Digested Case - Credits (Finals) PDF

SUMMARY / CASE DIGESTS 1. METROPOLITAN BANK AND TRUST COMPANY VS. S.F. NAGUIAT ENTERPRISES, ENTERPRISES, INC. G.R. No. 178407, March 18, 2015 LEONEN  SUMMARY This case calls for the determination of whether the approval and consent of the insolvency court is required under Act No. 1956, otherwise known as the Insolvency Law, before a secured creditor like petitioner Metropolitan Bank and Trust Company can proceed with the extrajudicial foreclosure of the mortgaged property. Sometime in April 1997, Spouses Rommel Naguiat and Celestina Naguiat and S.F. Naguiat Enterprises, Inc. (S.F. Naguiat) executed a real estate mortgage in favor of Metropolitan Metropolitan Bank and Trust Company (Metrobank) to secure certain credit accommodations accommodations obtained from the latter amounting to P17 million. S.F. Naguiat represented by Celestina T. Naguiat, Eugene T. Naguiat, and Anna N. Africa obtained a loan from Metrobank in the amount of P1,575,000.00. The loan was likewise secured by the 1997 real estate mortgage by virtue of the Agreement on Existing Mortgage(s) executed between the parties. S.F. Naguiat filed a Petition for Voluntary Insolvency with Application for the Appointment of a Receiver pursuant to Act No. 1956, as amended, before the RTC of Angeles. Among the assets declared in the Petition was one of the properties mortgaged to Metrobank. RTC judge issued an order declaring S.F. Naguiat insolvent; directing the Deputy Deputy Sheriff to take possession of all the properties of S.F. Naguiat until the appointment of a receiver/assignee; receiver/assignee; and forbidding payment of any debts due, delivery of properties, and transfer of any of its properties. ] In lieu of a Comment, Metrobank filed a Manifestation and Motion informing the court of Metrobank's decision to withdraw from the insolvency proceedings because it intended to extrajudicially foreclose the mortgaged property to satisfy its claim against S.F. Naguiat. Subsequently, S.F. Naguiat defaulted in paying its loan. Metrobank instituted an extrajudicial foreclosure proceeding against the mortgaged property and sold the property at a public auction to Phoenix Global Energy, Inc., the the highest bidder. Afterwards, Sheriff Claude B. Balasbas prepared the Certificate of Sale and submitted it for approval to Clerk of Court Vicente S. Fernandez, Jr. and Executive Judge Bernardita Gabitan-Erum (Executive Judge Gabitan-Erum). However, Executive Judge GabitanErum issued the order denying her approval of the Certificate of Sale in view of the July 12, 2005 Order issued by the insolvency court. CA rendered its Decision dismissing the Petition on the basis of Metrobank's failure to "obtain the permission of the insolvency court to extrajudicially foreclose the mortgaged property. ” CA  declared that "a suspension of the foreclosure proceedings is in order, until an assignee [or receiver,] is elected or appointed [by the insolvency court] so as to afford the insolvent i nsolvent debtor proper proper representation in the foreclosure [proceedings]." [proceedings]." Hence, the present Petition for Review was filed. Petitioner Petitioner contends that the Court of Appeals decided questions of substance in a way not in accord with law and with the applicable decisions of this court. SC found that the petition has no merit. DOCTRINE: Petitioner argues that nowhere in Act No. 1956 does it require that a secured creditor must first obtain leave or permission from the insolvency court before said creditor can foreclose on the mortgaged property. It adds that this procedural requirement applies only to civil suits, and not when the secured creditor opts to exercise the right to foreclose extrajudicially the mortgaged property under Act No. 3135, as amended, because extrajudicial foreclosure is not a civil suit. Thus, the Court of Appeals allegedly imposed a new condition that was tantamount to unauthorized  judicial legislation legislation when it required required petitioner to to file a Motion Motion for Leave of the insolvency insolvency court. court. Nonetheless, Nonetheless, petitioner petitioner contends that the filing of its Manifestation before the insolvency court served as sufficient notice notice of its intention and, i n effect, asked the court's permission to foreclose the mortgaged property. [Court looked into history of insolvency] Act No. 1956 impliedly requires a secured creditor to ask the permission of the insolvent court before said creditor can foreclose the mortgaged property. When read together, the following provisions of Act No. 1956 reveal the necessity for leave of the insolvency court.  Here, the foreclosure and sale of the mortgaged property of the debtor, without leave of court, contravene the provisions of Act No. 1956 and violate the Order dated July 12, 2005 of the insolvency court which declared S.F. Naguiat insolvent and forbidden from making any transfer of any of its properties to any person.

