanding indebtedness (Guanzon vs. Argel, 33 SCRA 474 [1970])  By mortgaging a piece of property, a debtor merely subjects it to a lien but ownership thereof is not parted with.( Adlawan vs. Torres 233 SCRA 645) 2) Creates merely an encumbrance.  The mortgagor’s default does not operate to vest in the mortgagee the ownership of the encumbered property. His failure to redeem the property does not automatically vest ownership of the property to the mortgagee which would grant the latter the right to appropriate the property or dispose of it for such effect is against public policy as enunciated by Article 2088. (Reyes vs. Sierra, 93 SCRA 472 [1979]). DBP v. CA, 2000  A consideration of the cases shows that a decree of registration cut off or extinguished a right acquired by a person when such right refers to a lien or encumbrance on the land — not to the right of ownership thereof — which was not annotated on the certificate of title issued thereon. Indeed, registration has never been a mode of acquiring ownership over immovable property. In the case of Reyes v. Court of Appeals, we ruled that the fact that a party was able to secure a title in his favor did not operate to vest ownership upon her of the property. Here, neither Jose Alvarez nor the spouses Beduya ever exercised any right of ownership over the land. The fact of registration in their favor never vested in them the ownership of the land in dispute. "If a person obtains a title under the Torrens system, which includes by mistake or oversight land which can no longer be registered under the system, he does not, by virtue of the said certificate alone, become the owner of the lands illegally included."  Private respondent has been in actual, open, peaceful and continuous possession of the property since 1950. Together with his actual possession of the land, several tax declarations issued in his name constitute strong evidence of ownership of the land occupied by him.  It was established that private respondent, having been in possession of the land since 1950, was the owner of the property when it was registered by Jose Alvarez in 1969, his possession tacked to that of his predecessor-in-interest, Ulpiano Mumar, which dates

back to 1917. Clearly, more than 30 years had elapsed before a decree of registration was issued in favor of Jose Alvarez. This uninterrupted adverse possession of the land for more than 30 years could only ripen into ownership of the land through acquisitive prescription which is a mode of acquiring ownership and other real rights over immovable property. Prescription requires public, peaceful, uninterrupted and adverse possession of the property in the concept of an owner for ten (10) years, in case the possession is in good faith and with a just title. Such prescription is called ordinary prescription, as distinguished from extraordinary prescription which requires possession for 30 years in case possession is without just title or is not in good faith.  Generally, an action for reconveyance based on an implied or constructive trust, such as the instant case, prescribes in 10 years from the date of issuance of decree of registration. However, this rule does not apply when the plaintiff is in actual possession of the land.  Section 38 of the Land Registration Act provides that a certificate of title is conclusive and binding upon the whole world. Consequently, a buyer need not look beyond the certificate of title in order to determine who is the actual owner of the land. However, this is subject to the right of a person deprived of land through fraud to bring an action for reconveyance, provided that it does not prejudice the rights of an innocent purchaser for value and in good faith. "It is a condition sine qua non for an action for reconveyance to prosper that the property should not have passed to the hands of an innocent purchaser for value." The same rule applies to mortgagees, like petitioner. The evidence before us, however, indicates that petitioner is not a mortgagee in good faith. To be sure, an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagor's title. Nonetheless, especially in the case of a banking institution, a mortgagee must exercise due diligence before entering into said contract. Judicial notice is taken of the standard practice for banks, before approving a loan, to send representatives to the premises of the land offered as collateral and to investigate who are the real owners thereof. Banks, their business being impressed with public interest, are expected to exercise more care and prudence than private individuals in their dealings, even those involving registered lands. Petitioner here was already aware that a person other than the registered owner was in actual possession of the land when it bought the same at the foreclosure sale. A person who deliberately ignores a significant fact which would create suspicion in an otherwise reasonable man is not an innocent purchaser for value. "It is a well-settled rule that a purchaser cannot close his eyes to facts which should put a reasonable man upon his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor."  As to the question of estoppel, we do not find petitioner to be estopped from questioning private respondent's title. "Estoppel in pais arises when one, by his acts, representations or admission, or by his own silence when he ought to speak out, intentionally or through culpable negligence, induces another to believe certain facts to exist and such other rightfully relies and acts on such belief, so that he will be prejudiced if the former is permitted to deny the existence of such facts." In the case at bar, nothing in record indicates that petitioner impliedly acquiesced to the validity of private respondent's title when it found out that the latter was occupying a portion of the land covered by TCT No. 10101. Lagrosa v. CA  The "Deed of Real Estate Mortgage" executed by Julio Arizapa is null and void, the property mortgaged by Julio Arizapa being then owned by the City of Manila under Transfer Certificate of Title No. 91120. For a person to validly constitute a valid mortgage on real estate, he must be the absolute owner thereof as required by Article 2085 of the Civil Code of the Philippines. Since the mortgage to Presentacion Quimbo of the lot is null and void, the

assignment by Presentacion Quimbo of her rights as mortagee to Lagrosa is likewise void. Even if the mortgage is valid as insisted by herein petitioner, it is well-settled that a mere mortgagee has no right to eject the occupants of the property mortgaged. This is so, because a mortgage passes no title to the mortgagee. Indeed, by mortgaging a piece of property, a debtor merely subjects it to lien but ownership thereof is not parted with. Thus, a mortgage is regarded as nothing more than a mere lien, encumbrance, or security for a debt, and passes no title or estate to the mortgagee and gives him no right or claim to the possession of the property. The agreement between the City of Manila and Julio Arizapa was in the nature of a "contract to sell," the price for the lot being payable on installment for a period of twenty (20) years which could yet prevent, such as by the non-fulfillment of the condition, the obligation to convey title from acquiring any obligatory force. Hence, there is no "right" as awardee to speak of, and there is no alienable interest in the property to deal with. By Lagrosa's own admission, he is merely an assignee of the rights of the mortgagee of the lot and that, consequently, the respondent Court of Appeals correctly ruled that the only right of action of Lagrosa as such assignee of the mortgagee, where the mortgagor is already dead, is that provided for in Section 7 of Rule 86 and Section 5 of Rule 87 of the Rules of Court. Thus, the mortgagee does not acquire title to the mortgaged real estate unless and until he purchases the same at public auction and the property is not redeemed within the period provided for by the Rules of Court.  It is a well known doctrine that the issue as to whether title was procured by falsification or fraud as advanced by petitioner can only be raised in an action expressly instituted for the purpose. Torrens title can be attacked only for fraud, within one year after the date of the issuance of the decree of registration. Such attack must be direct, and not by a collateral proceeding. The title represented by the certificate cannot be changed, altered, modified, enlarged, or diminished in a collateral proceeding. Thus, the arguments of petitioner Lagrosa in the ejectment suit are misplaced. Casabuena v. CA  At the bottom of this controversy is the undisputed fact that Ciriaco Urdaneta was indebted to Benin, to secure which debt the spouses ceded their rights over the land through a deed of assignment. An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause transfers his credit and its accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could have enforced it against the debtor. Stated simply, it is the process of transferring the right of the assignor to the assignee, who would then be allowed to proceed against the debtor. The assignment involves no transfer of ownership but merely effects the transfer of rights which the assignor has at the time, to the assignee. Benin having been deemed subrogated to the rights and obligations of the spouses, she was bound by exactly the same conditions to which the latter were bound. This being so, she and the Casabuenas were bound to respect the prohibition against selling the property within the five-year period imposed by the City government.  The act of assignment could not have operated to efface liens or restrictions burdening the right assigned, because an assignee cannot acquire a greater right than that pertaining to the assignor. At most, an assignee can only acquire rights duplicating those which his assignor is entitled by law to exercise. In the case at bar, the Casabuenas merely stepped into Benin's shoes, who was not so much an owner as a mere assignee of the rights of her debtors. Not having acquired any right over the land in question, it follows that Benin conveyed nothing to defendants with respect to the property.  While it is true that the duplex is owned by Benin, the Casabuenas mistakenly believed that the deed included cession of rights of ownership over the land as well. The encumbrance of the property may be deemed as an exercise of their right of ownership over

the property considering that, under the law, only owners of certain properties may mortgage the same. By mortgaging a piece of property, a debtor merely subjects it to a lien but ownership thereof is not parted with. As a result, notwithstanding the encumbrance of the Bulacan lot through a deed of assignment in favor of Benin, the spouses Urdaneta remain its owners, to the exclusion of petitioner.

EXTENT OF MORTGAGE General Rule: A mortgage constituted on immovable property is not limited to the property itself but also extends to all its accessions, improvements, growing fruits and rents or income (see Article 2127) as well as to the proceeds of insurance should the property be destroyed of the expropriation value of the property should it be expropriated. Exception: contrary stipulation

Cu Unjieng & Hijos v. Mabalacat Sugar Co.,  The 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 mortgage debtor, installed after the constitution thereof. (Bischoff vs. Pomar and Compañia General de Tabacos, 12 Phil., 690.)  The notice announcing the sale at public auction of all the properties of a sugar central extends to the machinery and accessories acquired and installed in its mill after the constitution of the mortgage.  The court, that has ordered the placing of the mortgaged properties in the hands of a receiver in a foreclosure suit, has jurisdiction to order their sale at public auction even before the termination of the receivership.  The fact that the price at which the mortgaged properties were sold at public auction is inadequate, is not in itself sufficient to justify the annulment of the sale. AFTER-ACQUIRED CLAUSE Luzon Lumber & Hardware Co., v. Quiambao  Under our jurisprudence, the term or phrase refection credits (refaccionarios) used or employed in article 1923 of the old Civil Code refers to and includes not only materials used for repair or reconstruction, but those used for new construction as well.  The lien of one furnishing building materials used in a building or construction, whether old or new, comes under article 1923 of the old Civil Code, and not under article 1922 of the same Code. Since refection credit is provided for and included in the old Civil Code of 1889, said lien (refection credit) is not a right granted for the first time under article 2242 of the new Civil Code (Republic Act 386) so as to come under the contemplation of article 2253 in the sense that the provisions of the new Civil Code should govern it although the acts or events which gave rise thereto may have occurred under the old Civil Code.  The deed of mortgage having been recorded in 1948 and the building materials having been furnished in 1948 and 1949, that is to say, before the promulgation of the new Civil Code in 1950, the preference of credits or liens has to be governed by the old Civil Code.

 When a mortgage is made to include new or future improvements on registered land, said lien attaches and vests not at the time said improvements are constructed but on the date of the recording and registration of the deed of mortgage. The mortgage lien of the Rehabilitation Finance Corporation on all the improvements, having vested on the day and hour the mortgage was registered — about one month before plaintiff began furnishing materials for construction — it enjoyed preference over the refection credit of plaintiff in point of time. China Banking Corporation v. CA  The parties have stipulated that the provisions of Act No. 3135 is the controlling law in case of foreclosure. By invoking the said Act, there is no doubt that it must "govern the manner in which the sale and redemption shall be effected." Clearly, the fundamental principle that contracts are respected as the law between the contracting parties finds application in the present case, specially where they are not contrary to law, morals, good customs and public policy.  It is well settled that mortgages given to secure future advancements or loans are valid and legal contracts, and that the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered.  Foreclosure is valid where the debtors are in default in the payment of their obligation. The essence of a contract of mortgage indebtedness is that a property has been identified or set apart from the mass of the property of the debtor-mortgagor as security for the payment of money or the fulfillment of an obligation to answer the amount of indebtedness, in case of default of payment. It is a settled rule that in a real estate mortgage when the obligation is not paid when due, the mortgagee has the right to foreclose the mortgage and to have the property seized and sold in view of applying the proceeds to the payment of the obligation. In fact, aside from the mortgage contracts, the promissory notes executed to evidence the loans also authorize the mortgagee to foreclose on the mortgages.  Where a debt is secured by a mortgage and there is a default in payment on the part of the mortgagor, the mortgagee has a choice of one (1) or two (2) remedies, but he cannot have both. The mortgagee may: 1) foreclosure the mortgage; or 2) file an ordinary action to collect the debt. "When the mortgagee chooses the foreclosure of the mortgage as a remedy, he enforces his lien by the sale on foreclosure of the mortgaged property. The proceeds of the sale will be applied to the satisfaction of the debt. With this remedy, he has a prior lien on the property. In case of a deficiency, the mortgagee has the right to claim for the deficiency resulting from the price obtained in the sale of the real property at public auction and the outstanding obligation at the time of the foreclosure proceedings (Soriano vs. Enriquez, 24 Phil. 584; Banco de Islas Filipinas vs. Concepcion Hijos, 53 Phil. 86; Banco Nacional vs. Barreto, 53 Phil. 101). "On the other hand, if the mortgagee resorts to an action to collect the debt, he thereby waives his mortgage lien. He will have no more priority over the mortgaged property. If the judgment in the action to collect is favorable to him, and it becomes final and executory, he can enforce said judgment by execution. He can even levy execution on the same mortgaged property, but he will not have priority over the latter and there may be other creditors who have better lien on the properties of the mortgagor." [Caltex Philippines, Inc vs. Intermediate Appellate Court, 176 SCRA 741]

Phil. Bank of Communications v. CA

 The Court is unconvinced for the cases relied upon by the petitioner are inapplicable. The doctrine first laid down in Lim Julian vs. Lutero (49 Phil. 703 [1926]) pertains only to mortgages securing future advancements. The petitioner would not have been misled into thinking otherwise had it properly quoted Mojica in its petition. The following explanation is helpful to distinguish future advancements from the loan in the case at bench: It is not uncommon that persons enter into a contract whereby they draw sums of money from their creditors, usually banks, from time to time, and as security therefor execute a mortgage on their property. Such contracts are sometimes executed for an account smaller or larger than that actually borrowed. Thus, it may appear in the contract that the loan secured by the mortgage is only for P10,000 when by reason of advancements made by the creditor to the debtor the amount ultimately drawn and borrowed is P20,000. Under these circumstances it is inequitable to consider that the mortgage can be foreclosed only for the amount of P10,000. Indeed, no bank or creditor would be willing to make such advancements which are in excess of the amount stipulated if the payment thereof is not secured. . . . The obligation in this case was not a series of indeterminate sums incurred over a period of time, but two specific amounts procured in a single instance. Thus, the inapplicability of Lim Julian. Instead, what applies here is the general rule that "an action to foreclose a mortgage must be limited to the amount mentioned in the mortgage."  The mortgage provision relied upon by the petitioner is known in American jurisprudence as a "dragnet" clause, which is specifically phrased to subsume all debts of past or future origin. Such clauses are "carefully scrutinized and strictly construed."  The mortgage contract is also one of adhesion as it was prepared solely by the petitioner and the only participation of the other party was the affixing of his signature or "adhesion" thereto. Being a contract of adhesion, the mortgage is to be strictly construed against the petitioner, the party which prepared the agreement.  There is also sufficient authority to declare that any ambiguity in a contract whose terms are susceptible of different interpretations must be read against the party who drafted it. A mortgage and a note secured by it are deemed parts of one transaction and are construed together, thus, an ambiguity is created when the notes provide for the payment of a penalty but the mortgage contract does not. Construing the ambiguity against the petitioner, it follows that no penalty was intended to be covered by the mortgage. The mortgage contract consisted of three pages with no less than seventeen conditions in fine print; it included provisions for interest and attorney's fees similar to those in the promissory notes; and it even provided for the payment of taxes and insurance charges. Plainly, the petitioner can be as specific as it wants to be, yet it simply did not specify nor even allude to, that the penalty in the promissory notes would be secured by the mortgage. This can then only be interpreted to mean that the petitioner had no design of including the penalty in the amount secured.  A reading, not only of the earlier quoted provision, but of the entire mortgage contract yields no mention of penalty charges. Construing this silence strictly against the petitioner, it can fairly be concluded that the petitioner did not intend to include the penalties on the promissory notes in the secured amount. This explains the finding by the trial court, as affirmed by the Court of Appeals, that "penalties and charges are not due for want of stipulation in the mortgage contract." Indeed, a mortgage must sufficiently describe the debt sought to be secured, which description must not be such as to mislead or deceive, and an obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage. In this case, the mortgage contract provides that it secures notes and other evidences of indebtedness. Under the rule of ejusdem generis, where a description of things of a particular class or kind is "accompanied by words of a generic character, the generic words will usually be limited to things of a kindred nature with those particularly enumerated. . . ." A penalty charge does not belong to the species of obligations enumerated in the mortgage, hence, the said contract cannot be understood to secure the penalty.

Alienation or Assignment of Mortgage 1. Said assignment is valid and assignee may foreclose the mortgage in case of nonpayment of the mortgage indebtedness. (Santiago vs. Pioneer Savings and Loan Bank, 157 SCRA 100 [1988]). 2. An assignee cannot acquire greater rights than those pertaining to an assignor (Koa vs. Court of Appeals, 219 SCRA 541).

Santiago v. Pioneer Savings and Loan Bank  The evidence on record sufficiently defeats plaintiff-appellant's claim for relief from extrajudicial foreclosure. Her Special Power of Attorney in favor of CRCP specifically included the authority to mortgage the Disputed Property. The Real Estate Mortgage in favor of FINASIA explicitly authorized foreclosure in the event of default. Indeed, foreclosure is but a necessary consequence of non-payment of a mortgage indebtedness. Plaintiff-appellant, therefore, cannot rightfully claim that FINASIA, as the assignee of the mortgagee, cannot extrajudicially foreclose the mortgaged property. A mortgage directly and immediately subjects the property upon which it is imposed to the fulfillment of the obligation for whose security it was constituted. [Article 2126, Civil Code].  The assignment of receivables made by the original mortgagee, FINASIA, to Defendant Bank was valid, since a mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law. [Article 2128, ibid.] Said formalities were complied with in this case. The assignment was made in a public instrument and proper recording in the Registry of Property was made. [Article 1625, ibid.] While notice may not have been given to plaintiff-appellant personally, the publication of the Notice of Sheriff's Sale, as required by law, is notice to the whole world. RIGHT OF CREDITOR AGAINST TRANSFEREE  The fact that the mortgagor has transferred the mortgaged property to a third person does not relieve him from his obligation to pay the debt to the mortgage creditor in the absence of novation (McCallough & Co. vs. Sierra, 41 Phil. 1 [1921]). The mortgage on the property may still be foreclosed despite the transfer.  The mortgage credit being a real right which follows the property, the creditor may demand from any possessor the payment of the credit secured by said property. It is necessary, however, that prior demand for payment must have been made on the debtor and the latter failed to pay. (Bank of the Phil. Island vs. Concepcion & Hijos, Inc., 53 Phil. 906 [1929]) 

The transferee is not liable for any deficiency in the absence of a contrary stipulation.

