PHILIPPINE NATIONAL BANK, G.R. No.

170865
Petitioner,

- versus -

SPOUSES CHEAH CHEE CHONG

and OFELIA CAMACHO CHEAH,
Respondents.
x--------------------------------x

SPOUSES CHEAH CHEE CHONG G.R. No. 170892

and OFELIA CAMACHO CHEAH,
Petitioners, Present:

CORONA, C.J., Chairperson,

LEONARDO-DE CASTRO,
- versus - BERSAMIN,
DEL CASTILLO, and
VILLARAMA, JR., JJ.

PHILIPPINE NATIONAL BANK, Promulgated:

Respondent. April 25, 2012
x-------------------------------------------------------------------x
 DECISION

DEL CASTILLO, J.:

Law favoreth diligence, and therefore, hateth folly and

negligence.Wingates Maxim.

In doing a friend a favor to help the latters friend collect the proceeds of a foreign
check, a woman deposited the check in her and her husbands dollar account. The local
bank accepted the check for collection and immediately credited the proceeds thereof to
said spouses account even before the lapse of the clearing period. And just when the
money had been withdrawn and distributed among different beneficiaries, it was
discovered that all along, to the horror of the woman whose intention to accommodate
a friends friend backfired, she and her
bank had dealt with a rubber check.

These consolidated[1] Petitions for Review on Certiorari filed by the Philippine

National Bank (PNB)[2] and by the spouses Cheah Chee Chong and Ofelia Camacho Cheah
(spouses Cheah)[3] both assail the August 22, 2005 Decision[4] and December 21, 2005
Resolution[5]of the Court of Appeals (CA) in CA-G.R. CV No. 63948 which declared both
parties equally negligent and, hence, should equally suffer the resulting loss. For its part,
PNB questions why it was declared blameworthy together with its depositors, spouses
Cheah, for the amount wrongfully paid the latter, while the spouses Cheah plead that
they be declared entirely faultless.

Factual Antecedents

On November 4, 1992, Ofelia Cheah (Ofelia) and her friend Adelina Guarin
(Adelina) were having a conversation in the latters office when Adelinas friend, Filipina
Tuazon (Filipina), approached her to ask if she could have Filipinas check cleared and
encashed for a service fee of 2.5%. The check is Bank of America Check No. 190[6] under
the account of Alejandria Pineda and Eduardo Rosales and drawn by Atty. Eduardo
Rosales against Bank of America Alhambra Branch in California, USA, with a face amount
of $300,000.00, payable to cash. Because Adelina does not have a dollar account in which
to deposit the check, she asked Ofelia if she could accommodate Filipinas request since
she has a joint dollar savings account with her Malaysian husband Cheah Chee Chong
(Chee Chong) under Account No. 265-705612-2 with PNB Buendia Branch.
Ofelia agreed.

That same day, Ofelia and Adelina went to PNB Buendia Branch. They met with
Perfecto Mendiola of the Loans Department who referred them to PNB Division Chief
Alberto Garin (Garin). Garin discussed with them the process of clearing the subject check
and they were told that it normally takes 15 days.[7]Assured that the deposit and
subsequent clearance of the check is a normal transaction, Ofelia deposited Filipinas
check. PNB then sent it for clearing through its correspondent bank, Philadelphia
National Bank. Five days later, PNB received a credit advice[8] from Philadelphia National
Bank that the proceeds of the subject check had been temporarily credited to PNBs
account as of November 6, 1992. On November 16, 1992, Garin called up Ofelia to inform
her that the check had already been cleared.[9] The following day, PNB Buendia Branch,
after deducting the bank charges, credited $299,248.37 to the account of the spouses
Cheah.[10] Acting on Adelinas instruction to withdraw the credited amount, Ofelia that day
personally withdrew $180,000.00.[11]Adelina was able to withdraw the remaining amount
the next day after having been authorized by Ofelia.[12] Filipina received all the proceeds.

In the meantime, the Cable Division of PNB Head Office in Escolta, Manila received
on November 16, 1992 a SWIFT[13] message from Philadelphia National Bank dated
November 13, 1992 with Transaction Reference Number (TRN) 46506218, informing PNB
of the return of the subject check for insufficient funds.[14] However, the PNB Head Office
could not ascertain to which branch/office it should forward the same for proper
action. Eventually, PNB Head Office sent Philadelphia National Bank a SWIFT message
informing the latter that SWIFT message with TRN 46506218 has been relayed to PNBs
various divisions/departments but was returned to PNB Head Office as it seemed
misrouted. PNB Head Office thus requested for Philadelphia National Banks advice on
said SWIFT messages proper disposition.[15]After a few days, PNB Head Office ascertained
that the SWIFT message was intended for PNB Buendia Branch.

PNB Buendia Branch learned about the bounced check when it received on
November 20, 1992 a debit advice,[16]followed by a letter[17] on November 24, 1992, from
Philadelphia National Bank to which the November 13, 1992 SWIFT message was
attached. Informed about the bounced check and upon demand by PNB Buendia Branch
to return the money withdrawn, Ofelia immediately contacted Filipina to get the money
back. But the latter told her that all the money had already been given to several people
who asked for the checks encashment.In their effort to recover the money, spouses
Cheah then sought the help of the National Bureau of Investigation. Said agencys Anti-
Fraud and Action Division was later able to apprehend some of the beneficiaries of the
proceeds of the check and recover from them $20,000.00. Criminal charges were then
filed against these suspect beneficiaries.[18]

Meanwhile, the spouses Cheah have been constantly meeting with the bank
officials to discuss matters regarding the incident and the recovery of the value of the
check while the cases against the alleged perpetrators remain pending. Chee Chong in
the end signed a PNB drafted[19] letter[20] which states that the spouses Cheah are offering
their condominium units as collaterals for the amount withdrawn. Under this setup, the
amount withdrawn would be treated as a loan account with deferred interest while the
spouses try to recover the money from those who defrauded them. Apparently, Chee
Chong signed the letter after the Vice President and Manager of PNB Buendia Branch,
Erwin Asperilla (Asperilla), asked the spouses Cheah to help him and the other bank
officers as they were in danger of losing their jobs because of the incident. Asperilla
likewise assured the spouses Cheah that the letter was a mere formality and that the
mortgage will be disregarded once PNB receives its claim for indemnity from Philadelphia
National Bank.

Although some of the officers of PNB were amenable to the proposal,[21] the same
did not materialize. Subsequently, PNB sent a demand letter to spouses Cheah for the
return of the amount of the check,[22] froze their peso and dollar deposits in the amounts
of P275,166.80 and $893.46,[23] and filed a complaint[24] against them for Sum of Money
with Branch 50 of the Regional Trial Court (RTC) of Manila, docketed as Civil Case No. 94-
71022. In said complaint, PNB demanded payment of around P8,202,220.44, plus
interests[25] and attorneys fees, from the spouses Cheah.

As their main defense, the spouses Cheah claimed that the proximate cause of
PNBs injury was its own negligence of paying a US dollar denominated check
without waiting for the 15-day clearing period, in violation of its bank practice as
mandated by its own bank circular, i.e., PNB General Circular No. 52-101/88.[26] Because
of this, spouses Cheah averred that PNB is barred from claiming what it had lost. They
further averred that it is unjust for them to pay back the amount disbursed as they never
really benefited therefrom. As counterclaim, they prayed for the return of their frozen
deposits, the recoupment of P400,000.00 representing the amount they had so far spent
in recovering the value of the check, and payment of moral and exemplary damages, as
well as attorneys fees.

Ruling of the Regional Trial Court

The RTC ruled in PNBs favor. The dispositive portion of its Decision[27] dated May
20, 1999 reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of

the plaintiff Philippine National Bank [and] against defendants Mr. Cheah Chee
Chong and Ms. Ofelia Camacho Cheah, ordering the latter to pay jointly and
severally the herein plaintiffs bank the amount:

1. of US$298,950.25 or its peso equivalent based on Central Bank

Exchange Rate prevailing at the time the proceeds of the BA Check No. 190
were withdrawn or the prevailing Central Bank Rate at the time the amount is
to be reimbursed by the defendants to plaintiff or whatever is lower. This is
without prejudice however, to the rights of the defendants (accommodating
 parties) to go against the group of Adelina Guarin, Atty. Eduardo Rosales,
Filipina Tuazon, etc., (Beneficiaries- accommodated parties) who are privy to
the defendants.

No pronouncement as to costs.

No other award of damages for non[e] has been proven.

SO ORDERED.[28]

The RTC held that spouses Cheah were guilty of contributory negligence.
Because Ofelia trusted a friends friend whom she did not know and considering the
amount of the check made payable to cash, the RTC opined that Ofelia showed lack of
vigilance in her dealings. She should have exercised due care by investigating the
negotiability of the check and the identity of the drawer. While the court found that the
proximate cause of the wrongful payment of the check was PNBs negligence in not
observing the 15-day guarantee period rule, it ruled that spouses Cheah still cannot
escape liability to reimburse PNB the value of the check as an accommodation party
pursuant to Section 29 of the Negotiable Instruments Law.[29] It likewise applied the
principle of solutio indebiti under the Civil Code. With regard to the award of other forms
of damages, the RTC held that each party must suffer the consequences of their own acts
and thus left both parties as they are.

Unwilling to accept the judgment, the spouses Cheah appealed to the CA.

Ruling of the Court of Appeals

 While the CA recognized the spouses Cheah as victims of a scam who nevertheless
have to suffer the consequences of Ofelias lack of care and prudence in immediately
trusting a stranger, the appellate court did not hold PNB scot-free. It ruled in its August
22, 2005Decision,[30] viz:

As both parties were equally negligent, it is but right and just that both
parties should equally suffer and shoulder the loss. The scam would not have
been possible without the negligence of both parties. As earlier stated, the
complaint of PNB cannot be dismissed because the Cheah spouses were
negligent and Ms. Cheah took an active part in the deposit of the check and
the withdrawal of the subject amounts. On the other hand, the Cheah spouses
cannot entirely bear the loss because PNB allowed her to withdraw without
waiting for the clearance of the check. The remedy of the parties is to go after
those who perpetrated, and benefited from, the scam.
WHEREFORE, the May 20, 1999 Decision of the Regional Trial Court,
Branch 5, Manila, in Civil Case No. 94-71022, is hereby REVERSED and SET
ASIDE and another one entered DECLARING both parties equally negligent and
should suffer and shoulder the loss.

Accordingly, PNB is hereby ordered to credit to the peso and dollar accounts
of the Cheah spouses the amount due to them.

SO ORDERED.[31]

In so ruling, the CA ratiocinated that PNB Buendia Branchs non-receipt of the SWIFT
message from Philadelphia National Bank within the 15-day clearing period is not an
acceptable excuse. Applying the last clear chance doctrine, the CA held that PNB had the
last clear opportunity to avoid the impending loss of the money and yet, it glaringly
exhibited its negligence in allowing the withdrawal of funds without exhausting the 15-
day clearing period which has always been a standard banking practice as testified to by
PNBs own officers, and as provided in its own General Circular No. 52/101/88. To the CA,
PNB cannot claim from spouses Cheah even if the latter are accommodation parties
under the law as the banks own negligence is the proximate cause of the damage it
sustained.Nevertheless, it also found Ofelia guilty of contributory negligence. Thus, both
parties should be made equally responsible for the resulting loss.

Both parties filed their respective Motions for Reconsideration[32] but same were
denied in a Resolution[33] dated December 21, 2005.

Hence, these Petitions for Review on Certiorari.

Our Ruling

The petitions for review lack merit. Hence, we affirm the ruling of the CA.
PNBs act of releasing the proceeds of the check
prior to the lapse of the 15-day clearing period
was the proximate cause of the loss.

Proximate cause is that cause, which, in natural and continuous sequence,

unbroken by any efficient intervening cause, produces the injury and without which the
result would not have occurred. x x x To determine the proximate cause of a controversy,
the question that needs to be asked is: If the event did not happen, would the injury have
resulted? If the answer is no, then the event is the proximate cause.[34]

Here, while PNB highlights Ofelias fault in accommodating a strangers check and
depositing it to the bank, it remains mum in its release of the proceeds thereof without
exhausting the 15-day clearing period, an act which contravened established banking
rules and practice.
 It is worthy of notice that the 15-day clearing period alluded to is construed as 15
banking days. As declared by Josephine Estella, the Administrative Service Officer who
was the banks Remittance Examiner, what was unusual in the processing of the check
was that the lapse of 15 banking days was not observed.[35] Even PNBs agreement with
Philadelphia National Bank[36]regarding the rules on the collection of the proceeds of US
dollar checks refers to business/ banking days. Ofelia deposited the subject check
on November 4, 1992. Hence, the 15th banking day from the date of said deposit should
fall on November 25, 1992.However, what happened was that PNB Buendia Branch,
upon calling up Ofelia that the check had been cleared, allowed the proceeds thereof to
be withdrawn on November 17 and 18, 1992, a week before the lapse of the standard
15-day clearing period.

This Court already held that the payment of the amounts of checks without
previously clearing them with the drawee bank especially so where the drawee bank is a
foreign bank and the amounts involved were large is contrary to normal or ordinary
banking practice.[37] Also, in Associated Bank v. Tan,[38] wherein the bank allowed the
withdrawal of the value of a check prior to its clearing, we said that [b]efore the check
shall have been cleared for deposit, the collecting bank can only assume at its own risk x
x x that the check would be cleared and paid out.The delay in the receipt by PNB Buendia
Branch of the November 13, 1992 SWIFT message notifying it of the dishonor of the
subject check is of no moment, because had PNB Buendia Branch waited for the
expiration of the clearing period and had never released during that time the proceeds of
the check, it would have already been duly notified of its dishonor. Clearly, PNBs disregard
of its preventive and protective measure against the possibility of being victimized by bad
checks had brought upon itself the injury of losing a significant amount of money.

It bears stressing that the diligence required of banks is more than that of a
Roman pater familias or a good father of a family. The highest degree of diligence is
expected.[39] PNB miserably failed to do its duty of exercising extraordinary diligence and
reasonable business prudence. The disregard of its own banking policy amounts to gross
negligence, which the law defines as negligence characterized by the want of even slight
care, acting or omitting to act in a situation where there is duty to act, not inadvertently
but wilfully and intentionally with a conscious indifference to consequences in so far as
other persons may be affected.[40]With regard to collection or encashment of checks,
suffice it to say that the law imposes on the collecting bank the duty to scrutinize diligently
the checks deposited with it for the purpose of determining their genuineness and
regularity. The collecting bank, being primarily engaged in banking, holds itself out to the
public as the expert on this field, and the law thus holds it to a high standard of
conduct.[41] A bank is expected to be an expert in banking procedures and it has the
necessary means to ascertain whether a check, local or foreign, is sufficiently funded.

Incidentally, PNB obliges the spouses Cheah to return the withdrawn money under the
principle of solutio indebiti, which is laid down in Article 2154 of the Civil Code:[42]

Art. 2154. If something is received when there is no right to demand it, and it was
unduly delivered through mistake, the obligation to return it arises.

[T]he indispensable requisites of the juridical relation known as solutio indebiti, are,
(a) that he who paid was not under obligation to do so; and (b) that the payment was made
by reason of an essential mistake of fact.[43]

In the case at bench, PNB cannot recover the proceeds of the check under the
principle it invokes. In the first place, the gross negligence of PNB, as earlier discussed,
can never be equated with a mere mistake of fact, which must be something excusable and
which requires the exercise of prudence. No recovery is due if the mistake done is one of
gross negligence.

The spouses Cheah are guilty of contributory

negligence and are bound to share the loss with
the bank

Contributory negligence is conduct on the part of the injured party,

contributing as a legal cause to the harm he has suffered, which falls below the standard
to which he is required to conform for his own protection.[44]

The CA found Ofelias credulousness blameworthy. We agree. Indeed, Ofelia failed

to observe caution in giving her full trust in accommodating a complete stranger and this
led her and her husband to be swindled.Considering that Filipina was not personally
known to her and the amount of the foreign check to be encashed was $300,000.00, a
higher degree of care is expected of Ofelia which she, however, failed to exercise under
the circumstances. Another circumstance which should have goaded Ofelia to be more
circumspect in her dealings was when a bank officer called her up to inform that the Bank
of America check has already been cleared way earlier than the 15-day clearing
period.The fact that the check was cleared after only eight banking days from the time it
was deposited or contrary to what Garin told her that clearing takes 15 days should have
already put Ofelia on guard. She should have first verified the regularity of such hasty
clearance considering that if something goes wrong with the transaction, it is she and her
husband who would be put at risk and not the accommodated party. However, Ofelia
chose to ignore the same and instead actively participated in immediately withdrawing
the proceeds of the check. Thus, we are one with the CA in ruling that Ofelias prior
consultation with PNB officers is not enough to totally absolve her of any liability. In the
first place, she should have shunned any participation in that palpably shady transaction.

In any case, the complaint against the spouses Cheah could not be dismissed. As
PNBs client, Ofelia was the one who dealt with PNB and negotiated the check such that
its value was credited in her and her husbands account. Being the ones in privity with PNB,
the spouses Cheah are therefore the persons who should return to PNB the money released
to them.

All told, the Court concurs with the findings of the CA that PNB and the spouses
Cheah are equally negligent and should therefore equally suffer the loss. The two must
both bear the consequences of their mistakes.

WHEREFORE, premises considered, the Petitions for Review on Certiorari in

G.R. No. 170865 and in G.R. No. 170892 are both DENIED. The assailed August 22,
2005Decision and December 21, 2005 Resolution of the Court of Appeals in CA-G.R. CV
No. 63948 are hereby AFFIRMED in toto.
 SO ORDERED.

G.R. No. 173881 December 1, 2010

HYATT ELEVATORS and ESCALATORS CORPORATION, Petitioner,

vs.
CATHEDRAL HEIGHTS BUILDING COMPLEX ASSOCIATION, INC., Respondent.

DECISION

PERALTA, J.:

Before this Court is a petition for review on certiorari,1 under Rule 45 of the Rules of Court, seeking
to set aside the April 20, 2006 Decision2and July 31, 2006 Resolution3 of the Court of Appeals (CA),
in CA-G.R. CV No. 80427.

The facts of the case are as follows:

On October 1, 1994, petitioner Hyatt Elevators and Escalators Corporation entered into an
"Agreement to Service Elevators" (Service Agreement)4 with respondent Cathedral Heights Building
Complex Association, Inc., where petitioner was contracted to maintain four passenger elevators
installed in respondent's building. Under the Service Agreement, the duties and obligations of
petitioner included monthly inspection, adjustment and lubrication of machinery, motors, control
parts and accessory equipments, including switches and electrical wirings.5 Section D (2) of the
Service Agreement provides that respondent shall pay for the additional charges incurred in
connection with the repair and supply of parts.

Petitioner claims that during the period of April 1997 to July 1998 it had incurred expenses
amounting to Php 1,161,933.47 in the maintenance and repair of the four elevators as itemized in a
statement of account.6 Petitioner demanded from respondent the payment of the aforesaid amount
allegedly through a series of demand letters, the last one sent on July 18, 2000.7 Respondent,
however, refused to pay the amount.

Petitioner filed with the Regional Trial Court (RTC), Branch 100, Quezon City, a Complaint for sum
of money against respondent. Said complaint was docketed as Civil Case No. Q-01-43055.

On March 5, 2003, the RTC rendered Judgment8ruling in favor of petitioner, the dispositive portion of
which reads:

WHEREFORE, premises considered, JUDGMENT IS HEREBY RENDERED IN FAVOR OF THE

PLAINTIFF AND AGAINST THE DEFENDANT ordering the latter to pay Plaintiff as follows:

1. The sum of ₱1,161,933.27 representing the costs of the elevator parts used, and for
services and maintenance, with legal rate of interest from the filing of the complaint;
 2. The sum of ₱50,000.00 as attorney's fees;

3. The costs of suit.

SO ORDERED.9

The RTC held that based on the sales invoices presented by petitioner, a contract of sale of goods
was entered into between the parties. Since petitioner was able to fulfill its obligation, the RTC ruled
that it was incumbent on respondent to pay for the services rendered. The RTC did not give
credence to respondent's claim that the elevator parts were never delivered and that the repairs
were questionable, holding that such defense was a mere afterthought and was never raised by
respondent against petitioner at an earlier time.

Respondent filed a Motion for Reconsideration.10On August 17, 2003, the RTC issued a
Resolution11denying respondent's motion. Respondent then filed a Notice of Appeal.12

On April 20, 2006, the CA rendered a Decision finding merit in respondent's appeal, the dispositive
portion of which reads:

WHEREFORE, premises considered, the instant appeal is GRANTED. The Judgment of the
Regional Trial Court, Branch 100, Quezon City, dated March 5, 2003, is hereby REVERSED and
SET ASIDE. The complaint below is dismissed.

SO ORDERED.13

In reversing the RTC, the CA ruled that respondent did not give its consent to the purchase of the
spare parts allegedly installed in the defective elevators. Aside from the absence of consent, the CA
also held that there was no perfected contract of sale because there was no meeting of minds upon
the price. On this note, the CA ruled that the Service Agreement did not give petitioner the unbridled
license to purchase and install any spare parts and demand, after the lapse of a considerable length
of time, payment of these prices from respondent according to its own dictated price.

Aggrieved, petitioner filed a Motion for Reconsideration,14 which was, however, denied by the CA in
a Resolution dated July 31, 2006.

Hence, herein petition, with petitioner raising a lone issue for this Court's resolution, to wit:

WHETHER OR NOT THERE IS A PERFECTED CONTRACT OF SALE BETWEEN

PETITIONER AND RESPONDENT WITH REGARDS TO THE SPARE PARTS
DELIVERED AND INSTALLED BY PETITIONER ON THE FOUR ELEVATORS OF
RESPONDENT AT ITS HOSPITAL UNDER THE AGREEMENT TO SERVICE
ELEVATORS AS TO RENDER RESPONDENT LIABLE FOR THEIR PRICES?15

Before anything else, this Court shall address a procedural issue raised by respondent in its
Comment16 that the petition should be denied due course for raising questions of fact.

The determination of whether there exists a perfected contract of sale is essentially a question of
fact. It is already a well-settled rule that the jurisdiction of this Court in cases brought before it from
the CA by virtue of Rule 45 of the Revised Rules of Court is limited to reviewing errors of law.
Findings of fact of the CA are conclusive upon this Court. There are, however, recognized
exceptions to the foregoing rule, namely: (1) when the findings are grounded entirely on speculation,
surmises, or conjectures; (2) when the inference made is manifestly mistaken, absurd, or impossible;
(3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension
of facts; (5) when the findings of fact are conflicting; (6) when, in making its findings, the Court of
Appeals went beyond the issues of the case, or its findings are contrary to the admissions of both
the appellant and the appellee; (7) when the findings are contrary to those of the trial court; (8) when
the findings are conclusions without citation of specific evidence on which they are based; (9) when
the facts set forth in the petition, as well as in the petitioner’s main and reply briefs, are not disputed
by the respondent; and (10) when the findings of fact are premised on the supposed absence of
evidence and contradicted by the evidence on record.17

The present case falls under the 7th exception, as the RTC and the CA arrived at conflicting findings
of fact.

Having resolved the procedural aspect, this Court shall now address the substantive issue raised by
petitioner. Petitioner contends that the CA erred when it ruled that there was no perfected contract of
sale between petitioner and respondent with regard to the spare parts delivered and installed.

It is undisputed that a Service Agreement was entered into by petitioner and respondent where
petitioner was commissioned to maintain respondent's four elevators. Embodied in the Service
Agreement is a stipulation relating to expenses incurred on top of regular maintenance of the
elevators, to wit:

SERVICE AND INSPECTION FEE:

xxxx

(2) In addition to the service fee mentioned in the preceding paragraph under this article, the
Customer shall pay whatever additional charges in connection with the repair, supply of parts other
than those specifically mentioned in ARTICLE A.2., or servicing of the elevator/s subject of this
contract.18

Petitioner claims that during the period of April 1997 to July 1998, it had used parts in the
maintenance and repair of the four elevators in the total amount of ₱1,161,933.47 as itemized in a
statement of account19 and supported by sales invoices, delivery receipts, trouble call reports and
maintenance and checking reports. Respondent, however, refuses to pay the said amount arguing
that petitioner had not complied with the Standard Operating Procedure (SOP) following a
breakdown of an elevator.

As testified to by respondent's witness Celestino Aguilar, the SOP following an elevator breakdown
is as follows: (a) they (respondent) will notify petitioner's technician; (b) the technician will evaluate
the problem and if the problem is manageable the repair was done right there and then; (c) if some
parts have to be replaced, petitioner will present the defective parts to the building administrator and
a quotation is made; (d) the quotation is then indorsed to respondent's Finance Department; and (e)
a purchase order is then prepared and submitted to the Board of Directors for approval.20

Based on the foregoing procedure, respondent contends that petitioner had failed to follow the SOP
since no purchase orders from respondent's Finance Manager, or Board of Directors relating to the
supposed parts used were secured prior to the repairs. Consequently, since the repairs were not
authorized, respondent claims that it has no way of verifying whether the parts were actually
delivered and installed as alleged by petitioner.
At the outset, this Court observes that the SOP is not embodied in the Service Agreement nor was a
document evidencing the same presented in the RTC. The SOP appears, however, to be the
industry practice and as such was not contested by petitioner. Nevertheless, petitioner offers an
excuse for non-compliance with the SOP on its claim that the SOP was not followed upon the behest
and request of respondent.

A perusal of petitioner's petition and evidence in the RTC shows that the main thrust of its case is
premised on the following claims: first, that the nature and operations of a hospital necessarily
dictate that the elevators are in good running condition at all times; and, second, that there was a
verbal agreement between petitioner's service manager and respondent's building engineer that the
elevators should be running in good condition at all times and breakdowns should only last one day.

In order to prove its allegations, petitioner presented Wilson Sua, its finance manager, as its sole
witness. Sua testified to the procedure followed by petitioner in servicing respondent's elevators, to
wit:

Q: Can you tell us Mr. witness, what is the procedure actually followed whenever there is a
need for trouble call maintenance or repair?

A: The St. Luke’s Cathedral’s personnel, which includes the administrative officers, the guard
on duty, or the receptionist, will call us through the phone if their elevators brake (sic) down.

Q: Then, what happened?

A: Immediately, we dispatched our technicians to check the trouble.

Q: And who were these technicians whom you normally or regularly dispatched to attend to
the trouble of the elevators of the defendant?

A: With regard to this St. Luke’s, we dispatched Sunny Jones and Gilbert Cinamin.

Q: And what happened after dispatching these technicians?

A: They come back immediately to the office to request the parts needed for the
troubleshooting of the elevators.

Q: Then what happened?

A: A part will be brought to the project cite and they will install it and note it in the trouble call
report and have it received properly by the building guard or the receptionist or by the
building engineers, and they will test it for a couple of weeks to determine if the parts are the
correct part needed for that elevator and we will secure their approval, thereafter we will
issue our invoices and delivery receipts.

Q: This trouble call reports, are these in writing?

A: Yes, sir. These are in writing and these are being written within that day.

Q: Within the day of?

A: Of the trouble. And have it received by the duly personnel of St. Luke’s Cathedral.
 Q: And who prepared this trouble call reports?

A: The technician who actually checked the elevator.

Q: When do the parts being installed?

A: On the same date they brought the parts on the project cite.

Q: You mentioned sales invoice and delivery receipts. Who prepared these invoice?

A: Those were prepared by our inventory clerk under my supervision?

Q: How about the delivery receipts?

A: Just the same.

Q: When would the sales invoice be prepared?

A: After the approval of the building engineer.

Q: But at the time that the sales invoice and delivery receipts were being prepared after the
approval of the building engineer, what happened to the parts? Were they already installed
or what?

A: They were already installed.

Q: Now, why would the parts be installed before the preparation of the sales invoice
and the delivery receipts?

A: There was an agreement between the building engineer and our service manager
that the elevator should be running in good condition at all times, breakdown should
be at least one day only. It cannot stop for more than a day.21

On cross examination, Sua testified that the procedure was followed on the authority of a verbal
agreement between petitioner's service manager and respondent's engineer, thus:

Q: So, you mean to say that despite the fact that material are expensive you immediately
installed these equipments without the prior approval of the board?

A: There is no need for the approval of the board since there is a verbal agreement between
the building engineer and the Hyatt service manager to have the elevator run.

Q: Aside from the building engineer, there is a building administrator?

A: No, ma'am. He is already the building administrator and the building engineer. That is
engineer Tisor.

Q: And with regard to the fact that the delivery receipts were acknowledged by the engineer,
is that true?
 A: Yes, ma'am.

Q: You also mentioned earlier that aside from the building engineer, the receptionist and
guards are also authorized. Are you sure that they are authorized to receive the delivery
receipts?

A: Yes, ma'am. It was an instruction given by Engineer Tisor, the building engineer and also
the building administrator to have it received.

Q: So, all these agreements are only verbally, it is not in writing?

A: Yes, ma'am.22

In its petition, petitioner claims that because of the special circumstances of the building being a
hospital, the procedure actually followed since October 1, 1994 was as follows:

1. Whenever any of the four elevators broke down, the administrative officers, security guard
or the receptionist of respondent called petitioner by telephone;

2. Petitioner dispatched immediately a technician to the St. Luke’s Cathedral Heights

Building to check the trouble;

3. If the breakdown could be repaired without installation of parts, repair was done on the
spot;

4. If the repair needed replacement of damaged parts, the technician went back to
petitioner’s office to get the necessary replacement parts;

5. The technician then returned to the St. Luke’s Cathedral Heights Building and installed the
replacement parts and finished the repair;

6. The placement parts, which were installed in the presence of the security guard, building
engineers or receptionist of respondents whoever was available, were indicated in the
trouble call report or sometimes in the delivery receipt and copy of the said trouble call report
or delivery receipt was then given to the blue security guard, building engineers or
receptionist, who duly acknowledged the same;

7. Based on the trouble call report or the delivery receipts, which already indicated the
replacement parts installed and the services rendered, respondent should prepare the
purchase order, but this step was never followed by respondent for whatever reason;

8. In the meantime, the elevator was tested for a couple of weeks to see if the replacement
parts were correct and the approval of the building engineers was secured;

9. After the building engineers gave their approval that the replacement parts were correct or
after the lapse of two weeks and nothing was heard or no complaint was lodged, then the
corresponding sales invoices and delivery receipts, if nothing had been issued yet, were
prepared by petitioner and given to respondent, thru its receptionists or security guards;
 10. For its purposes, respondent should compare the trouble call reports or delivery receipts
which indicated the replacement parts installed or with the sales invoices and delivery
receipts to confirm the correctness of the transaction;

11. If respondent had any complaint that the parts were not actually installed or delivered or
did not agree with the price of the parts indicated in the sales invoices, then it should bring its
complaint or disagreement to the attention of petitioner. In this regard, no complaint or
disagreement as to the prices of the spare parts has been lodged by respondent.23

In varying language, our Rules of Court, in speaking of burden of proof in civil cases, states that
each party must prove his own affirmative allegations and that the burden of proof lies on the party
who would be defeated if no evidence were given on either side. Thus, in civil cases, the burden of
1avvphi1

proof is generally on the plaintiff, with respect to his complaint.24 In the case at bar, it is petitioner's
burden to prove that it is entitled to its claims during the period in dispute.

After an extensive review of the records and evidence on hand, this Court rules that petitioner has
failed to discharge its burden.

This Court finds that the testimony of Sua alone is insufficient to prove the existence of the verbal
agreement, especially in view of the fact that respondent insists that the SOP should have been
followed. It is an age-old rule in civil cases that one who alleges a fact has the burden of proving it
and a mere allegation is not evidence.25

The testimony of Sua, at best, only alleges but does not prove the existence of the verbal
agreement. It may even be hearsay. It bears stressing, that the agreement was supposedly entered
into by petitioner's service manager and respondent's building engineer. It behooves this Court as to
why petitioner did not present their service manager and Engineer Tisor, respondent's building
engineer, the two individuals who were privy to the transactions and who could ultimately lay the
basis for the existence of the alleged verbal agreement. It should have occurred to petitioner during
the course of the trial that said testimonies would have proved vital and crucial to its cause.
Therefore, absent such testimonies, the existence of the verbal agreement cannot be sustained by
this Court.

Moreover, even assuming arguendo, that this Court were to believe the procedure outlined by Sua,
his testimony26 clearly mentions that prior to the preparation of the sales invoices and delivery
receipts, the parts delivered and installed must have been accepted by respondent's engineer or
building administrator. However, again, petitioner offered no evidence of such acceptance by
respondent’s engineer prior to the preparation of the sales invoices and delivery receipts.

This Court is not unmindful of the fact that petitioner also alleges in its petition that the non-
observance of the SOP was the practice way back in 1994 when petitioner started servicing
respondent's elevators. On this note, petitioner argued in the following manner:

And most importantly, the Court of Appeals failed to appreciate that the parts being sought to be
paid by petitioner in the Complaint were delivered and installed during the period from April 1997 to
July 1998, which followed the same actual procedure adopted since October 1, 1994. Based on the
same procedure adopted because of the special circumstances of St. Luke's Cathedral Heights
Building being a hospital, respondent has paid the replacement parts installed from October 1994 to
March 1997. Never did respondent question the adopted actual procedure from October 1994 to
March 1997. x x x27
Was the procedure claimed by petitioner the adopted practice since 1994? This Court rules that
other than the foregoing allegation, petitioner has failed to prove the same. A perusal of petitioner's
Formal Offer of Evidence28 would show that the only documents presented by it are sales invoices,
trouble call reports and delivery receipts, all relating to the alleged transactions between 1997 to
1998. It is unfortunate that petitioner had failed to present in the RTC the documents from 1994 to
1996 for it may have proven that the non-observance of the SOP was the practice since 1994. Such
documents could have shown that respondent had paid petitioner in the past without objection on
similar transactions under similar billing procedures. The same would have also validated petitioner's
claim that the secretary and security guards were all authorized to sign the documents.
Unfortunately, for petitioner's cause, this Court has no basis to validate its claim, because other than
its bare allegation in the petition, petitioner offers no proof to substantiate the same.

By the contract of sale, one of the contracting parties obligates himself to transfer the ownership of
and deliver a determinate thing, and the other to pay therefor a price certain in money or its
equivalent.29 The absence of any of the essential elements will negate the existence of a perfected
contract of sale. In the case at bar, the CA ruled that there was no perfected contract of sale
between petitioner and respondent, to wit:

Aside from the absence of consent, there was no perfected contract of sale because there was no
meeting of minds upon the price. As the law provides, the fixing of the price can never be left to the
discretion of one of the contracting parties. In this case, the absence of agreement as to the price is
evidenced by the lack of purchase orders issued by CHBCAI where the quantity, quality and price of
the spare parts needed for the repair of the elevators are stated. In these purchase orders, it would
show that the quotation of the cost of the spare parts earlier informed by Hyatt is acceptable to
CHBCAI. However, as revealed by the records, it was only Hyatt who determined the price, without
the acceptance or conformity of CHBCAI. From the moment the determination of the price is left to
the judgment of one of the contracting parties, it cannot be said that there has been an arrangement
on the price since it is not possible for the other contracting party to agree on something of which he
does not know beforehand.30

Based on the evidence presented in the RTC, it is clear to this Court that petitioner had failed to
secure the necessary purchase orders from respondent's Board of Directors, or Finance Manager, to
signify their assent to the price of the parts to be used in the repair of the elevators. In Boston Bank
of the Philippines v. Manalo,31 this Court explained that the fixing of the price can never be left to the
decision of one of the contracting parties, to wit:

A definite agreement as to the price is an essential element of a binding agreement to sell personal
or real property because it seriously affects the rights and obligations of the parties. Price is an
essential element in the formation of a binding and enforceable contract of sale. The fixing of the
price can never be left to the decision of one of the contracting parties. But a price fixed by
one of the contracting parties, if accepted by the other, gives rise to a perfected sale.32

There would have been a perfected contract of sale had respondent accepted the price dictated by
petitioner even if such assent was given after the services were rendered. There is, however, no
proof of such acceptance on the part of respondent.