Executive Executive Judge Gabitan-Erum did not unlawfully neglect to perform her duty when she refused to approve and sign the Certificate of Sale, as would warrant the issuance of a writ of mandamus against her. An executive judge has the administrative administrative duty in extrajudicial foreclosure proceedings to ensure that all the conditions of Act No. 3135 have been complied with before approving the sale at public auction of any mortgaged property. Furthermore, Act No. 3135 outlines the notice and publication requirements requirements and the procedure for the extrajudicial extrajudicial foreclosure which constitute a condition sine qua non  for its validity. There was a valid reason for Executive Judge Gabitan-Erum to doubt the propriety propriety of the foreclosure sale. Her verification with the records of the Clerk of Court showed that a Petition for Insolvency had been filed and had already been acted upon by the insolvency court prior to the application for extrajudicial extrajudicial foreclosure of the mortgaged properties. Among the inventoried unpaid debts and properties attached attached to the Petition for Insolvency was the loan secured by the real estate mortgage subject of the application for extrajudicial foreclosure foreclosure sale. With the pendency of the insolvency case, substantial doubt exists to justify the refusal by Executive Judge Gabitan-Erum to approve the Certificate of Sale as the extrajudicial foreclosure sale without leave of the insolvency court  may  may contravene the policy and purpose of Act No. 1956. Act No. 3135 is silent with respect to mortgaged properties that are in custodia legis, such as the property in this case, which was placed under the control and supervision of the insolvency court. This

court has declared that "[a] court which has control of such property, exercises exclusive jurisdiction over the same, retains all incidents relative to the conduct of such property. No court, except one having supervisory control or superior  jurisdiction in the premises, has a right to interfere with and change that possession." The extrajudicial foreclosure and sale of the mortgaged property of the debtor would clearly constitute an interference with the insolvency court's possession of the property.

2. RCBC vs ROYAL CARGO FACTS: Terrymanila filed a petition for voluntary insolvency with the RTC of Bataan on February 13,  1991. One of its creditors was RCBC with which it had an obligation of P3 Million that was secured  by a chattel mortgage executed on February 16, 1989. The chattel mortgage was duly recorded. Royal Cargo another creditor of Terrymanila, filed an action with RTC Manila for collection of  sum of money and preliminarily attached "some" of Terrymanila's personal properties on March 5, 1991. On April 12, 1991, the Bataan RTC declared Terrymanila insolvent.  On June 11, 1991, Manila RTC, rendered judgment in the collection case in favor of Royal  Cargo. In the meantime, RCBC sought in the insolvency proceedings at the Bataan RTC permission  to extrajudicially foreclose the chattel mortgage which was granted by Order of February 3, 1992. The provincial sheriff of Bataan thereupon scheduled on June 16, 1992 the public auction sale  of the mortgaged personal properties. At the auction sale, RCBC was the sole bidder of the properties and purchased them for P1.5  Million. Eventually, RCBC sold the properties to Domingo Bondoc and Victoriano See. Royal Cargo filed on July 30, 1992 a petition before the RTC of Manila against the Provincial  Sheriff of the RTC Bataan and RCBC, for annulment of the auction sale . Apart from questioning the inclusion in the auction sale of some of the properties which it had attached, respondent questioned the failure to duly notify it of the sale at least 10 days before the sale. ISSUE: WON Royal Cargo should have been given a ten day prior notice of the foreclosure sale. RULING: Section 13 of the Chattel Mortgage Law allows the would-be redemptioner thereunder to redeem the mortgaged property only b e f o r e  its sale. [T]here is no law in our statute books which vests the right of redemption over personal property. the right of redemption applies to real properties, not personal properties, sold on execution. , the redemption cited in Section 13 partakes of an e q u i t y  of redemption, which 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 to clear it from the encumbrance of the mortgage. It is not the same as r i g h t of redemption which is the right of the mortgagor to redeem the mortgaged property after registration of the foreclosure sale, and even after confirmation of the sale. While respondent had attached some of Terrymanila's assets to secure the satisfaction of a judgment what it effectively attached was Terrymanila's  equity of redemption. Having thus attached Terrymanila's equity of redemption, respondent had to be informed of the date of sale of the mortgaged assets for it to exercise such equity of redemption over some of those foreclosed properties, as provided for in Section 13.