Stipulation Forbidding Alienation of Mortgaged Property Such a stipulation is void. However, if the mortgagor alienates the property, the transferee is bound to respect the encumbrance because being a real right, the property remains

subject to the fulfillment of the obligation for whose guaranty it was constituted (Article 2126). Exception: Right of first refusal Litonjua v. L&R Corporation, 1999  Insofar as the validity of the questioned stipulation prohibiting the mortgagor from selling his mortgaged property without the consent of the mortgagee is concerned, therefore, the ruling in the Tambunting case is still the controlling law. Indeed, we are fully in accord with the pronouncement therein that such a stipulation violates Article 2130 of the New Civil Code. Both the lower court and the Court of Appeals in its Amended Decision rationalized that since paragraph 8 of the subject Deed of Real Estate Mortgage contains no absolute prohibition against the sale of the property mortgaged but only requires the mortgagor to obtain the prior written consent of the mortgagee before any such sale, Article 2130 is not violated thereby. This observation takes a narrow and technical view of the stipulation in question without taking into consideration the end result of requiring such prior written consent. True, the provision does not absolutely prohibit the mortgagor from selling his mortgaged property; but what it does not outrightly prohibit, it nevertheless achieves. For all intents and purposes, the stipulation practically gives the mortgagee the sole prerogative to prevent any sale of the mortgaged property to a third party. The mortgagee can simply withhold its consent and thereby, prevent the mortgagor from selling the property. In other words, stipulations like those covered by paragraph 8 of the subject Deed of Real Estate Mortgage is not binding upon the parties. Accordingly, the sale made by the spouses Litonjua to PWHAS, notwithstanding the lack of prior written consent of L & R Corporation, is valid.  Coming now to the issue of whether the redemption offered by PWHAS on account of the spouses Litonjua is valid, we rule in the affirmative. The sale by the spouses Litonjua of the mortgaged properties to PWHAS is valid. Therefore, PWHAS stepped into the shoes of the spouses Litonjua on account of such sale and was in effect, their successor-in-interest. As such, it had the right to redeem the property foreclosed by L & R Corporation. Again, Tambunting, supra, clarified that — ". . . The acquisition by the Hernandezes' of the Escuetas' rights over the property carried with it the assumption of the obligations burdening the property, as recorded in the Registry of the Property, ie., mortgage debts in favor of the RFC (DBP) and the Tambuntings. The Hernandezes', by stepping into the Escuetas' shoes as assignees, had the obligation the obligation to pay the mortgage debts, otherwise, these debts would and could be enforced against the property subject of the assignment. Stated otherwise, the Hernandezes, by the assignment, obtained the right to remove the burdens of the property subject thereof by paying the obligations thereby secured; that is to say, they had the right of redemption as regards the first mortgage, to be exercised within the time and in the manner prescribed by law and the mortgage deed; and as regards the second mortgage, sought to be judicially foreclosed but yet unforeclosed, they had the so-called equity of redemption." The right of PWHAS to redeem the subject properties finds supports in Section 6 of Act 3135 itself which gives not only the mortgagor-debtor the right to redeem, but also his successor-in-interest. As vendee of the subject properties, PWHAS qualifies as such a successor-in-interest of the spouses Litonjua. It is clear from the records that PWHAS offered to redeem the subject properties seven (7) months after the date of registration of the foreclosure sale, well within the one year period of redemption.  All things considered, what then are the relative rights and obligations of the parties? To recapitulate: the sale between the spouses Litonjua and PWHAS is valid, notwithstanding the absence of L & R Corporation's prior written consent hereto. Inasmuch as the sale of PWHAS was valid, its offer to redeem and its tender of the redemption price, as successor-

in-interest of the spouses Litonjua, within the one-year period should have been accepted as valid by L & R Corporation. However, while the sale is, indeed, valid, the same is rescissible because it ignored L & R Corporation's right of first refusal. Foreseeing a possible rescission of the sale, the spouses Litonjua contend that with the restoration of the original status quo, with no sale having been made, they should now be allowed to redeem the subject properties, the period of redemption having been suspended during the period of litigation. In effect, the spouses Litonjua want to retain ownership of the same. We cannot, however, sanction this belated reversal of the spouses Litonjua's decision to sell. To do so would afford them undue advantage on account of the appreciation of the value of the subject properties in the intervening years when they precisely were the ones who violated and ignored the right of first refusal of L & R Corporation over the same. Moreover, it must be stressed that in rescinding the sale made to PWHAS, the purpose is to uphold and enforce the right of first refusal of L & R Corporation.

MEANING OF FORECLOSURE It is the remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation secured by the mortgage. Fiestan v. CA,1990  Distinction should be made of the three different kinds of sales under the law, namely: an ordinary execution sale, a judicial foreclosure sale, and an extrajudicial foreclosure sale, because a different set of law applies to each class of sale mentioned. An ordinary execution sale is governed by the pertinent provisions of Rule 39 of the Rules of Court. Rule 68 of the Rules of Court applies in cases of judicial foreclosure sale. On the other hand, Act No. 3135, as amended by Act No. 4118 otherwise known as "An Act to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real Estate Mortgages" applies in cases of extrajudicial foreclosure sale.  The case at bar, as the facts disclose, involves an extrajudicial foreclosure sale. The public auction sale conducted on August 6, 1979 by the Provincial Sheriff of Ilocos Sur refers to the "sale" mentioned in Section 1 of Act No. 3135, as amended, which was made pursuant to a special power inserted in or attached to a real estate mortgage made as security for the payment of money or the fulfillment of any other obligation. It must be noted that in the mortgage contract, petitioners, as mortgagor, had appointed private respondent DBP, for the purpose of extrajudicial foreclosure, "as his attorney-in-fact to sell the property mortgaged under Act No. 3135, as amended, to sign all documents and perform any act requisite and necessary to accomplish said purpose . . . . In case of foreclosure, the Mortgagor hereby consents to the appointment of the mortgagee or any of its employees as receiver, without any bond, to take charge of the mortgaged property at once, and to hold possession of the same .  There is no justifiable basis, therefore, to apply by analogy the provisions of Rule 39 of the Rules of Court on ordinary execution sale, particularly Section 15 thereof as well as the jurisprudence under said provision, to an extrajudicial foreclosure sale conducted under the provisions of Act No. 3135, as amended. Act No. 3135, as amended, being a special law governing extrajudicial foreclosure proceedings, the same must govern as against the provisions on ordinary execution sale under Rule 39 of the Rules of Court.  In extrajudicial foreclosure of mortgage, the property sought to be foreclosed need not be identified or set apart by the sheriff from the whole mass of property of the mortgagor for the purpose of satisfying the mortgage indebtedness. For, the essence of a contract of mortgage indebtedness is that a property has been identified or set apart from

the mass of the property of the debtor-mortgagor as security for the payment of money or the fulfillment of an obligation to answer the amount of indebtedness, in case of default of payment. By virtue of the special power inserted or attached to the mortgage contract, the mortgagor has authorized the mortgagee-creditor or any other person authorized to act for him to sell said property in accordance with the formalities required under Act No. 3135, as amended.

Valmonte v. CA  It is well-settled that non-compliance with the notice and publication requirements of an extrajudicial foreclosure sale is a factual issue. Compliance with the statutory requirements is a proven fact and not a matter of presumption. A mortgagor who alleges absence of any of such requisites has the burden of establishing the factum probandum. Following the ruling in Sadang vs. GSIS, the Court of Appeals upheld the validity of the publication of the notice of extrajudicial foreclosure, holding that the customary affidavit of the editor of a newspaper, duly introduced in evidence, is a prima facie proof of said fact. The party alleging non-compliance with the requisite publication has the onus probandi. Absent any proof to the contrary, lack of publication has not been substantiated. What is more, the affidavit of the editor of Nueva Era, to the effect that the notice of sale had been published in said newspaper of general circulation once a week for three (3) consecutive weeks, and what Basilio Castro (letter carrier in the province of Nueva Ecija) and Eugenio de Guzman (former Justice of the Peace and Mayor of Jaen) testified and attested to constitute enough evidence of publication.  On the issue of unconscionably low price paid by the bank for the mortgaged properties, the purchase price of P5,524,40 was found by the respondent court to suffice. It is well settled that when there is a right to redeem, inadequacy of price is of no moment for the reason that the judgment debtor has always the chance to redeem and reacquire the property. In fact, the property may be sold for less than its fair market value precisely because the lesser the price the easier for the owner to effect a redemption.  Petitioners further theorized that the foreclosure sale in question should be invalidated since it was conducted on a holiday. They rely on Section 31 of the Revised Administrative Code, which provides that where the act required or permitted by law falls on a holiday, the act may be done on the next succeeding business day. In the case under scrutiny, the auction sale was made on August 19, 1954, which was declared a holiday by the late Pres. Ramon Magsaysay. In upholding the validity of the sale, the Court of Appeals opined "that since the law used the word 'may,' it is merely discretionary and cannot be given a prohibitive meaning." The Court is of the same conclusion on the validity of the sale.  Another basis for the Court to uphold the regularity of the extrajudicial foreclosure under controversy is the equitable principle of estoppel. Petitioner's admission that as mortgagors, they had asked for an extension of time to redeem subject properties estopped them from impugning the regularity of the conduct of the sale. It bears stressing that on October 10, 1955, appellant Joaquin Valmonte (one of the herein petitioners) sent a letterrequest to the appellee bank for additional time within which to exercise the right of redemption over the properties at P35,000.00 (Exh. 33-Bank; 8-Valenton). In view of such request and of the similar request from Congressman Celestino C. Juan, the Bank, through its Board of Directors (BOD) Resolution No. 1096, extended the redemption period until December 31, 1955 for the appellants (the petitioners here) to purchase in cash their properties in the amount of the total claim of the bank. Did the aforesaid act of seeking an extension of the redemption period constitute an act of ratification within legal contemplation, thus rendering the petitioners in estoppel? The answer to this important and pertinent question is in the affirmative. If a party in interest enters into a lawful agreement, stipulation, compromise or arrangement calculated to benefit him in connection with a

mortgage foreclosure sale, he inevitably affirms thereby the validity, force and effect of the sale. Similarly, a party cannot later on rely upon the supposed defects of the sale. The act of plaintiffs in asking for an extension of time to redeem the foreclosed properties estopped them from questioning the foreclosure sale thereafter.  Since the appellants failed to redeem within the redemption period and during the extension agreed upon, the effect of such failure to redeem was to vest absolute ownership over subject properties purchased. The annotation of the unforeclosed mortgage even if appearing on the title of Artemio Valenton did not in any way affect the sale between the latter and PNB. In fact, since there was merger on the part of PNB prior to the sale to said Valenton, any lien which the petitioners were claiming as subsisting was already extinguished. Granting ex gratia argumenti that there was no merger and the unforeclosed mortgage subsisted, PNB still had the right to sell subject properties and the party who purchased the same shall only be subjected to the said encumbrance. Indubitably, petitioners are not the proper parties to insist that there be a foreclosure because as earlier stated, the prerogative to decide whether or not to foreclose is with the mortgagee and not with the mortgagor.  Under ordinary circumstances, if a person has a mortgage credit over a property which was sold in an auction sale, the only right left to him was to collect its mortgage credit from the purchaser thereof during the sale conducted. This is so because a mortgage directly and immediately subjects the property on which it is constituted, whoever its possessor may be, to the fulfillment of the obligation for the security of which it was created. However, these steps need not be taken in the present case because PNB was the purchaser of subject properties and it did so with full knowledge that it had a mortgage thereon. Obligations are extinguished by the merger of the rights of the creditor and debtor. In the case under consideration, the merger took place in the person of PNB, the principal creditor in the case. The merger was brought about when during the auction sale, PNB purchased the properties on which it had another subsisting mortgage credit. This court is bound by the finding of respondent court that the two loans referred to are separate and distinct and the mere allegation by petitioners that said loans constitute a single indivisible obligation should be stricken off as the said allegation is not supported by evidence. In effect, the mortgage for the P16,000.00 loan was deemed extinguished. While it is true that there was still an annotation on the Transfer Certificate of Title issued to respondent Artemio Valenton, the said annotation or encumbrance was already discharged by operation of law. Consequently, petitioners' contention that the said title issued to Valenton was not valid by reason of the said annotation, is devoid of any legal basis.

DBP v. Cuba, 1998  We agree with CUBA that the assignment of leasehold rights was a mortgage contract. Simultaneous with the execution of the notes was the execution "Assignments of Leasehold Rights" where CUBA assigned her leasehold rights and interest on a 44-hectare fishpond, together with the improvements thereon. As pointed out by CUBA, the deeds of assignment constantly referred to the assignor (CUBA) as "borrower"; the assigned rights, as mortgaged properties; and the instrument itself, as mortgage contract. Moreover, under condition No. 22 of the deed, it was provided that "failure to comply with the terms and condition of any of the loans shall cause all other loans to become due and demandable and all mortgages shall be foreclosed." And, condition No. 33 provided that if "foreclosure is actually accomplished, the usual 10% attorney's fees and 10% liquidated damages of the total obligation shall be imposed." There is, therefore, no shred of doubt that a mortgage was intended. In People's Bank & Trust Co. vs. Odom, this Court had the occasion to rule that an assignment to guarantee an obligation is in effect as mortgage.

 We find no merit in DBP's contention that the assignment novated the promissory notes in that the obligation to pay a sum of money the loans (under the promissory notes) was substituted by the assignment of the rights over the fishpond (under the deed of assignment). As correctly pointed out by CUBA, the said assignment merely complemented or supplemented the notes; both could stand together. The former was only an accessory to the latter. Contrary to DBP's submission, the obligation to pay a sum of money remained, and the assignment merely served as security for the loans were granted. Also, the last paragraph of the assignment stated: "The assignor further reiterates and states all terms, covenants, are conditions stipulated in the promissory note or notes covering the proceeds of this loan, making said promissory note or notes, to all intent and purposes, an integral part hereof".  Neither did the assignment amount to payment by cession under Article 1255 of the Civil Code for the plain and simple reason that there was only one creditor, the DBP. Article 1255 contemplates the existence of two or more creditors and involves the assignment of all the debtor's property.  Nor did the assignment constitute dation in payment under Article 1245 of the Civil Code, which reads: "Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law on sales." It bears stressing that the assignment, being in its essence a mortgage, was but a security and not a satisfaction of indebtedness.  The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.  Condition No. 12 did not provide that the ownership over the leasehold rights would automatically pass to DBP upon CUBA's failure to pay the loan on time. It merely provided for the appointment of DBP as attorney-in-fact with authority, among other things, to sell or otherwise dispose of the said real rights, in case of default by CUBA, and to apply the proceeds to the payment of the loan. This provision is a standard condition in mortgage contracts and is in conformity with Article 2087 of the Civil Code, which authorizes the mortgagee to foreclose the mortgage and alienate the mortgaged property for the payment of the principal obligation. DBP, however, exceeded the authority vested by condition No. 12 of the deed of assignment. As admitted by it during the pre-trial, it had "[w]ithout, foreclosure proceedings, whether judicial or extrajudicial . . . appropriated the [l]easehold rights of plaintiff Lydia Cuba over the fishpond in question." Its contention that it limited itself to mere administration by posting caretakers is further belied by the deed of conditional sale it executed in favor of CUBA. DBP cannot take refuge in condition No. 12 of the deed of assignment to justify its act of appropriating the leasehold rights. As stated earlier, condition No. 12 did not provide that CUBA's default would operate to vest in DBP ownership of the said rights. Besides, an assignment to guarantee an obligation, as in the present case, is virtually a mortgage and not an absolute conveyance of title which confers ownership on the assignee.  At any rate, DBP's act of appropriating CUBA's leasehold rights was violative of Article 2088 of the Civil Code, which forbids a creditor from appropriating, or disposing of the thing given as security for the payment of a debt. Instead of taking ownership of the questioned real rights upon default by CUBA, DBP should have foreclosed the mortgage, as has been stipulated in condition no. 22 of the deed of assignment. But, as admitted by DBP, there was no such foreclosure. Yet, in its letter dated 26 October 1997, addressed to the Minister of Agriculture and Natural Resources and coursed through the Director of the Bureau of Fisheries and Aquatic Resources, DBP declared that it "had foreclosed the mortgage and enforced the assignment of leasehold rights on March 21, 1979 for failure of said spouses (CUBA spouses) to pay their loan amortizations." This only goes to show that DBP was aware of the necessity of foreclosure proceedings. In view of the false

representation of DBP that it had already foreclosed the mortgage, the Bureau of Fisheries cancelled CUBA's original lease permit, approved the deed of conditional sale, and issued a new permit in favor of CUBA. Said acts which were predicated on such false representation, as well as the subsequent acts emanating from DBP's appropriation of the leasehold rights, should therefore be set aside. To validate these acts would open the floodgates to circumvention of Article 2088 of the Civil Code. Even in cases where foreclosure proceedings were had, this Court had not hesitated to nullify the consequent auction sale for failure to comply with the requirements laid down by law, such as Act No. 3135, as amended. With more reason that the sale of property given as security for the payment of a debt be set aside if there was no prior foreclosure proceeding.

KINDS OF FORECLOSURE Judicial foreclosure There is court intervention Decisions are appealable Order of the court cuts off all rights of the parties impleaded There is equity of redemption except on banks which provides for a right of redemption Period of redemption starts from the finality of the judgment until order of confirmation No need for a special power of attorney in the contract of mortgage

Extrajudicial foreclosure No court intervention Not appealable, it is immediately executory Foreclosure does not cut off right of all parties involved There is right of redemption Period to redeem start from date registration of certificate of sale Special power of attorney in favor mortgagee is needed in the contract

of of

1) Judicial 

Rule 68, ROC: o May be availed of by bringing an action in the proper court which has jurisdiction over the area wherein the real property involved or a portion thereof is situated. o If the court finds the complaint to be well-founded, it shall order the mortgagor to pay the amount due with interest and other charges within a period of not less than 90 days nor more than 120 days from the entry of judgment o If the mortgagor fails to pay at the time directed, the court, upon motion, shall order the property to be sold to the highest bidder at a public auction. o Upon confirmation of the sale by the court, also upon motion, it shall operate to divest the rights of all parties to the action and to vest their rights to the purchaser subject to such rights of redemption as may be allowed by law. o Before the confirmation, the court retains control of the proceedings o The proceeds of the sale shall be applied to the payment of the:  Costs of the sale;  Amount due the mortgagee;  Claims of junior encumbrancers or persons holding subsequent mortgages in the order of their priority; and  Balance, if any shall be paid to the mortgagor.

o o

Sheriff’s certificate is executed, acknowledged and recorded to complete the foreclosure. NATURE OF JUDICIAL FORECLOSURE PROCEEDINGS:  Quasi in rem action.  Foreclosure is only the result or incident of the failure to pay debt.  Survives death of mortgagor.