This Court shares the observation of the CA that the signatures of receipt by the information clerk or
the guard on duty on the sales invoices and delivery receipts merely pertain to the physical receipt of
the papers. It does not indicate that the parts stated were actually delivered and installed. Moreover,
because petitioner failed to prove the existence of the verbal agreement which allegedly authorized
the aforementioned individuals to sign in respondent’s behalf, such signatures cannot be tantamount
to an approval or acceptance by respondent of the parts allegedly used and the price quoted by
petitioner. Furthermore, what makes the claims doubtful and questionable is that the date of the
sales invoice and the date stated in the corresponding delivery receipt are too far apart as aptly
found by the CA, to wit:

Further, We note that the date stated in the sales invoice vis-a-vis the date stated in the
corresponding delivery receipt is too far apart. For instance, Delivery Receipt No. 3492 dated
February 13, 1998 has a corresponding Sales Invoice No. 7147 dated June 30, 1998. What puts
doubt to this transaction is the fact that the sales invoice was prepared only after four (4) months
from the delivery. The considerable length of time that has lapsed from the delivery to the issuance
of the sales invoice is questionable. Further the delivery receipts were received months after its
preparation. In the case of Delivery Receipt No. 3850 dated November 26, 1997, Gumisad received
this only on July 20, 1998, or after a lapse of eight (8) months. Such kind of procedure followed by
Hyatt is certainly contrary to usual business practice, especially since in this case, it involves
considerable amount of money.33

Based on the foregoing, the CA was thus correct when it concluded that "the Service Agreement did
not give petitioner the unbridled license to purchase and install any spare parts and demand, after
the lapse of a considerable length of time, payment of these prices from respondent according to its
own dictated price."34

Withal, this Court rules that petitioner's claim must fail for the following reasons: first, petitioner failed
to prove the existence of the verbal agreement that would authorize non-observance of the SOP;
second, petitioner failed to prove that such procedure was the practice since 1994; and, third, there
was no perfected contract of sale between the parties as there was no meeting of minds upon the
price.

To stress, the burden of proof is on the plaintiff. He must rely on the strength of his case and not on
the weakness of respondent's defense. Based on the manner by which petitioner had presented its
claim, this Court is of the opinion that petitioner's case leaves too much to be desired.

WHERFORE, premises considered, the petition is DENIED. The April 20, 2006 Decision and July
31, 2006 Resolution of the Court of Appeals, in CA-G.R. CV No. 80427, are AFFIRMED.

SO ORDERED.

TITAN-IKEDA CONSTRUCTION G.R. No. 158768

& DEVELOPMENT
CORPORATION,
Petitioner, Present:
PUNO, C.J., Chairperson,
SANDOVAL-GUTIERREZ,
-v e r s u s- CORONA,
AZCUNA and
LEONARDO-DE CASTRO, JJ.
PRIMETOWN PROPERTY
GROUP, INC.,
Respondent. Promulgated:

February 12, 2008

x--------------------------------------------------x

DECISION

CORONA, J.:

This petition for review on certiorari[1]seeks to set aside the decision of the Court
of Appeals (CA) in CA-G.R. CV No. 61353[2] and its resolution[3] denying
reconsideration.
In 1992, respondent Primetown Property Group, Inc. awarded the contract for the
structural works[4] of its 32-storey Makati Prime Tower (MPT) to petitioner Titan-
Ikeda Construction and Development Corporation.[5] The parties formalized their
agreement in a construction contract[6] dated February 4, 1993.[7]

Upon the completion of MPT's structural works, respondent awarded

the P130,000,000 contract for the tower's architectural works[8] (project) to
petitioner. Thus, on January 31, 1994, the parties executed a supplemental
agreement.[9] The salient portions thereof were:

1. the [project] shall cover the scope of work of the detailed construction bid plans
and specifications and bid documents dated 28 September 1993, attached and
forming an integral part hereof as Annex A.

2. the contract price for the said works shall be P130 million.

3. the payment terms shall be full swapping or full payment in condominium units.
The condominium units earmarked for the [petitioner] are shown in the attached
Annex B.

4. the [respondent] shall transfer and surrender to [petitioner] the condominium

units abovestated in accordance with the following schedule:

(a) 80% of units upon posting and acceptance by [respondent] of the

performance bond [and]

(b) 20% or remaining balance upon completion of the project as provided in

the construction contract and simultaneous with the posting by
[petitioner] of the reglementary guarantee bond.
 5. the contract period shall be fifteen (15) months reckoned from the release of the
condominium certificates of title (CCTs) covering eighty percent (80%) of the units
transferable to [petitioner] as aforesaid[.]

Significantly, the supplemental agreement adopted those provisions of the

construction contract which it did not specifically discuss or provide for. [10] Among
those carried over was the designation of GEMM Construction Corporation
(GEMM) as the project's construction manager.[11]

Petitioner started working on the project in February 1994.

On June 30, 1994, respondent executed a deed of sale[12] (covering 114

condominium units and 20 parking slots of the MPT collectively valued by the
parties at P112,416,716.88)[13] in favor of petitioner pursuant to the full-swapping
payment provision of the supplemental agreement.

Shortly thereafter, petitioner sold some of its units to third persons.[14]

In September 1995, respondent engaged the services of Integratech, Inc. (ITI), an

engineering consultancy firm, to evaluate the progress of the project.[15] In its
September 7, 1995 report,[16] ITI informed respondent that petitioner, at that point,
had only accomplished 31.89% of the project (or was 11 months and six days
behind schedule).[17]
Meanwhile, petitioner and respondent were discussing the possibility of the latters
take over of the projects supervision. Despite ongoing negotiations, respondent did
not obtain petitioners consent in hiring ITI as the projects construction manager.
Neither did it inform petitioner of ITIs September 7, 1995 report.

On October 12, 1995, petitioner sought to confirm respondent's plan to take over
the project.[18] Its letter stated:

The mutual agreement arrived at sometime in the last week of August 1995 for
[respondent] to take over the construction supervision of the balance of the [project]
from [petitioner's] [e]ngineering staff and complete [the] same by December 31, 1995
as promised by [petitioner's] engineer.

The [petitioner's] accomplished works as of this date of [t]ake over is of acceptable

quality in materials and workmanship.

This mutual agreement on the take over should not be misconstrued in any other way
except that the take over is part of the long range plan of[respondent] that [petitioner],
in the spirit of cooperation, agreed to hand over the construction supervision
to[respondent] as requested. (emphasis supplied)[19]

Engineers Antonio Co, general construction manager of respondent, and Luzon Y.

Tablante, project manager of petitioner, signed the letter.

INTEGRATECHS (ITIS) REPORT

 In its September 7, 1995 report, ITI estimated that petitioner should have
accomplished 48.71% of the project as of the October 12, 1995 takeover
date.[20]Petitioner repudiated this figure[21] but qualifiedly admitted that it did not
finish the project.[22] Records showed that respondent did not merely take over the
supervision of the project but took full control thereof.[23]

Petitioner consequently conducted an inventory.[24] On the basis thereof,

petitioner demanded from respondent the payment of its balance amounting
to P1,779,744.85.[25]

On February 19, 1996, petitioner sent a second letter to respondent

demanding P2,023,876.25. This new figure included the cost of materials
(P244,331.40) petitioner advanced from December 5, 1995 to January 26, 1996.[26]

On November 22, 1996, petitioner demanded from respondent the delivery of

MPT's management certificate[27] and the keys to the condominium units and the
payment of its (respondent's) balance.[28]

Because respondent ignored petitioner's demand, petitioner, on December 9,

1996, filed a complaint for specific performance[29] in the Housing and Land Use
Regulatory Board (HLURB).

While the complaint for specific performance was pending in the HLURB,
respondent sent a demand letter to petitioner asking it to reimburse the actual
costs incurred in finishing the project (or P69,785,923.47).[30] In view of the
pendency of the HLURB case, petitioner did not heed respondent's demands.

On April 29, 1997, the HLURB rendered a decision in favor of petitioner.[31] It ruled
that the instrument executed on June 30, 1994 was a deed of absolute sale because
the conveyance of the condominium units and parking slots was not subject to any
condition.[32] Thus, it ordered respondent to issue MPTs management certificate
and to deliver the keys to the condominium units to petitioner.[33] Respondent did
not appeal this decision. Consequently, a writ of execution was issued upon its
finality.[34]

Undaunted by the finality of the HLURB decision, respondent filed a

complaint for collection of sum of money[35] against petitioner in the Regional Trial
Court (RTC) of Makati City, Branch 58 on July 2, 1997. It prayed for the
reimbursement of the value of the projects unfinished portion amounting
to P66,677,000.[36]

During trial, the RTC found that because respondent modified the MPT's
architectural design, petitioner had to adjust the scope of work.[37] Moreover,
respondent belatedly informed petitioner of those modifications. It also failed to
deliver the concrete mix and rebars according to schedule. For this reason,
petitioner was not responsible for the project's delay.[38] The trial court thus
allowed petitioner to set-off respondent's other outstanding liabilities with
respondents excess payment in the project.[39] It concluded that respondent owed
petitioner P2,023,876.25.[40] In addition, because respondent refused to deliver the
keys to the condominium units and the management certificate to petitioner, the
RTC found that petitioner lost rental income amounting to US$1,665,260.[41] The
dispositive portion of the RTC decision stated:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered dismissing

[respondent's] [c]omplaint for lack of merit. On the other hand, finding preponderance of
evidence to sustain [petitioner's] counterclaim, judgment is hereby rendered in favor of
[petitioner] ordering [respondent] to pay the former:

1. The unpaid balance of the consideration for [petitioner's] services in [the project]
in the amount of P2,023,867.25 with legal interest from the date of demand until
fully paid;

2. Compensatory damages in the amount of US$1,665,260 or its peso equivalent at

the current foreign exchange rate representing lost rental income due only as of
July 1997 and the accrued lost earnings from then on until the date of actual
payment, with legal interest from the date of demand until fully paid; and

3. Attorney's fees in the amount of P100,000 as acceptance fee, P1,000 appearance

fee per hearing and 25% of the total amount awarded to [petitioner].

With costs against the [respondent].

SO ORDERED.[42]

Respondent appealed the RTC decision to the CA.[43] The appellate court found that
respondent fully performed its obligation when it executed the June 30, 1994 deed
of absolute sale in favor of petitioner.[44]Moreover, ITI's report clearly established
that petitioner had completed only 48.71% of the project as of October 12, 1995,
the takeover date. Not only did it incur delay in the performance of its obligation
but petitioner also failed to finish the project.The CA ruled that respondent was
entitled to recover the value of the unfinished portion of the project under the
principle of unjust enrichment.[45] Thus:
WHEREFORE, the appealed decision is REVERSED and a new one entered dismissing
[petitioner's] counterclaims of P2,023,867.25 representing unpaid balance for [its]
services in [the project]; US$1,665,260 as accrued lost earnings, and attorney's fees.
[Petitioner] is hereby ordered to return to [respondent] the amount of P66,677,000
representing the value of unfinished [portion of the project], plus legal interest thereon
until fully paid. Upon payment by [petitioner] of the aforementioned amount,
[respondent] is hereby ordered to deliver the keys and [m]anagement [c]ertificate of the
[Makati Prime Tower] paid to [petitioner] as consideration for the [project].[46]

Petitioner moved for reconsideration but it was denied. Hence, this petition.

Petitioner contends that the CA erred in giving weight to ITI's report because the
project evaluation was commissioned only by respondent,[47] in disregard of
industry practice. Project evaluations are agreed upon by the parties and
conducted by a disinterested third party.[48]

We grant the petition.

REVIEW OF CONFLICTING FACTUAL

FINDINGS
As a general rule, only questions of law may be raised in a petition for review on
certiorari. Factual issues are entertained only in exceptional cases such as where
the findings of fact of the CA and the trial court are conflicting.[49]

Here, a glaring contradiction exists between the factual findings of the RTC and the
CA. The trial court found that respondent contributed to the project's delay
because it belatedly communicated the modifications and failed to deliver the
necessary materials on time. The CA, however, found that petitioner incurred delay
in the performance of its obligation. It relied on ITI's report which stated that
petitioner had accomplished only 48.71% of the project as of October 12, 1995.

JANUARY 31, 1994

SUPPLEMENTAL AGREEMENT
WAS EXTINGUISHED

A contract is a meeting of the minds between two persons whereby one binds
himself, with respect to the other, to give something or to render some
service.[50] This case involved two contracts entered into by the parties with regard
to the project.

The parties first entered into a contract for a piece of work[51] when they executed
the supplemental agreement. Petitioner as contractor bound itself to execute the
project for respondent, the owner/developer, in consideration of a price certain
(P130,000,000). The supplemental agreement was reciprocal in nature because the
obligation of respondent to pay the entire contract price depended on the
obligation of petitioner to complete the project (and vice versa).

Thereafter, the parties entered into a second contract. They agreed to extinguish
the supplemental agreement as evidenced by the October 12, 1995 letter-
agreement which was duly acknowledged by their respective representatives.[52]

While the October 12, 1995 letter-agreement stated that respondent was to take
over merely the supervision of the project, it actually took over the whole project
itself. In fact, respondent subsequently hired two contractors in petitioner's
stead.[53]Moreover, petitioner's project engineer at site only monitored the
progress of architectural works undertaken in its condominium units.[54] Petitioner
never objected to this arrangement; hence, it voluntarily surrendered its
participation in the project. Moreover, it judicially admitted in its answer that
respondent took over the entire project, not merely its supervision, pursuant to its
(respondents) long-range plans.[55]

Because the parties agreed to extinguish the supplemental agreement, they were
no longer required to fully perform their respective obligations. Petitioner was
relieved of its obligation to complete the project while respondent was freed of its
obligation to pay the entire contract price. However, respondent, by executing the
June 30, 1994 deed of absolute sale, was deemed to have paid P112,416,716.88.
Nevertheless, because petitioner applied part of what it received to respondents
outstanding liabilities,[56] it admitted overpayment.

Because petitioner acknowledged that it had been overpaid, it was obliged to

return the excess to respondent. Embodying the principle of solutio indebiti, Article
2154 of the Civil Code provides:

Article 2154. If something is received when there is no right to demand it and it was
unduly delivered through mistake, the obligation to return it arises.

For the extra-contractual obligation of solutio indebiti to arise, the following

requisites must be proven:

1. the absence of a right to collect the excess sums and

2. the payment was made by mistake.[57]

With regard to the first requisite, because the supplemental agreement had been
extinguished by the mutual agreement of the parties, petitioner became entitled
only to the cost of services it actually rendered (i.e., that fraction of the project cost
in proportion to the percentage of its actual accomplishment in the project). It was
not entitled to the excess (or extent of overpayment).

On the second requisite, Article 2163 of the Civil Code provides:

 Article 2163. It is presumed that there was a mistake in the payment if
something which had never been dueor had already been paid was delivered;
but, he from whom the return is claimed may prove that the delivery was made
out of liberality or for any other just cause. (emphasis supplied)
In this instance, respondent paid part of the contract price under the
assumption that petitioner would complete the project within the stipulated
period. However, after the supplemental agreement was extinguished, petitioner
ceased working on the project. Therefore, the compensation petitioner received in
excess of the cost of its actual accomplishment as of October 12, 1995 was never
due. The condominium units and parking slots corresponding to the said excess
were mistakenly delivered by respondent and were therefore not due to petitioner.

Stated simply, respondent erroneously delivered excess units to petitioner and the
latter, pursuant to Article 2154, was obliged to the return them to
respondent.[58] Article 2160 of the Civil Code provides:
Article 2160. He who in good faith accepts an undue payment of a thing certain
and determinate shall only be responsible for the impairment or loss of the same or its
accessories and accessions insofar as he has thereby been benefited. If he has alienated
it, he shall return the price or assign the action to collect the sum.

One who receives payment by mistake in good faith is, as a general rule, only
liable to return the thing delivered.[59] If he benefited therefrom, he is also liable
for the impairment or loss of the thing delivered and its accessories and
accessions.[60] If he sold the thing delivered, he should either deliver the proceeds
of the sale or assign the action to collect to the other party.[61]
The situation is, however, complicated by the following facts:

a) the basis of the valuation (P112,416,716.99) of the condominium units

and parking slots covered by the June 30, 1994 deed of sale is unknown;

b) the percentage of petitioner's actual accomplishment in the project has

not been determined and

c) the records of this case do not show the actual number of condominium
units and parking slots sold by petitioners.

Because this Court is not a trier of facts, the determination of these matters
should be remanded to the RTC for reception of further evidence.

The RTC must first determine the percentage of the project petitioner actually
completed and its proportionate cost.[62] This will be the amount due to petitioner.
Thereafter, based on the stipulated valuation in the June 30, 1994 deed of sale, the
RTC shall determine how many condominium units and parking slots correspond to
the amount due to petitioner. It will only be the management certificate and the
keys to these units that petitioner will be entitled to. The remaining units, having
been mistakenly delivered by respondent, will therefore bethe subject of solutio
indebiti.

What exactly must petitioner give back to respondent? Under Article 2160 in
relation to Article 2154, it should return to respondent the condominium units and
parking slots in excess of the value of its actual accomplishment (i.e., the amount
due to it) as of October 12, 1995. If theseproperties include units and/or slots
already sold to third persons, petitioner shall deliverthe proceeds of the
sale thereof or assign the actions for collection to respondent as required by Article
2160.
DELAY IN THE COMPLETION OF THE
PROJECT

Mora or delay is the failure to perform the obligation in due time because
of dolo (malice) or culpa (negligence).[63] A debtor is deemed to have violated his
obligation to the creditor from the time the latter makes a demand. Once the
creditor makes a demand, the debtor incurs mora or delay.[64]

The construction contract[65] provided a procedure for protesting delay:

Article XIV

DELAYS AND ABANDONMENT

15.1. If at any time during the effectivity of this contract, [PETITIONER] shall incur
unreasonable delay or slippages of more than fifteen percent (15%) of the scheduled
work program, [RESPONDENT] should notify[PETITIONER] in writing to accelerate the
work and reduce, if not erase, slippage. If after the lapse of sixty (60) days from receipt
of such notice, [PETITIONER] fails to rectify the delay or slippage, [RESPONDENT] shall
have the right to terminate this contract except in cases where the same was caused by
force majeure. FORCE MAJEURE as contemplated herein, and in determination of delay
includes, but is not limited to, typhoon, flood, earthquake, coup d'etat, rebellion,
sedition, transport strike, stoppage of work, mass public action that prevents workers
from reporting for work, and such other causes beyond [PETITIONER'S]
control.[66] (emphasis supplied)
 xxx xxx xxx

Respondent never sent petitioner a written demand asking it to accelerate work on

the project and reduce, if not eliminate, slippage. If delay had truly been the reason
why respondent took over the project, it would have sent a written demand as
required by the construction contract. Moreover, according to the October 12,
1995 letter-agreement, respondent took over the project for the sole reason that
such move was part of its (respondent's) long-term plan.

Respondent, on the other hand, relied on ITI's September 7, 1995 report. The
construction contract named GEMM, not ITI, as construction manager.[67] Because
petitioner did not consent to the change of the designated construction manager,
ITI's September 7, 1995 report could not bind it.

In view of the foregoing, we hold that petitioner did not incur delay in the
performance of its obligation.
RECOVERY OF ADDITIONAL COSTS
RESULTING FROM CHANGES

The supplemental agreement was a contract for a stipulated price.[68] In such

contracts, the recovery of additional costs (incurred due to changes in plans or
specifications) is governed by Article 1724 of the Civil Code.
 Article 1724. The contractor who undertakes to build a structure or any other work for a
stipulated price, in conformity with plans and specifications agreed upon with the
landowner, can neither withdraw from the contract nor demand an increase in the price
on account of higher cost of labor or materials, save when there has been a change in
plans and specifications, provided:

1. such change has been authorized by the proprietor in writing; and

2. the additional price to be paid to the contractor has been determined in writing by
both parties.

In Powton Conglomerate, Inc. v. Agcolicol,[69]we reiterated that a claim for the cost
of additional work arising from changes in the scope of work can only be allowed
upon the:

1. written authority from the developer/owner ordering/allowing the changes in work;

and

2. written agreement of parties with regard to the increase in cost (or price) due to the
change in work or design modification. [70]

Furthermore:

Compliance with the two requisites of Article 1724, a specific provision governing
additional works, is a condition precedent of the recovery. The absence of one or the
other bars the recovery of additional costs. Neither the authority for the changes made
nor the additional price to be paid therefor may be proved by any other evidence for
purposes of recovery.[71] (emphasis supplied)
Petitioner submitted neither one. In addition, petitioners project coordinator
Estellita Garcia testified that respondent never approved any change
order.[72] Thus, under Article 1724 and pursuant to our ruling in Powton
Conglomerate, Inc., petitioner cannot recover the cost it incurred in effecting the
design modifications. A contractor who fails to secure the owner or developer's
written authority to changes in the work or written assent to the additional cost to
be incurred cannot invoke the principle of unjust enrichment.[73]
RECOVERY OF COMPENSATORY
DAMAGES

Indemnification for damages comprehends not only the loss suffered (actual
damages or damnum emergens) but also the claimant's lost profits (compensatory
damages or lucrum cessans). For compensatory damages to be awarded, it is
necessary to prove the actual amount of the alleged loss by preponderance of
evidence.[74]

The RTC awarded compensatory damages based on the rental pool rates submitted
by petitioner[75] and on the premise that all those units would have been leased had
respondent only finished the project by December 31, 1995.[76] However, other
than bare assertions, petitioner submitted no proof that the rental pool was in fact
able to lease out the units. We thus hold that the losses sustained by petitioner
were merely speculative and there was no basis for the award.

REMAND OF OTHER CLAIMS

Since respondent did not repudiate petitioner's other claims stated in the
inventory[77] in the RTC and CA, it is estopped from questioning the validity
thereof.[78] However, because some of petitioner's claims have been disallowed,
we remand the records of this case to the RTC for the computation of respondent's
liability.[79]

WHEREFORE, the petition is hereby GRANTED.

The March 15, 2002 decision and May 29, 2003 resolution of the Court of Appeals
in CA-G.R. CV No. 61353 and the August 5, 1998 decision of the Regional Trial Court,
Branch 58, Makati City in Civil Case No. 97-1501 are hereby SET ASIDE. New
judgment is entered:

1. ordering petitioner Titan-Ikeda Construction and Development Corporation

to return to respondent Primetown Property Group, Inc. the condominium
units and parking slots corresponding to the payment made in excess of the
proportionate (project) cost of its actual accomplishment as of October 12,
1995, subject to its (petitioners) allowable claims as stated in the inventory
and

2. dismissing petitioner Titan-Ikeda Construction and Development

Corporations claims for the cost of additional work (or change order) and
damages.
The records of this case are remanded to the Regional Trial Court of Makati City,
Branch 58 for:

1. the reception of additional evidence to determine

(a) the percentage of the architectural work actually completed by

petitioner Titan-Ikeda Construction and Development
Corporation as of October 12, 1995 on the Makati Prime Tower
and

(b) the number of condominium units and parking slots sold by

petitioner Titan-Ikeda Construction and Development
Corporation to third persons;

2. the computation of petitioner Titan-Ikeda Construction and

Development Corporation's actual liability to respondent Primetown
Property Group, Inc. or vice-versa, and the determination of
imposable interests and/or penalties, if any.

SO ORDERED.

RENATO C. CORONA

Associate Justice

WE CONCUR:
G.R. No. 180168 February 27, 2012

MANILA INTERNATIONAL AIRPORT AUTHORITY,Petitioner,

vs.
AVIA FILIPINAS INTERNATIONAL, INC.,Respondent.

DECISION

PERALTA, J.

Before the Court is a petition for review on certiorariunder Rule 45 of the Rules of Court, seeking the
reversal and setting aside of the June 19, 2007 Decision1 and the October 11, 2007 Resolution2 of the
Court of Appeals (CA) in CA-G.R. CV No. 79325. The assailed CA Decision affirmed with
modification the Decision3 dated March 21, 2003 of the Regional Trial Court (RTC) of Quezon City,
Branch 224, in Civil Case No. Q-98-34395, while the CA Resolution denied petitioner's Motion for
Reconsideration.

The factual and procedural antecedents are as follows:

In September 1990, herein petitioner Manila International Airport Authority (MIAA) entered into a
contract of lease with herein respondent Avia Filipinas International Corporation (AFIC), wherein
MIAA allowed AFIC to use specific portions of land as well as facilities within the Ninoy Aquino
International Airport exclusively for the latter's aircraft repair station and chartering operations. The
contract was for one (1) year, beginning September 1, 1990 until August 31, 1991, with a monthly
rental of ₱6,580.00.

In December 1990, MIAA issued Administrative Order No. 1, Series of 1990, which revised the rates
of dues, charges, fees or assessments for the use of its properties, facilities and services within the
airport complex. The Administrative Order was made effective on December 1, 1990. As a
consequence, the monthly rentals due from AFIC was increased to ₱15,996.50. Nonetheless, MIAA
did not require AFIC to pay the new rental fee. Thus, it continued to pay the original fee of
₱6,580.00.

After the expiration of the contract, AFIC continued to use and occupy the leased premises giving
rise to an implied lease contract on a monthly basis. AFIC kept on paying the original rental fee
without protest on the part of MIAA.

Three years after the expiration of the original contract of lease, MIAA informed AFIC, through a
billing statement dated October 6, 1994, that the monthly rental over the subject premises was
increased to ₱15,966.50 beginning September 1, 1991, which is the date immediately following the
expiration of the original contract of lease. MIAA sought recovery of the difference between the
increased rental rate and the original rental fee amounting to a total of ₱347,300.50 covering thirty-
seven (37) months between September 1, 1991 and September 31, 1994. Beginning October 1994,
AFIC paid the increased rental fee. However, it refused to pay the lump sum of ₱347,300.50 sought
to be recovered by MIAA. For the continued refusal of AFIC to pay the said lump sum, its employees
were denied access to the leased premises from July 1, 1997 until March 11, 1998. This,
notwithstanding, AFIC continued paying its rentals. Subsequently, AFIC was granted temporary
access to the leased premises.
AFIC then filed with the RTC of Quezon City a Complaint for damages with injunction against MIAA
and its General Manager seeking uninterrupted access to the leased premises, recovery of actual
and exemplary damages, refund of its monthly rentals with interest at the time that it was denied
access to the area being rented as well as attorney's fees.

In its Answer with Counterclaim, MIAA contended that under its lease contract with AFIC, MIAA is
allowed to either increase or decrease the monthly rental; AFIC has rental arrears in the amount of
₱347,300.50; AFIC was wrong in claiming that MIAA took the law into its own hands in denying AFIC
and its employees access to the leased premises, because under the lease contract, in case of
failure on the part of AFIC to pay rentals for at least two (2) months, the contract shall become
automatically terminated and canceled without need of judicial action or process and it shall be
lawful for MIAA or any person or persons duly authorized on its behalf to take possession of the
property either by padlocking the premises or posting its guards to prevent the entry of any person.
MIAA prayed for the award of exemplary damages as well as attorney's fees and litigation expenses.

On March 21, 2003, the RTC rendered its Decision, the dispositive portion of which reads as follows:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiff [AFIC]
and as against the defendants [MIAA] ordering the latter to pay plaintiff the following:

a) the amount of ₱2,000,000.00 as actual damages;

b) the amount of P200,000.00 as exemplary damages;

c) to refund the monthly rental payments beginning July 1, 1997 up [to] March 11, 1998 with
interest at twelve (12%) percent;

d) the amount of ₱100,000.00 as attorney's fees;

e) cost of suit.

IT IS SO ORDERED.4

MIAA filed an appeal with the CA contending that the RTC erred in: (1) finding that MIAA is not
entitled to apply the increase in rentals as against AFIC; (2) finding that MIAA is not entitled to
padlock the leased premises or post guards to prevent entry of AFIC therein; and (3) awarding
actual and exemplary damages and attorney's fees.

On June 19, 2007, the CA rendered its assailed Decision, the dispositive portion of which reads,
thus:

WHEREFORE, premises considered, the decision of the Regional Trial Court of Quezon City in Civil
Case No. Q-98-34395 is hereby AFFIRMED with MODIFICATION. The awards of
actual/compensatory damages and exemplary damages are deleted. The refund of monthly rental
payments from July 1, 1997 to March 11, 1998 shall earn interest of six percent (6%) per annum
from the date of the filing of the complaint until the finality of this decision. An interest of twelve
percent (12%) per annum shall be imposed upon any unpaid balance from such finality until the
judgment amount is fully satisfied.

The award of attorney's fees stands.

SO ORDERED.5

MIAA filed a Motion for Reconsideration, but the CA denied it via its Resolution dated October 11,
2007.

Hence, the present petition for review on certiorari raising the following issues:

WHETHER THE HONORABLE COURT OF APPEALS CORRECTLY INTERPRETED THE

PROVISIONS OF THE LEASE CONTRACT IN LINE WITH THE PROVISIONS OF THE
CIVIL CODE AND EXISTING JURISPRUDENCE ON CONTRACTS.

WHETHER THE PRINCIPLE OF UNJUST ENRICHMENT IS APPLICABLE TO THE

INSTANT CASE.

WHETHER RESPONDENT IS ENTITLED TO ATTORNEY'S FEES.6

Petitioner MIAA contends that, as an administrative agency possessed of quasi-legislative and

quasi-judicial powers as provided for in its charter, it is empowered to make rules and regulations
and to levy fees and charges; that its issuance of Administrative Order No. 1, Series of 1990 is
pursuant to the exercise of the abovementioned powers; that by signing the lease contract,
respondent AFIC already agreed and gave its consent to any further increase in rental rates; as
such, the provisions of the lease contract being cited by the CA which provides that "any
amendment, alteration or modification [of the lease contract] shall not be valid and binding, unless
and until made in writing and signed by the parties thereto" is deemed complied with because
respondent already consented to having any subsequent amendments to Administrative Order No. 1
automatically incorporated in the lease contract; that the above-quoted provisions should not also be
interpreted as having the effect of limiting the authority of MIAA to impose new rental rates in
accordance with its authority under its charter.

Petitioner also argues that it is not guilty of unjust enrichment when it denied respondent access to
the leased premises, because there is nothing unlawful in its act of imposing sanctions against
respondent for the latter's failure to pay the increased rental.

Lastly, petitioner avers that respondent is not entitled to attorney's fees, considering that it was not
compelled to litigate and incur expenses to protect its interest by reason of any unjustified act on the
part of petitioner. Petitioner reiterates that it was merely exercising its right as the owner and
administrator of the leased property and, as such, its acts may not be deemed unwarranted.

The petition lacks merit.

Article 1306 of the Civil Code provides that "[t]he contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy."

Moreover, Article 1374 of the Civil Code clearly provides that "[t]he various stipulations of a contract
shall be interpreted together, attributing to the doubtful ones that sense which may result from all of
them taken jointly." Indeed, in construing a contract, the provisions thereof should not be read in
isolation, but in relation to each other and in their entirety so as to render them effective, having in
mind the intention of the parties and the purpose to be achieved.7 In other words, the stipulations in a
contract and other contract documents should be interpreted together with the end in view of giving
effect to all.8
In the present case, the Court finds nothing repugnant to law with respect to the questioned
provisions of the contract of lease between petitioner and respondent. It is true that Article II,
Paragraph 2.04 of the Contract of Lease states that "[a]ny subsequent amendment to Administrative
Order No. 4, Series of 1982, which will effect a decrease or escalation of the monthly rental or
impose new and additional fees and charges, including but not limited to government/MIAA circulars,
rules and regulation to this effect, shall be deemed incorporated herein and shall automatically
amend this Contract insofar as the monthly rental is concerned."9 However, the Court agrees with the
CA that the abovequoted provision of the lease contract should not be read in isolation. Rather, it
should be read together with the provisions of Article VIII, Paragraph 8.13, which provide that "[a]ny
amendment, alteration or modification of th[e] Contract shall not be valid and binding, unless and
until made in writing and signed by the parties thereto."10 It is clear from the foregoing that the
intention of the parties is to subject such amendment to the conformity of both petitioner and
respondent. In the instant case, there is no showing that respondent gave his acquiescence to the
said amendment or modification of the contract.

The situation is different with respect to the payments of the increased rental fee made by
respondent beginning October 1994 because by then the amendment to the contract was made in
writing through a bill sent by petitioner to respondent.11 The fact that respondent subsequently settled
the said bill proves that he acceded to the increase in rental fee. The same may not be said with
respect to the questioned rental fees sought to be recovered by petitioner between September 1991
and September 1994 because no bill was made and forwarded to respondent on the basis of which
it could have given or withheld its conformity thereto.

It may not be amiss to point out that during the abovementioned period, respondent continued to pay
and petitioner kept on receiving the original rental fee of ₱6,580.00 without any reservations or
protests from the latter.12 Neither did petitioner indicate in the official receipts it issued that the
payments made by respondent constitute only partial fulfillment of the latter's obligations. Article
1235 of the Civil Code clearly states that "[w]hen the obligee accepts the performance knowing its
incompleteness or irregularity, and without expressing any protest or objection, the obligation is
deemed fully complied with." For failing to make any protest or objection, petitioner is already
estopped from seeking recovery of the amount claimed.

Anent the second issue, since it has been established that petitioner has no legal basis in requiring
respondent to pay additional rental fees from September 1, 1991 to September 30, 1994, it, thus,
follows that petitioner's act of denying respondent and its employees access to the leased premises
from July 1, 1997 until March 11, 1998, by reason of respondent's non-payment of the said
additional fees, is likewise unjustified.

Under Paragraph 3, Article 1654 of the Civil Code, the lessor is obliged "[t]o maintain the lessee in
the peaceful and adequate enjoyment of the lease for the entire duration of the contract."

Moreover, Article 1658 of the same Code provides that "[t]he lessee may suspend the payment of
the rent in case the lessor fails to make the necessary repairs or to maintain the lessee in peaceful
and adequate enjoyment of the property leased."

Furthermore, as correctly cited by the RTC, Article 19 of the Civil Code provides that "[e]very person
must, in the exercise of his rights and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith."