Recall, however, that respondent filed a motion to reconsider the February 3, 1992 Order of the RTC Bataan-insolvency court which granted leave to petitioner to foreclose the chattel mortgage. Thus, even prior to receiving, through counsel, a mailed notice of the auction sale on the date of the auction sale itself on June 16, 1992, respondent was already put on notice of the impending foreclosure sale of the mortgaged chattels. It could thus have expediently exercised its equity of redemption, at the earliest when it received the insolvency court's Order of March 20, 1992 denying its Motion for Reconsideration of the February 3, 1992 Order. In any event, even if respondent would have participated in the auction sale and matched petitioner's bid, the superiority of petitioner's lien over the mortgaged assets would preclude respondent from recovering the chattels. "the right of those who acquire said properties should not and can not be superior to that of the creditor who has in his favor an instrument of mortgage executed with the formalities of the law, in good faith, and without the least indication of fraud It bears noting that the chattel mortgage in favor of petitioner was registered more than two years before the issuance of a writ of attachment over some of Terrymanila's chattels in favor of respondent. Since the registration of a chattel mortgage is an effective and binding notice to other creditors of its existence and creates a real right or lien that follows the property wherever it may be, 47 the right of respondent, as an attaching creditor or as purchaser, had it purchased the mortgaged chattel at the auction sale, is subordinate to the lien of the mortgagee who has in his favor a valid chattel mortgage. ISSUES/HELD:(1) WON Royal Cargo should have been notified of the foreclosure sale – NO Petitioner: Chattel Mortgage Law only allows an attaching creditor or judgment creditor to " redeem “the  mortgage, BEFORE the holding of the auction. SC: Agrees. Sec. 13 of the Chattel Mortgage Law allows the would-be redemption to redeem the mortgaged property only BEFORE its sale. The redemption cited in Sec. 13 partakes of an equity of redemption, which is the right of the mortgagor to redeem the mortgaged property after his default in the performance of conditions of the mortgage, but before the sale of property, to clear it from encumbrance of the mortgage. Royal Cargo attached Terry's equity of redemption. Thus it had to be informed of the date of sale of mortgaged assets for it to exercise such equity of redemption over some of those foreclosed properties. Royal Cargo was aware of the auction sale - It was informed about the Order of the insolvency court that granted leave to RCBC to foreclose the chattel mortgage.- Its negligence or omission to exercise its equity of redemption within a reasonable time, or even on the day of auction sale, warrants a presumption that it had either abandoned it or opted not to a ssert it Royal Cargo was not prejudiced by the auction sale - Terry had sufficient, unencumbered assets to cover obligations owing to its other creditors RCBC had a superior lien over the mortgaged assets - The right of those who acquire properties should not and cannot be superior to that o f a 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- Right of Royal Cargo was subordinate to the lien of the mortgagee, who has in his favor a valid chattel mortgage (2) WON RCBC was guilty of constructive fraud in failing to provide Royal Cargo with a10-day notice - NO Foreclosure suits may be initiated even during insolvency proceedings, as long as leave must first be obtained from the insolvency court, as what RCBC did.