Sulit v. CA  The governing law thus explicitly authorizes the purchaser in a foreclosure sale to apply for a writ of possession during the redemption period by filing an ex parte motion under oath for that purpose in the corresponding registration or cadastral proceeding in the case of property with Torrens title. Upon the filing of such motion and the approval of the corresponding bond, the law also in express terms directs the court to issue the order for a writ of possession. No discretion appears to be left to the court. Any question regarding the regularity and validity of the sale, as well as the consequent cancellation of the writ, is to be determined in a subsequent proceeding as outlined in Section 8 of Act 3135, and it cannot be raised as a justification for opposing the issuance of the writ of possession since, under the Act, the proceeding for this is ex parte. Such recourse is available to a mortgagee, who effects the extrajudicial foreclosure of the mortgage, even before the expiration of the period of redemption provided by law and the Rules of Court.  The rule is however, not without exception. Under Section 35, Rule 39 of the Rules of Court, which is made applicable to the extrajudicial foreclosure of real estate mortgages by Section 6 of Act 3135, the possession of the mortgaged property may be awarded to a purchaser in the extrajudicial foreclosure "unless a third party is actually holding the property adversely to the judgment debtor."  The case at bar is quite the reverse, in the sense that instead of an inadequacy in price, there is due in favor of private respondent, as mortgagor, a surplus from the proceeds of the sale equivalent to approximately 40% of the total mortgage debt, which excess is indisputably a substantial amount. Nevertheless, it is our considered opinion, and we so hold, that equitable considerations demand that a writ of possession should also not issue in this case.  In forced sales low prices are generally offered and the mere inadequacy of the price obtained at the sheriff's sale, unless shocking to the conscience, has been held insufficient to set aside a sale. This is because no disadvantage is caused to the mortgagor. On the contrary, a mortgagor stands to gain with a reduced price because he possesses the right of redemption. When there is the right to redeem, inadequacy of price becomes immaterial since the judgment debtor may reacquire the property or sell his right to redeem, and thus recover the loss he claims to have suffered by reason of the price obtained at the auction sale. The application of the proceeds from the sale of the mortgaged property to the mortgagor's obligation is an act of payment, not payment by dation; hence, it is the mortgagee's duty to return any surplus in the selling price to the mortgagor. Perforce, a mortgagee who exercises the power of sale contained in a mortgage is considered a custodian of the fund, and, being bound to apply it properly, is liable to the persons entitled thereto if he fails to do so. And even though the mortgagee is not strictly considered a trustee in a purely equitable sense, but as far as concerns the unconsumed balance, the mortgagee is deemed a trustee for the mortgagor or owner of the equity of redemption.  The general rule that mere inadequacy of price is not sufficient to set aside a foreclosure sale is based on the theory that the lesser the price the easier it will be for the owner to effect the redemption. The same thing cannot be said where the amount of the bid is in excess of the total mortgage debt. The reason is that in case the mortgagor decides to exercise his right of redemption, Section 30 of Rule 39 provides that the redemption price

should be equivalent to the amount of the purchase price, plus one per cent monthly interest up to the time of the redemption, together with the amount of any assessments or taxes which the purchaser may have paid thereon after purchase, and interest on such lastnamed amount at the same rate.  Where the redemptioner chooses to exercise his right of redemption, it is the policy of the law to aid rather than to defeat his right. It stands to reason, therefore, that redemption should be looked upon with favor and where no injury will follow, a liberal construction will be given to our redemption laws, specifically on the exercise of the right to redeem. Conformably hereto, and taking into consideration the facts obtaining in this case, it is more in keeping with the spirit of the rules, particularly Section 30 of Rule 39, that we adopt such interpretation as may be favorable to the private respondent.  In case of a surplus in the purchase price, however, there is jurisprudence to the effect that while the mortgagee ordinarily is liable only for such surplus as actually comes into his hands, but he sells on credit instead of for cash, he must still account for the proceeds as if the price were paid in cash, and in an action against the mortgagee to recover the surplus, the latter cannot raise the defense that no actual cash was received. We cannot simply ignore the importance of surplus proceeds because by their very nature, surplus money arising from a sale of land under a decree of foreclosure stands in the place of the land itself with respect to liens thereon or vested rights therein. They are constructively, at least, real property and belong to the mortgagor or his assigns. Inevitably, the right of a mortgagor to the surplus proceeds is a substantial right which must prevail over rules of technicality. Since it has never been denied that the bid price greatly exceeded the mortgage debt, petitioner cannot be allowed to unjustly enrich himself at the expense of private respondent.  Surplus money, in case of a foreclosure sale, gains much significance where there are junior encumbrancers on the mortgaged property. Jurisprudence has it that when there are several liens upon the premises, the surplus money must be applied to their discharge in the order of their priority. A junior mortgagee may have his rights protected by an appropriate decree as to the application of the surplus, if there be any, after satisfying the prior mortgage. His lien on the land is transferred to the surplus fund. And a senior mortgagee, realizing more than the amount of his debt on a foreclosure sale, is regarded as a trustee for the benefit of junior encumbrancers.  If the mortgagee is retaining more of the proceeds of the sale than he is entitled to, this fact alone will not affect the validity of the sale but simply gives the mortgagor a cause of action to recover such surplus. This is likewise in harmony with the decisional rule that in suing for the return of the surplus proceeds, the mortgagor is deemed to have affirmed the validity of the sale since nothing is due if no valid sale has been made. In the early case of Caparas vs. Yatco, etc., et al., it was also held that where the mortgagee has been ordered by the court to return the surplus to the mortgagor or the person entitled thereto, and the former fails to do so and flagrantly disobeys the order, the court can cite the mortgagee for contempt and mete out the corresponding penalty under Section 3(b) of the former Rule 64 (now Rule 71) of the Rules of Court.

2) Extrajudicial. 

Act No. 3135, as amended: a) Express authority to sell is given to the mortgagee. b) Authority is not extinguished by death of mortgagor or mortgagee. c) Public sale should be made after proper notice. d) Surplus proceeds of foreclosure sale belong to the mortgagor. e) Debtor has the right to redeem the property sold within 1 year from and after the date of sale.

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f) Remedy of party aggrieved by foreclosure is a petition to set aside sale and cancellation of writ of possession. Nature of power of foreclosure by extrajudicial sale: a) Conferred for mortgagee’s protection. b) An ancillary stipulation. c) A prerogative of the mortgagee. Both should be distinguished from execution sale governed by Rule 39, ROC. Foreclosure retroacts to the date of registration of mortgage. A stipulation of upset price, or the minimum price at which the property shall be sold to become operative in the event of a foreclosure sale at public auction, is null and void.

DBP v. Zaragosa, 1978  In extrajudicial foreclosure of mortgage, where the proceeds of the sale are insufficient to cover the debt, the mortgagee is entitled to claim the deficiency from the debtor. While Act No. 3135, as amended (re extrajudicial foreclosure) discloses nothing as to the mortgagee's right to recover such deficiency, neither does it expressly or impliedly prohibit such recovery. Article 2131 of the New Civil Code expressly provides that the form, extent and consequences of a mortgage and as to other matters not included in the Civil Code shall be governed by the provisions of the Mortgage Law and of the Land Registration Law. And under the Mortgage Law, the mortgagee has the right to claim for the deficiency resulting from the price obtained in the sale of the real property at public auction and the outstanding obligation. Moreover, if the legislature intended to foreclose the right of a creditor to sue for deficiency resulting from the foreclosure of the security to guarantee the obligation, it so expressly provides.  Where the sale of the mortgaged property in an extrajudicial foreclosure proceedings had been held in abeyance for four years due to the numerous transfers made of the date of sale upon requests of the mortgage debtors themselves, the latter cannot take advantage of the delay which was of their own making, to the prejudice of the other party, so that prior to the completion of the foreclosure, the mortgagor is liable for the interest on the mortgage.  A foreclosure of mortgage means the termination of all rights of the mortgagor in the property covered by the mortgage. It denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself. In judicial foreclosures, the "foreclosure" is not complete until the Sheriff's Certificate executed, acknowledges and recorded. In the absence of a Certificate of Sale, no title passes by the foreclosure proceedings to the vendee. It is only when the foreclosure proceedings completed and the mortgaged property sold to the purchaser that all interests of the mortgagor are cut off from the property.

Ponce de Leon v. Rehabilitation Finance Corp.  Where there is the right to redeem . . . — inadequacy of price should not be material, because the judgment debtor may re-acquire the property or else sell his right to redeem and thus recover any loss he claims to have suffered by reason of the price obtained at the execution sale.  Mere inadequacy of the price obtained at the sheriff's sale unless shocking to the conscience will not be sufficient to set aside the sale if there is no showing that, in the event of a regular sale, a better price can be obtained. The reason is that, generally, and, in forced sales, low prices are usually offered. The Court cannot consider the sale of the

Bacolod properties, the Taft Avenue house and lot and the Parañaque property of the Sorianos null and void for having been sold at inadequate prices shocking to the conscience and there being no showing that in the event of a resale, better prices can be obtained."  The terms 'banking institution' and 'bank,' as used in this Act, are synonymous and interchangeable and specifically include banks, banking institutions, commercial banks, savings banks, mortgage banks, trust companies, building and loan associations, branches and agencies in the Philippines of foreign banks, hereinafter called Philippine branches, and all other corporations, companies, partnerships, and associations performing banking functions in the Philippines."  In the event of foreclosure of a real estate mortgage to said banks or institutions, the property sold may be redeemed "by paying the amount fixed by the court in the order of execution," or the amount judicially adjudicated to the creditor bank. This provision had the effect of amending section 6 of Act No. 3135, insofar as the redemption price is concerned, when the mortgagee is a bank or a banking or credit institution, said section 6 of Act No. 3135 being, in this respect, inconsistent with the above-quoted portion of section 78 of Rep. Act No. 337. In short, the Parañaque property was sold pursuant to said Act No. 3135, but the sum for which it is redeemable shall be governed by Rep. Act No. 337, which partakes of the nature of an amendment to Act No. 3135, insofar as mortgages to banks or banking or credit institutions are concerned, to which class the RFC belongs.  NOTE: Section 47 of the General Banking Law of 200 now requires the mortgagor or debtor to pay ―the amount due under the mortgage deed, deleting the phrase ―the amount fixed by the court in the order of execution.‖

Lucena V. Ca  This Court has ruled that failure to comply with statutory requirements as to publication of notice of auction sale constitutes a jurisdictional defect which invalidates the sale. Even slight deviations therefrom are not allowed. Section 5 of Republic Act No. 720 as amended by Republic Act No. 5939 provides: "The foreclosure of mortgages covering loans granted by rural banks shall be exempt from the publication in newspapers were the total amount of the loan, including interests due and unpaid, does not exceed three thousand pesos. It shall be sufficient publication in such cases if the notices of foreclosure are posted in at least three of the most conspicuous public places in the municipality and barrio where the land mortgaged is situated during the period of sixty days immediately preceding the public auction. Proof of publication as required herein shall be accomplished by affidavit of the sheriff or officer conducting the foreclosure sale and shall be attached with the records of the case: . . . ." In the case at bar, the affidavit of posting executed by the sheriff states that notices of the public auction sale were posted in three (3) conspicuous public places in the municipality such as (1) the bulletin board of the Municipal Building (2) the Public Market and (3) the Bus Station. There is no indication that notices were posted in the barrio where the subject property lies. Clearly, there was a failure to publish the notices of auction sale as required by law. In Roxas vs. Court of Appeals, (221 SCRA 729) this Court has ruled that the foreclosure and public auction sale of a parcel of land foreclosed by a rural bank were null and void when there was failure to post notices of auction sale in the barrio where the subject property was located. This Court finds that the same situation obtains in the case at bar. Further still, there was a failure on the part of private respondents to publish notices of foreclosure sale in a newspaper of general circulation. Section 5 of R.A. 720 as amended by R.A. 5939 provides that such foreclosures are exempt from the publication requirement when the total amount of the loan including interests due and unpaid does not exceed three-thousand pesos (P3,000.00). The law clearly refers to the total amount of the loan along with interests and not merely the balance thereof, as stressed by the use of the

word "total." At the time of foreclosure, the total amount of petitioner's loan including interests due and unpaid was P3,006.90. Publication of notices of auction sale in a newspaper was thus necessary.

San Jose v. CA, 1993  The provision of Act No. 3135 as amended by Act No. 4118 relevant to the issues in this case is Section 3 which states: "Sec. 3. Notice shall be given by posting notices of sale for not less than twenty (20) 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 of city." In Tambunting v. Court of Appeals, (167 SCRA 16 [1988]) the Court stressed that the statutory provisions governing publication of notice of mortgage foreclosure sales must be strictly complied with, and that even the slightest deviations therefrom will invalidate the notice. This Court stated that the failure to advertise a mortgage foreclosure sale in compliance with statutory requirements constitutes a jurisdictional defect invalidating the sale and that a substantial error or omission in a notice of sale will render the notice insufficient and vitiate the sale.  The Notice of Sheriff's Sale, in this case, did not state the correct number of the transfer certificate of title of the property to be sold. This is a substantial and fatal error which resulted in invalidating the entire Notice. That the correct technical description appeared on the Notice does not constitute substantial compliance with the statutory requirements. The purpose of the publication of the Notice of Sheriff's Sale is to inform all interested parties of the date, time and place of the foreclosure sale of the real property subject thereof. Logically, this not only requires that the correct date, time and place of the foreclosure sale appear in the notice but also that any and all interested parties be able to determine that what is about to be sold at the foreclosure sale is that real property in which they have an interest.  The Court is not unaware of the fact that the majority of the population do not have the necessary knowledge to be able to understand that technical descriptions in certificates of title. It is to be noted and stressed that the Notice is not meant only for individuals with the training to understand technical descriptions of property but also for the layman with an interest in the property to be sold, who normally relies on the number of the certificate of title. To hold that the publication of the correct technical description, with an incorrect title number, of the property to be sold constitutes substantial compliance would certainly defeat the purpose of the Notice. This is not to say that a correct statement of the title number but with an incorrect technical description in the notice of sale constitutes a valid notice of sale. The Notice of Sheriff's Sale, to be valid, must contain the correct title number and the correct technical description of the property to be sold.

Langkaan Realty Devt., Inc. v. UCPB, 2000  In ascertaining whether or not the venue of the extra-judicial foreclosure sale was improperly laid, it is imperative to consult Act No. 3135, as amended, the law applicable to such a sale. Act 3135 provides, insofar as pertinent, as follows: "SECTION 1. When a sale is made under a special power inserted in or attached to any real estate mortgage hereafter made as security for the payment of money or the fulfillment of any other obligation, the provisions of the following sections shall govern as to the manner in which the sale and redemption shall be effected, whether or not provision for the same is made in the power. SEC. 2. Said sale cannot be made legally outside of the province which the property sold is

situated; and in case the place within said province in which the sale is to be made is the subject of stipulation, such sale shall be made in said place or in the municipal building of the municipality in which the property or part thereof is situated." Thus, the extra-judicial foreclosure sale cannot be held outside the province where the property is situated. Should a place within the province be a subject of stipulation, the sale shall be held at the stipulated place or in the municipal building of the municipality where the property or part thereof is situated.  We agree with the petitioner that under the terms of the contract, the extra-judicial foreclosure sale could be held at Trece Martires, the capital of the province which has territorial jurisdiction over the foreclosed property. The stipulation of the parties in the real estate mortgage contract is clear, and therefore, should be respected absent any showing that such stipulation is contrary to law, morals, good customs, public policy or public order. A contract is the law between the parties. However, since the stipulation of the parties lack qualifying or restrictive words to indicate the exclusivity of the agreed forum, the stipulated place is considered only as an additional, not a limiting venue. Therefore, the stipulated venue and that provided under Act 3135 can be applied alternatively. Now, applying Act 3135, the venue of the sale should be at the municipal building of Dasmariñas since the foreclosed property is located in the municipality of Dasmariñas.  Well-known is the basic legal principle that venue is waivable. Failure of any party to object to the impropriety of venue is deemed a waiver of his right to do so. In the case at bar, we find that such waiver was exercised by the petitioner. An extra-judicial foreclosure sale is an action in rem, and thus requires only notice by publication and posting to bind the parties interested in the foreclosed property. No personal notice is necessary. As such, the due publication and posting of the extra-judicial foreclosure sale of the Dasmariñas property binds the petitioner, and failure of the latter to object to the venue of the sale constitutes waiver.

See Fiestan v. CA

PROCEDURE FOR EXTRAJUDICIAL FORECLOSURE OF BOTH REAL ESTATE MORTGAGE UNDER ACT NO. 3135 AND CHATTEL MORTGAGE UNDER ACT NO. 1508 (A.M. N0. 99-10-05-0; January 15, 2000) (ARC-DINREA) 1. Filing of application before the Executive Judge through the Clerk of Court, whether under the direction of the sheriff or a notary public. 2. Clerk of Court will examine whether the requirement of the law have been complied with, that is, whether the notice of sale has been posted for not less than 20 days in at least 3 public places of the municipality or city where the property is situated, and if the same is worth more than P400.00, that such notice has been published once a week for at least 3 consecutive weeks in a newspaper of general circulation in the city or municipality 3. the certificate of sale must be approved by the Executive Judge 4. in extrajudicial foreclosure of real mortgages in different locations covering one indebtedness, only one filing fee corresponding to such debt shall be collected 5. the Clerk of Court shall issue certificate of payment indicating the amount of indebtedness, the filing fees collected, the mortgages sought to be foreclosed, the description of the real estates and their respective locations

6. the notice of sale shall be published in a newspaper of general circulation 7. the application shall be raffled among all sheriffs 8. after the redemption period has expired, the Clerk of Court shall archive the records 9. no auction sale shall be held unless there are at least 2 participating bidders, otherwise the sale shall be postponed to another date. If on the new date there shall not be at least 2 bidders, the sale shall then proceed. The names of the bidders shall be reported to the Sheriff of the Notary Public, who conducted the sale to the Clerk of Court before the issuance of the certificate of sale. STIPULATION OF UPSET PRCIE – VOID OR “TIPO” A stipulation of upset price, or the minimum price at which the property shall be sold to become operative in the event of a foreclosure sale at public auction, is null and void. BPI v. Yulo A sale of pledged articles should be had in accordance with the provisions of the present Code of Civil Procedure and not in accordance with those of the code in force at the time the contract was made. Even though a clause be inserted in a mortgage, fixing an upset price to become operative in the event of foreclosure, nevertheless the sale must take place and the property must be awarded to the highest bidder. Parties cannot, by agreement, contravene the statutes and interfere with the lawful procedure of the courts. Parties cannot insist upon an upset price in the sale of mortgaged property in accordance with the provisions of the old code, when they especially agreed that the sale should be made in accordance with the provisions of the new. RIGHT OF MORTGAGEE TO RECOVER DEFICIENCY 1) 2) 3) 4)

Mortgagee is entitled to recover deficiency. If the deficiency is embodied in a judgment, it is referred to as deficiency judgment. Action for recovery of deficiency may be filed even during redemption period. Action to recover prescribes after 10 years from the time the right of action accrues.