Article 22 of the same Code also states that "[e]very person who through an act of performance by
another, or any other means, acquires or comes into possession of something at the expense of the
latter without just or legal ground, shall return the same to him." In accordance with jurisprudence,
there is unjust enrichment when a person unjustly retains a benefit to the loss of another, or when a
person retains money or property of another against the fundamental principles of justice, equity and
good conscience.13 The principle of unjust enrichment essentially contemplates payment when there
is no duty to pay, and the person who receives the payment has no right to receive it.14

In the instant case, it is clear that petitioner failed to maintain respondent in the peaceful and
adequate enjoyment of the leased premises by unjustifiably preventing the latter access thereto.
Consequently, in accordance with Article 1658 of the Civil Code, respondent had no duty to make
rent payments. Despite that, respondent still continued to pay the rental fees agreed upon in the
original contract. Thus, it would be the height of inequity and injustice as well as unjust enrichment
on the part of petitioner if the rental fees paid by respondent during the time that it was denied
access to and prevented from using the leased premises be not returned to it. 1âwphi1

With respect to attorney's fees, the Court finds no error on the part of the CA in sustaining such
award on the ground that petitioner's act of denying respondent and its employees access to the
leased premises has compelled respondent to litigate and incur expenses to protect its interest.15 The
Court likewise agrees with the CA that, under the circumstances prevailing in the present case,
attorney's fees may be granted on grounds of justice and equity.16

Finally, the Court deems it proper to reiterate the provisions of Supreme Court Administrative
Circular No. 10-2000 which enjoins all judges of lower courts to observe utmost caution, prudence
and judiciousness in the issuance of writs of execution to satisfy money judgments against
government agencies and local government units.

WHEREFORE, the petition is DENIED. The June 19, 2007 Decision and October 11, 2007
Resolution of the Court of Appeals in CA-G.R. CV No. 79325 are AFFIRMED. The Regional Trial
Court of Quezon City, Branch 224 is ORDERED to comply with the directives of Supreme Court
Administrative Circular No. 10-2000.

SO ORDERED.

G.R. No. 171132 August 15, 2012

MANUEL D. YNGSON, JR. (in his capacity as the Liquidator of ARCAM & COMPANY,
INC.), Petitioner,
vs.
PHILIPPINE NATIONAL BANK, Respondent.

DECISION

VILLARAMA, JR., J.:

On appeal are the Resolutions dated April 14, 20051and January 24, 20062 of the Court of Appeals
(CA) in CA-G.R. SP No. 88735. The CA dismissed petitioner's petition for review of the January 4,
2005 Resolution3 and February 9, 2000 Order4 of the Securities and Exchange Commission (SEC) for
failure of petitioner to attach to the petition copies of material portions of the records and other
relevant or pertinent documents.

The facts follow:

ARCAM & Company, Inc. (ARCAM) is engaged in the operation of a sugar mill in
Pampanga.5 Between 1991 and 1993, ARCAM applied for and was granted a loan by respondent
Philippine National Bank (PNB).6 To secure the loan, ARCAM executed a Real Estate Mortgage over
a 350,004-square meter parcel of land covered by TCT No. 340592-R and a Chattel Mortgage over
various personal properties consisting of machinery, generators, field transportation and heavy
equipment.

ARCAM, however, defaulted on its obligations to PNB. Thus, on November 25, 1993, pursuant to the
provisions of the Real Estate Mortgage and Chattel Mortgage, PNB initiated extrajudicial foreclosure
proceedings in the Office of the Clerk of Court/Ex Officio Sheriff of the Regional Trial

Court (RTC) of Guagua, Pampanga.7 The public auction was scheduled on December 29, 1993 for
the mortgaged real properties and December 8, 1993 for the mortgaged personal properties.

On December 7, 1993, ARCAM filed before the SEC a Petition for Suspension of Payments,
Appointment of a Management or Rehabilitation Committee, and Approval of Rehabilitation Plan,
with application for issuance of a temporary restraining order (TRO) and writ of preliminary
injunction. The SEC issued a TRO and subsequently a writ of preliminary injunction, enjoining PNB
and the Sheriff of the RTC of Guagua, Pampanga from proceeding with the foreclosure sale of the
mortgaged properties.8 An interim management committee was also created.

On February 9, 2000, the SEC ruled that ARCAM can no longer be rehabilitated. The SEC noted
that the petition for suspension of payment was filed in December 1993 and six years had passed
but the potential white knight" investor had not infused the much needed capital to bail out ARCAM
from its financial difficulties.9 Thus, the SEC decreed that ARCAM be dissolved and placed under
liquidation.10The SEC Hearing Panel also granted PNB’s motion to dissolve the preliminary injunction
and appointed Atty. Manuel D. Yngson, Jr. & Associates as Liquidator for

ARCAM.11 With this development, PNB revived the foreclosure case and requested the RTC Clerk of
Court to re-schedule the sale at public auction of the mortgaged properties.

Contending that foreclosure during liquidation was improper, petitioner filed with the SEC a Motion
for the Issuance of a Temporary Restraining Order and/or Writ of Preliminary Injunction to enjoin the
foreclosure sale of ARCAM’s assets. The SEC en banc issued a TRO effective for seventy-two (72)
hours, but said TRO lapsed without any writ of preliminary injunction being issued by the SEC.
Consequently, on July 28, 2000, PNB resumed the proceedings for the extrajudicial foreclosure sale
of the mortgaged properties.12 PNB emerged as the highest winning bidder in the auction sale, and
certificates of sale were issued in its favor.

On November 16, 2000, petitioner filed with the SEC a motion to nullify the auction sale.13 Petitioner
posited that all actions against companies which are under liquidation, like ARCAM, are suspended
because liquidation is a continuation of the petition for suspension proceedings. Petitioner argued
that the prohibition against foreclosure subsisted during liquidation because payment of all of
ARCAM’s obligations was proscribed except those authorized by the Commission. Moreover,
petitioner asserted that the mortgaged assets should be included in the liquidation and the proceeds
shared with the unsecured creditors.
In its Opposition, PNB asserted that neither Presidential Decree (P.D.) No. 902-A nor the SEC rules
prohibits secured creditors from foreclosing on their mortgages to satisfy the mortgagor’s debt after
the termination of the rehabilitation proceedings and during liquidation proceedings.14

On January 4, 2005, the SEC issued a Resolution15denying petitioner’s motion to nullify the auction
sale. It held that PNB was not legally barred from foreclosing on the mortgages. Aggrieved,
petitioner filed on February 28, 2005, a petition for review in the CA questioning the January 4, 2005
Resolution of the SEC.16

By Resolution dated April 14, 2005, the CA dismissed the petition on the ground that petitioner failed
to attach material portions of the record and other documents relevant to the petition as required in
Rule 46, Section 3 of the 1997 Rules of Civil Procedure, as amended. The CA likewise denied
ARCAM’s motion for reconsideration in its Resolution dated January 24, 2006.

Hence this petition under Rule 45 arguing that:

4.1. THE SEC ERRED IN FAILING TO APPLY THE RULES OF CONCURRENCE

AND PREFERENCE OF CREDITS UNDER THE CIVIL CODE AND
JURISPRUDENCE WHEN PD 902-A PROVIDES THAT THE SAME BE APPLIED IN
INSTANCES WHEREBY AN ENTITY IS ORDERED DISSOLVED AND PLACED
UNDER LIQUIDATION ON ACCOUNT OF FAILURE TO REHABILITATE DUE TO
INSOLVENCY.17

4.2. IT WAS GROSSLY ERRONEOUS FOR THE SEC TO HAVE ALLOWED PNB
TO FORECLOSE THE MORTGAGE WITHOUT FIRST ALLOWING THE ARCAM
LIQUIDATOR TO

MAKE A DETERMINATION OF THE LIENS OVER THE ARCAM REAL

PROPERTIES, SINCE THE LIQUIDATOR HAD INITIALLY DETERMINED THAT
ASIDE FROM PNB, SOME ARCAM WORKERS MAY ALSO HAVE A LEGAL LIEN
OVER THE SAID PROPERTY AS REGARDS THEIR CLAIMS FOR UNPAID
WAGES. THESE LIENS OVER THE SAME MOVABLE OR REAL PROPERTY ARE
TO BE SATISFIED PRO-RATA WITH THE CONTRACTUAL LIENS PURSUANT TO
2247 AND 2249 OF THE CIVIL CODE, IN RELATION TO 2241 TO 2242
RESPECTIVELY. ALSO, THERE MAY BE SOME TAX ASSESSMENTS THAT THE
LIQUIDATOR DOES NOT KNOW ABOUT, AND IF THERE WERE, THESE COULD
COMPRISE TAX LIENS, WHICH UNDER ARTICLE 2243 OF THE CIVIL CODE
ARE CLEARLY GIVEN PRIORITY OVER OTHER PREFERRED CLAIMS SINCE
SUCH ARE TO BE SATISFIED FIRST, OVER OTHER LIENS PROVIDED UNDER
ARTICLES 2241 AND 2242 OF THE CIVIL CODE, SUCH AS MORTGAGE LIENS.18

4.3. THE SEC LABORED UNDER THE MISTAKEN IMPRESSION THAT AFTER AN
ENTITY IS DISSOLVED AND PLACED UNDER LIQUIDATION DUE TO
INSOLVENCY, SECURED CREDITORS ARE AUTOMATICALLY ALLOWED TO
FORECLOSE OR EXECUTE OR OTHERWISE MAKE GOOD ON THEIR CREDITS
AGAINST THE DEBTOR.19

4.4. JURISPRUDENCE ON THE MATTER ALSO NEGATES THE SEC’S HOLDING

THAT THE FORECLOSURE BY PNB WAS LEGAL. EVEN ASSUMING FOR THE
SAKE OF ARGUMENT THAT PNB IS THE SOLE AND ONLY LIEN HOLDER, IT
STILL CANNOT FORECLOSE UNLESS THE LIQUIDATOR AGREES TO SUCH OR
 THAT THE SEC GAVE PNB PRIOR PERMISSION TO INSTITUTE THE SEPARATE
FORECLOSURE PROCEEDINGS.20

4.5. RESPONDENT PNB SHOULD BE MADE TO PAY DAMAGES FOR THE

REASON THAT THE FORECLOSURE PROCEEDINGS WERE ATTENDED WITH
BAD FAITH.21

The issues to be resolved are: (1) whether the CA correctly dismissed the petition for failure to
attach material documents referred to in the petition; and (2) whether PNB, as a secured creditor,
can foreclose on the mortgaged properties of a corporation under liquidation without the knowledge
and prior approval of the liquidator or the SEC.

On the procedural issue, the Court finds that the CA erred in dismissing the petition for review before
it on the ground of failure to attach material portions of the record and other documents relevant to
the petition. A perusal of the petition for review filed with the CA, and as admitted by PNB,22 reveals
that certified true copies of the assailed January 4, 2005 SEC Resolution and the February 9, 2000
SEC Order appointing petitioner Atty. Manuel D. Yngson, Jr. as liquidator were annexed therein.

We find the foregoing attached documents sufficient for the appellate court to decide the case at bar
considering that the SEC resolution contains statements of the factual antecedents material to the
case. The Resolution also contains the SEC’s findings on the legality of PNB’s foreclosure of the
mortgages. The SEC held that when the rehabilitation proceeding was terminated and the
suspensive effect of the order staying the enforcement of claims was lifted, PNB could already
assert its preference over unsecured creditors, and the secured asset and the proceeds need not be
included in the liquidation and shared with the unsecured creditors.23 Before the CA, petitioner raised
only the same legal questions as there was no controversy involving factual matters. Petitioner
claimed that the SEC erred in not applying the rules on concurrence and preference of credits, and
in denying its motion to nullify the auction sale of the secured properties.24 Therefore, the assailed
SEC Resolution is the only material portion of the record that should be annexed with the petition for
the CA to decide on the correctness of the SEC’s interpretation of the law and jurisprudence on the
matter before it.

Having so ruled, this Court would normally order the remand of the case to the CA for resolution of
the substantive issues. However, we find it more appropriate to decide the merits of the case in the
interest of speedy justice considering that the parties have adequately argued all points and issues
raised. It is the policy of the Court to strive to settle an entire controversy in a single proceeding, and
to leave no root or branch to bear the seeds of future litigation.25 The ends of speedy justice would
not be served by a remand of this case to the CA especially since any ruling of the CA on the matter
could end up being appealed to this Court.

Did the SEC then err in ruling that PNB was not barred from foreclosing on the mortgages? We
answer in the negative.

In the case of Consuelo Metal Corporation v. Planters Development Bank,26 which involved factual
antecedents similar to the present case, the court has already settled the above question and upheld
the right of the secured creditor to foreclose the mortgages in its favor during the liquidation of a
debtor corporation. In that case, Consuelo Metal Corporation (CMC) filed with the SEC a petition to
be declared in a state of suspension of payment, for rehabilitation, and for the appointment of a
rehabilitation receiver or management committee under Section 5(d) of P.D. No. 902-A. On April 2,
1996, the SEC, finding the petition sufficient in form and substance, declared that "all actions for
claims against CMC pending before any court, tribunal, office, board, body and/or commission are
deemed suspended immediately until further orders" from the SEC. Then on November 29, 2000,
upon the management committee’s recommendation, the SEC issued an Omnibus Order directing
the dissolution and liquidation of CMC. Thereafter, respondent Planters Development Bank (Planters
Bank), one of CMC’s creditors, commenced the extrajudicial foreclosure of CMC’s real estate
mortgage. Planters Bank extrajudicially foreclosed on the real estate mortgage as CMC failed to
secure a TRO. CMC questioned the validity of the foreclosure because it was done without the
knowledge and approval of the liquidator. The Court ruled in favor of the respondent bank, as
follows:

In Rizal Commercial Banking Corporation v. Intermediate Appellate Court, we held

that if rehabilitation is no longer feasible and the assets of the corporation are finally
liquidated, secured creditors shall enjoy preference over unsecured creditors, subject
only to the provisions of the Civil Code on concurrence and preference of credits.
Creditors of secured obligations may pursue their security interest or lien, or they
may choose to abandon the preference and prove their credits as ordinary claims.

Moreover, Section 2248 of the Civil Code provides:

"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."

In this case, Planters Bank, as a secured creditor, enjoys preference over a specific
mortgaged property and has a right to foreclose the mortgage under Section 2248 of
the Civil Code. The creditor-mortgagee has the right to foreclose the mortgage over a
specific real property whether or not the debtor-mortgagor is under insolvency or
liquidation proceedings. The right to foreclose such mortgage is merely suspended
upon the appointment of a management committee or rehabilitation receiver or upon
the issuance of a stay order by the trial court. However, the creditor-mortgagee may
exercise his right to foreclose the mortgage upon the termination of the rehabilitation
proceedings or upon the lifting of the stay order.27 (Emphasis supplied)

It is worth mentioning that under Republic Act No. 10142, otherwise known as the Financial
Rehabilitation and Insolvency Act (FRIA) of 2010, the right of a secured creditor to enforce his lien
during liquidation proceedings is retained. Section 114 of said law thus provides:

SEC. 114. Rights of Secured Creditors. – The Liquidation Order shall not affect the
right of a secured creditor to enforce his lien in accordance with the applicable
contract or law. A secured creditor may:

(a) waive his rights under the security or lien, prove his claim in the liquidation
proceedings and share in the distribution of the assets of the debtor; or

(b) maintain his rights under his security or lien;

If the secured creditor maintains his rights under the security or lien:

(1) the value of the property may be fixed in a manner agreed upon by the creditor
and the liquidator. When the value of the property is less than the claim it secures,
1âw phi 1

the liquidator may convey the property to the secured creditor and the latter will be
admitted in the liquidation proceedings as a creditor for the balance; if its value
exceeds the claim secured, the liquidator may convey the property to the creditor and
waive the debtor’s right of redemption upon receiving the excess from the creditor;
 (2) the liquidator may sell the property and satisfy the secured creditor’s entire claim
from the proceeds of the sale; or

(3) the secured creditor may enforce the lien or foreclose on the property pursuant to
applicable laws. (Emphasis supplied)

In this case, PNB elected to maintain its rights under the security or lien; hence, its right to foreclose
the mortgaged properties should be respected, in line with our pronouncement in Consuelo Metal
Corporation.

As to petitioner's argument on the right of first preference as regards unpaid wages, the Court has
elucidated in the case of Development Bank of the Philippines v. NLRC28 that 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 of the Labor Code, 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. Consequently,
the right of first preference for unpaid wages may not be invoked in this case to nullify the
foreclosure sales conducted pursuant to PNB 's right as a secured creditor to enforce its lien on
specific properties of its debtor, ARCAM.

WHEREFORE, the petition for review on certiorariis DENIED.

With costs against the petitioner.

SO ORDERED.

G.R. No. 180036 January 16, 2013

SITUS DEV. CORPORATION, DAILY SUPERMARKET, INC. and COLOR LITHOGRAPH PRESS,
INC.,Petitioners,
vs.
ASIATRUST BANK, ALLIED BANKING CORPORATION, METROPOLITAN BANK AND TRUST
COMPANY and CAMERON GRANVILLE II ASSET MANAGEMENT, INC.
("CAMERON"),Respondents.

RESOLUTION

SERENO, CJ.:

For resolution is the Motion for Reconsideration1 of our 25 July 2012 Decision2 in the case involving
petitioners herein, Situs Development Corporation, Daily Supermarket, Inc. and Color Lithographic
Press, Inc.
Most of the arguments raised by petitioners are too insubstantial to merit our consideration or are
merely rehashed from their previous pleadings and have already been passed upon by this Court.
However, certain issues merit a brief discussion, to wit:

1. That the properties belonging to petitioner corporations’ majority stockholders may be

included in the rehabilitation plan pursuant to Metropolitan Bank and Trust Company v. ASB
Holdings, Inc.3 (the Metrobank Case);

2. That the subject properties should be included in the ambit of the Stay Order by virtue of
the provisions of the Financial Rehabilitation and Insolvency Act of 2010 (FRIA), which
should be given a retroactive effect; and

3. That Allied Bank and Metro Bank were not the owners of the mortgaged properties when
the Stay Order was issued by the rehabilitation court.

On the first issue, petitioners incorrectly argue that the properties belonging to their majority
stockholders may be included in the rehabilitation plan, because these properties were mortgaged to
secure petitioners’ loans. In support of their argument, they cite a footnote appearing in the
Metrobank Case, which states:4

In their petition for rehabilitation, the corporations comprising the ASB Group of Companies alleged
that their allied companies … have joined in the said petition ‘because they executed mortgages
and/or pledges over their real and personal properties to secure the obligations of petitioner ASB
Group of Companies. Further, (they) agreed to contribute, to the extent allowed by law, some of their
specified properties and assets to help rehabilitate petitioner ASB Group of Companies.’ (Rollo, pp.
119-120)

A reading of the footnote shows that it is not a ruling on the propriety of the joinder of parties; rather,
it is a statement of the fact that the afore-quoted allegation was made in the petition for rehabilitation
in that case.

On the second issue, petitioners argue that the trial court was correct in including the subject
properties in the ambit of the Stay Order. Under the FRIA, the Stay Order may now cover third-party
or accommodation mortgages, in which the "mortgage is necessary for the rehabilitation of the
debtor as determined by the court upon recommendation by the rehabilitation receiver."5 The FRIA
likewise provides that its provisions may be applicable to further proceedings in pending cases,
except to the extent that, in the opinion of the court, their application would not be feasible or would
work injustice.6

Sec. 146 of the FRIA, which makes it applicable to "all further proceedings in insolvency, suspension
of payments and rehabilitation cases x x x except to the extent that in the opinion of the court their
application would not be feasible or would work injustice," still presupposes a prospective
application. The wording of the law clearly shows that it is applicable to all further proceedings. In no
way could it be made retrospectively applicable to the Stay Order issued by the rehabilitation court
back in 2002.

At the time of the issuance of the Stay Order, the rules in force were the 2000 Interim Rules of
Procedure on Corporate Rehabilitation (the "Interim Rules"). Under those rules, one of the effects of
a Stay Order is the stay of the "enforcement of all claims, whether for money or otherwise and
whether such enforcement is by court action or otherwise, against the debtor, its guarantors and
sureties not solidarily liable with the debtor."7 Nowhere in the Interim Rules is the rehabilitation court
authorized to suspend foreclosure proceedings against properties of third-party mortgagors. In fact,
we have expressly ruled in Pacific Wide Realty and Development Corp. v. Puerto Azul Land,
Inc.8 that the issuance of a Stay Order cannot suspend the foreclosure of accommodation
mortgages. Whether or not the properties subject of the third-party mortgage are used by the debtor
corporation or are necessary for its operation is of no moment, as the Interim Rules do not make a
distinction. To repeat, when the Stay Order was issued, the rehabilitation court was only empowered
to suspend claims against the debtor, its guarantors, and sureties not solidarily liable with the debtor.
Thus, it was beyond the jurisdiction of the rehabilitation court to suspend foreclosure proceedings
against properties of third-party mortgagors.

The third issue, therefore, is immaterial. Whether or not respondent banks had acquired ownership
1âwphi1

of the subject properties at the time of the issuance of the Stay Order, the same conclusion will still
be reached. The subject properties will still fall outside the ambit of the Stay Order issued by the
rehabilitation court.

Since the subject properties are beyond the reach of the Stay Order, and since foreclosure and
consolidation of title may no longer be stalled, petitioners’ rehabilitation plan is no longer feasible.
We therefore affirm our earlier finding that the dismissal of the Petition for the Declaration of State of
Suspension of Payments with Approval of Proposed Rehabilitation Plan is in order.

WHEREFORE, the Court resolves to DENY WITH FINALITY the instant Motion for Reconsideration
for lack of merit. No further pleadings shall be entertained. Let entry of judgment be made in due
course.

SO ORDERED.

G.R. No. 175844 July 29, 2013

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.
SARABIA MANOR HOTEL CORPORATION,Respondent.

DECISION

PERLAS-BERNABE, J.:

Before the Court is a petition for review on certiorari1 assailing the Decision2 dated April 24, 2006
and Resolution3 dated December 6, 2006 of the Court of Appeals, Cebu City (CA) in CA-G.R. CV.
No. 81596 which affirmed with modification the rehabilitation plan of respondent Sarabia Manor
Hotel Corporation (Sarabia) as approved by the Regional Trial Court of Iloilo City, Branch 39 (RTC)
through its Order4 dated August 7, 2003.

The Facts

Sarabia is a corporation duly organized and existing under Philippine laws, with principal place of
business at 101 General Luna Street, Iloilo City.5 It was incorporated on February 22, 1982, with an
authorized capital stock of ₱10,000,000.00, fully subscribed and paid-up, for the primary purpose of
owning, leasing, managing and/or operating hotels, restaurants, barber shops, beauty parlors, sauna
and steam baths, massage parlors and such other businesses incident to or necessary in the
management or operation of hotels.6

In 1997, Sarabia obtained a ₱150,000,000.00 special loan package from Far East Bank and Trust
Company (FEBTC) in order to finance the construction of a five-storey hotel building (New Building)
for the purpose of expanding its hotel business. An additional ₱20,000,000.00 stand-by credit line
was approved by FEBTC in the same year.7

The foregoing debts were secured by real estate mortgages over several parcels of land8 owned by
Sarabia and a comprehensive surety agreement dated September 1, 1997 signed by its
stockholders.9 By virtue of a merger, Bank of the Philippine Islands (BPI) assumed all of FEBTC’s
rights against Sarabia.10

Sarabia started to pay interests on its loans as soon as the funds were released in October 1997.
However, largely because of the delayed completion of the New Building, Sarabia incurred various
cash flow problems. Thus, despite the fact that it had more assets than liabilities at that time,11 it,
nevertheless, filed, on July 26, 2002, a Petition12 for corporate rehabilitation (rehabilitation petition)
with prayer for the issuance of a stay order before the RTC as it foresaw the impossibility to meet its
maturing obligations to its creditors when they fall due.

In the said petition, Sarabia claimed that its cash position suffered when it was forced to take-over
the construction of the New Building due to the recurring default of its contractor, Santa Ana – AJ
Construction Corporation (contractor),13 and its subsequent abandonment of the said
project.14Accordingly, the New Building was completed only in the latter part of 2000, or two years
past the original target date of August 1998, thereby skewing Sarabia’s projected revenues. In
addition, it was compelled to divert some of its funds in order to cover cost overruns. The situation
became even more difficult when the grace period for the payment of the principal loan amounts
ended in 2000 which resulted in higher amortizations. Moreover, external events adversely affecting
the hotel industry, i.e., the September 11, 2001 terrorist attacks and the Abu Sayyaf issue, also
contributed to Sarabia’s financial difficulties.15 Owing to these circumstances, Sarabia failed to
generate enough cash flow to service its maturing obligations to its creditors, namely: (a) BPI (in the
amount of ₱191,476,421.42); (b) Rural Bank of Pavia (in the amount of ₱2,500,000.00); (c) Vic
Imperial Appliance Corp. (Imperial Appliance) (in the amount of ₱5,000,000.00); (d) its various
suppliers (in the amount of ₱7,690,668.04); (e) the government (for minimum corporate income tax
in the amount of ₱547,161.18); and (f) its stockholders (in the amount of ₱18,748,306.35).16

In its proposed rehabilitation plan,17 Sarabia sought for the restructuring of all its outstanding loans,
submitting that the interest payments on the same be pegged at a uniform escalating rate of: (a) 7%
per annum (p.a.) for the years 2002 to 2005; (b) 8% p.a. for the years 2006 to 2010; (c) 10% p.a. for
the years 2011 to 2013; (d) 12% p.a. for the years 2014 to 2015; and (e) 14% p.a. for the year 2018.
Likewise, Sarabia sought to make annual payments on the principal loans starting in 2004, also in
escalating amounts depending on cash flow. Further, it proposed that it should pay off its
outstanding obligations to the government and its suppliers on their respective due dates, for the
sake of its day to day operations.

Finding Sarabia’s rehabilitation petition sufficient in form and substance, the RTC issued a Stay
Order18on August 2, 2002. It also appointed Liberty B. Valderrama as Sarabia’s rehabilitation
receiver (Receiver). Thereafter, BPI filed its Opposition.19

After several hearings, the RTC gave due course to the rehabilitation petition and referred Sarabia’s
proposed rehabilitation plan to the Receiver for evaluation.20
In a Recommendation21 dated July 10, 2003 (Receiver’s Report), the Receiver found that Sarabia
may be rehabilitated and thus, made the following recommendations:

(1) Restructure the loans with Sarabia’s creditors, namely, BPI, Imperial Appliance, Rural
Bank of Pavia, and Barcelo Gestion Hotelera, S.L. (Barcelo), under the following terms and
conditions: (a) the total outstanding balance as of December 31, 2002 shall be recomputed,
with the interest for the years 2001 and 2002 capitalized and treated as part of the principal;
(b) waive all penalties; (c) extend the payment period to seventeen (17) years, i.e., from
2003 to 2019, with a two-year grace period in principal payment; (d) fix the interest rate at
6.75% p.a. plus 10% value added tax on interest for the entire term of the restructured
loans;22 (e) the interest and principal based on the amortization schedule shall be payable
annually at the last banking day of each year; and (f) any deficiency shall be paid personally
by Sarabia’s stockholders in the event it fails to generate enough cash flow; on the other
hand, any excess funds generated at the end of the year shall be paid to the creditors to
accelerate the debt servicing;23

(2) Pay Sarabia’s outstanding payables with its suppliers and the government so as not to
disrupt hotel operations;24

(3) Convert the Advances from stockholders amounting to ₱18,748,306.00 to stockholder’s

equity and other advances amounting to ₱42,688,734.00 as of the December 31, 2002
tentative financial statements to Deferred Credits; the said conversion should increase
stockholders’ equity to ₱268,545,731.00 and bring the debt to equity ratio to 0.85:1;25

(4) Require Sarabia’s stockholders to pay its payables to the hotel recorded as Accounts
Receivable – Trade, amounting to ₱285,612.17 as of December 31, 2001, and its remaining
receivables after such date;26

(5) No compensation or cash dividends shall be paid to the stockholders during the
rehabilitation period, except those who are directly employed by the hotel as a full time
officer, employee or consultant covered by a valid contract and for a reasonable fee;27

(6) All capital expenditures which are over and above what is provided in the case flow of the
rehabilitation plan which will materially affect Sarabia’s cash position but which are deemed
necessary in order to maintain the hotel’s competitiveness in the industry shall be subject to
the RTC’s approval prior to its implementation;28

(7) Terminate the management contract with Barcelo, thereby saving an estimated
₱25,830,997.00 in management fees, over and above the salaries and benefits of certain
managerial employees;29

(8) Appoint a new management team which would be required to submit a comprehensive
business plan to support the generation of the target revenue as reported in the rehabilitation
plan;30

(9) Open a debt servicing account and transfer all excess funds thereto, which in no case
should be less than ₱500,000.00 at the end of the month; the funds will be drawn payable to
the creditors only based on the amortization schedule;31 and

(10) Release the surety obligations of Sarabia’s stockholders, considering the adequate
collaterals and securities covered by the rehabilitation plan and the continuing mortgages
over Sarabia’s properties.32
 The RTC Ruling

In an Order33 dated August 7, 2003, the RTC approved Sarabia’s rehabilitation plan as
recommended by the Receiver, finding the same to be feasible. In this accord, it observed that the
rehabilitation plan was realistic since, based on Sarabia’s financial history, it was shown that it has
the inherent capacity to generate funds to pay its loan obligations given the proper
perspective.34 The recommended rehabilitation plan was also practical in terms of the interest rate
pegged at 6.75% p.a. since it is based on Sarabia’s ability to pay and the creditors’ perceived cost of
money.35 It was likewise found to be viable since, based on the extrapolations made by the Receiver,
Sarabia’s revenue projections, albeit projected to slow down, remained to have a positive
business/profit outlook altogether.36

The RTC further noted that while it may be true that Sarabia has been unable to comply with its
existing terms with BPI, it has nonetheless complied with its obligations to its employees and
suppliers and pay its taxes to both local and national government without disrupting the day-to-day
operations of its business as an on-going concern.37

More significantly, the RTC did not give credence to BPI’s opposition to the Receiver’s
recommended rehabilitation plan as neither BPI nor the Receiver was able to substantiate the claim
that BPI’s cost of funds was at the 10% p.a. threshold. In this regard, the RTC gave more credence
to the Receiver’s determination of fixing the interest rate at 6.75% p.a., taking into consideration not
only Sarabia’s ability to pay based on its proposed interest rates, i.e., 7% to 14% p.a., but also BPI’s
perceived cost of money based on its own published interest rates for deposits, i.e., 1% to 4.75%
p.a., as well as the rates for treasury bills, i.e., 5.498% p.a. and CB overnight borrowings, i.e.,
7.094%. p.a.38

The CA Ruling

In a Decision39 dated April 24, 2006, the CA affirmed the RTC’s ruling with the modification of
reinstating the surety obligations of Sarabia’s stockholders to BPI as an additional safeguard for the
effective implementation of the approved rehabilitation plan.40 It held that the RTC’s conclusions as
to the feasibility of Sarabia’s rehabilitation was well-supported by the company’s financial
statements, both internal and independent, which were properly analyzed and examined by the
Receiver.41 It also upheld the 6.75%. p.a. interest rate on Sarabia’s loans, finding the said rate to be
reasonable given that BPI’s interests as a creditor were properly accounted for. As published, BPI’s
time deposit rate for an amount of ₱5,000,000.00 (with a term of 360-364 days) is at 5.5% p.a.; while
the benchmark ninety one-day commercial paper, which banks used to price their loan averages to
6.4% p.a. in 2005, has a three-year average rate of 6.57% p.a.42 As such, the 6.75% p.a. interest
rate would be higher than the current market interest rates for time deposits and benchmark
commercial papers. Moreover, the CA pointed out that should the prevailing market interest rates
change as feared by BPI, the latter may still move for the modification of the approved rehabilitation
plan.43

Aggrieved, BPI moved for reconsideration which was, however, denied in a Resolution44 dated
December 6, 2006.

Hence, this petition.

The Issue Before the Court

The primordial issue raised for the Court’s resolution is whether or not the CA correctly affirmed
Sarabia’s rehabilitation plan as approved by the RTC, with the modification on the reinstatement of
the surety obligations of Sarabia’s stockholders.

BPI mainly argues that the approved rehabilitation plan did not give due regard to its interests as a
secured creditor in view of the imposition of a fixed interest rate of 6.75% p.a. and the extended loan
repayment period.45 It likewise avers that Sarabia’s misrepresentations in its rehabilitation petition
remain unresolved.46

On the contrary, Sarabia essentially maintains that: (a) the present petition improperly raises
questions of fact;47 (b) the approved rehabilitation plan takes into consideration all the interests of the
parties and the terms and conditions stated therein are more reasonable than what BPI
proposes;48 and (c) BPI’s allegations of misrepresentation are mere desperation moves to convince
the Court to overturn the rulings of the courts a quo.49

The Court’s Ruling

The petition has no merit.

A. Propriety of BPI’s petition;

procedural considerations.

It is fundamental that a petition for review on certiorari filed under Rule 45 of the Rules of Court
covers only questions of law. In this relation, questions of fact are not reviewable and cannot be
passed upon by the Court unless, the following exceptions are found to exist: (a) when the findings
are grounded entirely on speculations, surmises, or conjectures; (b) when the inference made is
manifestly mistaken, absurd, or impossible; (c) when there is a grave abuse of discretion; (d) when
the judgment is based on misappreciation of facts; (e) when the findings of fact are conflicting; (f)
when in making its findings, the same are contrary to the admissions of both parties; (g) when the
findings are contrary to those of the trial court; (h) when the findings are conclusions without citation
of specific evidence on which they are based; (i) when the facts set forth in the petition as well as in
the petitioner’s main and reply briefs are not disputed by the respondent; and (j) when the findings of
fact are premised on the supposed absence of evidence and contradicted by the evidence on
record.50

The distinction between questions of law and questions of fact is well-defined. A question of law
exists when the doubt or difference centers on what the law is on a certain state of facts. A question
of fact, on the other hand, exists if the doubt centers on the truth or falsity of the alleged facts. This
being so, the findings of fact of the CA are final and conclusive and the Court will not review them on
appeal.51

In view of the foregoing, the Court finds BPI’s petition to be improper – and hence, dismissible52 – as
the issues raised therein involve questions of fact which are beyond the ambit of a Rule 45 petition
for review.

To elucidate, the determination of whether or not due regard was given to the interests of BPI as a
secured creditor in the approved rehabilitation plan partakes of a question of fact since it will require
a review of the sufficiency and weight of evidence presented by the parties – among others, the
various financial documents and data showing Sarabia’s capacity to pay and BPI’s perceived cost of
money – and not merely an application of law. Therefore, given the complexion of the issues which
BPI presents, and finding none of the above-mentioned exceptions to exist, the Court is constrained
to dismiss its petition, and prudently uphold the factual findings of the courts a quo which are entitled
to great weight and respect, and even accorded with finality. This especially obtains in corporate
rehabilitation proceedings wherein certain commercial courts have been designated on account of
their expertise and specialized knowledge on the subject matter, as in this case.

In any event, even discounting the above-discussed procedural considerations, the Courts still finds
BPI’s petition lacking in merit.