5.

DE BARRETO, ET. AL. v. VILLANUEVA, ET. AL., (1961) Special Preferred Credits (Important: See full text of the Resolution)

Facts: Rosario Cruzado sold all her right, title, and interest and that of her children in the house and lot herein

involved to Villanueva for P19K. The purchaser paid P1,500 in advance, and executed a promissory note for the balance. However, the buyer could only pay P5,500 On account of the note, for which reason the vendor obtained judgment for the unpaid balance. In the meantime, the buyer Villanueva was able to secure a clean certificate of title and mortgaged the property to appellant Barretto to secure a loan of P30K, said mortgage having been duly recorded. Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the mortgage in her favor, obtained judgment, and upon its becoming final asked for execution. Cruzado filed a motion for recognition for her " vendor's lien " invoking Articles 2242, 2243, and 2249 of the new Civil Code. After hearing, the court below ordered the "lien" annotated on the back of the title, with the proviso that in case of sale under the foreclosure decree the vendor's lien and the mortgage credit of appellant Barretto should be paid pro rata from the proceeds. Appellants insist that: 1.

The vendor's lien, under Articles 2242 and 2243 of the new, Civil Code of the Philippines, can only become effective in the event of insolvency of the vendee, which has not been proved to exist in the instant case; and .

2.

That the Cruzado is not a true vendor of the foreclosed property. Article 2242  of the new Civil Code enumerates the claims, mortgage and liens that constitute an encumbrance

on specific immovable property, and among them are: . (2) For the unpaid price of real property sold, upon the immovable sold; and (5) Mortgage credits recorded in the Registry of Property." Article 2249  of the same Code provides that "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 assessment upon the immovable property or real rights. Held: Application of the above-quoted provisions to the case at bar would mean that the herein appellee

Rosario Cruzado as an unpaid vendor of the property in question has the right to share pro-rata with the appellants the proceeds of the foreclosure sale. Issue: Appellant’s argument: inasmuch as the unpaid vendor's lien in this case was not registered, it should

not prejudice the said appellants' registered rights over the property. Held: There is nothing to this argument. Note must be taken of the fact that article 2242 of the new Civil Code

enumerating the preferred claims, mortgages and liens on immovables, specifically requires that. Unlike the unpaid price of real property sold. mortgage credits, in order to be given preference, should be recorded in the Registry of Property. If the legislative intent was to impose the same requirement in the case of the vendor's lien, or the unpaid price of real property sold, the lawmakers could have easily inserted the same

qualification which now modifies the mortgage credits. The law, however, does not make any distinction between registered and unregistered vendor's lien, which only goes to show that any lien of that kind enjoys the preferred credit status. As to the point made that the articles of the Civil Code on concurrence and preference of credits are applicable only to the insolvent debtor, suffice it to say that nothing in the law shows any such limitation. If we are to interpret this portion of the Code as intended only for insolvency cases, then other creditor-debtor relationships where there are concurrence of credits would be left without any rules to govern them, and it would render purposeless the special laws on insolvency. Resolution on Motion to Consider (1962)

Appellants, spouses Barretto, have filed a motion vigorously urging that our decision be reconsidered and set aside, and a new one entered declaring that their right as mortgagees remain superior to the unrecorded claim of herein appellee for the balance of the purchase price of her rights, title, and interests in the mortgaged property. We have reached the conclusion that our original decision must be reconsidered and set aside: Under the system of the Civil Code of the Philippines, only taxes enjoy a similar absolute preference. All the remaining thirteen classes of preferred creditors under Article 2242 enjoy no priority among themselves, but must be paid pro-rata i.e., in proportion to the amount of the respective credits. Thus, Article 2249  provides: 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 rights." The full application of Articles 2249 and 2242 demands that there must be first some proceedings where the claims of all the preferred creditors may be bindingly adjudicated, such as: 1.