EFFECT OF INADEQUACY OF PRICE IN FORECLOSURE SALE 1. Where there is right to redeem GR: Inadequacy of price is immaterial because the judgment debtor may redeem the property Exception: the price is so inadequate as to shock the conscience of the court taking into consideration the peculiar circumstances 2. Property may be sold for less than its fair market value upon the theory that the lesser the price the easier for the owner to redeem 3. The value of the mortgaged property has no bearing on the bid price at the public auction, provided that the public auction was regularly and honestly conducted

Note: If the judgment obligor redeems he must make the same payments as are required to effect a redemption by a redemptioner, whereupon, no further redemption shall be allowed and he is restored to his estate. The person to whom the redemption payment is made must execute and deliver to him a certificate of redemption acknowledged before a notary public or other officer authorized to take acknowledgments of conveyances of real property. Such certificate must be filed and recorded in the registry of deeds of the place in which the property is situated and the registrar of deeds must note the record thereof on the margin of the record of the certificate of sale. The payments mentioned in this and the last preceding sections may be made to the purchaser or redemptioner, or for him to the officer who made the sale. [Section 29, Rule 39 of ROC] PNB v. CA, 1999  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 of a thing sold on installment basis [Civil Code, Art. 1484(3)]. Act No. 3135, which governs the extrajudicial foreclosure of 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.  Respondent spouses were benefited rather than harmed by the substantially lower reappraised value of their properties. As held in Velasquez v. Coronel: . . . "When there is the right to redeem, inadequacy of price should not be material, because the judgment debtor may reacquire the property or also sell his right to redeem and thus recover the loss he claims to have suffered by reason of the price obtained at the auction sale." Indeed, as pointed out by petitioner bank, respondents had several options. They could have participated in the public bidding or exercised their right of redemption or sold such right to redeem or simply settled their debt. However, they did none of these things despite due notice to them. Respondents are thus to blame for their predicament. Their claim of financial distress is not an excuse to evade their clear obligation to the bank. Prudential Bank v. Martinez, 1990  We have already ruled in several cases that in extrajudicial foreclosure of mortgage, where the proceeds of the sale insufficient to pay the debt, the mortgagee has the right recover the deficiency from the debtor.  Moreover, the fact the mortgaged property is sold at an amount less than its actual market value should not militate against the right to such recovery. We fail to see any disadvantage going for the mortgagor. On the contrary, a mortgagor stands to gain with a reduced price because he possesses the right of redemption. When there is the right to redeem, inadequacy of price should not be material, because the judgment debtor may reacquire the property or also sell his right to redeem and thus recover the loss he claims to have suffered by the reason of the price obtained at the auction sale. Generally, in forced sales, low prices are usually offered and the mere inadequacy of the price obtained at the sheriff's sale unless shocking to the conscience will not be sufficient to set aside a sale if there is no showing that in the event of a regular sale, a better price can be obtained.  The award of attorney's fees is proper. It cannot be disputed that the proceedings in the extrajudicial foreclosure and the deficiency suit are altogether different. The first is extrajudicial and summary in nature while the second is a court action. Hence, the efforts

exerted by the lawyer in these two separate courses of action should be recognized. Besides, the basis of the extrajudicial foreclosure proceeding was the Deed of Real Estate Mortgage, particularly condition No. 7 thereof, where the parties stipulated for a ten percent (10%) attorney's fees to be collected in the event that the mortgage is foreclosed or a legal action is taken to foreclose the mortgage (Appellee's Brief, Rollo, p. 9, italics supplied). However, the proceeds in that sale were insufficient to pay the debt contained in the appellant's promissory note. The appellee was, therefore, constrained to file a deficiency suit, an eventuality not covered by the Deed of Real Estate Mortgage. Necessarily, the basis of this case is the promissory note executed by the appellants. We find that the note itself shows that appellants obligated themselves to pay the sum of ten percent as attorney's fees whether incurred or not, exclusive of cost and other expenses of collection (Records, p. 7). Clearly, the trial court's award of attorney's fees was not without basis. The amount of P2,500.00 awarded as attorney's fees being less than ten percent (10%) of the deficiency sued for is just and proper in the premises.

WAIVER OF SECURITY BY CREDITOR 1. Mortgagee may waive right to foreclose his mortgage and maintain a personal action for recovery of the indebtedness. There is no statutory provision in our jurisdiction prohibiting a personal action to recover a sum of money even though a mortgage has been given as security for the payment of the same. (Hijos de I. de la Rama vs. Sajo, 45 Phil. 703 [1924]; Solomon and Lachica vs. Dantes, 63 Phil. 522 [1937]). 2. Mortgagee cannot have both remedies. He has only one cause of action, i. e., nonpayment of the mortgage debt; hence, he cannot split up his cause of action by filing a complaint for payment of the debt and another complaint for foreclosure. (Caltex Phils. Vs. Intermediate Appellate Court, 176 SRCA 741 [1989]). INDEPENDENT AND MUTUALLY EXCLUSIVE REMEDIES IN CASE OF DEATH OF DEBTOR 1. To waive the mortgage and claim the entire debt from the estate of the mortgagor as an ordinary claim 2. To foreclose the mortgage judicially and prove any deficiency as an ordinary claim; and 3. To rely on the mortgage exclusively, foreclosing the same at any time before it is barred by prescription without right to file a claim for any deficiency  The 3rd option includes extrajudicial foreclosure which bars any subsequent deficiency claim against the estate of the deceased. FORECLOSURE RETROACTS TO THE DATE OF REGISTRATION OF MORTGAGE St. Dominic Corp. v. IAC  The main purpose of the Torrens System is to avoid possible conflicts of title to real estate, and to facilitate transactions relative thereto by giving the public the right to rely upon the face of a Torrens certificate of title and to dispense with the need of inquiring further, except when the party concerned had actual knowledge of facts and circumstances that should impel a reasonably cautious man to make such further inquiry (Pascua v. Capuyoc, 77 SCRA 78). Thus, where innocent third persons relying on the correctness of the certificate of title thus issued, acquire rights over the property, the court cannot disregard

such rights (Director of Land v. Abache, et al., 73 Phil. 606). The lien of the petitioner, an innocent mortgagee for value must be respected and protected (Blanco v. Esquierdo, 110 Phil., 494).  The title to the property given as security to the Manufacturer's Bank and Trust Co., by the spouses Robes was valid, regular, and free from any lien or encumbrance. The mortgage was executed prior to the institution of Civil Case No. Q-11895, thus establishing it as a lien superior to whatever claims the plaintiffs therein may have as a result of the subsequent litigation. An inquiry beyond the face of the mortgagor's title would certainly have yielded no flaw at that time. This being so, the adverse claim in Civil Case No. Q11895 could not affect the rights of the mortgagee. The fact that the foreclosure of the mortgage and the subsequent auction sale were effected after the annotation of the adverse claim is of no moment. The foreclosure sale retroacts to the date of registration of the mortgage (Bank of the Philippine Islands v. Noblejas, 105 Phil., 418).

MEANING OF REDEMPTION REDEMPTION It is a transaction by which the mortgagor reacquires the property which may have passed under the mortgage or divests the property of the lien which the mortgage may have created7. KINDS OF REDEMPTION a) Equity of redemption: Right of the mortgagor to redeem the mortgaged property after his default in the performance of the conditions of the mortgage but before the sale of the mortgaged property or confirmation of sale; applies to judicial foreclosure of real mortgage and chattel mortgage foreclosure NOTE: redemption of the banking institutions is allowed within 1 year from confirmation of sale b) Right of redemption: Right of the mortgagor to redeem the property within a certain period after it was sold for the satisfaction of the debt. applies only to extrajudicial foreclosure of real mortgage NOTE: the right of redemption, as long as within the period prescribed, may be exercised irrespective of whether or not the mortgagee has subsequently conveyed the property to some other party (Sta. Ignacia Rural Bank,Inc v. CA, 230 SCRA 513 [1994]) PERIOD OF REDEMPTION 1. extra-judicial (Act No. 3135) a. natural person – 1 year from registration of the certificate of sale with Registry of Deeds

7

MEDIDA v CA: The rule up to now is that the right of a purchaser at a foreclosure sale is merely inchoate until after the period of redemption has expired without the right being exercised. The title to land sold under mortgage foreclosure remains, in the mortgagor or his grantee until the expiration of the redemption period and conveyance by the master's deed.

b. juridical person – same rule as natural person c. juridical person (mortgagee is bank) – 3 months after foreclosure or before registration of certificate of foreclosure whichever is earlier (Sec. 117 of General Banking Law) 2. Judicial – before confirmation of the sale by the court NOTE: Allowing redemption after the lapse of the statutory period when the buyer at the foreclosure sale does not object but even consents to the redemption, will uphold the policy of the law which is to aid rather than defeat the right of redemption (Ramirez v. CA, 219 SCRA 598 [1993])

Top-Rate International Services, Inc. v. IAC  Equity of redemption is the right of the mortgagor to redeem the mortgaged property after his default in the performance of the conditions of the mortgage but before the sale of the property or the confirmation of the sale, whereas the right of redemption means the right of the mortgagor to repurchase the property even after confirmation of the sale, in cases of foreclosure by banks, within one year from the registration of the sale. Limpin v. IAC  The effect of the failure to implead a subordinate lien-holder or subsequent purchaser or both is to render the foreclosure ineffective as against them, with the result that there remains in their favor the "unforeclosed equity of redemption." But the foreclosure is valid as between the parties to the suit.  The superiority of the mortgagee's lien over that of a subsequent judgment creditor is now expressly provided in Rule 39, Section 16 of the Revised Rules of Court, which states with regard to the effect of levy on execution that it shall create a lien in favor of a judgment creditor over the right title and interest of the judgment debtor in such property at the time of the levy, subject to the liens or encumbrances then existing.  It is well settled that a recorded mortgage is a right in rem, a lien on the property whoever its owner may be. The recordation of the mortgage in this case put the whole world, petitioners included, on constructive notice of its existence and warned everyone who thereafter dealt with the property on which it was constituted that he would have to reckon with that encumbrance.  The fact that at the time Ponce foreclosed the mortgage, the lots had already been bought by Limpin and subsequently sold to Sarmiento is of no consequence, since the settled doctrine is that the effects of the foreclosure sale retroact to the date of registration of the mortgage.

Sta. Ignacia Rural Bank v. CA The rules on redemption in the case of an extrajudicial foreclosure of land acquired under free patent or homestead statutes may be summarized as follows: If the land is mortgaged to a rural bank under R.A. No. 720, as amended, the mortgagor may redeem the property within two (2) years from the date of foreclosure or from the registration of the sheriff's certificate of sale at such foreclosure if the property is not covered or is covered, respectively, by a Torrens title. If the mortgagor fails to exercise such right, he or his heirs

may still repurchase the property within five (5) years from the expiration of the two (2) year redemption period pursuant to Section 119 of the Public Land Act (C.A. No. 141). If the land is mortgaged to parties other than rural banks, the mortgagor may redeem the property within one (1) year from the registration of the certificate of sale pursuant to Act No. 3135. If he fails to do so, he or his heirs may repurchase the property within five (5) years from the expiration of the redemption period also pursuant to Section 119 of the Public Land Act. Following the doctrine enunciated in the Rural Bank of Davao City case, it is clear from a perusal of the factual antecedents at bar that the plea for repurchase was not time-barred at the time it was made. When the certificate of sale in favor of petitioner was registered with the Register of Deeds on November 5, 1981, private respondents had two years, reckoned from said date, within which to redeem the property from petitioner, and another five years, under Commonwealth Act no. 141, counted from the expiration of the redemption period, to effect repurchase which private respondents precisely did when the suit below was initiated on March 20, 1986.

Lee Chuy Realty Corp. v. CA  The formal offer to redeem, accompanied by a bona fide tender of the redemption price, within the prescribed period is only essential to preserve the right of redemption for future enforcement beyond such period of redemption and within the period prescribed for the action by the statute of limitations. Where, as in the instant case, the right to redeem is exercised through judicial action within the reglementary period the formal offer to redeem, accompanied by a bona fide tender of the redemption price, while proper, may be unessential. The filing of the action itself is equivalent to a formal offer to redeem.  The formal offer to redeem is not a distinct step or condition sine qua non to the filing of the action in Court for the valid exercise of the right of legal redemption. What constitutes a condition precedent is either a formal offer to redeem or the filing of an action in court together with the consignation of the redemption price within the reglementary period. REQUISITES FOR VALID REDEMPTION 1. The redemption must be made within 12 months from the time of the registration of the sale. 2. Payment of the purchase price of the property plus 1% interest per month together with the taxes thereon, if any, paid by the purchaser with the same rate of interest computed from the date of registration of the sale; and 3. Written notice of the redemption must be served on the officer who made the sale and a duplicate filed with the proper Register of Deeds. (Rosales vs. Yboa, 120 SCRA 869 [1983]). Note: Acceptance of redemption price after the expiration of the statutory period for redemption is deemed a waiver of the one-year period to redeem foreclosed property. (Ramirez vs. Court of Appeals, 219 SCRA 598)

Canque v. CA, 1997 This Court reiterates the dictum that the mortgagor of titled real estate acquired under the Public Land Act but foreclosed by a rural bank, may redeem said property within two (2) years from the registration of the sheriff's certificate of sale; and if the said mortgagor fails to exercise such right, he or his heirs may still purchase the land within five years from the expiration of the two-year redemption period. In the case at bar, the Sheriff's" "Certificate of Sale was registered on September 9, 1983. Thus, based on the foregoing dictum, the petitioners, whose land was mortgaged to and foreclosed by a rural bank, had a period of two years or until September 9, 1985 to exercise their right of redemption. And in line with the mandate of Sec. 119 of the Public Land Act, they had an additional period of five years from the latter date or until September 9, 1990 to exercise their right to repurchase. Thus, the petitioners' right to redeem their land had not expired on September 7, 1990 when they filed suit against private respondent to compel the latter to allow the former to repurchase their land. In sum, we rule that the disposition of the Regional Trial Court allowing the redemption is correct although for a different reason, and that the Court of Appeals erred in failing to add the two-year redemption period to the five-year repurchase right granted by the Public Land Act. PAYMENT OF REDEMPTION MONEY Co v. PNB,  STANDARD's/CITADEL's period of redemption was up to March 10, 1976. That CITADEL filed its complaint to compel Philippine National Bank to accept its redemption only on March 11, 1976 is of no moment. The unequivocal tender of redemption was made in the letter of Francisco S. Corpus, its President, of March 3, 1976 accompanied by a manager's check of the Rizal Commercial Banking Corporation for the amount it believed it should pay as redemption price. The Supreme Court holds that the redemption was made on time, that is, within one year (or even twelve months) from the date appearing as the date of the registration of the certificate of sale.  Under the terms of the mortgage contract, the terms and conditions under which redemption may be exercised are deemed part and parcel thereof whether the same be merely conventional or imposed by law. To alter those terms in a manner prejudicial to the mortgagor or the person redeeming the property as his successor-in-interest after the foreclosures and sales would definitely come within the constitutional proscription against impairment of the obligations of contracts.  In Javellana vs. Mirasol, 40 Phil. 761, the Supreme Court has already sanctioned redemption by check.  In Lichauco vs. Olegario, et al., 43 Phil. 340, the Supreme Court held than "whether or not . . . an execution debtor was legally authorized to sell his right of redemption is a question already decided by this Court in the affirmative in numerous decisions on the precepts of Sections 463 and 464 and other sections related thereto, of the Code of Civil Procedure.  It is but just and proper that PNB should be paid the full amount of P3,366,546.42 without any interest as of March 11, 1976, when it refused a redemption legally and validly tendered. On the other hand, the amount of P1,621,970.00 tendered by CITADEL on March 5, 1976 and which was deposited in a savings account, drawing interest apparently less than 12% p.a., in the name of PNB by order of the trial court should be computed to have earned legal interest or 12% p.a., compounded annually, since March 11, 1976, provided however that should such amount including the compounded interest at 12% p.a., so earned be less than P3,366,546.42, petitioner herein should pay PNB such difference, and

provided, on the other hand, that with this arrangement, PNB does not have to account to CITADEL/LETICIA CO for any of the rentals it had earned from the time it took possession of the property. In the final analysis, instead of PNB losing P1,744,576.42, under strict technical legal reasoning, as explained above, applying hereto the principle of unjust enrichment, which We deem in the peculiar circumstances at this instant case to be the fairest way of resolving this controversy, it would still be paid by petitioner a certain amount, not to mention what must be quite substantial and considerable, the rentals the said bank it has earned, which it does not have to account for. AMOUNT PAYABLE 1. Mortgagee is not a bank (Act No. 3135 in relation to Sec. 28, Rule 39 of Rules of Court) a. Purchase price of the property b. 1% interest per month on the purchase price c. taxes paid and amount of purchaser’s prior lien, if any, with the same rate of interest computed from the date of registration of sale, up to the time of redemption 2. Mortgagee is a bank (GBL 2000) a. Amount due under the mortgage deed b. Interest c. Cost and expenses NOTE: Redemption price in this case is reduced by the income received from the property Exception: DBP v. Mirang  When the Legislature intends to bar or occlude a creditor from suing for any deficiency after foreclosing and selling the security given for the obligation, it makes express provisions to that effect, as it did in Article 2115 of the Civil Code on pledge. Hence, in the absence of a similar provision in Act 3135, as amended, it cannot be concluded that the creditor loses his right given him under the Mortgage Law and recognized in the Rules of Court, to take action for the recovery of any unpaid balance on the principal obligation, simply because he has chosen to foreclose his mortgage extrajudicially, pursuant to a special power of attorney given him by the mortgagor in the mortgage contract.  Although the predicament of the mortgagor, whose failure to pay the loan was due to the fact that the plantation which was being financed was attacked by mosaic disease, may evoke sympathy, it does not justify a disregard of the terms of the contract he entered into. His obligation thereunder is neither conditional nor aleatory; its terms are clear and subject to no exception.  In redeeming the foreclosed property, the mortgagor or debtor to the Development Bank of the Philippines should pay the entire amount he owed the bank on the date of sale, with interest thereon at the rate agreed upon, pursuant to Section 31, Com. Act 459 which provides that mortgagor or debtor . . . shall, within one year . . . have the right to redeem the real property by paying to the Bank all the amount he owed the latter on the date of sale, with interest on the total indebtedness at the rate agreed upon in the obligation from said date . . . "  To redeem his homestead, the mortgagor must pay not merely the price paid for it by the Development Bank of the Philippines at the auction sale but the total of his obligation still due and owing to the said Bank.