B. Approval of Sarabia’s
rehabilitation plan; substantive
considerations.

Records show that Sarabia has been in the hotel business for over thirty years, tracing its operations
back to 1972. Its hotel building has been even considered a landmark in Iloilo, being one of its kind
in the province and having helped bring progress to the community.23 Since then, its expansion was
continuous which led to its decision to commence with the construction of a new hotel building.
Unfortunately, its contractor defaulted which impelled Sarabia to take-over the same. This
significantly skewed its projected revenues and led to various cash flow difficulties, resulting in its
incapacity to meet its maturing obligations.

Recognizing the volatile nature of every business, the rules on corporate rehabilitation have been
crafted in order to give companies sufficient leeway to deal with debilitating financial predicaments in
the hope of restoring or reaching a sustainable operating form if only to best

accommodate the various interests of all its stakeholders, may it be the corporation’s stockholders,
its creditors and even the general public. In this light, case law has defined corporate rehabilitation
as an attempt to conserve and administer the assets of an insolvent corporation in the hope of its
eventual return from financial stress to solvency. It contemplates the continuance of corporate life
and activities in an effort to restore and reinstate the corporation to its former position of successful
operation and liquidity. Verily, the purpose of rehabilitation proceedings is to enable the company to
gain a new lease on life and thereby allow creditors to be paid their claims from its earnings.54 Thus,
rehabilitation shall be undertaken when it is shown that the continued operation of the corporation is
economically more feasible and its creditors can recover, by way of the present value of payments
projected in the plan, more, if the corporation continues as a going concern than if it is immediately
liquidated.55

Among other rules that foster the foregoing policies, Section 23, Rule 4 of the Interim Rules of
Procedure on Corporate Rehabilitation56 (Interim Rules) states that a rehabilitation plan may be
approved even over the opposition of the creditors holding a majority of the corporation’s total
liabilities if there is a showing that rehabilitation is feasible and the opposition of the creditors is
manifestly unreasonable. Also known as the "cram-down" clause, this provision, which is currently
incorporated in the FRIA,57 is necessary to curb the majority creditors’ natural tendency to dictate
their own terms and conditions to the rehabilitation, absent due regard to the greater long-term
benefit of all stakeholders. Otherwise stated, it forces the creditors to accept the terms and
conditions of the rehabilitation plan, preferring long-term viability over immediate but incomplete
recovery.

It is within the parameters of the aforesaid provision that the Court examines the approval of
Sarabia’s rehabilitation.

i. Feasibility of Sarabia’s rehabilitation.

In order to determine the feasibility of a proposed rehabilitation plan, it is imperative that a thorough
examination and analysis of the distressed corporation’s financial data must be conducted. If the
results of such examination and analysis show that there is a real opportunity to rehabilitate the
corporation in view of the assumptions made and financial goals stated in the proposed rehabilitation
plan, then it may be said that a rehabilitation is feasible. In this accord, the rehabilitation court should
not hesitate to allow the corporation to operate as an on-going concern, albeit under the terms and
conditions stated in the approved rehabilitation plan. On the other hand, if the results of the financial
examination and analysis clearly indicate that there lies no reasonable probability that the distressed
corporation could be revived and that liquidation would, in fact, better subserve the interests of its
stakeholders, then it may be said that a rehabilitation would not be feasible. In such case, the
rehabilitation court may convert the proceedings into one for liquidation.58 As further guidance on the
matter, the Court’s pronouncement in Wonder Book Corporation v. Philippine Bank of
Communications59proves instructive:

Rehabilitation is x x x available to a corporation [which], while illiquid, has assets that can generate
more cash if used in its daily operations than sold. Its liquidity issues can be addressed by a
practicable business plan that will generate enough cash to sustain daily operations, has a definite
source of financing for its proper and full implementation, and anchored on realistic assumptions and
goals. This remedy should be denied to corporations whose insolvency appears to be irreversible
and whose sole purpose is to delay the enforcement of any of the rights of the creditors, which is
rendered obvious by the following: (a) the absence of a sound and workable business plan; (b)
baseless and unexplained assumptions, targets and goals; (c) speculative capital infusion or
complete lack thereof for the execution of the business plan; (d) cash flow cannot sustain daily
operations; and (e) negative net worth and the assets are near full depreciation or fully
depreciated.60 (Emphasis and underscoring supplied)

Keeping with these principles, the Court thus observes that:

First, Sarabia has the financial capability to undergo rehabilitation.

Based on the Receiver’s Report, Sarabia’s financial history shows that it has the inherent capacity to
generate funds to repay its loan obligations if applied through the proper financial framework. The
Receiver’s examination and analysis of Sarabia’s financial data reveals that the latter’s business is
not only an on-going but also a growing concern. Despite its financial constraints, Sarabia likewise
continues to be profitable with its hotelier business as its operations have not been
disrupted.61 Hence, given its current fiscal position, the prospect of substantial and continuous
revenue generation is a realistic goal.

Second, Sarabia has the ability to have sustainable profits over a long period of time.

As concluded by the Receiver, Sarabia’s projected revenues shall have a steady year-on-year
growth from the time that it applied for rehabilitation until the end of its rehabilitation plan in 2018,
albeit with decreasing growth rates (growth rate is at 26% in 2003, 5% in 2004-2007, 3% in 2008-
2018).62 Should such projections come through, Sarabia would have the ability not just to pay off its
existing debts but also to carry on with its intended expansion. The projected sustainability of its
business, as mapped out in the approved rehabilitation plan, makes Sarabia’s rehabilitation a more
viable option to satisfy the interests of its stakeholders in the long run as compared to its immediate
liquidation.

Third, the interests of Sarabia’s creditors are well-protected.

As correctly perceived by the CA, adequate safeguards are found under the approved rehabilitation
plan, namely: (a) any deficiency in the required minimum payments to creditors based on the
presented amortization schedule shall be paid personally by Sarabia’s stockholders;

(b) the conversion of the advances from stockholders amounting to ₱18,748,306.00 and deferred
credits amounting to ₱42,688,734 as of the December 31, 2002 tentative audited financial
statements to stockholder’s equity was granted;64(c) all capital expenditures which are over and
above what is provided in the cash flow of the approved rehabilitation plan which will materially affect
the cash position of the hotel but which are deemed necessary in order to maintain the hotel’s
competitiveness in the industry shall be subject to the approval by the Court prior to
implementation;65(d) the formation of Sarabia’s new management team and the requirement that the
latter shall be required to submit a comprehensive business plan to support the generation of
revenues as reported in the Rehabilitation Plan, both short term and long term;66 (e) the maintenance
of all Sarabia’s existing real estate mortgages over hotel properties as collaterals and securities in
favor of BPI until the former’s full and final liquidation of its outstanding loan obligations with the
latter;67 and (f) the reinstatement of the comprehensive surety agreement of Sarabia’s stockholders
regarding the former’s debt to BPI.68 With these terms and conditions69 in place, the subsisting
obligations of Sarabia to its creditors would, more likely than not, be satisfied.

Therefore, based on the above-stated reasons, the Court finds Sarabia’s rehabilitation to be feasible.

ii. Manifest unreasonableness of BPI’s opposition.

Although undefined in the Interim Rules, it may be said that the opposition of a distressed
corporation’s majority creditor is manifestly unreasonable if it counter-proposes unrealistic payment
terms and conditions which would, more likely than not, impede rather than aid its rehabilitation. The
unreasonableness becomes further manifest if the rehabilitation plan, in fact, provides for adequate
safeguards to fulfill the majority creditor’s claims, and yet the latter persists on speculative or
unfounded assumptions that his credit would remain unfulfilled.

While Section 23, Rule 4 of the Interim Rules states that the rehabilitation court shall consider
certain incidents in determining whether the opposition is manifestly unreasonable,70 BPI neither
proposes Sarabia’s liquidation over its rehabilitation nor questions the controlling interest of
Sarabia’s shareholders or owners. It only takes exception to: (a) the imposition of the fixed interest
rate of 6.75% p.a. as recommended by the Receiver and as approved by the courts a quo,
proposing that the original escalating interest rates of 7%, 8%, 10%, 12%, and 14%, over seventeen
years be applied instead;71 and (b) the fact that Sarabia’s misrepresentations in the rehabilitation
petition, i.e., that it physically acquired additional property whereas in fact the increase was mainly
due to the recognition of Revaluation Increment and because of capital expenditures, were not taken
into consideration by the courts a quo.72

Anent the first matter, it must be pointed out that oppositions which push for high interests rates are
generally frowned upon in rehabilitation proceedings given that the inherent purpose of a
rehabilitation is to find ways and means to minimize the expenses of the distressed corporation
during the rehabilitation period. It is the objective of a rehabilitation proceeding to provide the best
possible framework for the corporation to gradually regain or achieve a sustainable operating form.
Hence, if a creditor, whose interests remain well-preserved under the existing rehabilitation plan, still
declines to accept interests pegged at reasonable rates during the period of rehabilitation, and, in
turn, proposes rates which are largely counter-productive to the rehabilitation, then it may be said
that the creditor’s opposition is manifestly unreasonable.
In this case, the Court finds BPI’s opposition on the approved interest rate to be manifestly
unreasonable considering that: (a) the 6.75% p.a. interest rate already constitutes a reasonable rate
of interest which is concordant with Sarabia’s projected rehabilitation; and (b) on the contrary, BPI’s
proposed escalating interest rates remain hinged on the theoretical assumption of future fluctuations
in the market, this notwithstanding the fact that its interests as a secured creditor remain well-
preserved.

The following observations impel the foregoing conclusion: first, the 6.75% p.a. interest rate is
actually higher than BPI’s perceived cost of money as evidenced by its published time deposit rate
(for an amount of ₱5,000,000.00, with a term of 360-364 days) which is only set at 5.5% p.a.;
second, the 6.75% p.a. is also higher than the benchmark ninety one-day commercial paper, which
is used by banks to price their loan averages to 6.4% p.a. in 2005, and has a three-year average
rate of 6.57% p.a.; and third, BPI’s interests as a secured creditor are adequately protected by the
maintenance of all Sarabia’s existing real estate mortgages over its hotel properties as collateral as
well as by the reinstatement of the comprehensive surety agreement of Sarabia’s stockholders,
among other terms in the approved rehabilitation plan.

As to the matter of Sarabia’s alleged misrepresentations, records disclose that Sarabia already
clarified its initial statements in its rehabilitation petition by submitting, on its own accord, a
supplemental affidavit dated October 24, 200273 that explains that the increase in its properties and
assets was indeed by recognition of revaluation increment.74 Proceeding from this fact, the CA
observed that BPI actually failed to establish its claimed defects in light of Sarabia’s assertive and
forceful explanation that the alleged inaccuracies do not warrant the dismissal of its petition.75 Thus,
absent any compelling reason to disturb the CA's finding on this score, the Court deems it proper to
dismiss BPI's allegations of misrepresentation against Sarabia.

As a final point, BPI claims that Sarabia's projections were "too optimistic," its management was
"extremely incompetent"76 and that it was even forced to pay a pre-termination penalty due to its
previous loan with the Landbank of the Philippines.77 Suffice it to state that bare allegations of fact
should not be entet1ained as they are bereft of any probative value.78 In any event, even if it is
assumed that the said allegations are substantiated by clear and convincing evidence, the Court,
absent any cogent basis to proceed otherwise, remains steadfast in its preclusion to thresh out
matters of fact on a Rule 45 petition, as in this case.

All told, Sarabia's rehabilitation plan, as approved and modified by the CA, is hereby sustained. In
view of the foregoing pronouncements, the Court finds it unnecessary to delve on the other ancillary
issues as herein raised.

WHEREFORE, the petition is DENIED. Accordingly, the Decision dated April 24, 2006 and
Resolution dated December 6, 2006 of the Court of Appeals, Cebu City in CA-G.R. CV. No. 81596
are hereby AFFIRMED.

SO ORDERED.
IN RE: PETITION FOR ASSISTANCE IN THE G.R. No. 158261
LIQUIDATION OF THE RURAL BANK OF
BOKOD (BENGUET), INC., PHILIPPINE
DEPOSIT INSURANCE CORPORATION, Present:

Petitioner,
PANGANIBAN, C.J.*
YNARES-SANTIAGO,
(Working Chairperson)
- versus - AUSTRIA-MARTINEZ,
CALLEJO, SR., and
BUREAU OF INTERNAL REVENUE, CHICO-NAZARIO, JJ.
Respondent.

Promulgated:

December 18, 2006

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari[1] under Rule 45 of the revised

Rules of Court, praying that this Court set aside the Orders, dated 17 January
2003[2]and 13 May 2003,[3] of the Regional Trial Court (RTC) of La Trinidad,
Benguet, sitting as the Liquidation Court of the closed Rural Bank of Bokod
(Benguet), Inc. (RBBI), in Spec. Proc. No. 91-SP-0060.
 There is no dispute as to the antecedent facts of the case, recounted as follows:

In 1986, a special examination of RBBI was conducted by the Supervision

and Examination Sector (SES) Department III of what is now the Bangko Sentral ng
Pilipinas(BSP),[4] wherein various loan irregularities were uncovered. In a letter,
dated 20 May 1986, the SES Department III required the RBBI management to
infuse fresh capital into the bank, within 30 days from date of the advice, and to
correct all the exceptions noted. However, up to the termination of the subsequent
general examination conducted by the SES Department III, no concrete action was
taken by the RBBI management.In view of the irregularities noted and the insolvent
condition of RBBI, the members of the RBBI Board of Directors were called for a
conference at the BSP on 4 August 1986. Only one RBBI Director, a certain Mr.
Wakit, attended the conference, and the examination findings and related
recommendations were discussed with him.In a letter, dated 4 August 1986, receipt
of which was acknowledged by Mr. Wakit, the SES Department III warned the RBBI
Board of Directors that, unless substantial remedial measures are taken to
rehabilitate the bank, it will recommend that the bank be placed under
receivership. In a subsequent letter, dated 17 November 1986, a copy of which was
sent to every member of the RBBI Board of Directors via registered mail, the SES
Department III reiterated its warning that it would recommend the closure of the
bank, unless the needed fresh capital was immediately infused. Despite these
notices, the SES Department III received no word from RBBI or from any of its
Directors as of 28 November 1986.[5]

In a meeting held on 9 January 1987, the Monetary Board of the BSP decided
to take the following action

Rural Bank of Bokod (Benguet), Inc. Report on its examination as of June

16, 1986, its placement under receivership

ACTION TAKEN

Finding to be true the statements of the Special Assistant to the

Governor and Head, Supervision and Examination Sector (SES)
Department III, in her memorandum dated 28 November 1986 submitting
a report on the general examination of the Rural Bank of Bokod (Benguet),
 Inc. as of 16 June 1986, that the financial condition of the rural bank is
one of insolvency and its continuance in business would involve further
losses to its depositors and creditors, x x x

xxxx

[T]he Board decided as follows:

a. To forbid the bank to do business in

the Philippines and place its assets and affairs under
receivership in accordance with Section 29 of R.A. No. 265,
as amended.

b. To designate the Special Assistant to the Governor

and Head, SES Department III, as Receiver of the bank;

c. To refer the cases of irregularities/frauds to the

Office of Special Investigation for further investigation and
possible filing of appropriate charges against the following
present/former officers and employees of the bank:

xxxx

d. To include the names of the above-mentioned

present and former officers and employees of the bank in the
list of persons barred from employment in any financial
institution under the supervision of the Central Bank without
prior clearance from the Central Bank.[6]

A memorandum and report, dated 28 August 1990, were submitted by the

Director of the SES Department III concluding that the RBBI remained in insolvent
financial condition and it can no longer safely resume business with the depositors,
creditors, and the general public. On 7 September 1990, the Monetary Board, after
determining and confirming the said memorandum and report, ordered the
liquidation of the bank and designated the Director of the SES Department III as
liquidator.[7]

On 10 April 1991, the designated BSP liquidator of RBBI caused the filing
with the RTC of a Petition for Assistance in the Liquidation of RBBI, docketed as
Spec. Proc. No. 91-SP-0060.[8] Subsequently, on 2 June 1992, the Monetary Board
transferred to herein petitioner Philippine Deposit Insurance Corporation (PDIC) the
receivership/liquidation of RBBI.[9]

PDIC then filed, on 11 September 2002, a Motion for Approval of Project of

Distribution[10] of the assets of RBBI, in accordance with Section 31, in relation to
Section 30, of Republic Act No. 7653, otherwise known as the New Central Bank
Act. During the hearing held on 17 January 2003, the respondent Bureau of Internal
Revenue (BIR), through Atty. Justo Reginaldo, manifested that PDIC should secure
a tax clearance certificate from the appropriate BIR Regional Office, pursuant to
Section 52(C) of Republic Act No. 8424, or the Tax Code of 1997, before it could
proceed with the dissolution of RBBI. On even date, the RTC issued one of the
assailed Orders,[11]directing PDIC to comply with Section 52(C) of the Tax Code of
1997 within 30 days from receipt of a copy of the said order. Pending compliance
therewith, the RTC held in abeyance the Motion for Approval of Project of
Distribution. On 13 May 2003, the second assailed Order[12] was issued, in which
the RTC, in resolving the Motion for Reconsideration filed by PDIC, ruled as
follows

ORDER

Submitted for resolution is petitioners motion for reconsideration

of the order of this court dated January 17, 2003holding in abeyance the
motion for approval of the project of distribution pending their compliance
with a tax clearance from the Bureau of Internal Revenue.

Petitioner in their motion state that Section 52-C of Republic Act

8424 does not cover closed banking institutions like the Rural Bank of
Bokod as the law that covers liquidation of closed banks is Section 30 of
Republic Act No. 7653 otherwise known as the new Central Bank Law.

Commenting on the motion for reconsideration the Bureau of

Internal Revenue states that the only logic why the Bureau is requesting
for a tax clearance is to determine how much taxes, if there be any, is due
the government.
 The court believes and so holds that petitioner should still secure
the necessary tax clearance in order for it to be cleared of all its tax
liabilities as regardless of what law covers the liquidation of closed banks,
still these banks are subject to payment of taxes mandated by law. Also in
its motion for approval of the project of distribution, paragraph 2, item 2.2
states that there are unremitted withholding taxes in the amount
of P8,767.32.

This shows that indeed there are still taxes to be paid. In order
therefore that all taxes due the government should be paid, petitioner
should secure a tax clearance from the Bureau of Internal Revenue.

Wherefore, based on the foregoing premises, the motion for

reconsideration filed by petitioner is hereby DENIED for lack of merit.[13]

Hence, PDIC filed the present Petition for Review on Certiorari, under Rule
45 of the revised Rules of Court, raising pure questions of law. It made a lone
assignment of error, alleging that

THE COURT A QUO ERRED IN APPLYING THE PROVISION OF

SECTION 52-C OF REPUBLIC ACT NO. 8424 DIRECTING THE
SUBMISSION OF TAX CLEARANCE FOR CORPORATIONS
CONTEMPLATING DISSOLUTION ON A BANK ORDERED
CLOSED AND PLACED UNDER RECEIVERSHIP AND,
THEREAFTER, UNDER LIQUIDATION, BY THE MONETARY
BOARD PURSUANT TO SECTION 30 OF REPUBLIC ACT NO.
7653.[14]

PDIC argues that the closure of banks under Section 30 of the New Central Bank
Act is summary in nature and procurement of tax clearance as required under Section
52(C) of the Tax Code of 1997 is not a condition precedent thereto; that under
Section 30, in relation to Section 31, of the New Central Bank Act, asset distribution
of a closed bank requires only the approval of the liquidation court; and that the BIR
is not without recourse since, subject to the applicable provisions of the Tax Code
of 1997, it may therefore assess the closed RBBI for tax liabilities, if any.
 In its Comment, the BIR countered with the following arguments: that the
present Petition for Review on Certiorari under Rule 45 of the revised Rules of
Court is not the proper remedy to question the Order, dated 17 January 2003, of the
RTC because said order is interlocutory and cannot be the subject of an appeal; that
Section 52(C) of the Tax Code of 1997 applies to all corporations, including banks
ordered closed by the Monetary Board pursuant to Section 30 of the New Central
Bank Act; that the RTC may order the PDIC to obtain a tax clearance before
proceeding to rule on the Motion for Approval of Project of Distribution of the assets
of RBBI; and that the present controversy should not have been elevated to this Court
since the parties are both government agencies who should have administratively
settled the dispute.

This Court finds that there are only two primary issues for the resolution of
the Petition at bar, one being procedural, and the other substantive. The procedural
issue involves the question of whether the Petition for Review on Certiorari under
Rule 45 of the revised Rules of Court is the proper remedy from the assailed Orders
of the RTC. The substantive issue deals with the determination of whether a bank
ordered closed and placed under receivership by the Monetary Board of the BSP still
needs to secure a tax clearance certificate from the BIR before the liquidation court
approves the project of distribution of the assets of the bank.

This Court shall first proceed with the procedural issue on the appropriateness
of the remedy taken by PDIC from the assailed RTC Orders.

The differences between an appeal by certiorari under Rule 45[15] of the

revised Rules of Court and an original action for certiorari under Rule 65[16] of the
same Rules have been laid down by this Court in the case of Atty. Paa v. Court of
Appeals,[17]to wit

a. In appeal by certiorari, the petition is based on questions of law which the

appellant desires the appellate court to resolve. In certiorari as an original action, the
petition raises the issue as to whether the lower court acted without or in excess of
jurisdiction or with grave abuse of discretion.
 b. Certiorari, as a mode of appeal, involves the review of the judgment, award or
final order on the merits. The original action for certiorari may be directed against an
interlocutory order of the court prior to appeal from the judgment or where there is no
appeal or any other plain, speedy or adequate remedy.

c. Appeal by certiorari must be made within the reglementary period for

appeal. An original action for certiorarimay be filed not later than sixty (60) days
from notice of the judgment, order or resolution sought to be assailed.

d. Appeal by certiorari stays the judgment, award or order appealed from. An

original action for certiorari, unless a writ of preliminary injunction or a temporary
restraining order shall have been issued, does not stay the challenged proceeding.

e. In appeal by certiorari, the petitioner and respondent are the original parties
to the action, and the lower court or quasi-judicial agency is not to be impleaded.
In certiorari as an original action, the parties are the aggrieved party against the lower
court or quasi-judicial agency and the prevailing parties, who thereby respectively
become the petitioner and respondents.

f. In certiorari for purposes of appeal, the prior filing of a motion for

reconsideration is not required (Sec. 1, Rule 45); while in certiorari as an original action, a
motion for reconsideration is a condition precedent (Villa-Rey Transit vs. Bello, L-18957,
April 23, 1963), subject to certain exceptions.

g. In appeal by certiorari, the appellate court is in the exercise of

its appellate jurisdiction and power of review, while in certiorari as an
original action, the higher court exercises original jurisdiction under its
power of control and supervision over the proccedings of lower courts.

Guided by the foregoing distinctions, this Court, in perusing the assailed RTC
Orders, dated 17 January 2003 and 13 May 2003, reaches the conclusion that these
are merely interlocutory in nature and are not the proper subjects of an appeal
by certiorariunder Rule 45 of the revised Rules of Court.

This Court has repeatedly and uniformly held that a judgment or order may
be appealed only when it is final, meaning that it completely disposes of the case and
definitively adjudicates the respective rights of the parties, leaving thereafter no
substantial proceeding to be had in connection with the case except the proper
execution of the judgment or order.Conversely, an interlocutory order or judgment
is not appealable for it does not decide the action with finality and leaves substantial
proceedings still to be had.[18]

The RTC Orders presently questioned before this Court has not disposed of
the case nor has it adjudicated definitively the rights of the parties in Spec. Proc. No.
91-SP-0060.They only held in abeyance the approval of the Project of Distribution
of the assets of RBBI until PDIC, as liquidator, acquires a tax clearance from the
BIR. Indubitably, there are still substantial proceedings to be had after PDIC
presents the required tax clearance to the trial court, since the Project of Distribution
of assets still has to be finalized and approved.

PDIC avers that the RTC Orders of 17 January 2003 and 13 May 2003 are
final because, as this Court pronounced in the case of Pacific Banking Corporation
Employees Organization (PaBCEO) v. Court of Appeals,[19] an order of the
liquidation court allowing or disallowing a claim is a final order and may be the
subject of an appeal. It further asserts that the legal issue of whether RBBI should
secure a tax clearance is a disputed claim, which was already allowed by the RTC in
its assailed Orders, thus, making the latter final.

This Court is unconvinced. The foregoing arguments of PDIC result from a

strained interpretation of law and jurisprudence, and are raised in an apparent
attempt to justify a very obvious faux pas on its part. While it is true that in
liquidation proceedings, the settlement of disputed or contentious claims may
require a full-dress hearing and the resolution of legal issues,[20] it does not follow
that all legal issues resolved in the course of the liquidation proceedings would
automatically be tantamount to an allowance or disallowance of a disputed or
contentious claim. In Spec. Proc. No. 91-SP-0060 pending before the RTC, there
can be no doubt that the claim of the BIR against RBBI consists of the unpaid tax
liabilities of the latter. The BIR contends that it could only determine the existence
and correct amount of the tax liabilities of RBBI if PDIC, as liquidator of the bank,
secures a tax clearance from the appropriate BIR Regional Office. The acquirement
of a tax clearance is not the claim of the BIR against RBBI, it is only the means by
which to ascertain such claim. Whatever tax liabilities the BIR may claim against
RBBI can still be disputed before the RTC by the PDIC, as liquidator of the bank,
whether as to the existence or computation of the said tax liabilities, and it is the
ruling of the RTC on such matters that may constitute a final order which definitively
settles the claim of the BIR. The mere grant by the RTC of the motion requiring
PDIC, as liquidator of RBBI, to secure a tax clearance, does not yet constitute an
adjudication of the claim of the BIR. Hence, the assailed RTC Orders, dated 17
January 2003 and 13 May 2003, are clearly interlocutory in nature.

As a general rule, an interlocutory order is not appealable until after the

rendition of the judgment on the merits, given that a contrary rule would delay the
administration of justice and unduly burden the courts. This Court, however, has also
held that an original action for certiorariunder Rule 65 of the revised Rules of Court
is an appropriate remedy to assail an interlocutory order when (1) the tribunal issued
such order without or in excess of jurisdiction or with grave abuse of discretion, and
(2) the assailed interlocutory order is patently erroneous and the remedy of appeal
would not afford adequate and expeditious relief.[21] Thus, despite this Courts
finding that PDIC, as the liquidator of RBBI, availed itself of the wrong remedy by
filing an appeal by certiorari under Rule 45 of the revised Rules of Court, We shall
adopt a positive and pragmatic approach, and, instead of dismissing the instant
Petition outright, it shall treat the same as an original action for certiorari under Rule
65 of the same Rules, in consideration of the crucial issues and substantial arguments
already presented by the concerned parties before this Court.[22]

II

Having disposed of the procedural issue, this Court now addresses the substantive
issue of whether RBBI, as represented by its liquidator, PDIC, still needs to secure
a tax clearance from the BIR before the RTC could approve the Project of
Distribution of the assets of RBBI.

The BIR anchors its position that a tax clearance is necessary on Section 52(C)
of the Tax Code of 1997, which provides

SEC. 52. Corporation Returns.

xxxx
 (C) Return of Corporation Contemplating Dissolution or
Reorganization. Every corporation shall, within thirty days (30) after the
adoption by the corporation of a resolution or plan for its dissolution, or
for the liquidation of the whole or any part of its capital stock, including a
corporation which has been notified of possible involuntary dissolution by
the Securities and Exchange Commission, or for its reorganization, render
a correct return to the Commissioner, verified under oath, setting forth the
terms of such resolution or plan and such other information as the
Secretary of Finance, upon recommendation of the Commissioner, shall,
by rules and regulations, prescribe.

The dissolving or reorganizing corporation shall, prior to the

issuance by the Securities and Exchange Commission of the Certificate of
Dissolution or Reorganization, as may be defined by rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, secure a certificate of tax clearance from the Bureau of
Internal Revenue which certificate shall be submitted to the Securities and
Exchange Commission.

To implement the foregoing provision, the BIR still relies on the regulations
it jointly issued with the Securities and Exchange Commission (SEC) in 1985, when
the Tax Code of 1977 was still in effect and a similar provision could be found in
Section 46(C) thereof. The full text of the regulations is reproduced below
BIR-SEC REGULATIONS NO. 1
SUBJECT: Regulations to Implement the Provisions of Executive
Order No. 1026, Amending Section 46(c) of the National Internal
Revenue Code of 1977, as amended, Requiring Dissolving Corporations
to File Information Returns and Secure Tax Clearance from the
Commissioner of Internal Revenue, and Providing Adequate Penalties for
Violations Thereof.
TO: All Internal Revenue Officers and Others Concerned.
Pursuant to the provisions of Section 277, in relation to Section 4
of the National Revenue Code of 1977, as amended, the following
regulations are hereby promulgated.
Section 1. Scope. These regulations shall govern the procedure for
the issuance of tax clearance certificates to dissolving corporations. This
shall include corporations intending to dissolve or liquidate the whole or
any part of its capital stocks, as well as, corporations which have been
notified of possible involuntary dissolution by the Securities and
Exchange Commission.
Section 2. Requirements in case of dissolution. a) Every
Corporation shall, within thirty (30) days after
- the adoption by the corporation of a resolution or plan for the dissolution
of the corporation, or for the liquidation of the whole or any part of its
capital stock, or
- the receipt of an order of suspension by the Securities and Exchange
Commission in case of involuntary dissolution,
file their income tax returns covering the income earned by them from the
beginning of the taxable year up to date of such dissolution.
In addition thereto, they shall submit within the same period and
verified under oath, the following documents:
1. a copy of the articles of incorporation and by-laws;
2. a copy of the resolution authorizing dissolution; and
3. balance sheet as of the date of dissolution and a profit and loss
statement covering the period from the beginning of the taxable
year to the date of dissolution.
b) The Securities and Exchange Commission whenever it issues an
order of involuntary dissolution or suspension of the primary franchise or
certificate of registration of a corporation, shall at the same time furnish
the Commissioner of Internal Revenue a copy of such order.
Section 3. Tax clearance certificate. a) Within thirty (30) days from
receipt of the documents mentioned in the preceding Section, the
Commissioner of Internal Revenue, or his duly authorized representative,
shall issue the corresponding tax clearance certificate (BIR Form No.
17.61) for the corporation which will be dissolved.
b) The Securities and Exchange Commission shall issue the final
order of dissolution only after a certificate of tax clearance has been
submitted by the dissolving corporation: Provided, that in case of
involuntary dissolution, the Securities and Exchange Commission may
nevertheless proceed with the dissolution if thirty (30) days after receipt
of the suspension order no tax clearance has yet been issued.
Section 4. Penalty. Failure to render the return and secure the
certificate of tax clearance as above-mentioned shall subject the officer(s)
of the corporation required by law to file the return under Section 46(a) of
 the National Internal Revenue Code of 1977, as amended, to a fine of not
less than P5,000.00 or imprisonment of not less than two (2) years, and
shall make them liable for all outstanding or unpaid tax liabilities of the
dissolving corporation.
Section 5. Effectivity. These regulations shall apply to all corporate
dissolution taking place on or after May 14, 1985.
Section 6. Repealing Clause. All revenue regulations, orders and
circulars which are inconsistent herewith are hereby modified
accordingly.

The afore-quoted Tax Code provision and regulations refer to a voluntary

dissolution and/or liquidation of a corporation through its adoption of a resolution
or plan to that effect, or an involuntary dissolution of a corporation by order of the
SEC. They make no reference at all to a situation similar to the one at bar in which
a banking corporation is ordered closed and placed under receivership by the BSP
and its assets judicially liquidated. Now, the determining question is, whether
Section 52(C) of the Tax Code of 1997 and BIR-SEC Regulations No. 1 could be
made to apply to the present case.

This Court rules in the negative.

First, Section 52(C) of the Tax Code of 1997 and the BIR-SEC Regulations
No. 1 regulate the relations only as between the SEC and the BIR, making a
certificate of tax clearance a prior requirement before the SEC could approve the
dissolution of a corporation. In Spec. Proc. No. 91-SP-0060 pending before the RTC,
RBBI was placed under receivership and ordered liquidated by the BSP, not the
SEC; and the SEC is not even a party in the said case, although the BIR is. This
Court cannot find any basis to extend the SEC requirements for dissolution of a
corporation to the liquidation proceedings of RBBI before the RTC when the SEC
is not even involved therein.

It is conceded that the SEC has the authority to order the dissolution of a
corporation pursuant to Section 121 of Batas Pambansa Blg. 68, otherwise known
as the Corporation Code of the Philippines, which reads
 Sec. 121. Involuntary dissolution. A corporation may be dissolved
by the Securities and Exchange Commission upon filing of a verified
complaint and after proper notice and hearing on the grounds provided by
existing laws, rules and regulations.

The Corporation Code, however, is a general law applying to all types of

corporations, while the New Central Bank Act regulates specifically banks and other
financial institutions, including the dissolution and liquidation thereof. As between
a general and special law, the latter shall prevailgeneralia specialibus non
derogant.[23]

The liquidation of RBBI is undertaken according to Sections 30 of the New

Central Bank Act, viz
Sec. 30. Proceedings in Receivership and Liquidation. - Whenever,
upon report of the head of the supervising or examining department, the
Monetary Board finds that a bank or quasi-bank:
(a) is unable to pay its liabilities as they become due in the ordinary
course of business: Provided, That this shall not include inability to pay
caused by extraordinary demands induced by financial panic in the
banking community;
(b) has insufficient realizable assets, as determined by the Bangko
Sentral, to meet its liabilities; or
(c) cannot continue in business without involving probable losses
to its depositors or creditors; or
(d) has wilfully violated a cease and desist order under Section 37
that has become final, involving acts or transactions which amount to
fraud or a dissipation of the assets of the institution; in which cases, the
Monetary Board may summarily and without need for prior hearing forbid
the institution from doing business in the Philippines and designate the
Philippine Deposit Insurance Corporation as receiver of the banking
institution.
For a quasi-bank, any person of recognized competence in banking
or finance may be designated as receiver.
The receiver shall immediately gather and take charge of all the
assets and liabilities of the institution, administer the same for the benefit
of its creditors, and exercise the general powers of a receiver under the
Revised Rules of Court but shall not, with the exception of administrative
expenditures, pay or commit any act that will involve the transfer or
disposition of any asset of the institution: Provided, That the receiver may
deposit or place the funds of the institution in non-speculative
investments. The receiver shall determine as soon as possible, but not later
than ninety (90) days from take over, whether the institution may be
rehabilitated or otherwise placed in such a condition that it may be
permitted to resume business with safety to its depositors and creditors
and the general public: Provided, That any determination for the
resumption of business of the institution shall be subject to prior approval
of the Monetary Board.
If the receiver determines that the institution cannot be rehabilitated
or permitted to resume business in accordance with the next preceding
paragraph, the Monetary Board shall notify in writing the board of
directors of its findings and direct the receiver to proceed with the
liquidation of the institution. The receiver shall:
(1) file ex parte with the proper regional trial court, and without
requirement of prior notice or any other action, a petition for assistance in
the liquidation of the institution pursuant to a liquidation plan adopted by
the Philippine Deposit Insurance Corporation for general application to all
closed banks. In case of quasi-banks, the liquidation plan shall be adopted
by the Monetary Board. Upon acquiring jurisdiction, the court shall, upon
motion by the receiver after due notice, adjudicate disputed claims against
the institution, assist the enforcement of individual liabilities of the
stockholders, directors and officers, and decide on other issues as may be
material to implement the liquidation plan adopted.The receiver shall pay
the cost of the proceedings from the assets of the institution.
(2) convert the assets of the institution to money, dispose of the
same to creditors and other parties, for the purpose of paying the debts of
such institution in accordance with the rules on concurrence and
preference of credit under the Civil Code of the Philippines and he may,
in the name of the institution, and with the assistance of counsel as he may
retain, institute such actions as may be necessary to collect and recover
accounts and assets of, or defend any action against, the institution. The
assets of an institution under receivership or liquidation shall be deemed
in custodia legis in the hands of the receiver and shall, from the moment
the institution was placed under such receivership or liquidation, be
exempt from any order of garnishment, levy, attachment, or execution.
The actions of the Monetary Board taken under this section or under
Section 29 of this Act shall be final and executory, and may not be
 restrained or set aside by the court except on petition for certiorari on the
ground that the action taken was in excess of jurisdiction or with such
grave abuse of discretion as to amount to lack or excess of
jurisdiction. The petition for certiorari may only be filed by the
stockholders of record representing the majority of the capital stock within
ten (10) days from receipt by the board of directors of the institution of
the order directing receivership, liquidation or conservatorship.
The designation of a conservator under Section 29 of this Act or the
appointment of a receiver under this section shall be vested exclusively
with the Monetary Board. Furthermore, the designation of a conservator
is not a precondition to the designation of a receiver.