insolvency,

2.

the settlement of decedents estate under Rule 87 of the Rules of Court, or

3.

other liquidation proceedings of similar import. This explains the rule of Article 2243  of the new Civil Code that — 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. And the rule is further clarified in the Report of the Code Commission, as follows: The question as to whether the Civil Code and the insolvency Law can be harmonized is settled by Article 2243. The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to be enforced in accordance with the Insolvency Law ."

Rule

Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosure sale (as in the case now before us) is not the proceeding contemplated by law for the enforcement of preferences under Article 2242, unless the claimant were enforcing a credit for taxes that enjoy absolute priority. If none of the claims is for taxes, a dispute between two creditors will not enable the Court to ascertain the  pro-

rata dividend corresponding to each, because the rights of the other creditors likewise" enjoying preference

under Article 2242 can not be ascertained. Held: There being no insolvency or liquidation, the claim of the appellee, as unpaid vendor, did not require the

character and rank of a statutory lien co-equal to the mortgagee's recorded encumbrance, and must remain subordinate to the latter

.

6. BETITA V. GANZON EL AL. G. R. NO. L-24137, 49 PHIL. 87, FACTS: This action is brought to recover the possession of four carabaos with damages in the sum of P200.  On May 15, 1924, the defendant Alejo de l a Flor recovered a judgment against Tiburcia Buhayan for the  sum of P140 with costs. Under this judgment the defendant Ganzon, as sheriff levied execution on the carabaos in question which were found in the possession of one Simon Jacinto but registered in the name of Tiburcia Buhayan. The plaintiff, Eulogio Betita, alleged that the carabaos had been mortgaged to him and as evidence thereof presented a document dated May 6, 1924, but the sheriff proceeded with the sale of the animals at public auction where they were purchased by the defendant Clemente Perdena for the sum of P200, and this action was thereupon brought. RTC: inasmuch as that document was prior in date to the judgment under which the execution was levied, it was a preferred credit and judgment was rendered in favor of the plaintiff for the possession of the carabaos, without damages and without costs. ISSUE: WON there was a valid chattel mortgage or pledge HELD: NO  It is not a sufficient chattel mortgage; it does not meet the requirements of section 5 of the Chattel Mortgage Law (Act No. 1508), has not been recorded and, considered as a chattel mortgage, is consequently of no effect as against third parties.Neither did the document constitute a sufficient pledge of the property valid against third parties. Article 1865 of the Civil Code provides that "no pledge shall be effective as against third parties unless  evidence of its date appears in a public instrument." The document in question is not public, but it is suggested that its filing with the sheriff in connection  with the terceria gave in the effect of a public instrument and served to fix the date of the pledge, and that it therefore fulfills the requirements of article 1865. Assuming, without conceding, that the filing of the document with the sheriff had that effect, it seems nevertheless obvious that the pledge only became effective as against the plaintiff in execution from the date of the fili ng and did not rise superior to the execution attachment previously levied (see Civil Code, article 1227).

MANRESA: ART. 1865. A pledge will not be valid against a third party if the certainty of the date is not expressed in a public instrument. 







