Topic: Chattel Mortgage
WEEK 8 CASE 8 RCBC v ROYAL CARGO
Petitioner: Rizal Commercial Banking Corp. | Respondent: Royal Cargo Corp.
FACTS:
(1) Terrymanila Inc. filed a petition for voluntary insolvency with the RTC Bataan.
One of its creditors was RCBC with which it had an obligation of 3M secured
by a chattel mortgage. Another creditor, Royal Cargo, filed an action before
the RTC Manila for collection of a sum of money & preliminarily attached
some of Terrymanila's personal properties to secure the satisfaction of a
judgment award of P296,662.16.
(2) RTC Bataan declared Terrymanila insolvent, then RTC Manila rendered
judgment in favor of Royal Cargo.
(3) Meanwhile, RCBC sought, in the insolvency proceedings, permission to
extrajudicially foreclose the chattel mortgage granted by the RTC order.
Royal Cargo filed a MR but was denied. Being the sole bidder at the auction
sale, RCBC purchased the properties and eventually sold it to Domingo
Bondoc and Victoriano See.
(4) Royal Cargo filed a petition for annulment of auction sale against the
Provincial Sheriff and RCBC, questioning the failure to duly notify it of the
sale at least 10 days prior to the sale based on Sec. 14 of the Chattel
Mortgage Law1.
(5) RCBC filed a Motion to Dismiss on the ground that the complaint stated no
cause of action but was denied by RTC. The CA partly granted Royal
Cargo's appeal (but denied RCBC's) holding that it had a right to be timely
informed of the foreclosure sale. It also held RCBC guilty of constructive
fraud.
(6) RCBC contends that the Chattel Mortgage law only allows an attaching
credtor or judgment creditor to redeem the mortgage before the holding of
1 Sec. 14. 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 by a public officer at a public place in the municipality where the mortgagor
resides, or where the property is situated, provided at least ten days notice of the time, place,
and purpose of such sale has been posted at two or more public places in such municipality, and
the mortgagee, his executor, administrator or assignee shall notify the mortgagor or person
holding under him and the persons holding subsequent mortgages of the time and place of sale,
either by notice in writing directed to him or left at his abode, if within the municipality, or sent by
mail if he does not reside in such municipality, at least ten days previous to the date.
the auction. Sec. 14 and 13 should be read together since the right given to
the attaching creditor in Sec. 13 would not serve its purpose if the
subsequent attaching credtor from those who under Sec. 14 need to be
notified of the foreclosure sale 10 days before it is held were excluded. As to
the constructive fraud, both Lcs erred as it had no participation in the sending
of the notice.
(7) Royal Cargo argues that the decisions of the courts (CA & SC in GR no.
115662) are conclusive between the parties and that the obligation to notify
the mortgagor and the persons holding subsequent mortgages falls upon the
mortgagee RCBC.
ISSUE:
(1) WoN RCBC, as mortgagee, had the duty to notify Royal Cargo of the public
auction sale? NO.
(2) WoN RCBC was guilty of constructive fraud in failing to provide Royal Cargo with a
10-day notice? NO.
HELD:
I. Sec. 13 of the Chattel Mortgage Law allows the would-be redemptioner to
redeem the mortgaged property BEFORE its sale. However, Royal Cargo was
aware of the auction sale.
(1) 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 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 right 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.
(2) While RCBC had attached some of Terrymanila's assets to secure the
satisfaction of the judgment debt, what it attached was Terrymanila's equity
of redemption. Thus, Royal Cargo had to be informed of the date of sale of
the mortgaged assets for it to exercise such of equity of redemption over
some of the foreclosed properties under Sec. 13.
(3) Royal Cargo was aware of the auction sale. When RTC granted leave to
RCBC to foreclose the chattel mortgage, Royal Cargo filed a MR but was
 Topic: Chattel Mortgage

denied. Thus, even prior to receiving a mailed notice of the auction sale, it
was already put on notice of the impending foreclosure sale.
Its negligence or omission to exercise the equity of redemption
within a reasonable time, or even on the day of the auction sale,
warrants a presumption that it had either abandoned or opted not to
assert it.

(4) Royal Cargo has also not shown that it was prejudiced by the auction sale as
even if the mortgaged properties were foreclosed, Terrymanila still had
sufficient unencumbered assets to cover obligations owing to its creditors.
Furthermore, even if Royal Cargo would have participated in the auction sale
and matched RCBC's bid, the superiority of RCBC's lien over the mortgaged
assets would preclude Royal Cargo from recovering the chattels.
The right of those who acquire properties should not be superior to
that of 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
(registered 2 years before issuance of writ of attachment) who has
in his favor a valid chattel mortgage.

II. RCBC is not liable for constructive fraud for proceeding with the auction sale,
nor for selling the chattel.

(1) Foreclosure suits may be initiated even during the insolvency proceedings,
as long as leave must first be obtained from the insolvency court, as what
RCBC did.