Section 30 of the New Central Bank Act lays down the proceedings for
receivership and liquidation of a bank. The said provision is silent as regards the
securing of a tax clearance from the BIR. The omission, nonetheless, cannot compel
this Court to apply by analogy the tax clearance requirement of the SEC, as stated in
Section 52(C) of the Tax Code of 1997 and BIR-SEC Regulations No. 1, since,
again, the dissolution of a corporation by the SEC is a totally different proceeding
from the receivership and liquidation of a bank by the BSP. This Court cannot
simply replace any reference by Section 52(C) of the Tax Code of 1997 and the
provisions of the BIR-SEC Regulations No. 1 to the SEC with the BSP. To do so
would be to read into the law and the regulations something that is simply not there,
and would be tantamount to judicial legislation.

It should be noted that there are substantial differences in the procedure for
involuntary dissolution and liquidation of a corporation under the Corporation Code,
and that of a banking corporation under the New Central Bank Act, so that the
requirements in one cannot simply be imposed in the other.

Under the Corporation Code, the SEC may dissolve a corporation, upon the
filing of a verified complaint and after proper notice and hearing, on grounds
provided by existing laws, rules, and regulations.[24]Upon receipt by the corporation
of the order of suspension from the SEC, it is required to notify and submit a copy
of the said order, together with its final tax return, to the BIR.The SEC is also
required to furnish the BIR a copy of its order of suspension. The BIR is supposed
to issue a tax clearance to the corporation within 30 days from receipt of the
foregoing documentary requirements.The SEC shall issue the final order of
dissolution only after the corporation has submitted its tax clearance; or in case of
involuntary dissolution, the SEC may proceed with the dissolution after 30 days
from receipt by the BIR of the documentary requirements without a tax clearance
having been issued.[25] The corporation is allowed to continue as a body corporate
for three years after its dissolution, for the purpose of prosecuting and defending
suits by or against it, to settle and close its affairs, and to dispose of and convey its
property and distribute its assets, but not for the purpose of continuing its
business. The corporation may undertake its own liquidation, or at any time during
the said three years, it may convey all of its property to trustees for the benefit of its
stockholders, members, creditors, and other persons in interest.[26]

In contrast, the Monetary Board may summarily and without need for prior
hearing, forbid the banking corporation from doing business in the Philippines, for
causes enumerated in Section 30 of the New Central Bank Act; and appoint the
PDIC as receiver of the bank. PDIC shallimmediately gather and take charge of all
the assets and liabilities of the closed bank and administer the same for the benefit
of its creditors. The summary nature of the procedure for the involuntary closure of
a bank is especially stressed in Section 30 of the New Central Bank Act, which
explicitly states that the actions of the Monetary Board under the said Section or
Section 29 shall be final and executory, and may not be restrained or set aside by the
court except on a Petition for Certiorari filed by the stockholders of record of the
bank representing a majority of the capital stock.PDIC, as the appointed receiver,
shall file ex parte with the proper RTC, and without requirement of prior notice or
any other action, a petition for assistance in the liquidation of the bank. The bank
is not given the option to undertake its own liquidation.

Second, the alleged purpose of the BIR in requiring the liquidator PDIC to
secure a tax clearance is to enable it to determine the tax liabilities of the closed
bank. It raised the point that since the PDIC, as receiver and liquidator, failed to file
the final return of RBBI for the year its operations were stopped, the BIR had no
way of determining whether the bank still had outstanding tax liabilities.

To our mind, what the BIR should have requested from the RTC, and what
was within the discretion of the RTC to grant, is not an order for PDIC, as liquidator
of RBBI, to secure a tax clearance; but, rather, for it to submit the final return of
RBBI. The first paragraph of Section 30(C) of the Tax Code of 1997, read in
conjunction with Section 54 of the same Code, clearly imposes upon PDIC, as the
receiver and liquidator of RBBI, the duty to file such a return. The pertinent
provisions are reproduced below for reference

SEC. 52. Corporation Returns.

xxxx

(C) Return of Corporation Contemplating Dissolution or

Reorganization. Every corporation shall, within thirty days (30) after the
adoption by the corporation of a resolution or plan for its dissolution, or
for the liquidation of the whole or any part of its capital stock, including a
corporation which has been notified of possible involuntary dissolution by
the Securities and Exchange Commission, or for its reorganization, render
a correct return to the Commissioner, verified under oath, setting forth the
terms of such resolution or plan and such other information as the
Secretary of Finance, upon recommendation of the Commissioner, shall,
by rules and regulations, prescribe.

xxxx

SEC. 54. Returns of receivers, Trustees in Bankruptcy or

Assignees. In cases wherein receivers, trustees in bankruptcy or assignees
are operating the property or business of a corporation, subject to the tax
imposed by this Title, such receivers, trustees or assignees shall make
returns of net income as and for such corporation, in the same manner and
form as such an organization is hereinbefore required to make returns, and
any tax due on the income as returned by receivers, trustees or assignees
shall be assessed and collected in the same manner as if assessed directly
against the organizations of whose businesses or properties they have
custody or control.

Section 54 of the Tax Code of 1997 imposes a general duty on all receivers,
trustees in bankruptcy, and assignees, who operate and preserve the assets of a
corporation, regardless of the circumstances or the law by which they came to hold
their positions, to file the necessary returns on behalf of the corporation under their
care.
 The filing by PDIC of a final tax return, on behalf of RBBI, should already
address the supposed concern of the BIR and would already enable the latter to
determine if RBBI still had outstanding tax liabilities.

The unreasonableness and impossibility of requiring a tax clearance before

the approval by the RTC of the Project of Distribution of the assets of the RBBI
becomes apparent when the timeline of the proceedings is considered.

The BIR can only issue a certificate of tax clearance when the taxpayer had
completely paid off his tax liabilities. The certificate of tax clearance attests that the
taxpayer no longer has any outstanding tax obligations to the Government.

Should the BIR find that RBBI still had outstanding tax liabilities, PDIC will
not be able to pay the same because the Project of Distribution of the assets of RBBI
remains unapproved by the RTC; and, if RBBI still had outstanding tax liabilities,
the BIR will not issue a tax clearance; but, without the tax clearance, the Project of
Distribution of assets, which allocates the payment for the tax liabilities, will not be
approved by the RTC. It will be a chicken-and-egg dilemma.

The Government, in this case, cannot generally claim preference of credit, and
receive payment ahead of the other creditors of RBBI. Duties, taxes, and fees due
the Government enjoy priority only when they are with reference to a specific
movable property, under Article 2241(1) of the Civil Code, or immovable property,
under Article 2242(1) of the same Code. However, with reference to the other real
and personal property of the debtor, sometimes referred to as free property, the taxes
and assessments due the National Government, other than those in Articles 2241(1)
and 2242(1) of the Civil Code, will come only in ninth place in the order of
preference.[27]

Thus, the recourse of the BIR, after assessing the final return and examining
all other pertinent documents of RBBI, and making a determination of the latters
outstanding tax liabilities, is to present its claim, on behalf of the National
Government, before the RTC during the liquidation proceedings. The BIR is
expected to prove and substantiate its claim, in the same manner as the other
creditors. It is only after the RTC allows the claim of the BIR, together with the
claims of the other creditors, can a Project for Distribution of the assets of RBBI be
finalized and approved. PDIC, then, as liquidator, may proceed with the disposition
of the assets of RBBI and pay the latters financial obligations, including its
outstanding tax liabilities. And, finally, only after such payment, can the BIR issue
a certificate of tax clearance in the name of RBBI.

Third, the evident void in current statutes and regulations as to the relations
among the BIR, as tax collector of the National Government; the BSP, as regulator
of the banks; and the PDIC, as the receiver and liquidator of banks ordered closed
by the BSP, is not for this Court to fill in. It is up to the legislature to address the
matter through appropriate legislation, and to the executive to provide the
regulations for its implementation.

It is for these reasons that the RTC committed grave abuse of discretion, and
committed patent error, in ordering the PDIC, as the liquidator of RBBI, to first
secure a tax clearance from the appropriate BIR Regional Office, and holding in
abeyance the approval of the Project of Distribution of the assets of the RBBI by
virtue thereof.

Although this Court rules in favor of PDIC, in the sense that a tax clearance
is not a prerequisite to the approval of the Project of Distribution of the assets of
RBBI, it cannot uphold its argument that the Spec. Proc. No. 91-SP-0060 is summary
in nature.

Section 30(d) of the New Central Bank Act gives the Monetary Board of the
BSP the power to, summarily and without need for prior hearing, forbid a bank or
quasi-bank from doing business in the Philippines and designating the PDIC as
receiver of the banking institution. It bears to emphasize that: (1) the power is
granted to the Monetary Board of the BSP; and (2) what is summary in nature is the
power of the Monetary Board of the BSP to forbid or stop a bank or quasi-bank from
doing further business.

Once liquidation proceedings are instituted before the appropriate trial court,
and the trial court assumes jurisdiction over the Petition, then the proceedings take
a different character. Spec. Proc. No. 91-SP-0600 is the liquidation proceedings
initiated by the PDIC before the RTC. Liquidation proceedings have been described
in detail in the case of Pacific Banking Corporation Employees Organization
(PaBCEO) v. Court of Appeals,[28] to wit

[A] liquidation proceeding resembles the proceeding for the settlement of estate of
deceased persons under Rules 73 to 91 of the Rules of Court. The two have a common
purpose: the determination of all the assets and the payment of all the debts and
liabilities of the insolvent corporation or the estate. The Liquidator and the administrator
or executor are both charged with the assets for the benefit of the claimants. In both
instances, the liability of the corporation and the estate is not disputed. The court's
concern is with the declaration of creditors and their rights and the determination of
their order of payment

xxxx

A liquidation proceeding is a single proceeding which consists of a number of

cases properly classified as "claims." It is basically a two-phased proceeding. The first
phase is concerned with the approval and disapproval of claims.Upon the approval of
the petition seeking the assistance of the proper court in the liquidation of a closed
entity, all money claims against the bank are required to be filed with the liquidation
court. This phase may end with the declaration by the liquidation court that the claim is
not proper or without basis. On the other hand, it may also end with the liquidation court
allowing the claim. In the latter case, the claim shall be classified whether it is ordinary
or preferred, and thereafter included Liquidator. In either case, the order allowing or
disallowing a particular claim is final order, and may be appealed by the party aggrieved
thereby.

The second phase involves the approval by the Court of the distribution plan
prepared by the duly appointed liquidator. The distribution plan specifies in detail the
total amount available for distribution to creditors whose claim were earlier allowed.
The Order finally disposes of the issue of how much property is available for disposal.
Moreover, it ushers in the final phase of the liquidation proceeding - payment of all
allowed claims in accordance with the order of legal priority and the approved
distribution plan.

xxxx

A liquidation proceeding is commenced by the filing of a single petition by the

Solicitor General with a court of competent jurisdiction entitled, "Petition for Assistance
 in the Liquidation of e.g., Pacific Banking Corporation. All claims against the insolvent
are required to be filed with the liquidation court. Although the claims are litigated in
the same proceeding, the treatment is individual. Each claim is heard separately. And
the Order issued relative to a particular claim applies only to said claim, leaving the other
claims unaffected, as each claim is considered separate and distinct from the others. x x
x [Emphases supplied.]

Irrefragably, liquidation proceedings cannot be summary in nature. It requires

the holding of hearings and presentation of evidence of the parties
concerned, i.e.,creditors who must prove and substantiate their claims, and the
liquidator disputing the same. It also allows for multiple appeals, so that each
creditor may appeal a final order rendered against its claim. Hence, liquidation
proceedings may very well be highly-contested and drawn-out, because, at the end
of it all, all claims against the corporation undergoing litigation must be settled
definitively and its assets properly disposed off.

WHEREFORE, in view of the foregoing, this Court rules as follows

(a) The instant Petition is GRANTED and the Orders, dated 17 January 2003
and 13 May 2003, of the RTC, sitting as the Liquidation Court of the closed RBBI,
in Spec. Proc. No. 91-SP-0060, are NULLIFIED and SET ASIDE for having been
rendered with grave abuse of discretion;

(b) The PDIC, as liquidator, is ORDERED to submit to the BIR the final tax
return of RBBI, in accordance with the first paragraph of Section 52(C), in
connection with Section 54, of the Tax Code of 1997; and

(c) The RTC is ORDERED to resume the liquidation proceedings in Spec.

Proc. No. 91-SP-0060 in order to determine all the claims of the creditors, including
that of the National Government, as determined and presented by the BIR; and,
pursuant to such determination, and guided accordingly by the provisions of the
Civil Code on preference of credit, to review and approve the Project of Distribution
of the assets of RBBI.

SO ORDERED.
G.R. No. 172892

FIRST DIVISION

[ G.R. No. 172892, June 13, 2013 ]

PHILIPPINE DEPOSIT INSURANCE CORPORATION,

PETITIONER, VS. BUREAU OF INTERNAL REVENUE,
RESPONDENT.

DECISION
LEONARDO-DE CASTRO, J.:
This is a petition for review on Certiorari[1] of the Decision[2] and
Resolution[3] dated December 29, 2005 and May 5, 2006, respectively, of
the Court of Appeals in CA-G.R. SP No. 80816.

In Resolution No. 1056 dated October 26, 1994, the Monetary Board of the
Bangko Sentral ng Pilipinas (BSP) prohibited the Rural Bank of Tuba
(Benguet), Inc. (RBTI) from doing business in the Philippines, placed it
under receivership in accordance with Section 30 of Republic Act No. 7653,
otherwise known as the "New Central Bank Act," and designated the
Philippine Deposit Insurance Corporation (PDIC) as receiver.[4]

Subsequently, PDIC conducted an evaluation of RBTI's financial condition

and determined that RBTI remained insolvent. Thus, the Monetary Board
issued Resolution No. 675 dated June 6, 1997 directing PDIC to proceed
with the liquidation of RBTI. Accordingly and pursuant to Section 30 of the
New Central Bank Act, PDIC filed in the Regional Trial Court (RTC) of La
Trinidad, Benguet a petition for assistance in the liquidation of RBTI. The
petition was docketed as Special Proceeding Case No. 97-SP-0100 and
raffled to Branch 8.[5]
In an Order[6] dated September 4, 1997, the trial court gave the petition due
course and approved it.

As an incident of the proceedings, the Bureau of Internal Revenue (BIR)

intervened as one of the creditors of RBTI. The BIR prayed that the
proceedings be suspended until PDIC has secured a tax clearance required
under Section 52(C) of Republic Act No. 8424, otherwise known as the "Tax
Reform Act of 1997" or the "Tax Code of 1997," which provides:

SEC. 52. Corporation Returns.

xxxx

(C) Return of Corporation Contemplating Dissolution or

Reorganization. Every corporation shall, within thirty (30) days after the
adoption by the corporation of a resolution or plan for its dissolution, or for
the liquidation of the whole or any part of its capital stock, including a
corporation which has been notified of possible involuntary dissolution by
the Securities and Exchange Commission, or for its reorganization, render a
correct return to the Commissioner, verified under oath, setting forth the
terms of such resolution or plan and such other information as the
Secretary of Finance, upon recommendation of the commissioner, shall, by
rules and regulations, prescribe.

The dissolving or reorganizing corporation shall, prior to the issuance by

the Securities and Exchange Commission of the Certificate of Dissolution or
Reorganization, as may be defined by rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the Commissioner,
secure a certificate of tax clearance from the Bureau of Internal Revenue
which certificate shall be submitted to the Securities and Exchange
Commission.

In an Order[7] dated February 14, 2003, the trial court found merit in the
BIR's motion and granted it:
WHEREFORE, petitioner PDIC is directed to secure the necessary tax
clearance provided for under Section 45(C) of the 1993 National Internal
Revenue Code and now Section 52(C) of the 1997 National Internal
Revenue Code and to secure the same from the BIR District Office No. 9, La
Trinidad, Benguet.

Further, petitioner PDIC is directed to submit a comprehensive liquidation

report addressed to creditor Bangko Sentral and to remit the accounts
already collected from the pledged assets to said Bangko Sentral.

Claimant Bangko Sentral may now initiate collection suits directly against
the individual borrowers.

In the event that the collection efforts of Bangko Sentral against individual
borrowers may fail, Bangko Sentral shall proceed against the general assets
of the Rural Bank of Tuba Benguet.

Finally, Annex "A" attached to the manifestation and motion dated

November 29, 2002 [of PDIC] is considered as partial satisfaction of the
obligation of the Rural Bank of Tuba (Benguet) Inc., to Bangko Sentral.[8]

PDIC moved for partial reconsideration of the Order dated February 14,
2003 with respect to the directive for it to secure a tax clearance. It argued
that Section 52(C) of the Tax Code of 1997 does not cover closed banking
institutions as the liquidation of closed banks is governed by Section 30 of
the New Central Bank Act. The motion was, however, denied in an
Order[9] dated September 16, 2003.

PDIC thereafter brought the matter to the Court of Appeals by way of a

petition for Certiorari under Rule 65 of the Rules of Court. In its petition,
docketed as CA-G.R. SP No. 80816, PDIC asserted that the trial court acted
with grave abuse of discretion amounting to lack or excess of jurisdiction in
applying Section 52(C) of the Tax Code of 1997 to a bank ordered closed,
placed under receivership and, subsequently, under liquidation by the
Monetary Board.

In its Decision dated December 29, 2005, the appellate court agreed with
the trial court that banks under liquidation by PDIC are covered by Section
52(C) of the Tax Code of 1997. Thus, the Court of Appeals affirmed the
Orders dated February 14, 2003 and September 16, 2003 and dismissed
PDIC's petition.[11]

PDIC sought reconsideration but it was denied.[12]

Hence, this petition.

PDIC insists that Section 52(C) of the Tax Code of 1997 is not applicable to
banks ordered placed under liquidation by the Monetary Board of the
BSP. It argues that closed banks placed under liquidation pursuant to
Section 30 of the New Central Bank Act are not "corporations
contemplating liquidation" within the purview of Section 52(C) of the Tax
Code of 1997. As opposed to the liquidation of all other corporations, the
Monetary Board, not the Securities and Exchange Commission (SEC), has
the power to order or approve the closure and liquidation of banks. Section
52(C) of the Tax Code of 1997 applies only to corporations under the
supervision of the SEC.[13]

For its part, the BIR counters that the requirement of a tax clearance under
Section 52(C) of the Tax Code of 1997 is applicable to rural banks
undergoing liquidation proceedings under Section 30 of the New Central
Bank Act. For the BIR, the authority given to the BSP to supervise banks
does not mean that all matters regarding banks are exclusively under the
power of the BSP. Thus, banking corporations are still subject to
reasonable regulations imposed by the SEC on corporations. The purpose
of a tax clearance requirement under Section 52(C) of the Tax Code of 1997
is to ensure the collection of income taxes due to the government by
imposing upon a corporation undergoing liquidation the obligation of
reporting the income it earned, if any, for the purpose of determining the
amount of imposable tax.[14]

The petition succeeds.

This Court has already resolved the issue of whether Section 52(C) of the
Tax Code of 1997 applies to banks ordered placed under liquidation by the
Monetary Board, that is, whether a bank placed under liquidation has to
secure a tax clearance from the BIR before the project of distribution of the
assets of the bank can be approved by the liquidation court.

In Re: Petition for Assistance in the Liquidation of the Rural Bank of

Bokod (Benguet), Inc., Philippine Deposit Insurance Corporation v.
Bureau of Internal Revenue [15] ruled that Section 52(C) of the Tax Code of
1997 is not applicable to banks ordered placed under liquidation by the
Monetary Board,[16] and a tax clearance is not a prerequisite to the approval
of the project of distribution of the assets of a bank under liquidation by the
PDIC.[17]

Thus, this Court has held that the RTC, acting as liquidation court under
Section 30 of the New Central Bank Act, commits grave abuse of discretion
in ordering the PDIC, as liquidator of a bank ordered closed by the
Monetary Board, to first secure a tax clearance from the appropriate BIR
Regional Office, and holding in abeyance the approval of the project of
distribution of the assets of the closed bank by virtue thereof.[18] Three
reasons have been given.

First, Section 52(C) of the Tax Code of 1997 pertains only to a regulation of
the relationship between the SEC and the BIR with respect to corporations
contemplating dissolution or reorganization. On the other hand, banks
under liquidation by the PDIC as ordered by the Monetary Board constitute
a special case governed by the special rules and procedures provided under
Section 30 of the New Central Bank Act, which does not require that a tax
clearance be secured from the BIR.[19] As explained in In Re: Petition for
Assistance for Assistance in the Liquidation of the Rural Bank of Bokod
(Benguet), Inc.:

Section 52(C) of the Tax Code of 1997 and the BIR-SEC Regulations No.
1 [20] regulate the relations only as between the SEC and the BIR, making a
certificate of tax clearance a prior requirement before the SEC could
approve the dissolution of a corporation. x x

x.x x x x
Section 30 of the New Central Bank Act lays down the proceedings for
receivership and liquidation of a bank. The said provision is silent as
regards the securing of a tax clearance from the BIR. The omission,
nonetheless, cannot compel this Court to apply by analogy the tax clearance
requirement of the SEC, as stated in Section 52(C) of the Tax Code of 1997
and BIR-SEC Regulations No. 1, since, again, the dissolution of a
corporation by the SEC is a totally different proceeding from the
receivership and liquidation of a bank by the BSP. This Court cannot
simply replace any reference by Section 52(C) of the Tax Code of 1997 and
the provisions of the BIR-SEC Regulations No. 1 to the "SEC" with the
"BSP." To do so would be to read into the law and the regulations
something that is simply not there, and would be tantamount to judicial
legislation.[21]

Second, only a final tax return is required to satisfy the interest of the BIR
in the liquidation of a closed bank, which is the determination of the tax
liabilities of a bank under liquidation by the PDIC. In view of the timeline
of the liquidation proceedings under Section 30 of the New Central Bank
Act, it is unreasonable for the liquidation court to require that a tax
clearance be first secured as a condition for the approval of project of
distribution of a bank under liquidation.[22] This point has been elucidated
thus:

[T]he alleged purpose of the BIR in requiring the liquidator PDIC to secure
a tax clearance is to enable it to determine the tax liabilities of the closed
bank. It raised the point that since the PDIC, as receiver and liquidator,
failed to file the final return of RBBI for the year its operations were
stopped, the BIR had no way of determining whether the bank still had
outstanding tax liabilities.

To our mind, what the BIR should have requested from the RTC, and what
was within the discretion of the RTC to grant, is not an order for PDIC, as
liquidator of RBBI, to secure a tax clearance; but, rather, for it to submit the
final return of RBBI. The first paragraph of Section 30(C) of the Tax Code
of 1997, read in conjunction with Section 54 of the same Code, clearly
imposes upon PDIC, as the receiver and liquidator of RBBI, the duty to file
such a return. x x x.
xxxx

Section 54 of the Tax Code of 1997 imposes a general duty on all receivers,
trustees in bankruptcy, and assignees, who operate and preserve the assets
of a corporation, regardless of the circumstances or the law by which they
came to hold their positions, to file the necessary returns on behalf of the
corporation under their care.

The filing by PDIC of a final tax return, on behalf of RBBI, should already
address the supposed concern of the BIR and would already enable the
latter to determine if RBBI still had outstanding tax liabilities. The
unreasonableness and impossibility of requiring a tax clearance before the
approval by the RTC of the Project of Distribution of the assets of the RBBI
becomes apparent when the timeline of the proceedings is considered.

The BIR can only issue a certificate of tax clearance when the taxpayer had
completely paid off his tax liabilities. The certificate of tax clearance attests
that the taxpayer no longer has any outstanding tax obligations to the
Government.

Should the BIR find that RBBI still had outstanding tax liabilities, PDIC will
not be able to pay the same because the Project of Distribution of the assets
of RBBI remains unapproved by the RTC; and, if RBBI still had outstanding
tax liabilities, the BIR will not issue a tax clearance; but, without the tax
clearance, the Project of Distribution of assets, which allocates the payment
for the tax liabilities, will not be approved by the RTC. It will be a chicken-
and-egg dilemma.[23]

Third, it is not for this Court to fill in any gap, whether perceived or evident,
in current statutes and regulations as to the relations among the BIR, as tax
collector of the National Government; the BSP, as regulator of the banks;
and the PDIC, as the receiver and liquidator of banks ordered closed by the
BSP. It is up to the legislature to address the matter through appropriate
legislation, and to the executive to provide the regulations for its
implementation.[24]
There is another reason. The position of the BIR, insisting on prior
compliance with the tax clearance requirement as a condition for the
approval of the project of distribution of the assets of a bank under
liquidation, is contrary to both the letter and intent of the law on
liquidation of banks by the PDIC. In this connection, the relevant portion
of Section 30 of the New Central Bank Act provides:

Section 30. Proceedings in Receivership and Liquidation. x x x.

xxxx

If the receiver determines that the institution cannot be rehabilitated or

permitted to resume business in accordance with the next preceding
paragraph, the Monetary Board shall notify in writing the board of directors
of its findings and direct the receiver to proceed with the liquidation of the
institution. The receiver shall:

(1) file ex parte with the proper regional trial court, and without
requirement of prior notice or any other action, a petition for assistance in
the liquidation of the institution pursuant to a liquidation plan adopted by
the Philippine Deposit Insurance Corporation for general application to all
closed banks. In case of quasi-banks, the liquidation plan shall be adopted
by the Monetary Board. Upon acquiring jurisdiction, the court shall, upon
motion by the receiver after due notice, adjudicate disputed claims against
the institution, assist the enforcement of individual liabilities of the
stockholders, directors and officers, and decide on other issues as may be
material to implement the liquidation plan adopted. The receiver shall pay
the cost of the proceedings from the assets of the institution.

(2) convert the assets of the institution to money, dispose of the

same to creditors and other parties, for the purpose of paying
the debts of such institution in accordance with the rules on
concurrence and preference of credit under the Civil Code of the
Philippines and he may, in the name of the institution, and with the
assistance of counsel as he may retain, institute such actions as may be
necessary to collect and recover accounts and assets of, or defend any
action against, the institution. The assets of an institution under
receivership or liquidation shall be deemed in custodia legis in the hands of
the receiver and shall, from the moment the institution was placed under
such receivership or liquidation, be exempt from any order of garnishment,
levy, attachment, or execution[25]. (Emphasis supplied.)

The law expressly provides that debts and liabilities of the bank under
liquidation are to be paid in accordance with the rules on concurrence and
preference of credit under the Civil Code. Duties, taxes, and fees due the
Government enjoy priority only when they are with reference to a specific
movable property, under Article 2241(1) of the Civil Code, or immovable
property, under Article 2242(1) of the same Code. However, with reference
to the other real and personal property of the debtor, sometimes referred to
as "free property," the taxes and assessments due the National
Government, other than those in Articles 2241(1) and 2242(1) of the Civil
Code, such as the corporate income tax, will come only in ninth place in the
order of preference.[26] On the other hand, if the BIR's contention that a
tax clearance be secured first before the project of distribution of the assets
of a bank under liquidation may be approved, then the tax liabilities will be
given absolute preference in all instances, including those that do not fall
under Articles 2241(1) and 2242(1) of the Civil Code. In order to secure a
tax clearance which will serve as proof that the taxpayer had completely
paid off his tax liabilities, PDIC will be compelled to settle and pay first all
tax liabilities and deficiencies of the bank, regardless of the order of
preference under the pertinent provisions of the Civil Code. Following the
BIR's stance, therefore, only then may the project of distribution of the
bank's assets be approved and the other debts and claims thereafter settled,
even though under Article 2244 of the Civil Code such debts and claims
enjoy preference over taxes and assessments due the National Government.
The BIR effectively wants this Court to ignore Section 30 of the New
Central Bank Act and disregard Article 2244 of the Civil Code. However, as
a court of law, this Court has the solemn duty to apply the law. It cannot
and will not give its imprimatur to a violation of the laws.

WHEREFORE, the petition is hereby GRANTED. The Court further

rules as follows:
 the Decision dated December 29, 2005 and Resolution dated May 5,
(a) 2006 of the Court of Appeals in CA-G.R. SP No. 80816 are REVERSED
and SET ASIDE;

the Orders dated February 14, 2003 and September 16, 2003 of the
Regional Trial Court of La Trinidad, Benguet sitting as liquidation court
of the closed RBTI, in Special Proceeding Case No. 97-SP-0100 are
(b)
NULLIFIED and SET ASIDE, insofar as they direct the Philippine
Deposit Insurance Corporation to secure a tax clearance, for having been
rendered with grave abuse of discretion;

the PDIC, as liquidator, is ORDERED to submit to the BIR the final tax
(c) return of RBTI, in accordance with the first paragraph of Section 52(C),
in connection with Section 54, of the Tax Code of 1997; and

the Regional Trial Court of La Trinidad, Benguet is ORDERED to

resume the liquidation proceedings in Special Proceeding Case No. 97-
SP-0100 in order to determine all the claims of the creditors, including
(d)that of the National Government, as determined and presented by the
BIR; and, pursuant to such determination, and guided accordingly by
the provisions of the Civil Code on preference of credit, to review and
approve the project of distribution of the assets of RBTI.

SO ORDERED.

JOSE C. CORDOVA, G.R. No. 146555

 Petitioner,
Present:

PUNO, C.J., Chairperson,

SANDOVAL-GUTIERREZ,*
- v e r s u s - CORONA,
AZCUNA and
GARCIA, JJ. **

REYES DAWAY LIM BERNARDO

LINDO ROSALES LAW OFFICES,
ATTY. WENDELL CORONEL and
the SECURITIES AND EXCHANGE
COMMISSION,***
Respondents. Promulgated:

July 3, 2007
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

DECISION

CORONA, J.:
This is a petition for review on certiorari[1]of a decision[2] and resolution[3] of the
Court of Appeals (CA) dated July 31, 2000 and December 27, 2000, respectively, in
CA-G.R. SP No. 55311.

Sometime in 1977 and 1978, petitioner Jose C. Cordova bought from

Philippine Underwriters Finance Corporation (Philfinance) certificates of stock of
Celebrity Sports Plaza Incorporated (CSPI) and shares of stock of various
other corporations. He was issued a confirmation of sale.[4] The CSPI shares were
physically delivered by Philfinance to the former Filmanbank[5] and Philtrust Bank,
as custodian banks, to hold these shares in behalf of and for the benefit of
petitioner.[6]

On June 18, 1981, Philfinance was placed under receivership by public

respondent Securities and Exchange Commission (SEC). Thereafter, private
respondents Reyes Daway Lim Bernardo Lindo Rosales Law Offices and Atty.
Wendell Coronel (private respondents) were appointed as liquidators.[7] Sometime
in 1991, without the knowledge and consent of petitioner and without authority
from the SEC, private respondents withdrew the CSPI shares from the custodian
banks.[8] On May 27, 1996, they sold the shares to Northeast Corporation and
included the proceeds thereof in the funds of Philfinance. Petitioner learned about
the unauthorized sale of his shares only on September 10, 1996.[9] He lodged a
complaint with private respondents but the latter ignored it[10] prompting him to
file, on May 6, 1997,[11] a formal complaint against private respondents in the
receivership proceedings with the SEC, for the return of the shares.
 Meanwhile, on April 18, 1997, the SEC approved a 15% rate of recovery for
Philfinances creditors and investors.[12] On May 13, 1997, the liquidators began the
process of settling the claims against Philfinance, from its assets.[13]

On April 14, 1998, the SEC rendered judgment dismissing the petition.
However, it reconsidered this decision in a resolution dated September 24, 1999
and granted the claims of petitioner. It held that petitioner was the owner of the
CSPI shares by virtue of a confirmation of sale (which was considered as a deed of
assignment) issued to him by Philfinance. But since the shares had already been
sold and the proceeds commingled with the other assets of Philfinance, petitioners
status was converted into that of an ordinary creditor for the value of such shares.
Thus, it ordered private respondents to pay petitioner the amount of P5,062,500
representing 15% of the monetary value of his CSPI shares plus interest at the legal
rate from the time of their unauthorized sale.

On October 27, 1999, the SEC issued an order clarifying its September 24,
1999 resolution. While it reiterated its earlier order to pay petitioner the amount
of P5,062,500, it deleted the award of legal interest. It clarified that it never meant
to award interest since this would be unfair to the other claimants.

On appeal, the CA affirmed the SEC. It agreed that petitioner was indeed the
owner of the CSPI shares but the recovery of such shares had become impossible. It
also declared that the clarificatory order merely harmonized the dispositive portion
with the body of the resolution. Petitioners motion for reconsideration was denied.
 Hence this petition raising the following issues:

1) whether petitioner should be considered as a preferred (and secured)

creditor of Philfinance;
2) whether petitioner can recover the full value of his CSPI shares or

merely 15% thereof like all other ordinary creditors of Philfinance and
3) whether petitioner is entitled to legal interest.[14]

To resolve these issues, we first have to determine if petitioner was indeed a

creditor of Philfinance.

There is no dispute that petitioner was the owner of the CSPI shares. However,
private respondents, as liquidators of Philfinance, illegally withdrew said certificates
of stock without the knowledge and consent of petitioner and authority of the
SEC.[15] After selling the CSPI shares, private respondents added the proceeds of the

sale to the assets of Philfinance.[16] Under these circumstances, did the petitioner
become a creditor of Philfinance? We rule in the affirmative.

The SEC, after holding that petitioner was the owner of the shares, stated:

Petitioner is seeking the return of his CSPI shares which, for the present, is no
longer possible, considering that the same had already been sold by the respondents,
the proceeds of which are ADMITTEDLY commingled with the assets
of PHILFINANCE.