Considering the effects of a contract of pledge, it is easily understood that, without this warranty demanded by law, the case may happen wherein a debtor in bad faith from the moment that he sees his movable property in danger of execution may attempt to withdraw the same from the action of justice and the reach of his creditors by simulating, through criminal confabulations, anterior and fraudulent alterations in his possession by means of feigned contracts of this nature; for the effectiveness of the pledge, it be demanded as a precise condition that in every case the contract be executed in a public writing, for, otherwise, the determination of its date will be rendered difficult and its proof more so, even in cases in which it is executed before witnesses, due to the difficulty to be encountered in seeking those before whom it was executed. Our code does not demand in express terms that in all cases the pledge be constituted or formalized in a public writing, nor even in private document, but only that the certainty of the date be expressed in the first of the said class of instruments in order that it may be valid against a third party; and, in default of any express provision of law, in the cases where no agreement requiring the execution in a public writing exists, it should be subjected to the general rule, and especially to that established in the last paragraph of article 1280, according to which all contracts not included in the foregoing cases of the said article should be made in writing even though it be private, whenever the amount of the presentation of one or of the two contracting parties exceeds 1,500 pesetas. If the mere filing of a private document with the sheriff after the levy of execution can create a lien of pledge superior to the attachment, the purpose of the provisions of article 1865 as explained by Manresa clearly be defeated. Such could not have been the i ntention of the authors of the Code.

The alleged pledge is also ineffective for another reason: the plaintiff pledgee never had actual possession of the property within the meaning of article 1863 of the Civil Code. But it is argued that at the time of the levy the animals in question were in the possession of one Simon  Jacinto; that Jacinto was the plaintiff's tenant; and that the tenant's possession was the possession of his landlord. It appears, however, from the evidence that though not legally married, Simon Jacinto and Tiburcia  Buhayan were living together as husband and wife and had been so living for many years. Article 1863 of the Civil Code reads as follows: In addition to the requisites mentioned in article 1857, it shall be necessary, in order to constitute the contract of pledge, that the pledge be placed in the possession of the creditor or of a third person appointed by common consent. Manresa: Therefore, in order that the contract of pledge may be complete, it is indispensable that the aforesaid  delivery take place . the delivery of possession referred to in article 1863 implies a change in the actual possession of the  property pledged and that a mere symbolic delivery is not sufficient. the present case the animals in question were in the possession of Tiburcia Buhayan and Simon Jacinto before the alleged pledge was entered into and apparently remained with them until the execution was levied, and there was no actual delivery of possession to the plaintiff himself. There was therefore in reality no change in possession. SC REVERSED

On the need for contract of pledge to appear in a public instrument  BETITA vs. GANZON 

(49 PHIL. 87 3/29/26) Ostrand, J Alejo de la Flor obtained a judgment against Tiburcia Buhayan. Under this judgment, defendant sheriff Ganzon levied execution on the four carabaos in question which were in possession of Simon Jacinto but registered in the name of Tiburcia Buhayan. Plaintiff Betita presented a third party claim alleging that the carabao had been mortgaged to him evidenced by a document purporting to be the pledge contract Ganzon proceeded with the sale of the carabao in public auction while Betita brought an action to recover possession of said carabao Trial Court rendered judgment in favor of Betita declaring that his was a preferred credit The document presented by Betita did not constitute a pledge valid against third parties as expressly discusses in Art. 2096 of the Civil Code The document in question is not public. The filing of a private document of pledge with the sheriff after the levy of execution does not create a lien superior to that of the attachment The alleged pledge is also ineffective because the pledge never had actual possession of the pledged thing Judgment reversed

7. CRUZ & SERRANO VS. CHUA A.H. LEE (54 PHIL 10) Facts: Chua took from Cruz and Serrano a p awn ticket in pledge to secure an obligation. The pledge was lost for failure of Chua to renew the loan of Cruz and Serrano with the pawnbroker Issue: WON Chua is bound to renew the ticket from time to time, by the payment of interest or premium Held: Yes. The ordinary pawn ticket is a document by virtue of which the property in the thing pledged passes from hand to hand by mere delivery of t he ticket. It results that one who takes a pawn ticket in pledge acquired domination over the pledge. Article 2099 contemplates that the pledge may have to undertake expenses in order to prevent the pledge from being lost; and these expenses the pledge is entitled to

recover from the pledgor. This follows that where, in a case like this, the pledge is lost by failure of Chua to renew the loan, he is li able for the resulting damage. This duty of Chua is not destroyed by the fact that he has obtained a judgment for the debt of Cruz and Serrano which was secured by the pledge. The duty to use the diligence of good father of a family in caring for the thing pledged as long as the same remains in the power of the pledge.