RIGHTS OF PERSONS WITH SUBORDINATE INTEREST Ramirez v. CA  The PNB accepted the redemption price from the petitioner after the one (1) year period had expired. By accepting the redemption price after the statutory period for redemption had expired, PNB is considered to have waived the one (1) year period within which Ramirez could redeem the property. There is nothing in the law which prevents such a waiver. Allowing a redemption after the lapse of the statutory period, when the buyer at the foreclosure does not object but even consents to the redemption, will uphold the policy of the law recognized in such cases as Javellana v. Mirasol and Nuñez and in the more recent case of Tibajia, et al. v. Honorable Court of Appeals, et al. which is to aid rather than defeat the right of redemption. Thus, there is no doubt that the redemption made by petitioner Ramirez is valid.  The rule is well settled that a second mortgagee merely takes what is called an equity of redemption and thus a second mortgagee has to wait until after the debtor's obligation to the first mortgagee has been fully settled. The rights of a second mortgagee are strictly subordinate to the superior lien of the first mortgagee. In the case at bar, the proper foreclosure of the first mortgage gave, not only the first mortgagor, but also subsequent lien holders like Marmeto, the right to redeem the property within the statutory period. Marmeto failed to make the redemption but instead it was the petitioner who made such redemption. The recording of the deeds of assignment of the right to redeem in the first mortgage, would be immaterial since it cannot be denied that the foreclosure was recorded and thus private respondent Marmeto is charged with knowledge of his right to redeem. Having failed to redeem the property from PNB, he cannot now allege that title to the property would be consolidated in his name on the ground that the first mortgagor failed to redeem the property within the one (1) year statutory period. As earlier discussed, PNB validly waived the period by accepting the redemption money from petitioner Nimfa Ramirez. Nothing in the records shows that private respondent tried to make the redemption by paying the debt secured by the first mortgage. The trial court clearly erred in consolidating the title in the name of Marmeto and allowing him to assume the first mortgage obligation. Such a conclusion is clearly without basis in law or jurisprudence and would be contrary to the basic principle that a subsequent mortgage over the same property is subordinate to a prior one.

PERSONS ENTITLED TO EXERCISE RIGHT OF REDEMPTION 1. Mortgagor or one in privity of title with mortgage 2. Successor-in-interest 3. Under the Rules of Court a. The judgment obligor; or his successor in interest in the whole or any part of the property; b. A creditor having a lien by virtue of an attachment, judgment or mortgage on the property sold, or on some part thereof, subsequent to the lien under which the property was sold. Such redeeming creditor is termed a redemptioner. [Section 27, Rule 39] RIGHTS AND OBLIGATIONS OF MORTGAGEE IN POSSESSION a. Similar to those of an antichresis creditor which is to retain such possession until the indebtedness is satisfied and the property is redeemed. b. Without right to reimbursement for useful expenses.

Cosio and de Rama v. Palileo  A possessor in bad faith is entitled to be reimbursed for her expenses in restoring a house to its original condition after it had been partly damaged by fire, because such expenses are necessary and, under Article 546, are to be refunded even to possessors in bad faith.  A builder in bad faith, under Article 449 of the Civil Code, is not entitled to reimbursement. But Article 449 is a rule of accession, which is not applicable where a new house was not built on the land of another but only repairs were made on a house that had been partly destroyed by fire. This latter case comes under Article 546 of the Civil Code which provides for the refund of necessary expenses to every possessor.  Where by agreement the mortgaged property is delivered to the mortgagee, such mortgagee in possession is subject to the obligation of an antichretic creditor to apply the fruits to the payment, first, of the interest and, later, of the principal.  A mortgagee in possession is one "who has lawfully acquired actual or constructive possession of the premises mortgaged to him, standing upon his rights as mortgagee and not claiming under another title, for the purpose of enforcing his security upon such property or making its income help to pay his debt."

Lim v. CA  (a) "The mortgage was foreclosed on January 17, 1957 (should be January 19, 1959) . . . after which she (LIM) took possession of the two parcels of land." (b) "On February 28, 1959, the Deputy Sheriff of Misamis Oriental, Jose Velez Yasay, levied and sold at public auction the two parcels of land in question." It should appear clear that when the Disputed Property was sold at public auction on February 28, 1959, ALEMAN, as judgment debtor, was no longer the owner of the Disputed Property, ownership having been acquired by LIM on January 19, 1959. The sale to LAMBERANG could not have been valid.  At the very least, LIM should have been allowed to redeem the Disputed Property within the one year period from February 28, 1959, which she offered to do on February 27, 1960. The mortgage in her favor was executed on February 1, 1957, while the judgment against ALEMAN was rendered on June 18, 1956. The mortgage was subsequent to the judgment.

VENDEE’S RIGHT TO POSSESSION OF MORTGAGED PROPERTY SOLD – WRIT OF POSSESSION/INDEPENDENT ACTION a. Contingent – Before the expiration date of the redemption period, vendee’s right of possession is contingent upon the failure of the mortgagor to redeem  Before lapse of redemption period, in cases of extra-judicial foreclosure of REM, a purchaser may take possession upon filing of an ex parte application and approval of bond.  Such duty of trial court to grant the writ of possession is ministerial upon filing of bond. b. Final – After the redemption period is terminated, the right to redeem is barred, and vendee’s right of possession is final.  After lapse of redemption period, with greater reason could such writ of possession be issued by filing a petition for issuance of the writ.

Joven v. CA  Section 7 of Act No. 3135, as amended by Act No. 4118, provides that in case of extrajudicial foreclosure of mortgage, the court may issue as a matter of course a writ of possession in favor of the purchaser even during the redemption period, provided that a proper motion has been filed, a bond is approved, and no third person is involved. Section 35 of the ROC provides that "if no redemption be made within twelve (12) months after the sale, the purchaser, or his assignee, is entitled to a conveyance and the possession of property, . . . . The possession of the property shall be given to the purchaser or last redemptioner by the same officer unless a third party is actually holding the property adversely to the judgment debtor." To give effect to his right of possession, the purchaser must invoke the aid of the courts and ask for a writ of possession. He cannot simply take the law into his own hands and enter the property without judicial authorization. We have consistently held that he need not bring a separate and independent suit for this purpose. Nevertheless, it is essential that he ask for and be granted a writ of possession in order that he may be legally installed in the property he has bought. Section 63 (b) of P.D. 1529, otherwise known as the Property Registration Decree, requires that in case of nonredemption, the purchaser at a foreclosure sale shall file with the Register of Deeds either a final deed of sale executed by the person authorized by virtue of the power of attorney embodied in the deed of mortgage or his sworn statement attesting to the fact of nonredemption. The Register of Deeds shall thereupon issue a new certificate in favor of the purchaser after the owner's duplicate certificate shall have been previously delivered and canceled.  The buyer in a foreclosure sale becomes the absolute owner of the property purchased if it is not redeemed during the period of one year after the registration of the sale. As such, he is entitled to the possession of the said property and can demand it at any time following the consolidation of ownership in his name and the issuance to him of a new transfer certificate of title. The buyer can in fact demand possession of the land even during the redemption period except that he has to post a bond in accordance with Section 7 of Act No. 3135 as amended. No such bond is required after the redemption period if the property is not redeemed. Possession of the land then becomes an absolute right of the purchaser as confirmed owner. Upon proper application and proof of title, the issuance of the writ of possession becomes a ministerial duty of the court. In the case at bar, there is no showing that after the lapse of the redemption period without the petitioner having redeemed the lands, DBP executed an affidavit of consolidation of ownership of the subject properties. Neither has it filed with the Register of Deeds a final deed of sale or a sworn statement attesting to the fact of non-redemption. The circumstance that the properties are still in the name of the petitioner shows that DBP has also not yet obtained a new certificate of title in its name. And neither does it appear that DBP, on the basis of its purchase of the lands at the foreclosure sale, ever secured a writ of possession to authorize its entry into the said lands. Not having done any of these, DBP had as yet not acquired any perfected right of possession that it could transfer to the private respondents. And as the petitioner continued in actual possession of the subject premises, she could undoubtedly maintain an action for forcible entry against the private respondents when, not being armed with a court order or a writ of possession, they simply entered and took possession of the subject lands. REMEDY OF MORTGAGOR The only remedy of the mortgagor is to question the validity of the sale by a petition to set aside the sale and to cancel the writ of possession (summary procedure).

WHERE MORTGAGED PROPERTY CLAIMED BY A THIRD PERSON a. Claimants with interest adverse to mortgagor – The possession of the property sold may be given to the purchaser by the sheriff after the period of redemption had expired, unless a third person is actually holding the property adversely to the mortgagor or judgment debtor in which case an ordinary action is necessary to recover possession from such third person. b. Successor-in-interest of mortgagor – The purchaser is entitled to the possession of the property bought and cannot be excluded therefrom by one who merely claims tot be a successor-in-interest of the mortgagor and whose possession is, therefore, not adverse to the mortgagor unless it is adjudged that the alleged successor has a better right to the prooerty than the purchaser. c. Lessee of agricultural land – The agricultural lessee’s pre-emptive right to buy the land he cultivates and his right to redeem the land if sold to a third person without his knowledge, is superior to the mortgagee of land. Remedy of mortgagee is against the mortgagor-landowner. d. Buyer of condominium unit – Even with a valid mortgage on the lot, the seller is still bound to redeemed said mortgage.

CHATTEL MORTGAGE LAWS GOVERNING CHATTEL MORTGAGE 1) Chattel Mortgage Law8 (Act.1508, as amended). 2) Civil Code. 3) Revised Administrative Code. 4) Revised Penal Code. 5) Ship Mortgage Decree of 1978 (PD 1521) governs mortgage of vessels of domestic ownership. SUBJECT MATTER OF CHATTEL MORTGAGE 1. Shares of stock in a corporation 2. Interest in business 3. Machinery and house of mixed materials treated by parties as personal property and no innocent third person will be prejudiced thereby (Makati Leasing and Finance Corporation vs. Weaver Textile Mills, Inc., 122 SCRA 296 [1983]. 4. Vessels, the mortgage of which have been recorded with the Philippine Coast Guard in order to be effective as to third persons 5. Motor vehicles, the mortgage of which had been registered both with the Land Transportation Commission and the Chattel Mortgage Registry in order to affect third persons 8

ACME SHOE vs. CA: A chattel mortgage must comply substantially with the form prescribed by the Chattel Mortgage Law itself. One of the requisites, under Sec 5 thereof, is an affidavit of Good Faith. While it is not doubted that if such an affidavit is not appended to the agreement, the chattel mortgage would still be valid between the parties (not against third persons acting in GF), the fact, however, that the statute has provided that the parties to the contract must execute an oath that "x x x 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." makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely contemplated.

6. House which is intended to be demolished 7. Growing crops and large cattle (section 7, paragraphs 2 and 3, Act No. 1508)

Makati Leasing and Finance Corporation v. Wearever Textile Mills, Inc., 1983  If a house of strong materials, like what was involved in the Tumalad case may be considered as personal property for purposes of executing a chattel mortgage thereon as long as the parties to the contract so agree and no innocent third party will be prejudiced thereby, there is absolutely no reason why a machinery, which is movable in its nature and becomes immobilized only by destination or purpose, may not be likewise treated as such. This is really because one who has so agreed is estopped from denying the existence of the chattel mortgage.  In rejecting petitioner's assertion on the applicability of the Tumalad doctrine, the Court of Appeals lays stress on the fact that the house involved therein was built on a land that did not belong to the owner of such house. But the law makes no distinction with respect to the ownership of the land on which the house is built and the Supreme Court should not lay down distinctions not contemplated by law.  It must be pointed out that the characterization of the subject machinery as chattel by the private respondent is indicative of intention and impresses upon the property the character determined by the parties. As stated in Standard Oil Co. of New York v. Jaramillo, 44 Phil. 630, it is undeniable that the parties to a contract may by agreement treat as personal property that which by nature would be real property, as long as no interest of third parties would be prejudiced thereby.  On the other hand, as pointed out by petitioner and again not refuted by respondent, the latter has indubitably benefited from said contract. Equity dictates that one should not benefit at the expense of another. Private respondent could not now therefore, be allowed to impugn the efficacy of the chattel mortgage after it has benefited therefrom. Acme Shoe, Rubber, & Plastic Corporation v. CA, 1996  Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a suretyship, the faithful performance of the obligation by the principal debtor is secured by the personal commitment of another (the guarantor or surety). In contracts of real security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property — in pledge, the placing of movable property in the possession of the creditor; in chattel mortgage, by the execution of the corresponding deed substantially in the form prescribed by law; in real estate mortgage, by the execution of a public instrument encumbering the real property covered thereby; and in antichresis, by a written instrument granting to the creditor the right to receive the fruits of an immovable property with the obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal of his credit — upon the essential condition that if the principal obligation becomes due and the debtor defaults, then the property encumbered can be alienated for the payment of the obligation, but that should the obligation be duly paid, then the contract is automatically extinguished proceeding from the accessory character of the agreement. As the law so puts it, once the obligation is complied with, then the contract of security becomes, ipso facto, null and void.  While a pledge, real estate mortgage, or antichresis may exceptionally secure afterincurred obligations so long as these future debts are accurately described, a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security

itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law. Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute an act of default on the part of the borrower of the financing agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed. In the chattel mortgage here involved, the only obligation specified in the chattel mortgage contract was the P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void or terminated. (Belgian Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al.) The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had ceased to exist coincidentally with the full payment of the P3,000,000.00 loan, there no longer was any chattel mortgage that could cover the new loans that were concluded thereafter.  A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form prescribed by the Chattel Mortgage Law itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith. While it is not doubted that if such an affidavit is not appended to the agreement, the chattel mortgage would still be valid between the parties (not against third persons acting in good faith), the fact, however, that the statute has provided that the parties to the contract must execute an oath makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely contemplated. DEFINITION CHATTEL MORTGAGE is a contract by virtue of which a personal property is recorded in the Chattel Mortgage Register as security for the performance of an obligation. CHARACTERISTICS A chattel mortgage is 1. an accessory contract because it is for the purpose of securing the performance of a principal obligation; 2. a formal contract because for its validity, registration in the Chattel Mortgage Register is indispensable. 3. a unilateral contract because it produces only obligations on the part of the creditor to free the thing from the encumbrance upon fulfillment of the obligation. 

A mortgage is a mere accessory contract and thus, its validity would depend on the validity of the loan secured by it. We however, reject the petitioner’s argument that since the chattel mortgage involved was not registered, the same is null and void. Article 2125 of the Civil Code clearly provides that the non-registration of the mortgage does not affect the immediate parties. It states: ―Article 2125. In addition to the requisites 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. xxx xxx xxx The petitioner cannot invoke the above provision to nullify the chattel mortgage it executed in favor of respondent DBP. (Filipinas Marble Corporation vs. Intermediate Appellate Court, 142 SCRA 180)

CHATTEL MORTGAGE Involves movable property. Delivery of the personal property is NOT necessary. Registration is necessary for validity. Procedure: Sec. 14 of Act 1508, as amended.

If the property is foreclosed, the excess over the amount due goes to the debtor. Creditor is entitled to deficiency from the debtor EXCEPT if it is a security for the purchase of personal property in installments.

PLEDGE Involves movable property. Delivery of the personal property is necessary. Registration is NOT necessary for validity. Procedure: Art. 2112, CC.: Art. 2112. The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the sale of the thing pledged. This sale shall be made at a public auction, and with notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the first auction the thing is not sold, a second one with the same formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In this case he shall be obliged to give an acquittance for his entire claim. (1872a) If the property is sold, the debtor is not entitled to the excess UNLESS it is otherwise agreed or in case of legal pledge. Creditor is not entitled to recover deficiency notwithstanding any stipulation to the contrary.

EFFECT OF REGISTRATION 1) Creates real rights. 2) Adds nothing to mortgage. Note: Registration of assignment of mortgage is not required

Borlough v. Fortune Enterprises, Inc., 1957 The recording provisions of the Revised Motor Vehicles Law are merely complementary to those of the Chattel Mortgage Law. A mortgage of any motor vehicle in order to affect third persons should not only be registered in the Chattel Mortgage Registry, but the same should also be recorded in the Motor Vehicles Office as required by section 5 (e) of the Revised Motor Vehicles Law. The failure of the mortgage to report the mortgage executed in his favor has the effect of making said mortgage ineffective against a purchaser in good faith who registers his purchase in the Motor Vehicles Office. Allied Banking Corporation v. Salas, 1988

 Finding the chattel mortgage to be valid, the Court takes special note of the fact that said chattel mortgage was registered and duly recorded in the Chattel Mortgage Registry of Quezon City on February 7, 1974, prior to April 22, 1977, the date the writ of attachment of the properties in question was issued. This is a significant factor in determining who of two contending claimants should be given preference over the same properties in question.  The registration of the chattel mortgage more than three years prior to the writ of attachment issued by respondent judge is an effective and binding notice to other creditors of its existence and creates a real right or a lien, which being recorded, follows the chattel wherever it goes. The chattel mortgage lien attaches to the property wherever it may be. Thus, private respondent as attaching creditor acquired the properties in question subject to petitioner's mortgage lien as it existed thereon at the time of the attachment. In this regard, it must be stressed that the right of those who so acquire said properties should not and cannot be superior to that of the creditor who has in his favor an instrument of mortgage executed with the formalities of law, in good faith, and without the least indication of fraud.