This being the case, [petitioner] is now but a claimant for the value of those
shares. As a claimant, he shall be treated as an ordinary creditor in so far as the
value of those certificates is concerned.[17]
 The CA agreed with this and elaborated:
Much as we find both detestable and reprehensible the grossly abusive and
illicit contrivance employed by private respondents against petitioner, we,
nevertheless, concur with public respondent that the return of petitioners CSPI
shares is well-nigh impossible, if not already an utter impossibility, inasmuch as
the certificates of stocks have already been alienated or transferred in favor of
Northeast Corporation, as early as May 27, 1996, in consequence whereof the
proceeds of the sale have been transmuted into corporate assets of Philfinance,
under custodia legis, ready for distribution to its creditors and/or investors. Case
law holds that the assets of an institution under receivership or liquidation shall be
deemed in custodia legis in the hands of the receiver or liquidator, and shall from
the moment of such receivership or liquidation, be exempt from any order,
garnishment, levy, attachment, or execution.

Concomitantly, petitioners filing of his claim over the subject CSPI shares
before the SEC in the liquidation proceedings bound him to the terms and
conditions thereof. He cannot demand any special treatment [from] the liquidator,
for this flies in the face of, and will contravene, the Supreme Court dictum that
when a corporation threatened by bankruptcy is taken over by a receiver, all the
creditors shall stand on equal footing. Not one of them should be given preference
by paying one or some [of] them ahead of the others. This is precisely the
philosophy underlying the suspension of all pending claims against the corporation
under receivership. The rule of thumb is equality in equity.[18]

We agree with both the SEC and the CA that petitioner had become an
ordinary creditor of Philfinance.

Certainly, petitioner had the right to demand the return of his CSPI

shares.[19] He in fact filed a complaint in the liquidation proceedings in the SEC to

get them back but was confronted by an impossible situation as they had already
been sold. Consequently, he sought instead to recover their monetary value.

Petitioners CSPI shares were specific or determinate movable

properties.[20] But after they were sold, the money raised from the sale became
generic[21] and were commingled with the cash and other assets of Philfinance.
Unlike shares of stock, money is a generic thing. It is designated merely by its class

or genus without any particular designation or physical segregation from all others
of the same class.[22] This means that once a certain amount is added to the cash
balance, one can no longer pinpoint the specific amount included which then

becomes part of a whole mass of money.

It thus became impossible to identify the exact proceeds of the sale of the
CSPI shares since they could no longer be particularly designated nor distinctly

segregated from the assets of Philfinance. Petitioners only remedy was to file a claim
on the whole mass of these assets, to which unfortunately all of the other creditors
and investors of Philfinance also had a claim.

Petitioners right of action against Philfinance was a claim properly to be

litigated in the liquidation proceedings.[23]In Finasia Investments and Finance

Corporation v. CA,[24] we discussed the definition of claims in the context of

liquidation proceedings:

We agree with the public respondent that the word claim as used in Sec. 6(c) of
P.D. 902-A,[25] as amended, refers to debts or demands of a pecuniary nature. It means
"the assertion of a right to have money paid. It is used in special proceedings like those
before [the administrative court] on insolvency."

The word "claim" is also defined as:

Right to payment, whether or not such right is reduced to judgment,

liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed,
undisputed, legal, equitable, secured, or unsecured; or right to an equitable
 remedy for breach of performance if such breach gives rise to a right to payment,
whether or not such right to an equitable remedy is reduced to judgment, fixed,
contingent, matured, unmatured, disputed, undisputed, secured, unsecured.[26]

Undoubtedly, petitioner had a right to the payment of the value of his

shares. His demand was of a pecuniary nature since he was claiming the monetary
value of his shares. It was in this sense (i.e. as a claimant) that he was a creditor of
Philfinance.
The Civil Code provisions on concurrence and preference of credits are

applicable to the liquidation proceedings.[27] The next question is, was petitioner a
preferred or ordinary creditor under these provisions?

Petitioner argues that he was a preferred creditor because private respondents

illegally withdrew his CSPI shares from the custodian banks and sold them without
his knowledge and consent and without authority from the SEC. He quotes Article
2241 (2) of the Civil Code:
With reference to specific movable property of the debtor, the following claims
or liens shall be preferred:

xxx xxx xxx

(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;

xxx xxx xxx

(Emphasis supplied)
He asserts that, as a preferred creditor, he was entitled to the entire monetary value
of his shares.

Petitioners argument is incorrect. Article 2241 refers only to specific movable

property. His claim was for the payment of money, which, as already discussed, is
generic property and not specific or determinate.

Considering that petitioner did not fall under any of the provisions applicable
to preferred creditors, he was deemed an ordinary creditor under Article 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.

This being so, Article 2251 (2) states that:

Common credits referred to in Article 2245 shall be paid pro rata regardless of
dates.

Like all the other ordinary creditors or claimants against Philfinance, he was entitled
to a rate of recovery of only 15% of his money claim.
One final issue: was petitioner entitled to interest?

The SEC argues that awarding interest to petitioner would have given
petitioner an unfair advantage or preference over the other creditors.[28] Petitioner
counters that he was entitled to 12% legal interest per annum under Article 2209 of

the Civil Code from the time he was deprived of the shares until fully paid.
 The guidelines for awarding interest were laid down in Eastern Shipping
Lines, Inc. v. CA:[29]

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts
or quasi-delicts is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as
follows:

1. When the obligation is breached, and it consists in the payment of a sum of

money, i.e., a loan or forbearance of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or until
the demand can beestablished with reasonable certainty.

Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil
Code) but when such certainty cannot be so reasonably established at the time the
demand is made, the interest shall begin to run only from the date of the judgment of the
court is made (at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount of finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
 this interim period being deemed to be by then an equivalent to a forbearance of
credit.[30] (Emphasis supplied)

Under this ruling, petitioner was not entitled to legal interest of 12% per

annum (from demand) because the amount owing to him was not a loan [31] or
forbearance of money.[32]

Neither was he entitled to legal interest of 6% per annum under Article 2209

of the Civil Code[33] since this provision applies only when there is a delay in the
payment of a sum of money.[34] This was not the case here. In fact, petitioner himself
manifested before the CA that the SEC (as liquidator) had already paid

him P5,062,500 representing 15% of P33,750,000.[35]

Accordingly, petitioner was not entitled to interest under the law and current
jurisprudence.

Considering that petitioner had already received the amount of P5,062,500,

the obligation of the SEC as liquidator of Philfinance was totally extinguished.[36]

We note that there is an undisputed finding by the SEC and CA that private

respondents sold the subject shares without authority from the SEC. Petitioner
evidently has a cause of action against private respondents for their bad faith and
unauthorized acts, and the resulting damage caused to him.[37]
WHEREFORE, the petition is hereby DENIED.
ABUNDIO BARAYOGA and G.R. No. 160073
BISUDECO-PHILSUCOR
CORFARM WORKERS UNION Present:
(PACIWU CHAP-TPC),
Petitioners, Panganiban, J., Chairman,
Sandoval-Gutierrez,
Corona,
- versus - Carpio Morales, and
Garcia, JJ
ASSET PRIVATIZATION Promulgated:
TRUST,*
Respondent. October 24, 2005

x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --- -- -- -- -- x
DECISION

PANGANIBAN, J.:

R
esponsibility for the liabilities of a mortgagor towards its
employees cannot be transferred via an auction sale to a purchaser
who is also the mortgagee-creditor of the foreclosed assets and
chattels. Clearly, the mortgagee-creditor has no employer-
__________________
* The Privatization and Management Office has succeeded APT. Comment, p. 1; rollo, p. 480.

employee relations with the mortgagors workers. The mortgage constitutes

a lien on the determinate properties of the employer-debtor, because it is a
specially preferred credit to which the workers monetary claims is deemed
subordinate.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of

Court, assailing the January 30, 2003 Decision[2] and the August 27, 2003
Resolution[3] of the Court of Appeals (CA), in CA-GR SP No. 58813. The
disposition or fallo of the questioned Decision reads as follows:

IN VIEW OF ALL THE FOREGOING, the instant petition

is GRANTED and the assailed NLRC Decision dated February 18,
2000 is hereby RECALLED and SET ASIDEinsofar as herein
petitioner APT is concerned. No cost.[4]
The reversed Decision[5] of the National Labor Relations Commission

(NLRC) disposed as follows:

WHEREFORE, premises considered, the decision appealed from is

AFFIRMED with modifications as follows:

1. Complainants are awarded their monetary claims for

underpayment of salaries and payment of allowances per
their computation on pp. 97-99 and 142-144 of the records;

2. Complainants are declared to have been illegally

dismissed and should be paid their backwages from 01 May
1991 to 30 October 1992.[6]

The challenged August 27, 2003 Resolution denied petitioners Motion

for Reconsideration.

The Facts

The CA summarized the antecedents in this portion of its Decision,

which we quote:
 Bisudeco-Philsucor Corfarm Workers Union is composed of
workers of Bicolandia Sugar Development Corporation (BISUDECO),
a sugar plantation mill located in Himaao, Pili, Camarines Sur.

On December 8, 1986, [Respondent] Asset Privatization Trust

(APT), a public trust was created under Proclamation No. 50, as
amended, mandated to take title to and possession of, conserve,
provisionally manage and dispose of non-performing assets of the
Philippine government identified for privatization or disposition.

Pursuant to Section 23 of Proclamation No. 50, former

President Corazon Aquino issued Administrative Order No. 14
identifying certain assets of government institutions that were to be
transferred to the National Government. Among the assets transferred
was the financial claim of the Philippine National Bank against
BISUDECO in the form of a secured loan. Consequently, by virtue of
a Trust Agreement executed between the National Government and
APT on February 27, 1987, APT was constituted as trustee over
BISUDECOs account with the PNB.

Sometime later, on August 28, 1988, BISUDECO contracted

the services of Philippine Sugar Corporation (Philsucor) to take over
the management of the sugar plantation and milling operations until
August 31, 1992.

Meanwhile, because of the continued failure of BISUDECO to

pay its outstanding loan with PNB, its mortgaged properties were
foreclosed and subsequently sold in a public auction to APT, as the
sole bidder. On April 2, 1991, APT was issued a Sheriffs Certificate of
Sale.
 On July 23, 1991, the union filed a complaint for unfair labor
practice, illegal dismissal, illegal deduction and underpayment of
wages and other labor standard benefits plus damages.

In the meantime, on July 15, 1992, APTs Board of Trustees

issued a resolution accepting the offer of Bicol-Agro-Industrial
Cooperative (BAPCI) to buy the sugar plantation and mill. Again, on
September 23, 1992, the board passed another resolution authorizing
the payment of separation benefits to BISUDECOs employees in the
event of the companys privatization. Then, on October 30, 1992,
BAPCI purchased the foreclosed assets of BISUDECO from APT and
took over its sugar milling operations under the trade name Peafrancia
Sugar Mill (Pensumil).

On December 17, 1992, the union filed a similar complaint, later

to be consolidated with its earlier complaint and docketed as RAB V
Case No. 07-00184-91.

On March 2, 1993, it filed an amended complaint, impleading

as additional party respondents APT and Pensumil.

In their Position Paper, the union alleged that when Philsucor

initially took over the operations of the company, it retained
BISUDECOs existing personnel under the same terms and conditions
of employment. Nonetheless, at the start of the season sometime in
May 1991, Philsucor started recalling workers back to work, to the
exception of the union members. Management told them that they will
be re-hired only if they resign from the union. Just the same,
thereafter, the company started to employ the services of outsiders
under the pakyaw system.

BISUDECO, Pensumil and APT all interposed the defense of

lack of employer-employee relationship.
 xxxxxxxxx

After due proceedings, on April 30, 1998, Labor Arbiter

Fructuoso T. Aurellano disposed as follows:

WHEREFORE, premises considered, respondent APT is hereby

ordered to pay herein complainants of the mandated employment
benefits provided for under Section 27 of Proclamation No. 50
which benefits had been earlier extended to other employees
similarly situated.

SO ORDERED.

Both the union and APT elevated the labor arbiters decision
before NLRC.[7]

The NLRC affirmed APTs liability for petitioners money claims. While no
employer-employee relationship existed between members of the petitioner
union and APT, at the time of the employees illegal dismissal, the assets of
BISUDECO had been transferred to the national government through APT.
Moreover, the NLRC held that APT should have treated petitioners claim as
a lien on the assets of BISUDECO. The Commission opined that APT
should have done so, considering its awareness of the pending complaint of
petitioners at the time BISUDECO sold its assets to BAPCI, and APT
started paying separation pay to the workers.
Finding their computation to be in order, the NLRC awarded to petitioners
their money claims for underpayment, labor-standard benefits, and ECOLA.
It also awarded them their back wages, computed at the prevailing minimum
wage, for the period May 1, 1991 (the date of their illegal dismissal) until
October 30, 1992 (the sale of BISUDECO assets to the BAPCI). On the
other hand, the NLRC ruled that petitioners were not entitled to separation
pay because of the huge business losses incurred by BISUDECO, which had
resulted in its bankruptcy.

Respondent sought relief from the CA via a Petition for Certiorari under
Rule 65 of the Rules of Court.

Ruling of the Court of Appeals

The CA ruled that APT should not be held liable for petitioners claims
for unfair labor practice, illegal dismissal, illegal deduction and
underpayment of wages, as well as other labor-standard benefits plus
damages. As found by the NLRC, APT was not the employer of petitioners,
but was impleaded only for possessing BISUDECOs mortgaged properties
as trustee and, later, as the highest bidder in the foreclosure sale of those
assets.

Citing Batong Buhay Gold Mines v. Dela Serna,[8] the CA concluded that
petitioners claims could not be enforced against APT as mortgagee of the
foreclosed properties of BISUDECO.

Hence, this Petition.[9]

Issues

In their Memorandum, petitioners raise the following issues for our

consideration:

I. Whether or not the Court of Appeals erred in ruling that Respondent

Asset Privatization Trust (APT) should not be held liable for the
petitioner unions claim for unfair labor practice, illegal dismissal, illegal
deduction and underpayment of wages and other labor standard
benefits plus damages.
 II. Whether or not the claims of herein petitioners cannot be enforced
against APT/PNB as mortgagee of the foreclosed properties of
BISUDECO.

III. Whether or not the entitlement of petitioners upon their claims

against Respondent APT is recognized under the law.[10]

In brief, the main issue raised is whether Respondent APT is liable for
petitioners monetary claims.

The Courts Ruling

The Petition has no merit.

Main Issue:
Whether APT Is Liable for the Claims of
Petitioners Against Their Former Employer
 It should be stressed at the outset that, pursuant to Administrative

Order No. 14, Series of 1987,[11] PNBs assets, loans and receivables from its

borrowers were transferred to APT as trustee of the national government.

Among the liabilities transferred to APT was PNBs financial claim against

BISUDECO, not the latters assets and chattel. Contrary to petitioners

assertions, BISUDECO remained the owner of the mortgaged properties in

August 1988, when the Philippine Sugar Corporation (Philsucor) undertook

the operation and management of the sugar plantation until August 31, 1992,

under a so-called Contract of Lease between the two corporations. At the

time, APT was merely a secured creditor of BISUDECO.[12]

It was only in April 1991 that APT foreclosed the assets and chattels
of BISUDECO because of the latters continued failure to pay outstanding
loan obligations to PNB/APT. The properties were sold at public auction to
APT, the highest bidder, as indicated in the Sheriffs Certificate of Sale issued
on April 2, 1991. It was only in September 1992 (after the expiration of the
lease/management Contract with Philsucor in August 1992), however, when
APT took over BISUDECO assets, preparatory to the latters privatization.

In the present case, petitioner-unions members who were not recalled

to work by Philsucor in May 1991 seek to hold APT liable for their monetary
claims and allegedly illegal dismissal. Significantly, prior to the actual sale of
BISUDECO assets to BAPCI on October 30, 1992, the APT board of
trustees had approved a Resolution on September 23, 1992. The Resolution
authorized the payment of separation benefits to the employees of the
corporation in the event of its privatization. Not included in the Resolution,
though, were petitioner-unions members who had not been recalled to work
in May 1991.

The question now before the Court is whether APT is liable to pay
petitioners monetary claims, including back wages from May 1, 1991, to
October 30, 1992 (the date of the sale of BISUDECO assets to BAPCI).

We rule in the negative. The duties and liabilities of BISUDECO,

including its monetary liabilities to its employees, were not all automatically
assumed by APT as purchaser of the foreclosed properties at the auction
sale. Any assumption of liability must be specifically and categorically agreed
upon. In Sundowner Development Corp. v. Drilon,[13] the Court ruled that, unless
expressly assumed, labor contracts like collective bargaining agreements are
not enforceable against the transferee of an enterprise. Labor contracts are in
personamand thus binding only between the parties.

No succession of employment rights and obligations can be said to

have taken place between the two. Between the employees of BISUDECO
and APT, there is no privity of contract that would make the latter a
substitute employer that should be burdened with the obligations of the
corporation. To rule otherwise would result in unduly imposing upon APT
an unwarranted assumption of accounts not contemplated in Proclamation
No. 50 or in the Deed of Transfer between the national government and
PNB.

Furthermore, under the principle of absorption, a bona fide buyer or

transferee of all, or substantially all, the properties of the seller or transferor
is not obliged to absorb the latters employees.[14] The most that the
purchasing company may do, for reasons of public policy and social justice,
is to give preference of reemployment to the selling companys qualified
separated employees, who in its judgment are necessary to the continued
operation of the business establishment.[15]
In any event, the national government (in whose trust APT previously held
the mortgage credits of BISUDECO) is not the employer of petitioner-
unions members, who had been dismissed sometime in May 1991, even
before APT took over the assets of the corporation. Hence, under existing
law and jurisprudence, there is no reason to expect any kind of bailout by
the national government.[16] Even the NLRC found that no employer-
employee relationship existed between APT and petitioners. Thus, the
Commission gravely abused its discretion in nevertheless holding that APT,
as the transferee of the assets of BISUDECO, was liable to petitioners.

Petitioners also contend that in Central Azucarera del Danao v. Court of

Appeals,[17]this Court supposedly ruled that the sale of a business of a going
concern does not ipso facto terminate the employer-employee relations
insofar as the successor-employer is concerned, and that change of
ownership or management of an establishment or company is not one of the
just causes provided by law for termination of employment[.][18]

A careful reading of the Courts Decision in that case plainly shows that
it does not contain the words quoted by counsel for petitioners. At this
juncture, we admonish their counsel[19] of his bounden duty as an officer of
the Court to refrain from misquoting or misrepresenting the text of its
decisions.[20] Ever present is the danger that, if not faithfully and exactly
quoted, they may lose their proper and correct meaning, to the detriment of
other courts, lawyers and the public who may thereby be misled.[21]

In that case, contrary to the assertions of petitioners, the Court held as

follows:

There can be no controversy for it is a principle well-recognized, that

it is within the employers legitimate sphere of management control of
the business to adopt economic policies or make some changes or
adjustments in their organization or operations that would insure profit
to itself or protect the investment of its stockholders. As in the exercise
of such management prerogative, the employer may merge or
consolidate its business with another, or sell or dispose all or
substantially all of its assets and properties which may bring about the
dismissal or termination of its employees in the process. Such
dismissal or termination should not however be interpreted in such a
manner as to permit the employer to escape payment of termination
pay. x x x.

In a number of cases on this point, the rule has been laid down that
the sale or disposition must be motivated by good faith as an element
of exemption from liability. Indeed, an innocent transferee of a
business establishment has no liability to the employees of the
transferor to continue employing them. Nor is the transferee liable for
past unfair labor practices of the previous owner, except, when the
liability therefor is assumed by the new employer under the contract
of sale, or when liability arises because of the new owners
participation in thwarting or defeating the rights of the
employees.[22] (Citations omitted.)
In other words, the liabilities of the previous owner to its employees are not
enforceable against the buyer or transferee, unless (1) the latter unequivocally
assumes them; or (2) the sale or transfer was made in bad faith. Thus, APT
cannot be held responsible for the monetary claims of petitioners who had
been dismissed even before it actually took over BISUDECOs assets.

Moreover, it should be remembered that APT merely became a transferee

of BISUDECOs assets for purposes of conservation because of its lien on
those assets -- a lien it assumed as assignee of the loan secured by the
corporation from PNB. Subsequently, APT, as the highest bidder in the
auction sale, acquired ownership of the foreclosed properties.

Relevant to this transfer of assets is Article 110 of the Labor Code, as

amended by Republic Act No. 6715, which reads:
Article 110. Workers preference in case of bankruptcy. In the event of
bankruptcy or liquidation of the employers business, his workers shall
enjoy first preference as regards their unpaid wages and other
monetary claims shall be paid in full before the claims of the
Government and other creditors may be paid.[23]

This Court has ruled in a long line of cases[24] that under Articles 2241
and 2242 of the Civil Code, a mortgage credit is a special preferred credit
that enjoys preference with respect to a specific/determinate property of the
debtor. On the other hand, the workers preference under Article 110 of the
Labor Code is an ordinary preferred credit. While this provision raises the
workers money claim to first priority in the order of preference established
under Article 2244 of the Civil Code, the claim has no preference over special
preferred credits.

Thus, the right of employees to be paid benefits due them from the
properties of their employer cannot have any preference over the latters
mortgage credit. In other words, being a mortgage credit, APTs lien on
BISUDECOs mortgaged assets is a special preferred lien that must be
satisfied first before the claims of the workers.

Development Bank of the Philippines v. NLRC[25] explained the rationale of

this ruling as follows:
x x x. 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 insolvents assets. It is a right to a first
preference in the discharge of the funds of the judgment debtor. x x x
 Furthermore, workers claims for unpaid wages and monetary benefits
cannot be paid outside of a bankruptcy or judicial liquidation proceedings
against the employer.[26] It is settled that the application of Article 110 of the
Labor Code is contingent upon the institution of those proceedings, during
which all creditors are convened, their claims ascertained and inventoried,
and their preferences determined.[27] Assured thereby is an orderly
determination of the preference given to creditors claims; and preserved in
harmony is the legal scheme of classification, concurrence and preference of
credits in the Civil Code, the Insolvency Law, and the Labor Code.

The Court hastens to add that the present Petition was brought against
APT alone. In holding that the latter, which has never really been an
employer of petitioners, is not liable for their claims, this Court is not
reversing or ruling upon their entitlement to back wages and other unpaid
benefits from their previous employer.

On the basis of the foregoing clarification, the Court finds no

reversible error in the questioned CA Decision, which set aside the February
8, 2000 Decision of the NLRC. As a mere transferee of the mortgage credit
and later as the purchaser in a public auction of BISUDECOs foreclosed
properties, APT cannot be held liable for petitioners claims against
BISUDECO: illegal dismissal, unpaid back wages and other monetary
benefits.

WHEREFORE, the Petition is hereby DENIED, and the assailed Decision

and Resolution AFFIRMED. Costs against petitioners.

SO ORDERED.

G.R. No. 190901 November 12, 2014

AMADA COTONER-ZACARIAS, Petitioner,

vs.
SPOUSES ALFREDO AND THE HEIRS REVILLA OF PAZ REVILLA, Respondents.

DECISION

LEONEN, J.:

Well-settled is the rule that "conveyances by virtue of a forged signature ... are void ab initio [as] [t]he
absence of the essential [requisites] of consent and cause or consideration in these cases rendered
the contract inexistent[.]"1

Before us is a petition for review2 filed by Amada Cotoner-Zacarias against respondent spouses
Alfredo Revilla and Paz Castillo-Revilla, praying that this court render a decision "reversing the
Decision of the Regional Trial Court and Court of Appeals and declaring the transfer of title to the
Petitioner and then to her successors-in-interest as valid and binding as against the respondents."3

The Court of Appeals summarized the facts as follows.

Alfredo Revilla and Paz Castillo-Revilla (Revilla spouses) are the owners in fee simple of a 15,000-
square-meter unregistered parcel of land in Silang, Cavite, covered by Tax Declaration No. 7971.4

In 1983, the Revilla spouses faced financial difficulties in raising funds for Alfredo Revilla’s travel to
Saudi Arabia, so Paz Castillo-Revilla borrowed money from Amada Cotoner-Zacarias (Amada). By
way of security, the parties verbally agreed that Amada would take physical possession of the
property, cultivate it, then use the earnings from the cultivation to pay the loan and realty
taxes.5 Upon full payment of the loan, Amada would return the property to the Revilla spouses.6

Unknown to the Revilla spouses, Amada presented a fictitious document entitled "Kasulatan ng
Bilihanng Lupa" before the Provincial Assessor of Cavite. This document was executed on March
19, 1979 with the Revilla spouses as sellers and Amada as buyer of the property.7 Consequently,
Tax Declaration No. 7971 in the name of the Revilla spouses was cancelled, and Tax Declaration
No. 19773 in the name of Amada was issued.

On August 25, 1984, Amada sold the property to the spouses Adolfo and Elvira Casorla (Casorla
spouses) by "Deed of Absolute SaleUnregistered Land." Tax Declaration No. 30411-A was later
issued in the name of the Casorla spouses.8

In turn, the Casorla spouses executed a deed of absolute sale dated December 16, 1991 in favor of
the spouses Rodolfo and Yolanda Sun (Sun spouses). Tax Declaration Nos. 30852-A and 18584
were issued in favor of the Sun spouses.9

In December 1994, Alfredo Revilla returned from Saudi Arabia. He asked Amada why she had not
returnedtheir tax declaration considering their full payment of the loan. He then discovered that the
property’s tax declaration was already in the name of the Sun spouses.10

On February 15, 1995, the Revilla spouses were served a copy of the answer11 in the land
registration case filed by the Sun spouses for the property.12 The Revilla spouses then saw a copy of
the "Kasulatan ng Bilihan ng Lupa" and noticed that their signatures as sellers were forged.13

They then demanded the cancellation of the "Kasulatan ng Bilihan ng Lupa" from Amada and all
subsequent transfers of the property, its reconveyance, and the restoration of its tax declaration in
their name.14 Amada failed to take action.

On November 17, 1995, the Revillaspouses filed a complaint before the Tagaytay Regional Trial
Court for the annulment of sales and transfers of title and reconveyance of the property with
damages against Amada, the Casorla spouses, the Sun spouses, and the Provincial Assessor of
Cavite.15

In her answer, Amada denied that the property was used as a security for the Revilla spouses’
loan.16Instead, she claimed that the Revilla spouses voluntarily executed the "Kasulatan ng Bilihan
ng Lupa" in her favor on March 19, 1979. She added that the Revilla spouses’ cause of action
already prescribed.17

For their part, the Sun spouses argued good faith belief that Amada was the real owner of the
property asAmada showed them a tax declaration in her name and the "Kasulatan ng Bilihan ng
Lupa" allegedly executed by the Revilla spouses.18 When the Sun spouses discovered there was
another sale with the Casorla spouses, they were assured by Amada that she had already bought
back the property from the Casorla spouses.19 Subsequently, the Casorla spouses executed a deed
ofabsolute sale dated December 16, 1991 in favor of the Sun spouses.20 They also argued
prescription against the Revilla spouses, and prayed for damages against Amada by way of
crossclaim.21

On August 3, 2006, the Regional Trial Court22 found the "Kasulatan ng Bilihan ng Lupa" to be a
fictitious document, and ruled in favor of the Revilla spouses:
WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Declaring the sales/transfers from Tax Declaration No. 7971, s. 1980 to Tax Declaration
No. 18584, s. 1994 as NULL and VOID, without valid transmission of title and interest from
the original owners, plaintiffs herein and consequently, entitling plaintiffs to reinstatement and
reconveyance of their title/taxdeclaration as well as possession of the subject property;

2. Ordering defendant Zacariasto pay the following:

2.1 To the Plaintiffs:

a. ₱50,000.00 for moral damages;

b. ₱20,000.00 for exemplary damages; and

c. ₱80,000.00 for attorney’s fees.

2.2 To Defendant-Spouses Sun:

a. ₱467,350.00 for actual damages;

b. ₱50,000.00 for moral damages;

c. ₱20,000.00 for exemplary damages; and

d. ₱100,000.00 for attorney’s fees.

SO ORDERED.23

Amada appealed the trial court’s decision, while the Sun spouses partially appealed the decision as
to interest and damages.

On August 13, 2009, the Court of Appeals24dismissed the appeal of Amada, and partially granted the
appeal of the Sun spouses. The dispositive portion reads:

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us DISMISSING

the appeal filed by defendant appellant Amada C. Zacarias in this case, and PARTIALLY
GRANTING the appeal filed by the Spouses Rodolfo and Yolanda Sun. The Decision dated August
3, 2006 rendered by Branch 18 of the Regional Trial Court of the Fourth Judicial Region stationed in
Tagaytay City, Cavite in Civil Case No. TG-1543 is MODIFIED in that defendant-appellant Amada C.
Zacarias is ordered to pay interest at 6% per annum on the principal obligation in the amount of
₱467,350.00 from February 3, 1995, the date of the first judicial demand by the Spouses Sun, until
said decision on the principal obligation became final and executory, and interest at 12% per annum
on the principal obligation, moral and exemplary damages, as well as attorney’s fees, from the time
said decision became final and executory until full payment of said amounts.

SO ORDERED.25

The Court of Appeals denied Amada’s motion for reconsideration; hence, she filed this petition.
Petitioner argues that the antichresisclaim of the Revilla spouses was not reduced into writing, thus,
it is void under Article 2134 of the Civil Code.26 She submits that the allegation of antichresis was
only an excuse by the Revilla spouses for their failure to impugn possession of the property by
Amada and her successors-in-interest for over 16 years.27

Petitioner contends that the sale inher favor was established by the "Kasulatan ng Bilihan ng Lupa,"
the delivery of the tax declaration, and the testimony of one Mrs. Rosita Castillo (Rosita).28 Rosita
was the second wife of Felimon Castillo, the previous owner of the property. She testified that
respondent Paz Castillo-Revilla admitted toher father, Felimon, that she and Alfredo Revilla sold the
property to Amada.29

On the alleged forgery, petitioner submits that the court misapplied the principle that "he who alleges
not he who denies must prove" when it stated that she had the burden of proving the due execution
of the deed of absolute sale. Since the Revilla spouses alleged that the deedwas a forged
document, they had the burden of proving the forgery.30 She then cites the trial court in that
"[a]ccordingly, the National Bureauof Investigation was not able to ascertain the genuineness of the
signatureof plaintiff Paz Revilla because of lack of sufficient sample signatures. . . ."31

On the prescription argument, the parties live in a very small barangay. While Alfredo Revilla worked
in Saudi Arabia, he admitted returning to the Philippines twice a year, while his wife never left Silang,
Cavite,32 and yet the Revilla spouses never questioned the activities on the property for more than 16
years.33

On the proper docket fees, petitioner contends that the Revilla spouses paid docket fees based on
their prayer for actual damages of ₱50,000.00, moral damages of ₱50,000.00, and attorney’s fee of
₱80,000.00, when they should have based it on ₱12,000,000.00, the value of the property they
alleged in their supplemental pre-trial brief.34

Lastly, petitioner argues that the property is conjugal in nature, but the court never declared that
respondent Paz Castillo-Revilla’s signature was falsified. Thus, the sale over her half of the property
cannot be declared void.35 She adds that the Sun spouses are buyers in good faith for value, making
reinstatement of the property impossible.36

Respondents Revilla spouses counter that the factual issue of whether the "Kasulatan ng Bilihan ng
Lupa" isa falsified document was already conclusively resolved by the lower courts and, generally,
factual findings are beyond this court’s power of review.37

On the prescription issue, respondents Revilla spouses argue that an action or defense to declare a
document null is imprescriptible.38 Laches also does not apply since they immediately questioned the
fraudulent transfers by filing a complaint in November 1995 upon learning of the questionable
documents in February 1995, after Alfredo had returned from Saudi Arabia in December 1994.39

Respondents Revilla spouses contend that they paid the proper docket fees. The ₱12,000,000.00
mentioned during pre-trial that petitioner insists should have been the basis of the fees was neither
stated in the complaint nor awarded by the court.40

Respondents Revilla spouses argue that the court did not err in ordering reinstatement of the
property tothem. First, the defense that the Sun spouses were buyers in good faith is a personal
defense that cannot be raised by petitioner who was not privy to the sale between the Casorla
spouses and the Sun spouses.41 Second, an alternative prayer for damages cannot be interpreted as
an admission that the relief for reinstatement is not viable.42 Third, the transaction happened prior to
the effectivity of the Family Code; thus, Article 172 of the Civil Code applies such that "[t]he wife
cannot bind the conjugal partnership without the husband’s consent, except in cases provided by
law."43 Consequently, the result is the same even if respondent Paz Castillo-Revilla did not testify
that the signature is not hers, as she cannot bind the entire property without her husband’s
consent.44 Lastly, no unjust enrichment exists since they were deprived of their property for so long.45

The issues for this court’s resolution are as follows:

First, whether respondents Revilla spouses’ cause of action is barred by prescription or laches;
Second, whether the trial court acquired jurisdiction when respondents Revilla spouses paid filing
fees based on the ₱50,000.00 claim for damages in the complaint but stated in their supplemental
pre-trial brief that the property is valued at ₱12,000,000.00; and

Third, whether the Court of Appeals erred in upholding the reinstatement and reconveyance of the
property in favor of respondents Revilla spouses.

I.

On the first issue, petitioner argues that respondents Revilla spouses’ claim is barred by laches
since theyallowed 16 years to lapse, with petitioner having possession of the property, before filing
suit.46

Laches has been defined as "the failure or neglect, for an unreasonable and unexplained length of
time, to do that which — by the exercise of due diligence — could or should have been done
earlier."47

The elements that need to be present and proven before an action is considered barred by laches
are the following:

The four basic elements of laches are: (1) conduct on the part of the defendant, or of one under
whom he claims, giving rise to the situation of which complaint is made and for which the complaint
seeks a remedy; (2) delay in asserting the complainant's rights, the complainant having had
knowledge or notice of the defendant’s conduct and having been afforded an opportunity to institute
suit; (3) lack of knowledge or notice on the part of the defendant that the complainant would assert
the right on which he bases his suit; and, (4) injury or prejudice to the defendant in the event relief is
accorded to the complainant or the suit is not held to be barred.48

There was no delay by respondents Revilla spouses in asserting their rights over the property. The
lower courts found that respondents Revilla spouses first learned of the existence of the "Kasulatan
ng Bilihan ng Lupa" in February 1995 when they were serveda copy of the pleading in the land
registration case instituted by the Sun spouses.49 They filed their complaint within the same year,
specifically, on November 17, 1995. The lapse of only nine (9) months from the time they learned of
the questionable transfers on the property cannot be considered as sleeping on their rights.

In any case, doctrines of equity such as laches apply only in the absence of statutory law. The Civil
Code clearly provides that "[t]he action or defense for the declaration of the inexistence of a contract
does not prescribe."50 This court has discussed:

Lachesis a doctrine in equity and our courts are basically courts of law and not courts of equity.
Equity, which has been aptly described as "justice outside legality," should be applied only in the
absence of, and never against, statutory law. Aequetas nunguam contravenit legis. The positive
mandate of Art. 1410 of the New Civil Code conferring imprescriptibility to actions for declaration of
the inexistence of a contract should pre-empt and prevail over all abstract arguments based only on
equity. Certainly, laches cannot be set up to resist the enforcement of an imprescriptible legal right,
and petitioners can validly vindicate their inheritance despite the lapse of time.51

II.