9.

China Banking Corporation v CA

Facts: China Banking Corporation made a 53% equity investment (P16,227,851.80) in the First CBC Capital  – a Hongkong subsidiary engaged in financing and investment with “deposit-taking” function. It was shown that CBC has become insolvent so China Banking wrote-off its investment as worthless and treated it as a bad debt or as an ordinary loss deductible from its gross income. CIR disallowed the deduction on the ground that the investment should not be classified as being worthless. It also held that assuming that the securities were worthless, then they should be classified as a capital loss and not as a bad debt since there was no indebtedness between China Banking and CBC. Issue: Whether or not the investment should be classified as a capital loss. Held: Yes. Section 29.d.4.B of the NIRC contains provisions on securities becoming worthless. It conveys that capital loss normally requires the concurrence of 2 conditions: a. there is a sale or exchange b. the thing sold or exchanges is a capital asset. When securities become worthless, there is strictly no sale or exchange but the law deems it to be a loss. These are allowed to be deducted only to the extent of capital gains and not from any other income of the taxpayer. A similar kind of treatment is given by the NIRC on the retirement of certificates of indebtedness with interest coupons or in registered form, short sales and options to buy or sell property where no sale or exchange strictly exists. In these cases, The NIRC dispenses with the standard requirements. There is ordinary loss when the property sold is not a capital asset. In the case, CBC as an investee corporation, is a subsidiary corporation of China Banking whose shares in CBC are not intended for purchase or sale but as an investment. An equity investment is a capital asset of the investor. Unquestionably, any loss is a capital loss to the investor. -Additional notes: *The loss cannot be deductible as bad debt since the shares of stock do not constitute a loan extended by it to its subsidiary or a debt subject to obligatory repayment by the latter.

10. TITLE: PEOPLE·S BANK V DAHICAN LUMBER SUBJECT MATTER : Chattel mortgage-subject matter: machinery

FACTS A. Dahican lumber company (DAMCO) obtained several loans amounting to 250,000pesos from People·s bank (BANK) and ,together with DALCO, another loan amounting to$250,000 from Export-Import bank secured by

five promissory notes through people·s bank. In both loans, DAMCO executed and registered respective mortgages with inclusion of ´after acquired propertiesµ. DAMCO and DALCO failed to satisfy the fifth promissory note in favor of Export bank so People·s bank paid it and subsequently filed an action for the foreclosure of the mortgaged properties of DAMCO including the after acquired machinery, equipment and spare parts upon the latter's failure to fulfill its obligation. B. Contention of the Petitioner People·s bank asserted that the ´after acquiredµ machinery and equipment of DAMCO are subject to the deed of mortgage executed by DAMCO. Hence, these can be included in the foreclosure proceedings. C. Contentions of the Respondent DALCO argued that the mortgages were void as regards the after acquired properties because they were not registered in accordance with the chattel mortgage law. Moreover, provision of the fourth paragraph of each of said mortgages did not automatically make subject to such mortgages the "after acquired properties", the only meaning thereof being that the mortgagor was willing to constitute a lien over such properties. II. ISSUES TO BE RESOLVED Whether the ´after acquiredµ machinery and equipment of DAMCO are included as subject of the Real Estate mortgage, thus can be foreclosed. RULING OF THE SUPREME COURT Judgment rendered in favor of Plaintiff People’s bank. The after acquired machinery and equipment are