SHIP MORTGAGE DECREE  

Governs the mortgage of vessel of domestic ownership. Chattel mortgage constituted on a vessel registered in name of mortgagor, when registered in name of mortgagor in violation of a private contractual agreement that vessel would remain in name of seller, is still valid since such private agreement would not bind the mortgagee who had a right to rely upon the certification of registration. (Cebu International Finance v. CA)

AFFIDAVIT OF GOOD FAITH  An oath in a contract of chattel mortgage wherein the parties "severally swear that the mortgage is made for the purpose of securing the obligation specified in the conditions thereof and for no other purposes and that the same is a just and valid obligation and one not entered into for the purpose of fraud.  Under Section 5 of the Chattel Mortgage Law, in describing what shall be deemed sufficient to constitute a good chattel mortgage, includes the requirement of an affidavit of good faith appended to the mortgage and recorded therewith. But the absence of the affidavit vitiates a mortgage only as against third persons without notice like creditors and subsequent encumbrances. (Lilius vs. Manila Railroad Co., 62 Phil. 50 [1935]; Phil. Refining Co. vs. Jarque, 61 Phil. 229 [1935]; Giberson vs. A. N. Jurreidini Bros., 44 Phil. 216 [1922]).  A deed of chattel mortgage is void where it provides that the security stated therein ―is for the payment of any and all obligations hereinbefore contracted and which may hereafter be contracted by the mortgagor in favor of the mortgagee‖. A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage. (Jaca vs. Davao Lumber Co., 113 SCRA 107 [1982]). DESCRIPTION OF MORTGAGED PROPERTY Section 7 of the Chattel Mortgage Law does not demand a minute and specific description of every chattel mortgaged in the deed of mortgage, but only requires that the description of the mortgaged property be such as to enable the parties to the mortgage or any other

person to identify the same after a reasonable investigation and inquiry (Saldana vs. Phil. Guaranty Co., Inc., 106 Phil. 919 [1960]); otherwise, the mortgage is invalid. Jaca v. Davao Lumber Company, 1982  This deed of chattel mortgage is void because it provides that the security stated therein is for the payment of any and all obligations herein before contracted and which may hereafter be contracted by the Mortgagor in favor of the Mortgagee.  "A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage (11 CJ, 448; 5 R.C.L. 420-421). . . . Where the statute provides that the parties to a chattel mortgage must make oath that the debt is a just debt, honestly due and owing from the mortgagor to the mortgagee, it is obvious that a valid mortgage cannot be made to secure a debt to be thereafter contracted. (11 CJ. 448)" Saldana v. Philippines Guaranty Company, Inc., 1960  Section 7 of Act No. 1508, commonly known as the Chattel Mortgage Law, does not demand a minute and specific description of every chattel mortgaged in the deed of mortgage but only requires that the description of the properties be such "as to enable the parties in the mortgage, or any other person, after reasonable inquiry and investigation to identity the same". Gauged by this standard general descriptions have been held valid.  The limitation found in the last paragraph of section 7 of the Chattel Mortgage Law on "like or substituted properties" makes reference to those ''thereafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged," not to those already existing and originally included at the date of the constitution of the chattel mortgage. A contrary view would unduly impose a more rigid condition than what the law prescribes which is that the description be only such as to enable identification after a reasonable inquiry and investigation. REMEDIES UNDER CHATTEL MORTGAGE 1. When the condition of a chattel mortgage is broken, the following may exercise redemption: a. Mortgagor. b. Person holding a subsequent mortgage. c. Subsequent attaching creditor. 2. An attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the mortgage in the same manner as a mortgagee. 3. Redemption is made by paying or delivering to the mortgagee the amount due on such mortgage and the costs and expenses incurred by such breach of condition before the sale. RIGHTS ACQUIRED BY SECOND MORTGAGEE AND SUBSEQUENT PURCHASER 1. Before payment of debt  There remains in the mortgagor a mere right of redemption and only his right passes to the second mortgagee in case of a second mortgage.  As between the first and second mortgagees, the latter can only recover the property from the former by paying him the mortgage debt.



Even through extrajudicial foreclosure, the purchaser acquires no more than the right of redemption from the first mortgagee

2. After payment of debt  Judgment or attaching creditor who purchased the property at the execution sale could not acquire anything except such right of redemption.  He is not entitled to the actual possession and delivery of the property without first paying the mortgage debt. RIGHT OF MORTGAGEE TO POSSESSION 1. After default  When default occurs and the creditor desires to foreclose, the right of the creditor to take the mortgaged property is clearly implied from the provision which gives him the right to sell 2. Before default  A chattel mortgagee is not entitled to the possession of the property upon the execution of the chattel mortgage for otherwise, the contract becomes a pledge and ceases to be a chattel mortgage. FORECLOSURE OF CHATTEL MORTGAGE 1. public sale  if the mortgagor defaults in the payment of the secured debt or otherwise fails to comply with the conditions of the mortgage, the creditor has no right to appropriate to himself the personal property (Article 2141, 2088) because he is permitted only to recover his credit from the proceeds of the sale of the property at public auction through a public officer in the manner prescribed in Section 14 of Act No. 1508. (Mahoney vs. Tuason, 39 Phil. 951 [1919]); Esguerra vs. Court of Appeals, 173 SCRA 1 [1989]). 2. private sale –  if there is an express stipulation in the contract. o Exception: fraud or duress  there is nothing illegal, immoral or against public order in an agreement for the private sale of the personal properties covered by chattel mortgage PERIOD TO FORECLOSE 1. After 30 days from the time of the condition is broken 2. The 30-day period is the minimum period after violation of the mortgage condition for the creditor to cause the sale at public auction with at least 10 days notice to the mortgagor and posting of public notice of time, place, and purpose of such sale, and is a period of grace for the mortgagor, to discharge the obligation. 3. After the sale at public auction, the right of redemption is no longer available to the mortgagor. ACTION FOR REPLEVIN

 

In case of refusal of the mortgagor to surrender the possession of the mortgaged chattel sold by the sheriff, the remedy of the purchaser is to bring an ordinary action for recovery of possession. When the mortgagee seeks a replevin in order to effect the eventual foreclosure of the mortgage, it is not only the existence of, but also the mortgagor’s default on, the chattel mortgage that, among other things, can properly uphold the right to replevy the property.

CIVIL ACTION TO RECOVER CREDIT 1. independent action not required 2. mortgage lien deemed abandoned by obtaining a personal judgment RIGHT OF MORTGAGEE TO RECOVER DEFICIENCY 1. Where mortgage foreclosed: Creditor may maintain action for deficiency although the Chattel Mortgage Law is silent on this point, because a chattel mortgage is given only as a security and not as payment of the debt. 2. Where mortgage constituted as security for purchase of personal property payable in installments: No deficiency judgment can be asked and any contrary agreement shall be void. 3. Where mortgaged property subsequently attached and sold: Mortgagee is entitled to deficiency judgment in an action for specific performance. APPLICATION OF PROCEEDS OF SALE 1. 2. 3. 4.

Costs and expenses of keeping and sale. Payment of the obligation. Claims of persons holding subsequent mortgages in their order. Balance, if any, shall be paid to the mortgagor, or person holding rights under him.

BPI Credit Corporation v. CA, 1991  The complaint before the trial court is for replevin with a prayer for damages. A writ of replevin was in fact issued, but unfortunately the vehicle disappeared from the stockyard of petitioner. The records do not disclose that : (a) the vehicle was subsequently recovered and its possession restored to Cabacungan because of the writ, and (b) Filinvest subsequently foreclosed the chattel mortgage. It is, therefore, reasonable to assume that the writ of replevin was never implemented, Filinvest did not foreclosure the mortgage, and that the latter has the vehicle in its possession and control. There can be no question that although he has not yet fully paid its purchase price, Cabacungan became the owner of the vehicle, otherwise the seller would not have accepted it in mortgage. He was entitled to its possession and use until appropriate lawful proceedings would have been taken by Filinvest to obtain possession of the vehicle preliminary to foreclosure of the mortgage. Absent such proceedings, as in this case, Cabacungan was entitled to recover its possession. But the writ of replevin could not be and was not in fact implemented for the reason already adverted to. The conclusion is thus inescapable that return of the vehicle was rendered impossible by Filinvest. So, from 12 September 1983 up to at least 28 April 1987, when the trial court rendered its decision, and even up to the present — or for at most a little over eight (8)

years — Cabacungan was effectively deprived of the possession and use of the vehicle. Undoubtedly, whether it is being used or just kept idle somewhere by Filinvest, its value has significantly been reduced. It is obvious that Cabacungan had abandoned any claim for its recovery and for the restoration of its possession to him. He did not appeal from the decision which was silent on that point. Considering the lapse of more than eight (8) years since the illegal seizure of the vehicle, its possible deterioration and diminution in value as a result thereof, equity demands that Cabacungan should be paid its value, which is the second alternative provided for in Section 9, Rule 60 of the Rules of Court, and that he should not be held liable for the remaining unpaid installments on the promissory note.  It is not disputed that upon the default by a mortgagor in his obligations, the mortgagee has the right to the possession of the property mortgaged preparatory to its selling in a public auction. Section 14 of the Chattel Mortgage Law provides, inter alia, that the "mortgagee, his executor, administrator, or assign may after thirty days from the time of condition broken, cause the mortgaged property, or any part thereof, to be sold at public auction . . ." In the early case of Bachrach Motor Co. vs. Summers, this Court held this right to be unquestionable; however, if "the debtor refuses to yield up the property, the creditor must institute an action, either to effect a judicial foreclosure directly, or to secure possession as a preliminary to the sale contemplated. . . . He cannot lawfully take the property by force against the will of the debtor. . . In the article on Chattel Mortgages, in Corpus Juris, the following statement of the law on the same point is made: 'The only restriction on the mode by which the mortgagee shall secure possession of the mortgaged property after breach of condition is that he must act in an orderly manner and without creating a breach of the peace, subjecting himself to an action for trespass.'" The law does not allow the creditor himself to possess the mortgaged property through violence and against the will of the debtor because 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 debtor, for instance, may claim in good faith, and rightly or wrongly, that the debt is paid, or that for some other reason the alleged default is nonexistent.  As to the non-payment of the installments for June 1982 and February 1983, the trial court found that Cabacungan had an excuse therefor. He requested Filinvest to recompute the interests. If Filinvest deemed the excuse unfounded, its conduct in accepting payments for succeeding installments and the absence of a formal written demand therefor could hardly be reconciled with the former. Besides, such delinquency is immaterial to the issue of the legality of the taking of the vehicle. While Filinvest may have all the right in the world to foreclose the mortgage, that right did not grant it untrammeled license to intercept the property subject of the mortgage and seize it wherever it may be found, in a manner contrary to the stipulations set forth in the Chattel Mortgage contract.  On the question of whether the Deed of Chattel Mortgage is a contract of adhesion, We uphold the respondent court's conclusion that it is such. In Angeles vs. Calasanz, We said, quoting Sweet Lines vs. Teves, that while generally, stipulations in a contract come about after deliberate drafting by the parties thereto, there are certain contracts almost all the provisions of which have been drafted only by one party, usually a corporation. Such contracts are called contracts of adhesion, because the only participation of the party is the affixing of his signature or his "adhesion" thereto. The deed of Chattel Mortgage entered into by the parties easily falls into this category as it is evident that its preparation was done solely by Filinvest. This being the case, the terms of such contract are to be construed strictly against the latter, the party which prepared it. Movido v. RFC, 1959 A mortgagee who sues and obtains a personal judgment against a mortgagor upon his credit waives thereby his right to enforce the mortgage securing it (Bachrach Motor

Company vs. Icarangal, 68 Phil., 287; Manila Trading Company vs. Co. Kim, 71 Phil. 448). By instituting a civil action in the Court of First Instance to recover the amount of the loan from the mortgagor, and by securing a judgment in his favor upon the compromise agreement entered into by and between him and the mortgagor, the mortgagee abandoned his mortgage lien on the chattels in question. PNB v. Manila Investment & Construction, Inc., 1971 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 shall 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." . . . "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 a 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.)" 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. EXCEPTION: Under the Recto Law (Arts.1484 & 1485)  Applies in cases of: 1. sale of movables in installment 2. lease of personal property  with option to buy  when the lessor has deprived the lessee of the possession or enjoyment of the thing   

When the seller assigns his credit to another person, the assignee is likewise bound by the same law. (Borbon II v. Servicewide Specialists, Inc., 1996) Stipulation that the installments or rents paid shall not be returned to the buyer or lessee VALID insofar as the same may not be unconscionable (Art. 1486) Sale of movables in installment o The Recto law does NOT apply to a straight term sale in which the balance, after payment of the initial sum, should be paid in full at the time specified, because the law attempts to protect improvident buyers from the great temptation of buying beyond their means. In a straight term sale, the partial payments are not so small as to place buyers off their

guard and delude them to a miscalculation of their ability to pay. (Levy Hermanos, Inc. v. Gervacio, 1939) 

Lease of personal property with option to buy o The condition that the lessor has deprived the lessee of possession or enjoyment of the thing for the purpose of applying Art. 1485 is fulfilled when the lessor files a complaint for replevin to recover possession of the movable property. By virtue of the writ of seizure, the lessee is deprived of the use of the property. (Elisco Tool Manufacturing Corp., v. CA, 1999) o The Recto law does not apply to a financial leasing agreement which, by definition under RA 855615, does not give the lessee an option to buy. (Sing, Jr. v. FEB Leasing and Finance Corp., 2007)  BUT when a contract purporting to be a financial leasing agreement is in reality a contract of lease with option to buy, the Recto law applies. When the lessor, in its demand letter, gives the defaulting lessee the option of either returning the movable property or keeping it by paying the outstanding balance, the lessee is in effect given an option to buy, even if the ―lease agreement‖ does not contain a ―purchase option‖ clause.(PCI Leasing and Finance, Inc. v. Giraffe-X Creative Imaging, Inc., 2007)



The Recto law does not apply to a creditor-mortgagee in a loan secured by a chattel mortgage on the property purchased with the proceeds of the loan, absent proof that: o the agreement was in fact a consumer loan agreement (i.e., the mortgagee in fact bought the property from the original seller and in turn, sold it to the mortgagor) (Superlines Transportation Company, Inc. v. Lavides, 2003); or o the seller assigned to the creditor the right to collect the balance of the purchase price from the buyer. (Rosario v. PCI Leasing and Finance, Inc., 2005)



Alternative remedies under the Recto law: 1. Specific performance 2. Cancellation of sale, IF the buyer fails to pay 2 or more installments 3. Foreclosure of chattel mortgage on the thing sold, if one has been constituted, IF the buyer fails to pay 2 or more installments.



Nature of the remedies: ALTERNATIVE, NOT CUMULATIVE- the exercise of one bars the exercise of the others (Cruz v. Filipinas Investment & Finance Corp., 1968)

Industrial Finance Corporation v. Tobias, 1977 The claim of respondent cannot be sustained. Art. 1484 is clear that "should the vendee or purchaser of a personal property be in default in the payment of two or more of the agreed installments, the vendor or seller has the option to either exact fulfillment by the purchaser of the obligation, or to cancel the sale, or to foreclose the mortgage on the purchased personal property, if one was constituted. Since the case involves the sale of personal property on installments Art. 1484 of the Civil Code should apply. The remedies provided for in Art. 1484 are considered alternative, not cumulative such that the exercise of one would bar the exercise by the others. Here, petitioner has not cancelled the sale, nor has it

exercised the remedy of foreclosure. Foreclosure, judicial or extrajudicial, presupposes something more than a mere demand to surrender possession of the object of the mortgage. Since the petitioner has not availed itself of the remedy of cancelling the sale of the truck in question or of foreclosing the chattel mortgage on said truck, petitioner is still free to avail of the remedy of exacting fulfillment of the obligation of respondent Tobias, the vendee of the truck in question.

Ridad v. Filipinas Investment, 1983  Under Article 1484 of the Civil Code, the vendor of personal property, the purchase of which is payable in installments, has the right, should the vendee default in the payment of two or more of the agreed installments, to exact fulfillment by the purchaser of the obligation, or to cancel the sale, or to foreclose the mortgage on the purchased personal property, if one was constituted. Whichever right the vendor elects he cannot avail of the other, these remedies being alternative, not cumulative.  If the vendor avails himself of the right to foreclose his mortgage, the law prohibits him from further bringing an action against the vendee for the purpose of recovering whatever balance of the debt secured not satisfied by the foreclosure sale. The precise purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment, otherwise, the mortgagor-buyer would find himself without the property and still owing practically the full amount of his original indebtedness.  Where the appellant corporation elected to foreclose its mortgage upon default by the appellee in the payment of the agreed installments and having chosen to foreclose the chattel mortgage, bought the purchased vehicles at public auction as the highest bidder, it submitted itself to the consequences of Article 1484 of the Civil Code and the lower court rightly declared the nullity of the chattel mortgage in question in so far as the taxicab franchise and the used Chevrolet car of plaintiffs are concerned, under the authority of the ruling in the case of Levy Hermanos, Inc. vs. Pacific Commercial Co., et al., 71 Phil. 587, the facts of which are similar to those in the case at bar.  The vendor of personal property sold on the installment basis is precluded, after foreclosing the chattel mortgage on the thing sold, from having a recourse against the additional security put up by a third party to guarantee the purchaser's performance of his obligation. If the vendor under such circumstance is prohibited from having a recourse against the additional security for reasons therein stated, there is no ground why such vendor should not likewise be precluded from further extrajudicially foreclosing the additional security put up by the vendees themselves, as in the instant case, it being tantamount to a further action (cf. Cruz vs. Filipinas Investment & Finance Corporation, supra) that would violate Article 1484 of the Civil Code, for there is actually no difference between an additional security put up by the vendee himself and such security put up by a third party insofar as how the burden would ultimately fall on the vendee himself is concerned.  In sales on installments, where the action instituted is for specific performance and the mortgaged property is subsequently attached and sold, the sale thereof does not amount to a foreclosure of the mortgage, hence, the seller-creditor is entitled to a deficiency judgment. In that case, the vendor has availed of the first remedy provided by Article 1484 of the Civil Code, i.e., to exact fulfillment of the obligation; whereas in the present case, the remedy availed of was foreclosure of the chattel mortgage.