On the second issue, petitioner argues that respondents Revilla spouses did not pay the correct
docket fees. She submits that docket fees paid were based on the prayer for actual damages of
₱50,000.00, moral damages of ₱50,000.00, and attorney’s fee of ₱80,000.00, when the spouses
Revilla should have based it on ₱12,000,000.00, the value of the property they alleged in their
supplemental pre-trial brief.52 Petitioner cites Supreme Court Circular No. 7 and jurisprudence
holding that the payment of proper docket fees is crucial in vesting courts with jurisdiction over the
subject matter.53

This court finds that respondents Revilla spouses paid the proper docket fees, thus, the trial court
acquired jurisdiction.

It is true that "[i]t is not simply the filing of the complaint or appropriate initiatory pleading, but the
payment of the prescribed docket fee, that vests a trial court with jurisdiction over the subject matter
or nature of the action."54

In Manchester Development Corporation v. Court of Appeals,55 this court "condemned the practice of
counsel who in filing the original complaint omitted from the prayer any specification of the amount of
damages although the amount of over 78 million is alleged in the body of the complaint."56 The court
gave the following warning against this unethical practice that serves no other purpose than to avoid
paying the correct filing fees:

The Court serves warning that itwill take drastic action upon a repetition of this unethical practice. To
put a stop to this irregularity, henceforth all complaints, petitions, answers and other similar
pleadings should specify the amount of damages being prayed for not only inthe body of the
pleading but also in the prayer, and said damages shall be considered in the assessment of the filing
fees in any case. Any pleading that fails to comply with this requirement shall not be accepted nor
admitted, or shall otherwise be expunged from the record.

The Court acquires jurisdiction over any case only upon the payment of the prescribed docket fee.
An amendment of the complaint or similar pleading will not thereby vest jurisdiction in the Court,
much less the payment of the docket fee based on the amounts sought in the amended pleading.
The ruling in the Magaspi case in sofar as it is inconsistent with this pronouncement is overturned
and reversed.57 (Emphasis supplied)

This ruling was circularized through Supreme Court Circular No. 758 addressed to all lower court
judges and the Integrated Bar of the Philippines for dissemination to and guidance for all its
members.

The facts of this case differ from Manchester and similar situations envisioned under the circular.
The complaint filed by respondents Revilla spouses included in its prayer the amount of ₱50,000.00
as actual damages, without mention of any other amount in the body of the complaint. No amended
complaint was filed to increase this amount in the prayer. Thus, the Court of Appeals found as
follows:

In the case at bench, the complaint filed by the Spouses Revilla only asked for actual damages in
the amount of ₱50,000.00. While the Spouses Revilla mentioned the amount of ₱12,000,000.00 as
actual damages in the pre-trial, said amount was not stated in the complaint and neither was it
awarded by the lower court in its judgment. Hence, said amount was not even considered by the
court a quo when it awarded damages in favor of the Spouses Revilla. Considering that the
complaint was not formally amended by the spouses to increase the amount of actual damages
being sought, the trial court was not stripped of its jurisdiction to try the case since the Spouses
Revilla correctly paid the docket fees based merely on what was prayed for in the complaint.Indeed,
the mere mentioning by the Spouses Revilla of the amount of ₱12,000,000.00 during the pre-trial is
inconsequential, as the trial court properly acquired jurisdiction over the action when the Spouses
Revilla filed the complaint and paid the requisite filing fees based on the amount as prayed for in the
complaint.59 (Emphasis supplied)

In Padlan v. Dinglasan,60 this court reiterated that "[w]hat determines the jurisdiction of the court is
the nature of the action pleaded as appearing from the allegations in the complaint [and] [t]he
averments therein and the character of the relief sought are the ones to be consulted."61

Petitioner attached copies of the tax declarations and deeds of sale over the property to the petition.
Tax Declaration No. 7971 in the name of respondents Revilla spouses provides that the land had a
market value of ₱13,500.00, while the mango trees had a market value of ₱3,500.00.62 Petitioner
alleged in her petition that respondents Revilla spouses offered to sell the property to her for
₱50,000.00,63 while the trial court found that the "Kasulatan ng Bilihan ng Lupa" reflected the amount
of ₱20,000.00.64 Subsequent tax declarations in the name of petitioner, the Casorla spouses, and the
Sun spouses all provided for land market values lower than ₱50,000.00.65 The deed of sale in favor
of the Casorla spouses states that the assessed value of the property was ₱1,400.00, and the
consideration for the sale was ₱50,000.00.66 The subsequent deed of sale in favor of the Sun
spouses provides for the same amount as consideration.67

None of these documents submitted by petitioner indicate an amount in excess of the ₱50,000.00
prayed for by respondents Revilla spouses as actual damages in their complaint. Thus, the basis for
the ₱12,000,000.00 value raised during pre-trial is unclear. Based on the complaint, respondents
Revilla spouses paid the correct docket fees computed from the amounts in their prayer.

III.

The third issue involves the reinstatement of respondents Revilla spouses in the property and
reconveyance of its tax declaration in their favor.

Petitioner argues that antichresis is a formal contract that must be in writing in order to be
valid.68 Respondents Revilla spouses were not able to prove the existence of the alleged antichresis
contract. On the other hand, the sale of the property to petitioner was established by the "Kasulatan
ng Bilihan ng Lupa" and the testimony of Rosita Castillo, the second wife of the previous owner,
Felimon Castillo.69

We affirm the lower courts’ order of reinstatement and reconveyance of the property in favor of
respondents Revilla spouses.

Respondents Revilla spouses’ complaint sought "to annul the sales and transfers of title emanating
from Tax Declaration No. 7971 registered in their name involving a 15,000-square[-]meter
unregistered land . . . with prayer for reconveyance and claims for damages."70 There was no prayer
to declare the purported contract of sale as antichresis.71 Thus, respondents Revilla spouses neither
discussed nor used the term "antichresis" in their comment and memorandum before this court.
They focused on the nature of their complaint as one for annulment of titles on the ground of
forgery.72 At most, the trial court’s summary of respondents Revilla spouses’ evidence described the
parties’ agreements as follows:
Plaintiffs’ evidence and the testimony of plaintiff Alfredo Revilla tend to indicate that plaintiffs are the
owners in fee simple of a 15,000-square[-]meter unregistered land, located at Brgy. Adlas, Silang,
Cavite. Their ownership being evidenced by Tax Declaration No. 7971, s. 1980 (Exh. "A"). Sometime
in 1981, plaintiffs needed money for the travel and deployment of plaintiff Alfredo to Saudi Arabia.
Plaintiff Paz Revilla sought financial help from defendant Cotoner-Zacarias from whom she was able
to obtain a loan but secured with and by way of mortgage of the subject property. The parties further
agreed that defendant Cotoner Zacarias would take possession of the subject property and cultivate
it with the earnings therefrom to be used to pay-off the loan and the annual realty taxes on the land.It
was their agreement with defendant Cotoner Zacarias that the latter will rent the subject property
and with that agreement, the lease started sometime in 1981 and plantiffs got from defendant
Cotoner-Zacarias the amount of Php3,000.00 as rental for the first year, 1981, with no specific
agreement as to the period covered by such rental[.]73 (Emphasis supplied)

Article 2132 of the Civil Code provides that "[b]y the contract of antichresis the creditor acquires the
right to receive the fruits of an immovable of his debtor, with the obligation to apply them to the
payment of the interest, if owing, and thereafter to the principal of his credit."

Thus, antichresis involves an express agreement between parties such that the creditor will have
possession of the debtor’s real property given as security, and such creditor will apply the fruits of
the property to the interest owed by the debtor, if any, then to the principal amount.74

The term, antichresis, has a Greek origin with "‘anti’ (against) and ‘chresis’ (use) denoting the action
of giving a credit ‘against’ the ‘use’ of a property."75

Historically, 15th century B.C. tablets revealed that "antichresis contracts were commonly employed
in the Sumerian and Akkadian Mesopotamian cultures."76 Antichresis contracts were incorporated in
Babylonian law, modifying and combining it with that of mortgage pledge.77 Nearing the end of the
classical period, antichresis contracts entered Roman law that "adopted the convention that the
tenant usufruct had to be exactly compensated by the interest on the lump sum payment."78 During
the middle ages, canon law banned antichresis contracts for being a form of usury.79 These contracts
only reappeared in the 1804 Napoleonic Code that influenced the laws of most countries today.80 It
had been observed that "antichresis contracts coexist with periodic rent contracts in many property
markets."81

In the Civil Code, antichresis provisions may be found under Title XVI, together with other security
contracts such as pledge and mortgage.

Antichresis requires delivery of the property to the antichretic creditor, but the latter cannot ordinarily
acquire this immovable property in his or her possession by prescription.82

Similar to the prohibition against pactum commissorium83 since creditors cannot "appropriate the
thingsgiven by way of pledge or mortgage, or dispose of them,"84 an antichretic creditor also cannot
appropriate the real property in his or her favor upon the non-payment of the debt.85

Antichresis also requires that the amount of the principal and the interest be in writing for the
contract to be valid.86

However, the issue before us does not concern the nature of the relationship between the parties,
but the validity of the documents that caused the subsequent transfers of the property involved.

The reinstatement of the propertyin favor of respondents Revilla spouses was anchored on the lower
courts’ finding that their signatures as sellers in the "Kasulatan ng Bilihan ng Lupa" were forged.
This court has held that the "question of forgery is one of fact."87 Well-settled is the rule that "[f]actual
findings of the lower courts are entitled great weight and respect on appeal, and in fact accorded
finality when supported by substantial evidence on the record."88

The Court of Appeals agreed with the finding of the trial court that the signature of Alfredo Revilla in
the "Kasulatan ng Bilihan ng Lupa" was forged:

It was convincingly found by the court a quo that the Kasulatan ng Bilihan ng Lupaor Deed of Sale
covering the subject property allegedly executed by the Spouses Revilla in favorof Zacarias was
spurious, as the trial court, after relying on the report of the handwriting experts of the National
Bureau of Investigation (NBI) saying that "there exist significant differences in handwriting
characteristics/habits between the questioned and the standard/sample signatures ‘ALFREDO
REVILLA’ such as in the manner of execution of strokes, structural pattern of letters/elements, and
minute identifying details", as well as the trial court’s own visual analysis of the document and the
sample signatures of plaintiff-appellee Alfredo, clearly showed that his signature on the said
Kasulatan ng Bilihan ng Lupawas indeed forged.89

Petitioner contends that the lower courts never declared as falsified the signature of Alfredo’s wife,
Paz Castillo-Revilla. Since the property is conjugal in nature, the sale as to the one-half share ofPaz
Castillo-Revilla should not be declared as void.90

The transaction took place before the effectivity of the Family Code in 2004. Generally, civil laws
have no retroactive effect.91 Article 256 of the Family Code provides that "[it] shall have retroactive
effect insofar as it does not prejudice or impair vested or acquired rights in accordance with the Civil
Code or other laws."

Article 165 of the Civil Code states that "[t]he husband is the administrator of the conjugal
partnership." Article 172 of the Civil Code provides that "[t]he wife cannot bind the conjugal
partnership without the husband’s consent, except incases provided by law."92 In any case, the
Family Code also provides as follows:

Art. 96. The administration and enjoyment of the community property shall belong to both spouses
jointly. In case of disagreement, the husband’s decision shall prevail, subject to recourse to the court
by the wife for proper remedy, which must be availed of within five years from the date of the
contract implementing such decision.

In the event that one spouse is incapacitated or otherwise unable to participate in the administration
of the common properties, the other spouse may assume sole powers of administration. These
powers do not include disposition or encumbrance without authority of the court or the written
consent of the other spouse. In the absence of such authority or consent, the disposition or
encumbrance shall be void. However, the transaction shall be construed as a continuing offer on the
part of the consenting spouse and the third person, and may be perfected as a binding contract upon
the acceptance by the other spouse or authorization by the court before the offer iswithdrawn by
either or both offerors. (Emphasis supplied)

Thus, as correctly found by the Court of Appeals, "assuming arguendo that the signature of plaintiff-
appellee Paz on the Kasulatan ng Bilihan ng Lupawas not forged, her signature alone would still not
bind the subject property, it being already established that the said transaction was made without the
consent of her husband plaintiff-appellee Alfredo."93

Lastly, petitioner argues that she has no obligation to prove the genuineness and due execution of
the "Kasulatan ng Bilihan ng Lupa" considering it is a public document.94
The trial court found otherwise. Atty. Diosdado de Mesa, who allegedly notarized the "Kasulatanng
Bilihan ng Lupa," was not a commissioned notary public. The trial court discussed as follows:

Furthermore, it was discovered that the notary public who purportedly notarized the "Kasulatanng
Bilihan ng Lupa" has not been registered notary public in the province of Cavite in 1979 nor at
present. The record bears out various Certifications to prove there is no available record on file with
the Office of the Clerk of Court, Regional Trial Court, Cavite City of a Commission/Order appointing
Atty. Diosdado de Mesa, the lawyer who notarized the subject document, as Notary Public for the
Province and City of Cavite (Exh. "Y" to "Y-2"); Certification from the Records Management and
Archives Office, Manila that no copy is on file with the said office of the Deed of Sale allegedly
executed by plaintiffs before Notary Public Diosdado de Mesa, for and within Imus, Cavite,
acknowledged as Doc. No. 432, Page No. 45, Book No. VIII, Series of 1979 (Exh. "Z" to "Z-1");
Certification issued by Clerk of Court, Atty. Ana Liza M. Luna, Regional Trial Court, Tagaytay City
that there is no available record on file of a Commission/Order appointing Atty. Diosdado de Mesa
as Notary Public for the Province and Cities of Tagaytay, Cavite and Trece Martires in 1979 (Exh.
"AA" to"AA-2"); Certification issued by Clerk of Court, Atty. Jose O, Lagao, Jr., Regional Trial Court,
Multiple Sala, Bacoor, Cavite that there isno available record on file of a Commission/Order
appointing Atty. Diosdado de Mesa as Notary Public for the Province and City of Cavite (Exh. "BB" to
"BB-2"); and Certification issued by Clerk of Court, Atty. Regalado E. Eusebio, Regional Trial Court,
Multiple Sala, Imus, Cavite that there is no available record on file of a Commission/Order appointing
Atty. Diosdado de Mesa as Notary Public for the Province of Cavite (Exh. "CC" to "CC-
2").95 (Emphasis supplied).

Petitioner contends that the Sun spouses were buyers in good faith for value, thus, the court erred in
ordering reinstatement of the property in favor of respondents Revilla spouses.96

This court has held that "the rule in land registration law that the issue of whether the buyer of realty
is in good or bad faith is relevant only where the subject of the sale is registeredland and the
purchase was made from the registered owner whose title to the land is clean[.]"97 Our laws have
adopted the Torrens system to strengthen public confidence in land transactions: [T]he Torrens
system was adopted in this country because it was believed to be the most effective measure to
guarantee the integrity of land titles and to insure their indefeasibility once the claim of ownership is
established and recognized. If a person purchases a piece of land on the assurance that the seller’s
title thereto is valid, he should not run the risk of losing his acquisition. If this were permitted, public
confidence in the system would be eroded and land transactions would have to be attended by
complicated and not necessarily conclusive investigations and proof of ownership.98

Necessarily, those who rely in good faith on a clean title issued under the Torrens system for
registered lands must be protected. On the other hand, those who purchase unregistered lands do
1âwphi1

so at their own peril.99

This good faith argument cannot be considered as this case involves unregistered land. In any case,
as explained by respondents Revilla spouses in their memorandum, this is a defense personal to the
Sun spouses and cannot be borrowed by petitioner.100The Sun spouses no longer raised this
argument on appeal, but only made a partial appeal regarding legal interest on the award.101

WHEREFORE, this petition is DENIED for lack of merit. The decision of the Court of Appeals dated
August 13, 2009 is AFFIRMED.

SO ORDERED.
G.R. No. 169211 March 6, 2013

STAR TWO (SPV-AMC), INC.,1 Petitioner,

vs.
PAPER CITY CORPORATION OF THE PHILIPPINES,Respondent.

DECISION

PEREZ, J.:

For review before this Court is a Petition for Review on Certiorari filed by Rizal Commercial Banking
Corporation now substituted by Star Two (SPV-AMC), Inc. by virtue of Republic Act No.
91822otherwise known as the "Special Purpose Vehicle Act of 2002," assailing the 8 March 2005
Decision and 8 August 2005 Resolution of the Special Fourth Division of the Court of Appeals (CA)
in CA-G.R. SP No. 82022 upholding the 15 August 2003 and 1 December 2003 Orders of the
Valenzuela Regional Trial Court (RTC) ruling that the subject machineries and equipments of Paper
City Corporation (Paper City) are movable properties by agreement of the parties and cannot be
considered as included in the extrajudicial foreclosure sale of the mortgaged land and building of
Paper City.3

The facts as we gathered from the records are:

Rizal Commercial Banking Corporation (RCBC), Metropolitan Bank and Trust Co. (Metrobank) and
Union Bank of the Philippines (Union Bank) are banking corporations duly organized and existing
under the laws of the Philippines.

On the other hand, respondent Paper City is a domestic corporation engaged in the manufacture of
paper products particularly cartons, newsprint and clay-coated paper.4

From 1990-1991, Paper City applied for and was granted the following loans and credit
accommodations in peso and dollar denominations by RCBC: ₱10,000,000.00 on 8 January
1990,5₱14,000,000.00 on 19 July 1990,6 ₱10,000,000.00 on 28 June 1991,7 and ₱16,615,000.00 on
28 November 1991.8 The loans were secured by four (4) Deeds of Continuing Chattel Mortgages on
its machineries and equipments found inside its paper plants.

On 25 August 1992, a unilateral Cancellation of Deed of Continuing Chattel Mortgage on Inventory

of Merchandise/Stocks-in-Trade was executed by RCBC through its Branch Operation Head Joey P.
Singh and Asst. Vice President Anita O. Abad over the merchandise and stocks-in-trade covered by
the continuing chattel mortgages.9

On 26 August 1992, RCBC, Metrobank and Union Bank (creditor banks with RCBC instituted as the
trustee bank) entered into a Mortgage Trust Indenture (MTI) with Paper City. In the said MTI, Paper
City acquired an additional loan of One Hundred Seventy Million Pesos (₱170,000,000.00) from the
creditor banks in addition to the previous loan from RCBC amounting to ₱110,000,000.00 thereby
increasing the entire loan to a total of ₱280,000,000.00. The old loan of ₱110,000,000.00 was partly
secured by various parcels of land covered by TCT Nos. T-157743, V-13515, V-1184, V-1485, V-
13518 and V-13516 situated in Valenzuela City pursuant to five (5) Deeds of Real Estate Mortgage
dated 8 January 1990, 27 February 1990, 19 July 1990, 20 February 1992 and 12 March
1992.10 The new loan obligation of ₱170,000,000.00 would be secured by the same five (5) Deeds of
Real Estate Mortgage and additional real and personal properties described in an annex to MTI,
Annex "B."11 Annex "B" of the said MTI covered the machineries and equipments of Paper City.12

The MTI was later amended on 20 November 1992 to increase the contributions of the RCBC and
Union Bank to ₱80,000,000.00 and ₱70,000,000.00, respectively. As a consequence, they executed
a Deed of Amendment to MTI13 but still included as part of the mortgaged properties by way of a first
mortgage the various machineries and equipments located in and bolted to and/or forming part of
buildings generally described as:

Annex "A"

A. Office Building
Building 1, 2, 3, 4, and 5
Boiler House
Workers’ Quarter/Restroom
Canteen
Guardhouse, Parking Shed, Elevated Guard
Post and other amenities
B. Pollution Tank Nos. 1 and 2.
Reserve Water Tank and Swimming Pool
Waste Water Treatment Tank
Elevated Concrete Water Tank
And other Improvements listed in Annex "A"
C. Power Plants Nos. 1 and 2
Fabrication Building
Various Fuel, Water Tanks and Pumps
Transformers

Annex "B"

D. D. Material Handling Equipment

Paper Plant No. 3

A Second Supplemental Indenture to the 26 August 1992 MTI was executed on 7 June 1994 to
increase the amount of the loan from ₱280,000,000.00 to ₱408,900,000.00 secured against the
existing properties composed of land, building, machineries and equipments and inventories
described in Annexes "A" and "B."14

Finally, a Third Supplemental Indenture to the 26 August 1992 MTI was executed on 24 January
1995 to increase the existing loan obligation of ₱408,900,000.00 to ₱555,000,000.00 with an
additional security composed of a newly constructed two-storey building and other improvements,
machineries and equipments located in the existing plant site.15

Paper City was able to comply with its loan obligations until July 1997. But economic crisis ensued
which made it difficult for Paper City to meet the terms of its obligations leading to payment
defaults.16 Consequently, RCBC filed a Petition for Extrajudicial Foreclosure Under Act No. 3135
Against the Real Estate Mortgage executed by Paper City on 21 October 1998.17 This petition was
for the extra-judicial foreclosure of eight (8) parcels of land including all improvements thereon
enumerated as TCT Nos. V-9763, V-13515, V-13516, V-13518, V-1484, V-1485, V-6662 and V-6663
included in the MTI dated 26 August 1992, Supplemental
MTI dated 20 November 1992, Second Supplemental Indenture on the MTI dated 7 June 1994 and
Third Supplemental Indenture on the MTI dated 24 January 1995.18 Paper City then had an
outstanding obligation with the creditor banks adding up to Nine Hundred One Million Eight Hundred
One Thousand Four Hundred Eighty-Four and 10/100 Pesos (₱901,801,484.10), inclusive of interest
and penalty charges.19

A Certificate of Sale was executed on 8 February 1999 certifying that the eight (8) parcels of land
with improvements thereon were sold on 27 November 1998 in the amount of Seven Hundred Two
Million Three Hundred Fifty-One Thousand Seven Hundred Ninety-Six Pesos and 28/100
(₱702,351,796.28) in favor of the creditor banks RCBC, Union Bank and Metrobank as the highest
bidders.20

This foreclosure sale prompted Paper City to file a Complaint21 docketed as Civil Case No. 164-V-99
on 15 June 1999 against the creditor banks alleging that the extra-judicial sale of the properties and
plants was null and void due to lack of prior notice and attendance of gross and evident bad faith on
the part of the creditor banks. In the alternative, it prayed that in case the sale is declared valid, to
render the whole obligation of Paper City as fully paid and extinguished. Also prayed for was the
return of ₱5,000,000.00 as excessive penalty and the payment of damages and attorney’s fees.

In the meantime, Paper City and Union Bank entered into a Compromise Agreement which was later
approved by the trial court on 19 November 2001. It was agreed that the share of Union Bank in the
proceeds of the foreclosure shall be up to 34.23% of the price and the remaining possible liabilities
of Paper City shall be condoned by the bank. Paper City likewise waived all its claim and counter
charges against Union Bank and agreed to turn-over its proportionate share over the property within
120 days from the date of agreement.22

On the other hand, the negotiations between the other creditor banks and Paper City remained
pending. During the interim, Paper City filed with the trial court a Manifestation with Motion to
Remove and/or Dispose Machinery on 18 December 2002 reasoning that the machineries located
inside the foreclosed land and building were deteriorating. It posited that since the machineries were
not included in the foreclosure of the real estate mortgage, it is appropriate that it be removed from
the building and sold to a third party.23

Acting on the said motion, the trial court, on 28 February 2003 issued an Order denying the prayer
and ruled that the machineries and equipments were included in the annexes and form part of the
MTI dated 26 August 1992 as well as its subsequent amendments. Further, the machineries and
equipments are covered by the Certificate of Sale issued as a consequence of foreclosure, the
certificate stating that the properties described therein with improvements thereon were sold to
creditor banks to the defendants at public auction.24

Paper City filed its Motion for Reconsideration25 on 4 April 2003 which was favorably granted by the
trial court in its Order dated 15 August 2003. The court justified the reversal of its order on the
finding that the disputed machineries and equipments are chattels by agreement of the parties
through their inclusion in the four (4) Deeds of Chattel Mortgage dated 28 January 1990, 19 July
1990, 28 June 1991 and 28 November 1991. It further ruled that the deed of cancellation executed
by RCBC on 25 August 1992 was not valid because it was done unilaterally and without the consent
of Paper City and the cancellation only refers to the merchandise/stocks-in-trade and not to
machineries and equipments.26

RCBC in turn filed its Motion for Reconsideration to persuade the court to reverse its 15 August 2003
Order. However, the same was denied by the trial court through its 1 December 2003 Order
reiterating the finding and conclusion of the previous Order.27
Aggrieved, RCBC filed with the CA a Petition for Certiorari under Rule 65 to annul the Orders dated
15 August 2003 and 1 December 2003 of the trial court,28 for the reasons that:

I. Paper City gave its conformity to consider the subject machineries and equipment as real
properties when the president and Executive Vice President of Paper City signed the
Mortgage Trust Indenture as well as its subsequent amendments and all pages of the
annexes thereto which itemized all properties that were mortgaged.29

II. Under Section 8 of Act No. 1508, otherwise known as "The Chattel Mortgage Law" the
consent of the mortgagor (Paper City) is not required in order to cancel a chattel mortgage.
Thus the "Cancellation of Deed of Continuing Chattel Mortgage on Inventory of
Merchandise/Stocks-in-Trade" dated August 25, 1992 is valid and binding on the Paper City
even assuming that it was executed unilaterally by petitioner RCBC.30

III. The four (4) Deeds of Chattel Mortgage that were attached as Annexes "A" to "D" to the
December 18, 2003 "Manifestation with Motion to Remove and/or Dispose of Machinery"
were executed from January 8, 1990 until November 28, 1991. On the other hand, the
"Cancellation of Deed of Continuing Chattel Mortgage" was executed on August 25, 1992
while the MTI and the subsequent supplemental amendments thereto were executed from
August 26, 1992 until January 24, 1995. It is of the contention of RCBC that Paper City’s
unreasonable delay of ten

(10) years in assailing that the disputed machineries and equipments were personal
amounted to estoppel and ratification of the characterization that the same were real
properties.31

IV. The removal of the subject machineries or equipment is not among the reliefs prayed for
by the Paper City in its June 11, 1999 Complaint. The Paper City sought the removal of the
subject machineries and equipment only when it filed its December 18, 2002 Manifestation
with Motion to Remove and/or Dispose of Machinery.32

V. Paper City did not specify in its various motions filed with the respondent judge the subject
machineries and equipment that are allegedly excluded from the extrajudicial foreclosure
sale.33

VI. The machineries and equipments mentioned in the four (4) Deeds of Chattel Mortgage
that were attached on the Manifestation with Motion to Remove and/or Dispose of Machinery
are the same machineries and equipments included in the MTI and supplemental
amendments, hence, are treated by agreement of the parties as real properties.34

In its Comment,35 Paper City refuted the claim of RCBC that it gave its consent to consider the
machineries and equipments as real properties. It alleged that the disputed properties remained
within the purview of the existing chattel mortgages which in fact were acknowledged by RCBC in
the MTI particularly in Section 11.07 which reads:

Section 11.07. This INDENTURE in respect of the MORTGAGE OBLIGATIONS in the additional
amount not exceeding TWO HUNDRED TWENTY MILLION SIX HUNDRED FIFTEEN THOUSAND
PESOS (₱220,615,000.00) shall be registered with the Register of Deeds of Valenzuela, Metro
Manila, apportioned based on the corresponding loanable value of the MORTGAGED
PROPERTIES, viz:

a. Real Estate Mortgage – ₱206,815,000.00

b. Chattel Mortgage – ₱13,800,000.0036

Paper City argued further that the subject machineries and equipments were not included in the
foreclosure of the mortgage on real properties particularly the eight (8) parcels of land. Further, the
Certificate of Sale of the Foreclosed Property referred only to "lands and improvements" without any
specification and made no mention of the inclusion of the subject properties.37

In its Reply,38 RCBC admitted that there was indeed a provision in the MTI mentioning a chattel
mortgage in the amount of ₱13,800,000.00. However, it justified that its inclusion in the MTI was
merely for the purpose of ascertaining the amount of the loan to be extended to Paper City.39 It
reiterated its position that the machineries and equipments were no longer treated as chattels but
already as real properties following the MTI.40

On 8 March 2005, the CA affirmed41 the challenged orders of the trial court. The dispositive portion
reads:

WHEREFORE, finding no grave abuse of discretion committed by public respondent, the instant
petition is hereby DISMISSED for lack of merit. The assailed Orders dated 15 August and 2
December 2003, issued by Hon. Judge Floro P. Alejo are hereby AFFIRMED. No costs at this
instance.42

The CA relied on the "plain language of the MTIs:

Undoubtedly, nowhere from any of the MTIs executed by the parties can we find the alleged
"express" agreement adverted to by petitioner. There is no provision in any of the parties’ MTI, which
expressly states to the effect that the parties shall treat the equipments and machineries as real
property. On the contrary, the plain and unambiguous language of the aforecited MTIs, which
described the same as personal properties, contradicts petitioner’s claims.43

It was also ruled that the subject machineries and equipments were not included in the extrajudicial
foreclosure sale. The claim of inclusion was contradicted by the very caption of the petition itself,
"Petition for Extra-Judicial Foreclosure of Real Estate Mortgage Under Act No. 3135 As Amended." It
opined further that this inclusion was further stressed in the Certificate of Sale which enumerated
only the mortgaged real properties bought by RCBC without the subject properties.44

RCBC sought reconsideration but its motion was denied in the CA’s Resolution dated 8 August
2005.

RCBC before this Court reiterated all the issues presented before the appellate court:

1. Whether the unreasonable delay of ten (10) years in assailing that the disputed
machineries and equipments were personal properties amounted to estoppel on the part of
Paper City;

2. Whether the Cancellation of Deed of Continuing Mortgage dated 25 August 1992 is valid
despite the fact that it was executed without the consent of the mortgagor Paper City;

3. Whether the subsequent contracts of the parties such as Mortgage Trust Indenture dated
26 August 1992 as well as the subsequent supplementary amendments dated 20 November
1992, 7 June 1992, and 24 January 1995 included in its coverage of mortgaged properties
the subject machineries and equipment; and
 4. Whether the subject machineries and equipments were included in the extrajudicial
foreclosure dated 21 October 1998 which in turn were sold to the creditor banks as
evidenced by the Certificate of Sale dated 8 February 1999.

We grant the petition.

By contracts, all uncontested in this case, machineries and equipments are included in the mortgage
in favor of RCBC, in the foreclosure of the mortgage and in the consequent sale on foreclosure also
in favor of petitioner.

The mortgage contracts are the original MTI of 26 August 1992 and its amendments and
supplements on 20 November 1992, 7 June 1994, and 24 January 1995. The clear agreements
between RCBC and Paper City follow:

The original MTI dated 26 August 1992 states that:

MORTGAGE TRUST INDENTURE

This MORTGAGE TRUST INDENTURE, executed on this day of August 26, 1992,
by and between:

PAPER CITY CORPORATION OF THE PHILIPPINES, x x x hereinafter referred to

as the "MORTGAGOR");

-and-

RIZAL COMMERCIAL BANKING CORPORATION, x x x (hereinafter referred to as

the "TRUSTEE").

xxxx

WHEREAS, against the same mortgaged properties and additional real and personal
properties more particularly described in ANNEX "B" hereof, the MORTGAGOR
desires to increase their borrowings to TWO HUNDRED EIGHTY MILLION PESOS
(₱280,000,000.00) or an increase of ONE HUNDRED SEVENTY MILLION PESOS
(₱170,000,000.00) xxx from various banks/financial institutions;

xxxx

GRANTING CLAUSE

NOW, THEREFORE, this INDENTURE witnesseth:

THAT the MORTGAGOR in consideration of the premises and of the acceptance by

the TRUSTEE of the trust hereby created, and in order to secure the payment of the
MORTGAGE OBLIGATIONS which shall be incurred by the MORTGAGOR pursuant
to the terms hereof xxx hereby states that with the execution of this INDENTURE it
will assign, transfer and convey as it has hereby ASSIGNED, TRANSFERRED and
CONVEYED by way of a registered first mortgage unto RCBC x x x the various
parcels of land covered by several Transfer Certificates of Title issued by the
Registry of Deeds, including the buildings and existing improvements thereon, as
 well as of the machinery and equipment more particularly described and listed that is
to say, the real and personal properties listed in Annexes "A" and "B" hereof of which
the MORTGAGOR is the lawful and registered owner.45 (Emphasis and underlining
ours)

The Deed of Amendment to MTI dated 20 November 1992 expressly provides:

NOW, THEREFORE, premises considered, the parties considered have amended

and by these presents do further amend the Mortgage Trust Indenture dated August
26, 1992 including the Real Estate Mortgage as follows:

xxxx

2. The Mortgage Trust Indenture and the Real Estate Mortgage are hereby amended
to include as part of the Mortgage Properties, by way of a first mortgage and for pari-
passu and pro-rata benefit of the existing and new creditors, various machineries and
equipment owned by the Paper City, located in and bolted to and forming part of the
following, generally describes as x x x more particularly described and listed in
Annexes "A" and "B" which are attached and made integral parts of this Amendment.
The machineries and equipment listed in Annexes "A" and "B" form part of the
improvements listed above and located on the parcels of land subject of the
Mortgage Trust Indenture and the Real Estate Mortgage.46(Emphasis and underlining
ours)

A Second Supplemental Indenture to the 26 August 1992 MTI executed on 7 June 1994 to increase
the amount of loan from ₱280,000,000.00 to ₱408,900,000.00 also contains a similar provision in
this regard:

WHEREAS, the Paper City desires to increase its borrowings to be secured by the
INDENTURE from PESOS: TWO HUNDRED EIGHTY MILLION (₱280,000,000.00)
to PESOS: FOUR HUNDRED EIGHT MILLION NINE HUNDRED THOUSAND
(₱408,900,000.00) or an increase of PESOS: ONE HUNDRED TWENTY EIGHT
MILLION NINE HUNDRED THOUSAND (₱128,900,000.00) x x x which represents
additional loan/s granted to the Paper City to be secured against the existing
properties composed of land, building, machineries and equipment and inventories
more particularly described in Annexes "A" and "B" of the INDENTURE x x x.47

(Emphasis and underlining ours)

Finally, a Third Supplemental Indenture to the 26 August 1992 MTI executed on 24 January 1995
contains a similar provision:

WHEREAS, in order to secure NEW/ADDITIONAL LOAN OBLIGATION under the

Indenture, there shall be added to the collateral pool subject of the Indenture
properties of the Paper City composed of newly constructed two (2)-storey building,
other land improvements and machinery and equipment all of which are located at
the existing Plant Site in Valenzuela, Metro Manila and more particularly described in
Annex "A" hereof x x x.48 (Emphasis and underlining ours)

Repeatedly, the parties stipulated that the properties mortgaged by Paper City to RCBC are various
parcels of land including the buildings and existing improvements thereon as well as the machineries
and equipments, which as stated in the granting clause of the original mortgage, are "more
particularly described and listed that is to say, the real and personal properties listed in Annexes ‘A’
and ‘B’ x x x of which the Paper City is the lawful and registered owner." Significantly, Annexes "A"
and "B" are itemized listings of the buildings, machineries and equipments typed single spaced in
twenty-seven pages of the document made part of the records.