included in the executed mortgages. It is not disputed in the case at bar that the "after acquired properties" were purchased by DALCO in connection with, and for use in the development of its lumber concession and that they were purchased in addition to, or in replacement of those already existing in the premises on July 13, 1950. In Law, therefore, they must be deemed to have been immobilized , with the result that the real estate mortgages involved herein ³ which were registered as such ³ did not have to be registered a second time as chattel mortgages in order to bind the "after acquired properties" and affect third parties. Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property of every nature and description taken in exchange or replacement, as well as all buildings, machineries, fixtures, tools, equipments, and other property that the mortgagor may acquire, construct, install, attach; or use in, to upon, or in connection with the premises ³ that is, its lumber concession ³ "shall i mmediately be and become subject to the lien" of both mortgages in the same manner and to the same extent as if already included therein at the time of their execution. As the language thus used leaves no room for doubt as to the intention of the parties, We see no useful purpose in discussing the matter extensively. Suffice it to say that the stipulation referred to is common, and We might say logical, in all cases where the properties given as collateral are perishable or subject to inevitable wear and tear or were intended to be sold, or to be used ³ thus becoming subject to the inevitable wear and tear ³ but with the understanding³ express or implied ³ that they shall be replaced with others to be thereafter acquired by the mortgagor. Such stipulation is neither unlawful nor immoral, its obvious purpose being to maintain, to the extent allowed by circumstances, the original value of the properties given as security. Indeed, if such properties were of the nature already refe rred to, it would be poor  judgment on the part of the creditor who does not see to it that a similar provision is included in the contract. People’s Bank v. Dahican Lumber

Facts: ATLANTIC sold and assigned all its right in the DALCO for the total sum of P500,000.00 of which only the amount of $50,000.00 was paid. DALCO obtained various loans from the People's Bank & Trust Company amounting, as of July 13, 1950, to P200,000.00. DALCO also obtained, through the Bank, a loan of $250,000.00 from the Export -Import Bank of Washington D.C., evidenced by five promissory notes of $50,000.00 each, maturing on different dates, payable to the BANK or its order. As security for the payment of the abovementioned loans, DALCO executed in favor of the BANK a deed of mortgage covering live parcels of land situated in the province of Camarines Norte, together with all the buildings and other improvements existing thereon and all the personal properties of the mortgagor located in its place of business in the municipalities of Mambulao and Capalonga, Camarines Norte. DALCO executed a second mortgage on the same properties in favor of ATLANTIC to secure payment of the unpaid balance of the sale price of the lumber concession amounting to the sum of $450,000.00. Both deeds contained a provision which stated that it included essential afteracquired properties such as machineries, fixtures, tools and equiptments. Both mortgages were registered in the Office of the Register of Deeds of Camarines Norte. Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its maturity, the BANK paid the same to the Export-Import Bank of Washington D.C. and the latter assigned to the former its credit and the first mortgage securing it. Subsequently, the BANK gave DALCO and DAMCO up to April 1, 1953 to pay the overdue promissory note. DALCO purchased various machineries, equipment, spare parts and supplies in

addition to, or in replacement of some of those already owned and used by it on the date aforesaid. Pursuant to the provision of the mortgage deeds quoted heretofore regarding "after acquired properties", the BANK requested DALCO to submit complete lists of said properties but the latter failed to do so. On December 16, 1952, the Board of Directors of DALCO in a special meeting called for the purpose, passed a resolution agreeing to rescind the alleged sales of equipment, spare parts and supplies by CONNELL and DAMCO to it. On January 23, 1953, the BANK, in its own behalf and that of ATLANTIC, demanded that said agreements be cancelled but CONNELL and DAMCO refused to do so. As a result, on February 12, 1953, ATLANTIC and the BANK, commenced foreclosure proceedings in the Court of First Instance of Camarines Norte against DALCO and DAMCO. Issue: Should the deed also be registered in the Chattel Mortgage Registry in so far as it covered the after acquired machinery, fixtures, tools and equipments? Held: No more, since under Articles 415 the new Civil Code, the properties in question being machinery, receptacles, instruments or replacements intended by the owner of the t enement 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.

11.

LA NUZA VS DE LEON