Offenses Involving Chattel Mortgage 1. Knowingly removing any personal property mortgaged under the Chattel Mortgage Law to any province or city other than the one in which it was located at the time of the execution of the mortgage without the written consent of the mortgagee; and 2. Selling or pledging personal property already mortgaged, or any part thereof, under the terms of the Chattel Mortgage Law without the consent of the mortgagee written on the bank of the mortgage and duly recorded in the Chattel Mortgage Register (Article 319, Revised Penal Code). Note: The mortgagor is not relieved of criminal liability even if the mortgage indebtedness is thereafter paid in full (U.S. vs. Kilayko, 32 Phil. 61 [1915]), or the mortgagor-seller informed the purchaser that the thing sold had been mortgaged. (People vs. Alvares, 45 Phil. 472 [1923]). But the sale is valid although no written consent was obtained from the mortgagee but the mortgagor lays himself open to criminal prosecution. (Servicewide Specialists, Inc. vs. Intermediate Appellate Court, 174 SCRA 80 [1989]; Dy, Jr. vs. Court of Appeals, 198 SCRA 826 [1981]).

Dy, Jr. v. CA, 1991  The mortgagor who gave the property as security under a chattel mortgage did not part with the ownership over the same. He had the right to sell it although he was under the obligation to secure the written consent of the mortgagee or he lays himself open to criminal prosecution under the provision of Article 319 par. 2 of the Revised Penal Code. And even if no consent was obtained from the mortgagee, the validity of the sale would still not be affected.  We see no reason why Wifredo Dy, as the chattel mortgagor cannot sell the subject tractor. There is no dispute that the consent of Libra Finance was obtained in the instant case. In a letter dated August 27, 1979, Libra allowed the petitioner to purchase the tractor and assume the mortgage debt of his brother. The sale between the brothers was therefore valid and binding as between them and to the mortgagee, as well.  It was Libra Finance which was in possession of the subject tractor due to Wilfredo's failure to pay the amortization as a preliminary step to foreclosure. As mortgagee, he has the right of foreclosure upon default by the mortgagor in the performance of the conditions mentioned in the contract of mortgage. The law implies that the mortgagee is entitled to possess the mortgaged property because possession is necessary in order to enable him to have the property sold. While it is true that Wilfredo Dy was not in actual possession and control of the subject tractor, his right of ownership was not divested from him upon his default. Neither could it be said that Libra was the owner of the subject tractor because the mortgagee cannot become the owner of or convert and appropriate to himself the property mortgaged (Article 2088, Civil Code). Said property continues to belong to the mortgagor. The only remedy given to the mortgagee is to have said property sold at public auction and the proceeds of the sale applied to the payment of the obligation secured by the mortgagee (See Martinez vs. PNB, 93 Phil. 765, 767 [1953]). There is no showing that Libra Finance has already foreclosed the mortgage and that it was the new owner of the subject tractor. Undeniably, Libra gave its consent to the sale of the subject tractor to the petitioner. It was aware of the transfer of rights to the petitioner.  Where a third person purchases the mortgaged property, he automatically steps into the shoes of the original mortgagor (See Industrial Finance Corp. vs. Apostol, 177 SCRA 521 [1989]). His right of ownership shall be subject to the mortgage of the thing sold to him. In the case at bar, the petitioner was fully aware of the existing mortgage of the

subject tractor to Libra. In fact, when he was obtaining Libra's consent to the sale, he volunteered to assume the remaining balance of the mortgage debt of Wilfredo Dy which Libra undeniably agreed to. SPECIAL LAWS AFFECTING MORTGAGES 

PD 385

PNB v. Adil, 1982  Pursuant to Section 4 of P.D. No. 385 "requiring government financial institution to foreclose mandatorily all loans with arrearages, including interest and charges amounting to at least 20% of the total outstanding obligation" it is mandatory for the court to place the government financial institution, which petitioner PNB is, in the possession and control of the property. The said decree was enacted "in order to effect the early collection of delinquent loans from government financial institutions and enable them to continue effectively financing the development needs of the country" without being hampered by actions brought to the courts by borrowers. Also, Section 8 of Act No. 3135, as amended by Act 4118, the law that regulates the methods affecting extrajudicial foreclosure of mortgage provides that in cases in which an extrajudicial sale is made, "redemption shall be governed by the provisions of section four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure insofar as these are not inconsistent with the provisions of this Act." Sections 464-466 of the Code of Civil Procedure were superseded by Sections 25-27 and Section 31 and Section 35 of Rule 29 of the Revised Rules of Court. Section 35 which is one of the specific provisions applicable to the case at bar provides that "if no redemption be made within twelve (12) months after the sale, the purchaser, or his assigned, is entitled to a conveyance and possession of property. The possession of the property shall be given to the purchaser or last redemptioner by the officer unless a third party is actually holding the property adversely to the judgment debtor.''  The rule, therefore, is that after the redemption period has expired, the purchaser of the property has the right to be placed in possession thereof. Accordingly, it is the inescapable duty of the Sheriff to enforce the writ of possession, especially as in this case, a new title has already been issued in the name of the purchaser. In fact , under Section 7 of the said Act 3135, upon which the de los Angeles and Garcia cases were based, even before the redemption period, it is ministerial upon the court to issue a writ of possession in favor of a purchaser, provided that a proper motion has been filed, a bond approved, and no third person is involved. The right of the purchaser to be placed in the possession of the property is bolstered by Section 8 of the aforecited Act which provides that if the judge finds the complaint assailing the legality of the foreclosure sale justified, it shall not transfer the possession of the property, even on appeal, but will only proceed against the bond posted by the purchaser.  In the case at bar, the writ of possession was issued but its enforcement was suspended by the grace period given by the Sheriff who has no authority to do so, and later by the order of the judge on a very dubious ground as "humanitarian reason." If the applicable laws clearly allow the purchaser to have possession of the property foreclosed and mandate the court to give effect to such right, it should be a gross error for the judge to suspend the implementation of the writ of possession, which, as shown, should issue as a matter of course. We are of the opinion that once the writ of possession has been issued, the Court has no alternative but to enforce the writ without delay, especially as in this case, no motion for suspension of the enforcement was filed. The right of the petitioner to the possession of the property is clearly unassailable. It is founded on its right to ownership. As the purchaser of the properties in the foreclosure sale, and to which the respective titles thereto have already be settled, petitioner's right user the property has become absolute,

vesting upon him the right of possession over an enjoyment of the property which the Court must aid in affecting its delivery. After such delivery, the purchaser becomes the absolute owner of the property. As we said to Tan Soo Huat vs. Ongwico, 63 Phil. 749, the deed of conveyance entitled the purchaser to have and to hold the purchased property. This means, that the purchaser is entitled to go immediately upon the real property, and that it is the Sheriff's inescapable duty to place him in such possession.  Respondent cannot claim that the writ of possession was suspended under the authority set forth in Rule 135 of the Rules of Court. To invoke the power granted therein, the court must act within the law and with justice. When the reason given by the judge in issuing the order of suspension was not specified in the order, but stated only in the general term, as "humanitarian reasons." the Court did not act within the bounds of the law. The order was, furthermore, issued motu proprio and without the petitioner being afforded the right to present its side. We cannot give Our approval to the actuation of respondent judge, for an order suspending the implementation of an earlier order is like an injunction which must be issued always with circumspection, and upon proper motion of the party concerned. Filipinas Marble Corporation v. IAC, 1986  In the case at bar, the respondent try to impress upon this Court that the $5,000,000.00 loan was actually granted and released to the petitioner corporation and whatever the composition of the management which received the loan is of no moment because this management was acting in behalf of the corporation. The respondent also argue that since the loan was extended to the corporation, the releases had to be made to the then officers of that borrower corporation. We cannot, at this point, conclude that respondent DBP together with the Bancom people actually misappropriated and misspent the $5 million loan in whole or in part although the trial court found that there is "persuasive" evidence that such acts were committed by the respondent. This matter should rightfully be litigated below in the main action. Pending the outcome of such litigation, P.D. 385 cannot automatically be applied for if it is really proven that respondent DBP is responsible for the misappropriation of the loan, even if only in part, then the foreclosure of the petitioner's properties under the provisions of P.D. 385 to satisfy the whole amount of the loan would be gross mistake. It would unduly prejudice the petitioner, its employees and their families. Only after trial on the merits of the main case can the true amount of the loan which was applied wisely or not, for the benefit of the petitioner be determined. Consequently, the extent of the loan where there was no failure of consideration and which may be properly satisfied by foreclosure proceedings under P.D. 385 will have to await the presentation of evidence in a trial on the merits. 

Proc. No. 50 (Asset Privatization Trust)

Mantruste Systems, Inc. v. CA, 1989  Section 31 of Proclamation No. 50-A explicitly prohibits courts and administrative agencies from issuing "any restraining order or injunction against the Trust (APT) in connection with the acquisition, sale or disposition of assets transferred to it, nor against any purchaser of assets sold by the Trust to prevent such purchaser from taking possession of any assets purchased by him." While the petitioner decries the "probable injustice" that it will suffer if it is ousted from the hotel and possession of the property is delivered to the private respondents as the winning bidders/ purchasers at the public auction sale, the greater prejudice and injustice to the latter who, after paying P85 million to purchase the hotel have been deprived of its possession by the illegal issuance of the writ of injunction, may not be glossed over. On the other hand, as indicated by the Appellate Court, the

petitioner is not without adequate remedy to recover its alleged P12 million advances on behalf of the DBP to make the hotel operational. It may sue either the DBP, or its successor-in-interest, the APT, for payment of the claim.  Section 31 of Proclamation No. 50-A does not infringe any provision of the Constitution. It does not impair the inherent power of courts "to settle actual controversies which are legally demandable and enforceable and to determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the government" (Sec. 1, Art. VIII, 1987 Constitution). The power to define, prescribe and apportion the jurisdiction of the various courts belongs to the legislature, except that it may not deprive the Supreme Court of its jurisdiction over cases enumerated in Section 5, Article VIII of the Constitution (Sec. 2, Art. VIII, 1987 Constitution).  The President, in the exercise of her legislative power under the Freedom Constitution, issued Proclamation No. 50-A prohibiting the courts from issuing restraining orders and writs of injunction against the APT and the purchasers of any assets sold by it, to prevent courts from interfering in the discharge, by this instrumentality of the executive branch of the Government, of its task of carrying out "the expeditious disposition and privatization of certain government corporations and/or the assets thereof" (Proc. No. 50), absent any grave abuse of discretion amounting to excess or lack of jurisdiction on its part. This proclamation, not being inconsistent with the Constitution and not having been repealed or revoked by Congress, has remained operative (Sec. 3, Art. XVIII, 1987 Constitution).

ANTICHRESIS DEFINITION ANTICHRESIS is a contract whereby the creditor acquires the right to receive the fruits of an immovable of the debtor, with the obligation to apply then to the payment of the interest, if owing, and thereafter to the principal of the credit (Art 2132)

CHARACTERISTICS 1. Accessory contract – it secures the performance of a principal obligation 2. formal contract – it must be in a specified form to be valid (Art. 2134) ANTICHRESIS Refers to real property Perfected by mere consent Consensual contract

PLEDGE Refers to personal property Perfected by delivery of the thing pledged Real contract

ANTICHRESIS Property is delivered to creditor

REAL MORTGAGE Debtor usually retains possession of the property Creditor does not have any right to receive the fruits, but the mortgage creates a real right over the property The creditor has no such obligation

Creditor acquires only the right to receive the fruits of the property, hence, it does not produce a real right The creditor, unless there is stipulation to the contrary, is obliged to pay the taxes and

charges upon the estate It is expressly stipulated that the creditor There is no such obligation on part of given possession of the property shall apply mortgagee all the fruits thereof to the payment of interest, if owing, and thereafter to the principal Subject matter of both is real property Diego v. Fernando, 1960  If a contract of loan with security does not stipulate the payment of interest like in the case at bar, and possession of the mortgaged property is delivered to the mortgagee in order that the latter may gather its fruits, but without stating that said fruits are to be applied to the payment of interest, if any, and afterwards that of the principal, the contract is a mortgage and not antichresis (Legaspi and Salcedo vs. Celestial, 66 Phil., 372).

MEASURE OF PAYMENT  The fruits of the immovable which is the object of the antichresis must be appraised at their actual market value at the time of application.  The antichretic creditor is under obligation to apply the fruits of the property in satisfaction, first of whatever interest on the debt is due, and secondly, to the payment of the principal. SPECIAL REQUISITES: 1. it can cover only the fruits of an immovable property 2. delivery of the immovable is necessary for the creditor to receive the fruits and not that the contract shall be binding 3. amount of principal and interest must be specified in writing 4. express agreement that debtor will give possession of the property to creditor and that the latter will apply the fruits to the interest, if any, then to the principal of his credit. 5. NOTE: The obligation to pay interest is not of the essence of the contract of antichresis; there being nothing in the Code to show that antichresis is only applicable to securing the payment of interest-bearing loans. On the contrary, antichresis is susceptible of guaranteeing all kinds of obligations, pure or conditional OBLIGATIONS OF ANTICHRETIC CREDITOR 1. to pay taxes and charges on the estate, including necessary expenses  Creditor may avoid said obligation by: a. compelling debtor to reacquire enjoyment of the property b. by stipulation to the contrary 2. to apply all the fruits, after receiving them, to the payment of interest, if owing, and thereafter to the principal

3. to render an account of the fruits to the debtor 4. to bear the expenses necessary for its preservation and repair REMEDIES OF CREDITOR IN CASE OF NON-PAYMENT OF DEBT 1. action for specific performance 2. petition for the sale of the real property as in a foreclosure of mortgages under Rule 68 of the Rules of Court  the parties, however, may agree on an extrajudicial foreclosure in the same manner as they are allowed in contracts of mortgage and pledge (Tavera v. El Hogar Filipino, Inc. 68 Phil 712)  a stipulation authorizing the antichretic creditor to appropriate the property upon the non-payment of the debt within the agreed period is void (Art. 2088)

CONCURRENCE AND PREFERENCE OF CREDITS CLASSIFICATION OF CREDITS 1) Special preferred credits. (Art. 2241 and 2242, CC) a) Considered as mortgages or pledges of real or personal property or liens within the purview of legal provisions governing insolvency. b) Taxes due to the State shall first be satisfied. 2) Ordinary preferred credits (Art. 2244) – Preferred in the order given by law. 3) Common credits (Art. 2245) – Credits of any other kind or class, or by any other right or title not comprised in Arts. 2241- 2244 shall enjoy no preference. Art. 2236. The debtor is liable with all his property, present and future, for the fulfillment of his obligations, subject to the exemptions provided by law. (1911a) Art. 2237. Insolvency shall be governed by special laws insofar as they are not inconsistent with this Code. (n) Art. 2238. So long as the conjugal partnership or absolute community subsists, its property shall not be among the assets to be taken possession of by the assignee for the payment of the insolvent debtor's obligations, except insofar as the latter have redounded to the benefit of the family. If it is the husband who is insolvent, the administration of the conjugal partnership of absolute community may, by order of the court, be transferred to the wife or to a third person other than the assignee. (n) Art. 2239. If there is property, other than that mentioned in the preceding article, owned by two or more persons, one of whom is the insolvent debtor, his undivided share or interest therein shall be among the assets to be taken possession of by the assignee for the payment of the insolvent debtor's obligations. (n)

Art. 2240. Property held by the insolvent debtor as a trustee of an express or implied trust, shall be excluded from the insolvency proceedings. (n) Exempt Property 1. Family home constituted jointly by husband and wife or by unmarried head of a family (Article 152, Family Code). Exceptions: a.) for non-payment of taxes; b.) for debts incurred prior to the constitution of the family home; c.) for debts secured by mortgages on the premises before or after such constitution; and d.) for debts due to laborers, mechanics, architects, builders, material men and others who have rendered service or furnished material for the construction of the building 2. Right to receive support as well as any money or property obtained as such support. (Article 205, Family Code) 3. Tools and implements necessarily used by him in his trade or employment; 4. Three horses, or three cows, or three carabaos or other beasts of burden, such as the debtor may select, not exceeding one thousand pesos in value and necessarily used by him in his ordinary occupation; 5. His necessary clothing and that of all his family. 6. Household furniture and utensils necessary for housekeeping and used for that purpose by the debtor, such as the debtor may select, of a value not exceeding one thousand pesos; 7. Provisions for individual or family use insufficient for three months; 8. The professional libraries of attorney’s, judges, physicians, pharmacists, dentist, engineers, surveyors, clergymen, teachers and other professionals, not exceeding three thousand pesos in value; 9. One fishing boat and net, not exceeding the total value of one thousand pesos, the property of any fisherman, by the lawful use of which he earns a livelihood; 10. So much of the earnings of the debtor for his personal services within the month preceding the levy as are necessary for the support of his family; 11. Lettered gravestones; 12. All moneys, benefits, privileges or annuities accruing or in any manner growing out of any life insurance, if the annual premiums paid do not exceed five hundred pesos, and if they exceed the sum, a like exemption shall exist which shall bear the same proportion to the moneys, benefits privileges and annuities so accruing or growing out of such insurance that said five hundred pesos bears to the whole premiums paid; 13. The right to receive legal support, or money or property obtained as such support, or any pension or gratuity from the government; 14. Copyrights and other properties especially exempted by law (Section 12, Rule 39) 15. Property under legal custody and of the public dominion. Art. 2241. With reference to specific movable property of the debtor, the following claims or liens shall be preferred: (1) Duties, taxes and fees due thereon to the State or any subdivision thereof; (2) Claims arising from misappropriation, breach of trust, or malfeasance by public officials committed in the performance of their duties, on the movables, money or securities obtained by them;

(3) Claims for the unpaid price of movables sold, on said movables, so long as they are in the possession of the debtor, up to the value of the same; and if the movable has been resold by the debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost by the immobilization of the thing by destination, provided it has not lost its form, substance and identity; neither is the right lost by the sale of the thing together with other property for a lump sum, when the price thereof can be determined proportionally; (4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value thereof; (5) Credits for the making, repair, safekeeping or preservation of personal property, on the movable thus made, repaired, kept or possessed; (6) Claims for laborers' wages, on the goods manufactured or the work done; (7) For expenses of salvage, upon the goods salvaged; (8) Credits between the landlord and the tenant, arising from the contract of tenancy on shares, on the share of each in the fruits or harvest; (9) Credits for transportation, upon the goods carried, for the price of the contract and incidental expenses, until their delivery and for thirty days thereafter; (10) Credits for lodging and supplies usually furnished to travellers by hotel keepers, on the movables belonging to the guest as long as such movables are in the hotel, but not for money loaned to the guests; (11) Credits for seeds and expenses for cultivation and harvest advanced to the debtor, upon the fruits harvested; (12) Credits for rent for one year, upon the personal property of the lessee existing on the immovable leased and on the fruits of the same, but not on money or instruments of credit; (13) Claims in favor of the depositor if the depositary has wrongfully sold the thing deposited, upon the price of the sale. In the foregoing cases, if the movables to which the lien or preference attaches have been wrongfully taken, the creditor may demand them from any possessor, within thirty days from the unlawful seizure. (1922a) Art. 2242. With reference to specific immovable property and real rights of the debtor, the following claims, mortgages and liens shall be preferred, and shall constitute an encumbrance on the immovable or real right: (1) Taxes due upon the land or building; (2) For the unpaid price of real property sold, upon the immovable sold; (3) Claims of laborers, masons, mechanics and other workmen, as well as of architects, engineers and contractors, engaged in the construction, reconstruction or repair of buildings, canals or other works, upon said buildings, canals or other works; (4) Claims of furnishers of materials used in the construction, reconstruction, or repair of buildings, canals or other works, upon said buildings, canals or other works; (5) Mortgage credits recorded in the Registry of Property, upon the real estate mortgaged; (6) Expenses for the preservation or improvement of real property when the law authorizes reimbursement, upon the immovable preserved or improved; (7) Credits annotated in the Registry of Property, in virtue of a judicial order, by attachments or executions, upon the property affected, and only as to later credits; (8) Claims of co-heirs for warranty in the partition of an immovable among them, upon the real property thus divided; (9) Claims of donors or real property for pecuniary charges or other conditions imposed upon the donee, upon the immovable donated;

(10) Credits of insurers, upon the property insured, for the insurance premium for two years. (1923a) Carried Lumber Co. v. ACCCFA, For failure of Facoma to comply with the terms of their compromise agreement as approved by the trial court, plaintiff secured an execution of the judgment on compromise. Whereupon, the sheriff levied on Facoma's lease rights, warehouse, rice mill building and scheduled an auction sale thereof on January 31, 1961. On January 25, 1961, defendant filed a third-party claim and informed the sheriff that the properties levied upon had already been sold to it on November 5, 1960, when it foreclosed its mortgage lien over the properties. It was placed in possession on January 27, 1961. Nevertheless, the sheriff went on with the auction sale and sold the properties to plaintiff, as the highest bidder. Thereafter, plaintiff sued defendant to assert its preferential materialman's lien over the Facoma's properties and in order to obtain possession thereof. After trial, the lower court held that plaintiff has a lien over the warehouse and ricemill building of Facoma, superior to defendant's mortgage credit, to which it is entitled to material possession should defendant not satisfy its claim. From this judgment, defendant instituted the present appeal. Facts:  The term pro rata in Article 2249 of the Civil Code means in proportion or ratably, or a division according to share, interest or liability of each (72 C.J.S. 967-8).  The enumeration of ten claims, mortgages and lines in Article 2242 of the Civil Code did not create an order of preference. The materialman's (mechanic's) lien of refectionary credit, listed as No. 4 is not superior to the mortgage credit which is listed as No. 5. Said article merely lists the credits which may concur with respect to specific real properties and which would be satisfied pro-rata according to Article 2249.  There is no dispute that the Facoma warehouse was constructed by means of the materials supplied by plaintiff and that the construction was financed by defendant. Therefore, it is just and proper that the two creditors should have pro-rata shares in that warehouse.  The ruling (De Baretto vs. Villanueva, 110 Phil. 896, 904, 906) that as insolvency or a similar proceeding is necessary in order "to enable the court to ascertain the pro rata dividend corresponding to each" of the two creditors as well as the "other creditors" entitled to preference under Article 2242 does not apply where there are only two creditors.  Since plaintiff specified that it was asserting a lien only over the Facoma warehouse and not on the ricemill building, the trial court erred in sustaining its lien over the ricemill building. Plaintiff has no materialman's lien on the ricemill, it having supplied materials only for the construction of the warehouse.

Recorded Mortgage Credits

DBP v. NLRC, 1990  "A preference of credit bestows upon the preferred creditor an advantage of having his credit satisfied first ahead of other claims which may be established against the debtor. Logically, it becomes material only when the properties and assets of the debtors are insufficient to pay his debts in full; for if the debtor is amply able to pay his various creditors in full, how can the necessity exist to determine which of his creditors shall be paid

first or whether they shall be paid out of the proceeds of the sale the debtor's specific property? Indubitably, the preferential right of credit attains significance only after the properties of the debtor have been inventoried and liquidated, and the claims held by his various creditors have been established  A distinction should be made between a preference of credit and a lien. A preference applies only to claims which do not attach to specific properties. A lien creates a charge on a particular property. The right of first preference as regards unpaid wages recognized by Article 110 does not constitute a lien on the property of the insolvent debtor in favor of workers. It is but a preference of credit in their favor, a preference in application. It is a method adopted to determine and specify the order in which credits should be paid in the final distribution of the proceeds of the insolvent's assets. It is a right to a first preference in the discharge of the funds of the judgment debtor.  "Article 110 of the Labor Code does not purport to create a lien in favor of workers or employees for unpaid wages either upon all of the properties or upon any particular property owned by their employer. Claims for unpaid wages do not therefore fall at all within the category of specially preferred claims established under Articles 2241 and 2242 of the Civil Code, except to the extent that such claims for unpaid wages are already covered by Article 2241, number 6: `claims for laborers' wages, on the goods manufactured or the work done;' or by Article 2242, number 3: `claims of laborers and other workers engaged in the construction, reconstruction or repair of buildings, canals and other works.' To the extent that claims for unpaid wages fall outside the scope of Article 2241, number 6 and 2242, number 3, they would come within the ambit of the category of ordinary preferred credits under Article 2244."  The DBP anchors its claims on a mortgage credit. A 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 (Article 2176, Civil Code). It creates a real right which is enforceable against the whole world. It is a lien on an identified immovable property, which a preference is not. A recorded mortgage credit is a special preferred credit under Article 2242 (5) of the Civil Code on classification of credits. The preference given by Article 110, when not falling within Article 2241 (6) and Article 2242 (3) of the Civil Code and not attached to any specific property, is an ordinary preferred credit although its impact is to move it from second priority to first priority in the order of preference established by Article 2244 of the Civil Code (Republic vs. Peralta, supra).  In fact, under the Insolvency Law (Section 29) a creditor holding a mortgage or lien of any kind as security is not permitted to vote in the election of the assignee in insolvency proceedings unless the value of his security is first fixed or he surrenders all such property to the receiver of the insolvent's estate.  In fine, the right to preference given to workers under Article 110 of the Labor Code cannot exist in any effective way prior to the time of its presentation in distribution proceedings. It will find application when, in proceedings such as insolvency, such unpaid wages shall be paid in full before the "claims of the Government and other creditors" may be paid. But, for an orderly settlement of a debtors assets, all creditors must be convened, their claims ascertained and inventoried, and thereafter the preferences determined in the course of judicial proceedings which have for their object the subjection of the property of the debtor to the payment of his debts or other lawful obligations. Thereby, an orderly determination of preference of creditors' claims is assured (Philippine Savings Bank vs. Lantin, No. L-33929, September 2, 1983, 124 SCRA 476); the adjudication made will be binding on all parties-in-interest, since those proceedings are proceedings in harmony.

BPI v. CA,  In the instant case, the action of petitioner for foreclosure of real estate mortgage had been filed against respondent RUBY and was pending with the trial court when RUBY was placed by SEC under rehabilitation through the creation of a management committee pursuant to Sec. 6, par. (d), P.D. 902-A. In its order of 10 August 1984, SEC directed that all actions or claims against RUBY pending before any court, tribunal, branch or body be deemed suspended. On the basis of this order, the jurisdiction of the trial court over the case was also considered suspended. As a result, SEC acquired jurisdiction, which is bolstered by the fact that it had already appointed a rehabilitation receiver for the distressed corporation and had directed that all proceedings or claims against it be suspended.  The doctrine in the PCIB case has since been abrogated. In Alemar's Sibal & Sons v. Elbinias, (G.R. No. 75414, 4 June 1990, 186 SCRA 94) BF Homes, Inc. v. Court of Appeals, (G.R. No. 77143, 3 October 1990, 190 SCRA 262) Araneta v. Court of Appeals, (G.R. No. 95253, 10 July 1992, 211 SCRA 390) and RCBC v. Court of Appeals, (G.R. No. 74851, 14 September 1992, 213 SCRA 830) we already ruled that whenever a distressed corporation asks SEC for rehabilitation and suspension of payments, preferred creditors may no longer assert such preference, but shall stand on equal footing with other creditors. Foreclosure shall be disallowed so as not to prejudice other creditors or cause discrimination among them. If foreclosure is undertaken despite the fact that a petition for rehabilitation has been filed, the certificate of sale shall not be delivered pending rehabilitation. If this has already been done, no transfer certificate of title shall likewise be effected within the period of rehabilitation. The rationale behind PD 902-A, as amended, is to effect a feasible and viable rehabilitation. This cannot be achieved if one creditor is preferred over the others.  While it is recognized that petitioner is a preferred creditor whose claim is secured by a real estate mortgage on the properties of respondent RUBY, its right to enforce its claim in court is suspended with the placing by SEC of respondent under rehabilitation. This rule will enable the management committee or rehabilitation receiver to effectively exercise his/its power free from any judicial or extrajudicial interference that might unduly hinder the rescue of the distressed company. Credits Annotated in Virtue of Judicial Order Manabat v. Laguna Federation of Facomas, Inc., 1967 Facts:  Laguna Federation of Facomas, Inc. won a suit filed by it against a certain Nieves M. Vda. de Roxas  A writ of execution was issued by virtue of which Francisco Manabat, the provincial sheriff, sold at public auction all rights, titles and interests of Nieves M. Vda. de Roxas in ten (10) parcels of land for a total price of P37,000.  Discovering, however, that the parcels of land sold were subject to registered liens such as writs of execution and attachment annotated at the back of the respective title certificates, the sheriff instituted an action for interpleader in the same CFI of Laguna, for the different creditors or lienholders to litigate among themselves and determine their rights to the P37,000 proceeds of the sale.  CFI ruled that the defendants are entitled to the proceeds of the sale in the order of preference in accordance with the dates of the registration of their credits.  From said judgment only Cayco and Zorilla appealed.

 They are fourth in the order of preference when it comes to dates of the registration of their credits,  The Court of Appeals, certified the appeal to the SC as involving pure questions of law.  Appellants' reasoning is that this is an instance of several credits referring to the same specific real property; and that the rule in such case is to satisfy all the aforesaid credits pro rata, following Article 2249 of the Civil Code: Issue: Whether the rule to follow in the satisfaction of the credits involved is that of preference in the order of dates of registration, as held by the court a quo, or distribution pro rata, as appellants maintain. Ruling: It should be in the order of dates of registration of credits. The rule of pro rata does not apply to the credits mentioned in subpar. (7) of Article 2242 of the Civil Code. "(7) Credits annotated in the Registry of Property, in virtue of a judicial order, by attachments or executions, upon the property affected, and only as to later credits;" It being expressly provided that said credits are preferred "only as to later credits", it follows that the same limitation applies as to their preference among themselves, i.e., for purposes of satisfying several credits annotated by attachments or executions, the rule is still preference according to priority of the credits in the order of time. For, otherwise, the result would be absurd: the preference of an attachment or execution lien over later credits, as above provided for, could easily be defeated by simply obtaining writs of attachment or execution, and annotating them, no matter how much later. It not being disputed that appellants' credit is "later" than those of appellees Laguna Federation of Facomas, Inc., Valeriana Lim-aco de Almeda and Cosmopolitan Insurance Co., Inc., the appellees' credits must be deemed preferred to that of appellants. To satisfy them pro rata could erase the difference between earlier and later credits provided for by subpar. (7) of Article 2242 aforementioned.

Refectionary Credit Primarily an indebtedness incurred in the repair or reconstruction of something previously made, such repair or construction being made necessary by the deterioration or destruction of the thing as it formerly existed.

Art. 2243. The claims or credits enumerated in the two preceding articles shall be considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency. Taxes mentioned in No. 1, Article 2241, and No. 1, Article 2242, shall first be satisfied. (n) Art. 2244. With reference to other property, real and personal, of the debtor, the following claims or credits shall be preferred in the order named:

(1) Proper funeral expenses for the debtor, or children under his or her parental authority who have no property of their own, when approved by the court; (2) Credits for services rendered the insolvent by employees, laborers, or household helpers for one year preceding the commencement of the proceedings in insolvency; (3) Expenses during the last illness of the debtor or of his or her spouse and children under his or her parental authority, if they have no property of their own; (4) Compensation due the laborers or their dependents under laws providing for indemnity for damages in cases of labor accident, or illness resulting from the nature of the employment; (5) Credits and advancements made to the debtor for support of himself or herself, and family, during the last year preceding the insolvency; (6) Support during the insolvency proceedings, and for three months thereafter; (7) Fines and civil indemnification arising from a criminal offense; (8) Legal expenses, and expenses incurred in the administration of the insolvent's estate for the common interest of the creditors, when properly authorized and approved by the court; (9) Taxes and assessments due the national government, other than those mentioned in Articles 2241, No. 1, and 2242, No. 1; (10) Taxes and assessments due any province, other than those referred to in Articles 2241, No. 1, and 2242, No. 1; (11) Taxes and assessments due any city or municipality, other than those indicated in Articles 2241, No. 1, and 2242, No. 1; (12) Damages for death or personal injuries caused by a quasi-delict; (13) Gifts due to public and private institutions of charity or beneficence; (14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in a final judgment, if they have been the subject of litigation. These credits shall have preference among themselves in the order of priority of the dates of the instruments and of the judgments, respectively. (1924a) Art. 2245. Credits of any other kind or class, or by any other right or title not comprised in the four preceding articles, shall enjoy no preference. (1925) Art. 2246. Those credits which enjoy preference with respect to specific movables, exclude all others to the extent of the value of the personal property to which the preference refers. Art. 2247. If there are two or more credits with respect to the same specific movable property, they shall be satisfied pro rata, after the payment of duties, taxes and fees due the State or any subdivision thereof. (1926a) Art. 2248. Those credits which enjoy preference in relation to specific real property or real rights, exclude all others to the extent of the value of the immovable or real right to which the preference refers. Art. 2249. If there are two or more credits with respect to the same specific real property or real rights, they shall be satisfied pro rata, after the payment of the taxes and assessments upon the immovable property or real right. (1927a) DBP v. NLRC, 1995  Art. 110 should not be treated apart from other laws but applied in conjunction with the pertinent provisions of the Civil Code and the Insolvency Law to the extent that piecemeal distribution of the assets of the debtor is avoided. Complementing Art. 110 is Sec. 10,

Rule VIII, Book III, of the Revised Rules and Regulations Implementing the Labor Code. We interpreted this provision in Development Bank of the Philippines v. Santos to mean that — . . . a declaration of bankruptcy or a judicial liquidation must be present before the worker's preference may be enforced. Thus Article 110 of the Labor Code and its implementing rule cannot be invoked by the respondents in this case absent a formal declaration of bankruptcy or a liquidation order .  Art. 110, which was amended by R.A. 6715 effective 21 March 1989, now reads: Art. 110. Worker preference in case of bankruptcy. — In the event of bankruptcy or liquidation of an employer's business, his workers shall enjoy first preference as regards their unpaid wages and monetary claims, any provision of law to the contrary notwithstanding. Such unpaid wages and monetary claims shall be paid in full before the claims of the Government and other creditors may be paid. Obviously, the amendment expanded the concept of "worker preference" to cover not only unpaid wages but also other monetary claims to which even claims of the Government must be deemed subordinate. The Rules and Regulations Implementing R.A. 6715, approved 24 May 1989, also amended the corresponding implementing rule, and now reads: Sec. 10. Payment of wages and other monetary claims in case of bankruptcy. — In case of bankruptcy or liquidation of the employer's business, the unpaid wages and other monetary claims of the employees shall be given first preference and shall be paid in full before the claims of government and other creditors may be paid.  A preference applies only to claims which do not attach to specific properties. A lien creates a charge on a particular property. The right of first preference as regards unpaid wages recognized by Article 110 does not constitute a lien on the property of the insolvent debtor in favor of workers. It is but a preference of credit in their favor, a preference in application. It is a method adopted to determine and specify the order in which creditors should be paid in the final distribution of the proceeds of the insolvent's assets. It is a right to a first preference in the discharge of the funds of the judgment debtor. (Development Bank of the Philippines v. NLRC )  In the words of Republic v. Peralta, supra: 'Article 110 of the labor Code does not purport to create a lien in favor of workers or employees for unpaid wages either upon all of the properties or upon any particular property owned by their employer. Claims for unpaid wages do not therefore fall at all within the category of specially preferred claims established under Articles 2241 and 2242 of the Civil Code, except to the extent that such claims for unpaid wages are already covered by Article 2241, number 6: 'claims for laborers' wages, on the goods manufactured or the work done'; or by Article 2242, number 3: 'claims of laborers and other workers engaged in the construction, reconstruction or repair of buildings, canals and other works, upon said buildings, canals and other works. . . . To the extent that claims for unpaid wages fall outside the scope of Article 2241, number 6, and 2242, number 3, they would come within the ambit of the category of ordinary preferred credits under Article 2244. (Development Bank of the Philippines v. NLRC )

Rubberwolrd v. CA, 2000  Presidential Decree No. 902-A is clear that "all actions for claims against corporations, partnerships or associations under management or receivership pending before any court, tribunal, board or body shall be suspended accordingly." The law did not make any exception in favor of labor claims.  "The justification for the automatic stay of all pending actions for claims is to enable the management committee or the rehabilitation receiver to effectively exercise its/his powers free from any judicial or extra-judicial interference that might unduly hinder or prevent the 'rescue' of the debtor company. To allow such other actions to continue would

only add to the burden of the management committee or rehabilitation receiver, whose time, effort and resources would be wasted in defending claims against the corporation instead of being directed toward its restructuring and rehabilitation." Thus, the labor case would defeat the purpose of an automatic stay. To rule otherwise would open the floodgates to numerous claims and would defeat the rescue efforts of the management committee.

Two-Tier order of preference under arts. 2241 and 2242 First Tier – includes only taxes, duties and fees due on a specific movable or immovable property. Second Tier – All other special preferred (non-tax) credits stand on second tier to be satisfied pari passu and pro-rata Satisfaction of other credits