As held in Gateway Electronics Corp. v. Land Bank of the Philippines,49 the rule in this jurisdiction is
that the contracting parties may establish any agreement, term, and condition they may deem
advisable, provided they are not contrary to law, morals or public policy. The right to enter into lawful
contracts constitutes one of the liberties guaranteed by the Constitution.

It has been explained by the Supreme Court in Norton Resources and Development Corporation v.
All Asia Bank Corporation50 in reiteration of the ruling in Benguet Corporation v. Cabildo51 that:

x x x A court's purpose in examining a contract is to interpret the intent of the contracting parties, as
objectively manifested by them. The process of interpreting a contract requires the court to make a
preliminary inquiry as to whether the contract before it is ambiguous. A contract provision is
ambiguous if it is susceptible of two reasonable alternative interpretations. Where the written terms
of the contract are not ambiguous and can only be read one way, the court will interpret the contract
as a matter of law. x x x

Then till now the pronouncement has been that if the language used is as clear as day and readily
understandable by any ordinary reader, there is no need for construction.52

The case at bar is covered by the rule.

The plain language and literal interpretation of the MTIs must be applied. The petitioner, other
creditor banks and Paper City intended from the very first execution of the indentures that the
machineries and equipments enumerated in Annexes "A" and "B" are included. Obviously, with the
continued increase in the amount of the loan, totaling hundreds of millions of pesos, Paper City had
to offer all valuable properties acceptable to the creditor banks.

The plain and obvious inclusion in the mortgage of the machineries and equipments of Paper City
escaped the attention of the CA which, instead, turned to another "plain language of the MTI" that
"described the same as personal properties." It was error for the CA to deduce from the "description"
exclusion from the mortgage.

1. The MTIs did not describe the equipments and machineries as personal property. Had the CA
looked into Annexes "A" and "B" which were referred to by the phrase "real and personal properties,"
it could have easily noted that the captions describing the listed properties were "Buildings,"
"Machineries and Equipments," "Yard and Outside," and "Additional Machinery and Equipment." No
mention in any manner was made in the annexes about "personal property." Notably, while
"personal" appeared in the granting clause of the original MTI, the subsequent Deed of Amendment
specifically stated that:

x x x The machineries and equipment listed in Annexes "A" and "B" form part of the improvements
listed above and located on the parcels of land subject of the Mortgage Trust Indenture and the Real
Estate Mortgage.

The word "personal" was deleted in the corresponding granting clauses in the Deed of Amendment
and in the First, Second and Third Supplemental Indentures.
2. Law and jurisprudence provide and guide that even if not expressly so stated, the mortgage
extends to the improvements.

Article 2127 of the Civil Code provides:

Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and
the rents or income not yet received when the obligation becomes due, and to the amount of the
indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue
of expropriation for public use, with the declarations, amplifications and limitations established by
law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of a
third person. (Underlining ours)

In the early case of Bischoff v. Pomar and Cia. General de Tabacos,53 the Court ruled that even if the
machinery in question was not included in the mortgage expressly, Article 111 of the old Mortgage
Law provides that chattels permanently located in a building, either useful or ornamental, or for the
service of some industry even though they were placed there after the creation of the mortgage shall
be considered as mortgaged with the estate, provided they belong to the owner of said estate. The
provision of the old Civil Code was cited. Thus:

Article 1877 provides that a mortgage includes the natural accessions, improvements, growing fruits,
and rents not collected when the obligation is due, and the amount of the indemnities granted or due
the owner by the underwriters of the property mortgaged or by virtue of the exercise of eminent
domain by reason of public utility, with the declarations, amplifications, and limitations established by
law, in case the estate continues in the possession of the person who mortgaged it, as well as when
it passes into the hands of a third person.54

The case of Cu Unjieng e Hijos v. Mabalacat Sugar Co.55 relied on this provision. The issue was
whether the machineries and accessories were included in the mortgage and the subsequent sale
during public auction. This was answered in the affirmative by the Court when it ruled that the
machineries were integral parts of said sugar central hence included following the principle of law
that the accessory follows the principal.

Further, in the case of Manahan v. Hon. Cruz,56 this Court denied the prayer of Manahan to nullify
the order of the trial court including the building in question in the writ of possession following the
public auction of the parcels of land mortgaged to the bank. It upheld the inclusion by relying on the
principles laid upon in Bischoff v. Pomar and Cia. General de Tabacos57 and Cu Unjieng e Hijos v.
Mabalacat Sugar Co.58

In Spouses Paderes v. Court of Appeals,59 we reiterated once more the Cu Unjieng e Hijos ruling
and approved the inclusion of machineries and accessories installed at the time the mortgage, as
well as all the buildings, machinery and accessories belonging to the mortgagor, installed after the
constitution thereof.

3. Contrary to the finding of the CA, the Extra-Judicial Foreclosure of Mortgage includes the
machineries and equipments of respondent. While captioned as a "Petition for Extra-Judicial
Foreclosure of Real Estate Mortgage Under Act No. 3135 As Amended," the averments state that
the petition is based on "x x x the Mortgage Trust Indenture, the Deed of Amendment to the
Mortgage Trust Indenture, the Second Supplemental Indenture to the Mortgage Trust Indenture, and
the Third Supplemental Indenture to the Mortgage Trust Indenture (hereinafter collectively referred
to as the Indenture) duly notarized and entered as x x x."60Noting that herein respondent has an
outstanding obligation in the total amount of Nine Hundred One Million Eight Hundred One
Thousand Four Hundred Eighty Four and 10/100 Pesos (₱901,801,484.10), the petition for
foreclosure prayed that a foreclosure proceedings "x x x on the aforesaid real properties, including
all improvements thereon covered by the real estate mortgage be undertaken and the appropriate
auction sale be conducted x x x."61

Considering that the Indenture which is the instrument of the mortgage that was foreclosed exactly
states through the Deed of Amendment that the machineries and equipments listed in Annexes "A"
and "B" form part of the improvements listed and located on the parcels of land subject of the
mortgage, such machineries and equipments are surely part of the foreclosure of the "real estate
properties, including all improvements thereon" as prayed for in the petition.

Indeed, the lower courts ought to have noticed the fact that the chattel mortgages adverted to were
dated 8 January 1990, 19 July 1990, 28 June 1991 and 28 November 1991. The real estate
mortgages which specifically included the machineries and equipments were subsequent to the
chattel mortgages dated 26 August 1992, 20 November 1992, 7 June 1994 and 24 January 1995.
Without doubt, the real estate mortgages superseded the earlier chattel mortgages. 1âwphi1

The real estate mortgage over the machineries and equipments is even in full accord with the
classification of such properties by the Civil Code of the Philippines as immovable property. Thus:

Article 415. The following are immovable property:

(1) Land, buildings, roads and constructions of all kinds adhered to the soil;

xxxx

(5) Machinery, receptacles, instruments or implements 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 which tend directly
to meet the needs of the said industry or works;

WHEREFORE, the petition is GRANTED. Accordingly, the Decision and Resolution of the Court of
Appeals dated 8 March 2005 and 8 August 2005 upholding the 15 August 2003 and 1 December
2003 Orders of the Valenzuela Regional Trial Court are hereby REVERSED and SET ASIDE and
the original Order of the trial court dated 28 February 2003 denying the motion of respondent to
remove or dispose of machinery is hereby REINSTATED.

SO ORDERED.

RIZAL COMMERCIAL BANKING G.R. No. 179756

CORPORATION,
Petitioner,
Present:
 YNARES-SANTIAGO, *
CARPIO MORALES,**
- versus - Acting Chairperson,
PERALTA,***
DEL CASTILLO, and
ROYAL CARGO CORPORATION, ABAD, JJ.
Respondent.
Promulgated:
October 2, 2009
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CARPIO MORALES, J.:

Terrymanila, Inc.[1] (Terrymanila) filed a petition for voluntary insolvency
with the Regional Trial Court (RTC) of Bataan on February 13, 1991.[2] One of its
creditors was Rizal Commercial Banking Corporation (petitioner) 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 in the notarial
register of Amado Castano, a notary public for and in the Province of Bataan.[3]
Royal Cargo Corporation (respondent), another creditor of Terrymanila, filed
an action before the RTC of Manila for collection of sum of money and preliminarily
attached some of Terrymanilas personal properties on March 5, 1991 to secure the
satisfaction of a judgment award of P296,662.16, exclusive of interests and
attorneys fees.[4]
 On April 12, 1991, the Bataan RTC declared Terrymanila insolvent.

On June 11, 1991,[5] the Manila RTC, by Decision of even date, rendered
judgment in the collection case in favor of respondent.

In the meantime, petitioner 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.[6] It appears that respondent, together with
its employees union, moved to have this Order reconsidered but the motion was
denied by Order of March 20, 1992 Order.[7]

The provincial sheriff of Bataan thereupon scheduled on June 16, 1992 the
public auction sale of the mortgaged personal properties at the Municipal Building
of Mariveles, Bataan. At the auction sale, petitioner, the sole bidder of the
properties, purchased them for P1.5 Million. Eventually, petitioner sold the
properties to Domingo Bondoc and Victoriano See.[8]

Respondent later filed on July 30, 1992 a petition before the RTC of Manila,
docketed as Civil Case No. 92-62106, against the Provincial Sheriff of the RTC
Bataan and petitioner, for annulment of the auction sale(annulment of sale
case). Apart from questioning the inclusion in the auction sale[9] 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, citing Section 14 of Act No. 1508 or
the Chattel Mortgage Law which reads:

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. (Emphasis and underscoring supplied),

it claiming that its counsel received a notice only on the day of the sale.[10]

Petitioner, alleging that the annulment of sale case filed by

respondent stated no cause of action, filed on December 3, 1992 a Motion to
Dismiss[11] which was, however, denied by Branch 16 of the Manila RTC.[12]

Petitioner appealed the denial of the Motion to Dismiss via certiorari to the
Court of Appeals, docketed as CA-G.R. SP No. 31125. The appellate court dismissed
the petition, by Decision of February 21, 1994, it holding that respondents petition
for annulment prima facie states a sufficient cause of action and that the [trial
court] in denying [herein petitioner RCBCs] motion to dismiss, had acted
advisedly and well within its powers and authority.[13]

Petitioner thereupon filed before the Manila RTC its Answer Ex Abundante
Cautelam[14] in the annulment of sale case in which it lodged a Compulsory
Counterclaim by seeking P1 Million for moral damages, P500,000 for exemplary
damages, and P250,000 for attorneys fees. It thereafter elevated the case to this
Court via petition for review on certiorari, docketed as G.R. 115662. This Court by
minute Resolution of November 7, 1994,[15] denied the petition for failure to show
that a reversible error was committed by the appellate court.[16]
 Trial on the merits of the annulment of sale case thereupon ensued. By
Decision[17]of October 15, 1997, Branch 16 of the Manila RTC rendered judgment in
favor of respondent, disposing as follows:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby

rendered:

1. ORDERING . . . RCBC to pay plaintiff [heein respondent Royal

Cargo] the amount of P296,662.16 and P8,000.00 as
reasonable attorneys fees.

2. No pronouncement as to costs.

3. DISMISSING the petition as to respondents Provincial Sheriff of

Balanga, Bataan RTC;

SO ORDERED.

Both parties appealed to the Court of Appeals which, by Decision[18] of April

17, 2007, denied herein petitioners appeal and partly granted herein respondents
by increasing to P50,000 the attorneys fees awarded to it and additionally awarding
it exemplary damages and imposing interest on the principal amount payable to
it. Thus it disposed:

WHEREFORE, the foregoing considered, the appeal instituted by

appellant RCBC is hereby DENIED for lack of merit while the appeal of
appellant Royal Cargo is PARTLY GRANTED in that the amount
of attorneys fees awarded by the RTC is increased to P50,000.00.
 In addition, RCBC is ordered to pay Royal Cargo the amount of
P100,000.00 as exemplary damages. The principal amount of
P296,662.18 [sic] to be paid by RCBC to Royal Cargo shall likewise
earn 12% interest per annum from the time the petition was filed in the
court a quo until fully paid. The rest of the decision is AFFIRMED.

SO ORDERED. (Emphasis and underscoring supplied)

In partly granting respondents appeal from the Decision of Br. 16 of RTC

Manila, the appellate court ratiocinated that respondent had a right to be timely
informed of the foreclosure sale.

RCBCs citations [sic] of numerous rulings on the matter more than

supports the fact that as mortgagee, it had preferential right over the
chattels subject of the foreclosure sale. This however is not at issue in
this case. What is being contested is the right of Royal Cargo to be timely
informed of the foreclosure sale as it too had interests over the
mortgagee Terrymanila, Inc.s assets. We note that this matter
had already been passed upon by this Court on February 21, 1994 in CA-
G.R. SP No. 31125 as well as by the Supreme Court on November 7, 1994
in G.R. No. [1]15662.RCBC, by arguing about its preferential right as
mortgagee in the instant appeal merely reiterates what had already
been considered and ruled upon in earlier proceedings.

xxxx

Moreover, Section 14 of the Chattel Mortgage Law pertaining

to the procedure in the foreclosure of chattel mortgages provides, to
wit:
 xxxx

The above-quoted provision clearly requires that the mortgagee

should notify in writing the mortgagor or person holding under him of
the time and place of the sale by personal delivery of the notice. Thus,
RCBCs failure to comply with this requirement warranted a ruling against
it by the RTC. (Italics in the original; emphasis partly in the original;
underscoring supplied)

Its motion for reconsideration having been denied by the appellate

[19]
court, petitioner lodged the present petition for review which raises the
following issues:

WHETHER OR NOT RESPONDENT SHOULD HAVE BEEN GIVEN A TEN(10)-

DAY PRIOR NOTICE OF THE JUNE 16, 1992FORECLOSURE SALE

II

WHETHER OR NOT THE TRIAL COURT AND THE COURT OF APPEALS

GRAVELY ERRED IN DECLARING PETITIONER GUILTY OF CONSTRUCTIVE
FRAUD IN FAILING TO PROVIDE RESPONDENT A TEN (10)-DAY PRIOR
NOTICE OF THE FORECLOSURE SALE.

III
 WHETHER OR NOT THE PETITIONER WAS CORRECTLY HELD LIABLE TO
PAY RESPONDENT P296,662.[16] PLUS INTEREST THEREON, EXEMPLARY
DAMAGES AND ATTORNEYS FEES.

IV

WHETHER OR NOT PETITIONER IS ENTITLED TO AN AWARD OF

ATTORNEYS FEES.[20] (Underscoring supplied)

Petitioner faults the appellate court in applying res judicata by holding that
respondents entitlement to notice of the auction sale had already been settled in
its Decision in CA G.R. SP No. 31125 and in this Courts Decision in G.R. No.
115662. For, so it contends, the decisions in these cases dealt
on interlocutory issues, viz: the issue of whether respondents petition for
annulment of the sale stated a cause of action, and the issue of whether petitioners
motion to dismiss was properly denied.[21]

Arguing against respondents position that it was entitled to notice of the

auction sale, petitioner cites the Chattel Mortgage Lawwhich enumerates who are
entitled to be notified under Section 14 thereof. It posits that [h]ad the law
intended to include in said Section an attaching creditor or a judgment creditor [like
herein respondent], it could have so specifically stated therein, since in the
preceding section, Section 13, it already mentioned that a subsequent attaching
creditor may redeem.[22]

Petitioner goes on to fault the appellate court in echoing its ruling in CA-G.R.
SP No. 31125 that Sections 13[23] and 14 of the Chattel Mortgage Law should be
read in tandem since the right given to the attaching creditor under Section 13
would not serve its purpose if we were to exclude the subsequent attaching
creditor from those who under Section 14 need to be notified of the foreclosure
sale ten days before it is held.[24]

Petitioner likewise posits that Section 13 permits a subsequent attaching

creditor to redeem the mortgage only before the holding of the auction sale,
drawing attention to Paray v. Rodriguez[25] which instructs that no right of
redemption exists over personal property as the Chattel Mortgage Law is silent
thereon.[26]

Even assuming arguendo, petitioner contends, that there exists an obligation

to furnish respondent a notice of the auction sale 10 days prior thereto,
respondents judgment award of P296,662.16 with interest thereon at the legal rate
from the date of filing of the [c]omplaint and P10,000.00 as reasonable attorneys
fees is very much less than the P1.5 [m]illion bid of petitioner[27]
As for the issue of constructive fraud-basis of the award of damages to
respondent, petitioner maintains that both the trial and appellate courts erred in
concluding that it (petitioner) was the one which sent the notice of sheriffs sale to,
which was received on the day of the sale by, the counsel for respondent for, so it
contends, it had absolutely no participation in the preparation and sending of such
notice.[28]

In its Comment,[29] respondent reiterates that the respective decisions of the

appellate court and this Court in CA G.R. SP No. 31125 and G.R. No.
115662 are conclusive between the parties, hence, the right of [respondent] to a
[ten-day] notice has a binding effect and must be adopted in any other controversy
between the same parties in which the very same question is raised.[30]

And respondent maintains that the obligation to notify the mortgagor or

person holding under him and the persons holding subsequent mortgages falls
upon petitioner as the mortgagee.
 The petition is MERITORIOUS.

The respective decisions of the appellate court in CA G.R. SP No. 31125 and
this Court in G.R. No. 115662 did not conclusively settle the issue on the need to
give a 10-day notice to respondent of the holding of the public auction sale of the
chattels.

The elements of res judicata are: (1) the judgment sought to bar the new
action must be final; (2) the decision must have been rendered by a court having
jurisdiction over the subject matter and the parties; (3) the disposition of the case
must be a judgment on the merits; and (4) there must be as between the first and
second action, identity of parties, subject matter, and causes of action.[31]

Res judicata has two concepts: (1) bar by prior judgment as enunciated in
Rule 39, Section 47 (b) of the Rules of Civil Procedure; and (2) conclusiveness
of judgment in Rule 39, Section 47 (c).[32]

There is bar by prior judgment when, as between the first case where the
judgment was rendered, and the second case that is sought to be barred, there is
identity of parties, subject matter, and causes of action. Where there is identity of
parties and subject matter in the first and second cases, but no identity of causes
of action, there is conclusiveness of judgment.[33] The first judgment is conclusive
only as to those matters actually and directly controvertedand determined, not as
to matters merelyinvolved therein.

The Court of Appeals, in CA G.R. SP No. 31125, resolved only

the interlocutory issue of whether the trial courts Order of April 12, 1993 denying
petitioners motion to dismiss respondents petition for annulment was attended by
grave abuse of discretion. The appellate court did not rule on the merits of the
petition as to establish a controlling legal rule which has to be subsequently
followed by the parties in the same case. It merely held that respondents petition
in the trial court stated a sufficient cause of action. Its determination of
respondents entitlement to notice of the public auction sale was at bestprima
facie. Thus, the appellate court held:

In view of the above, We are of the considered view that the

private respondents petition in the court a quo prima facie states a
sufficient cause of action and that the public respondent in denying the
petitioners motion to dismiss, had acted advisedly and well within its
powers and authority. We, therefore, find no cause to annul the
challenged order issued by the respondent court in Civil Case No. 92-
62106. (Underscoring in the original; emphasis and italics supplied)[34]

An order denying a motion to dismiss is merely interlocutory and cannot give

rise to res judicata, hence, it is subject to amendments until the rendition of the
final judgment.[35]

On respondents contention that petitioner, as mortgagee, had the duty to

notify it of the public auction sale, the Court finds the same immaterial to the case.

Section 13 of the Chattel Mortgage Lawallows the would-be redemptioner

thereunder to redeem the mortgaged property only before its sale. Consider the
following pronouncement in Paray: [36]

[T]here is no law in our statute books which vests the right of

redemption over personal property. Act No. 1508, or the Chattel
Mortgage Law, ostensibly could have served as the vehicle for any
legislative intent to bestow a right of redemption over personal
property, since that law governs the extrajudicial sale of
mortgaged personal property, but the statute is definitely silent on the
point.And Section 39 of the 1997 Rules of Civil Procedure, extensively
 relied upon by the Court of Appeals, starkly utters that the right of
redemption applies to real properties, not personal properties, sold on
execution. (Emphasis, italics and underscoring supplied)

Unmistakably, the redemption cited in Section 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 beforethe sale of the property[37] to clear it from the encumbrance of the
mortgage.[38] 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,[39] and even after confirmation of the sale.[40]

While respondent had attached some of Terrymanilas assets to secure the

satisfaction of a P296,662.16 judgment rendered in another case, what it
effectively attached was Terrymanilas equity of redemption. That respondents
claim is much lower than the P1.5 million actual bid of petitioner at the auction sale
does not defeat respondents equity of redemption. Top Rate International
Services, Inc. v. IAC[41] enlightens:

It is, therefore, error on the part of the petitioner to say that

since private respondents lien is only a total of P343,227.40, they
cannot be entitled to the equity of redemption because the exercise of
such right would require the payment of an amount which cannot be
less than P40,000,000.00.

When herein private respondents prayed for the attachment of

the properties to secure their respective claims against Consolidated
Mines, Inc., the properties had already been mortgaged to the
consortium of twelve banks to secure an obligation of
US$62,062,720.66. Thus, like subsequent mortgagees, the respondents
liens on such properties became inferior to that of banks, which claims
 in the event of foreclosure proceedings, must first be satisfied. The
appellate court, therefore, was correct in holding that in reality, what
was attached by the respondents was merely Consolidated Mines . .
. equity of redemption. x x x x

xxxx

We, therefore, hold that the appellate court did not commit any
error in ruling that there was no over-levy on the disputed
properties. What was actually attached by respondents was
Consolidated Mines right or equity of redemption, an incorporeal and
intangible right, the value of which can neither be quantified nor equated
with the actual value of the properties upon which it may be
exercised.[42] (Emphasis, italics and underscoring supplied)

Having thus attached Terrymanilas 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, which motion was denied. Notably, respondent
failed to allege this incident in his annulment of sale case before the RTC of Manila.

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 courts Order of March 20, 1992 denying its Motion for
Reconsideration of the February 3, 1992 Order.

Despite its window of opportunity to exercise its equity of redemption,

however, respondent chose to be technically shrewd about its chances, preferring
instead to seek annulment of the auction sale, which was the result of the
foreclosure of the mortgage, permission to conduct which it had early on opposed
before the insolvency court. Its negligence or omission to exercise its equity of
redemption within a reasonable time, or even on the day of the auction sale,
warrants a presumption that it had either abandoned it or opted not to assert
it.[43] Equitable considerations thus sway against it.

It is also not lost on the Court that as early as April 12, 1991, Terrymanila had
been judicially declared insolvent. Respondents recourse was thus to demand the
satisfaction of its judgment award before the insolvency court as its judgment
award is a preferred credit under Article 2244[44] of the Civil Code. To now allow
respondent have its way in annulling the auction sale and at the same time let it
proceed with its claims before the insolvency court would neither rhyme with
reason nor with justice.

Parenthetically, respondent has not shown that it was prejudiced by the

auction sale since the insolvency court already determined that even if the
mortgaged properties were foreclosed, there were still sufficient, unencumbered
assets of Terrymanila to cover the obligations owing to other creditors, including
that of respondents.[45]

In any event, even if respondent would have participated in the auction sale
and matched petitioners bid, the superiority of petitioners lien over the mortgaged
assets would preclude respondent from recovering the chattels.
It has long been settled by this Court that 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. x x x. In purchasing it, with full knowledge that such
circumstances existed, it should be presumed that he did so, very much
willing to respect the lien existing thereon, since he should not have
expected that with the purchase, he would acquire a better right than
that which the vendor then had. (Emphasis and underscoring supplied)[46]

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
Terrymanilas chattels in favor of respondent. This is significant in determining who
between petitioner and respondent should be given preference over the subject
properties. 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.[48]

Contrary then to the appellate courts ruling, petitioner is not liable for
constructive fraud for proceeding with the auction sale. Nor for subsequently
selling the chattel. For foreclosure suits may be initiated even during insolvency
proceedings, as long as leave must first be obtained from the insolvency court[49] as
what petitioner did.

The appellate courts award of exemplary damages and attorneys fees for
respondent, given petitioners good faith, is thus not warranted.

As for petitioners prayer for attorneys fees in its Compulsory Counterclaim,

the same is in order, the dismissal of respondents Complaint
nowithstanding.[50] Perkin Elmer Singapore v. Dakila Trading,[51] citing Pinga v. Heirs
of German Santiago,[52] enlightens:
 It bears to emphasize that petitioners counterclaim against respondent is for damages
and attorneys fees arising from the unfounded suit. While respondents Complaint against
petitioner is already dismissed, petitioner may have very well incurred damages and
litigation expenses such as attorneys fees since it was forced to engage legal
representation in the Philippines to protect its rights and to assert lack of jurisdiction of
the courts over its person by virtue of the improper service of summons upon it. Hence,
the cause of action of petitioners counterclaim is not eliminated by the mere dismissal of
respondents complaint.[53] (Underscoring supplied)

To the Court, the amount of P250,000 prayed for by petitioner in its Counterclaim
is just and equitable, given the nature and extent of legal services employed in
controverting respondents unfounded claim.

WHEREFORE, the petition for review is GRANTED. The challenged Decision

and Resolution of the Court of Appeals are REVERSED and SET ASIDE. Civil Case No.
92-62106 lodged before the Regional Trial Court of Manila, Branch 16,
is DISMISSED for lack of merit.

Respondent, Royal Cargo Corporation, is ORDERED to pay petitioner, Rizal

Commercial Banking Corporation, P250,000 as and for attorneys fees.

No costs.

SO ORDERED.

PCI LEASING AND FINANCE, INC., G.R. No. 176381

 Petitioner,

Present:

CARPIO, J., Chairperson,

- versus - NACHURA,

PERALTA,

ABAD, and

MENDOZA, JJ.

TROJAN METAL INDUSTRIES

INCORPORATED, WALFRIDO

DIZON, ELIZABETH DIZON, Promulgated:

and JOHN DOE,

Respondents. December 15, 2010

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

DECISION

CARPIO, J.:

The Case

This is a petition for review1 with application for the immediate issuance of a
temporary restraining order and writ of preliminary injunction assailing the 5 October
2006 Decision2 and the 23 January 2007 Resolution3 of the Court of Appeals in CA-
G.R. CV No. 75855. The 5 October 2006 Decision set aside the 23 July 2002
Decision4 of the Regional Trial Court (Branch 79) of Quezon City in Civil Case
No. Q-99-37559, which granted petitioners complaint for recovery of sum of money
and personal property with prayer for the issuance of a writ of replevin.The 23
January 2007 Resolution denied petitioners motion for reconsideration.

The Facts

Sometime in 1997, respondent Trojan Metal Industries, Inc. (TMI) came to petitioner
PCI Leasing and Finance, Inc. (PCILF) to seek a loan. Instead of extending a loan,
PCILF offered to buy various equipment TMI owned, namely: a Verson double action
hydraulic press with cushion, a Hinoharapowerpress 75-tons capacity, a USI-
clearing powerpress 60-tons capacity, a Watanabe powerpress 60-tons capacity, a
YMGP powerpress 30-tons capacity, a YMGP powerpress 15-tons capacity, a lathe
machine, a vertical milling machine, and a radial drill. Hard-pressed for money, TMI
agreed. PCILF and TMI immediately executed deeds of sale5 evidencing TMIs sale to
PCILF of the various equipment in consideration of the total amount
of P 2,865,070.00.

PCILF and TMI then entered into a lease agreement,6 dated 8 April 1997, whereby the
latter leased from the former the various equipment it previously owned. Pursuant to
the lease agreement, TMI issued postdated checks representing 24 monthly
installments. The monthly rental for the Verson double action hydraulic press with
cushion was in the amount of P62,328.00; for the Hinoharapowerpress 75-tons
capacity, the USI-clearing powerpress 60-tons capacity, the Watanabe powerpress 60-
tons capacity, the YMGP powerpress 30-tons capacity, and the
YMGP powerpress 15-tons capacity, the monthly rental was in the amount
of P49,259.00; and for the lathe machine, the vertical milling machine, and the radial
drill, the monthly rental was in the amount of P22,205.00.

The lease agreement required TMI to give PCILF a guaranty deposit

of P1,030,350.00,7which would serve as security for the timely performance of TMIs
obligations under the lease agreement, to be automatically forfeited should TMI return
the leased equipment before the expiration of the lease agreement.
Further, spouses Walfrido and Elizabeth Dizon, as TMIs President and Vice-
President, respectively executed in favor of PCILF a Continuing Guaranty of Lease
Obligations.8Under the continuing guaranty, the Dizonspouses agreed to immediately
pay whatever obligations would be due PCILF in case TMI failed to meet its
obligations under the lease agreement.

To obtain additional loan from another financing company,9 TMI used the leased
equipment as temporary collateral.10 PCILF considered the second mortgage a
violation of the lease agreement. At this time, TMIs partial payments had
reached P1,717,091.00.11 On 8 December 1998, PCILF sent TMI a demand letter12 for
the payment of the latters outstanding obligation. PCILFs demand remained
unheeded.

On 7 May 1999, PCILF filed in the Regional Trial Court (Branch 79) of Quezon City
a complaint13 against TMI, spouses Dizon, and John Doe (collectively referred to as
respondents hereon) for recovery of sum of money and personal property with prayer
for the issuance of a writ of replevin, docketed as Civil Case No. Q-99-37559.

On 7 September 1999, the RTC issued the writ of replevin14 PCILF prayed for,
directing the sheriff to take custody of the leased equipment. Not long after, PCILF
sold the leased equipment to a third party and collected the proceeds amounting
to P1,025,000.00.15

In their answer,16 respondents claimed that the sale with lease agreement was a mere
scheme to facilitate the financial lease between PCILF and TMI. Respondents
explained that in a simulated financial lease, property of the debtor would be sold to
the creditor to be repaid through rentals; at the end of the lease period, the property
sold would revert back to the debtor. Respondents prayed that they be allowed to
reform the lease agreement to show the true agreement between the parties, which was
a loansecured by a chattel mortgage.

The Ruling of the RTC

In its 23 July 2002 Decision, the RTC granted the prayer of PCILF in its complaint.
The RTC ruled that the lease agreement must be presumed valid as the law between
the parties even if some of its provisions constituted unjust enrichment on the part of
PCILF. The dispositive portion of its Decision reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff-PCI Leasing and

Finance, Inc. and against defendants Trojan Metal, Walfrido Dizon, and Elizabeth Dizon,
as follows:

1. Ordering the plaintiff to be entitled to the possession of herein

machineries.

2. Ordering the defendants to pay the remaining rental obligation in the

amount of Php 888,434.48 plus legal interest from the date of filing of the
complaint;

3. Ordering defendant to pay an attorneys fees in the amount

of Php50,000.00;

4. Ordering the defendant to pay the cost of suit.

SO ORDERED.17

Respondents appealed to the Court of Appeals alleging that the RTC erred in ruling
that PCILF was entitled to the possession of TMIs equipment and that respondents
still owed PCILF the balance of P888,423.48.

The Ruling of the Court of Appeals

The Court of Appeals ruled that the sale with lease agreement was in fact a loan
secured by chattel mortgage. The Court of Appeals held that since PCILF sold the
equipment to a third party for P1,025,000.00 and TMI paid PCILF a guaranty deposit
of P1,030,000.00, PCILF had in its hands the sum of P2,055,250.00, as against TMIs
remaining obligation of P888,423.48, or an excess of P1,166,826.52, which should be
returned to TMI in accordance with Section 14 of the Chattel Mortgage Law.

Thus, in its 5 October 2006 Decision, the Court of Appeals set aside the Decision of
the RTC. The Court of Appeals entered a new one dismissing PCILFs complaint and
directing PCILF to pay TMI, by way of refund, the amount of P1,166,826.52.
The decretal part of its Decision reads:

WHEREFORE, premises considered, the July 23, 2002 Decision of the Regional Trial
Court of Quezon City, Branch 79, in Civil Case No. Q-99-37559, is hereby REVERSED
and SET ASIDE, and a new one entered DISMISSING the complaint and DIRECTING
the plaintiff-appellee PCI Leasing and Finance, Inc. to PAY, by way of REFUND, to the
defendant-appellant Trojan Metal Industries, Inc., the net amount of Php 1,166,826.52.

SO ORDERED.18

The Issues

The issues for resolution are (1) whether the sale with lease agreement the parties
entered into was a financial lease or a loan secured by chattel mortgage; and (2)
whether PCILF should pay TMI, by way of refund, the amount of P1,166,826.52.

The Courts Ruling

The petition lacks merit.

PCILF contends that the transaction between the parties was a sale and leaseback
financing arrangement where the client sells movable property to a financing
company, which then leases the same back to the client. PCILF insists the transaction
is not financial leasing, which contemplates extension of credit to assist a buyer in
acquiring movable property which the buyer can use and eventually own. PCILF
claims that the sale and leaseback financing arrangement is not contrary to law,
morals, good customs, public order, or public policy. PCILF stresses that the guaranty
deposit should be forfeited in its favor, as provided in the lease agreement. PCILF
points out that this case does not involve mere failure to pay rentals, it deals with a
flagrant violation of the lease agreement.

Respondents counter that from the very beginning, transfer to PCILF of ownership
over the subject equipment was never the intention of the parties. Respondents claim
that under the lease agreement, the guaranty deposit would be forfeited if TMI
returned the leased equipment to PCILF before the expiration of the lease agreement;
thus, since TMI never returned the leased equipment voluntarily, but through a writ
of replevinordered by the RTC, the guaranty deposit should not be forfeited.

Since the lease agreement in this case was executed on 8 April 1997, Republic Act
No. 5980 (RA 5980), otherwise known as the Financing Company Act, governs as to
what constitutes financial leasing. Section 1, paragraph (j) of the New Rules and
Regulations to Implement RA 598019 definesfinancial leasing as follows:

LEASING shall refer to financial leasing which is a mode of extending credit through a
non-cancelable contract under which the lessor purchases or acquires at the instance of
the lessee heavy equipment, motor vehicles, industrial machinery, appliances, business
and office machines, and other movable property in consideration of the periodic
payment by the lessee of a fixed amount of money sufficient to amortize at least 70% of
the purchase price or acquisition cost, including any incidental expenses and a margin of
profit, over the lease period. The contract shall extend over an obligatory period during
which the lessee has the right to hold and use the leased property and shall bear the cost
of repairs, maintenance, insurance, and preservation thereof, but with no obligation or
option on the part of the lessee to purchase the leased property at the end of the lease
contract.
The above definition of financial leasing gained statutory recognition with the
enactment of Republic Act No. 8556 (RA 8556), otherwise known as the Financing
Company Act of 1998.20 Section 3(d) of RA 8556 defines financial leasing as:

a mode of extending credit through a non-cancelable lease contract under which

the lessor purchases or acquires, at the instance of the lessee, machinery, equipment,
motor vehicles, appliances, business and office machines, and other movable or
immovable property in consideration of the periodic payment by the lessee of a fixed
amount of money sufficient to amortize at least seventy (70%) of the purchase price or
acquisition cost, including any incidental expenses and a margin of profit over an
obligatory period of not less than two (2) years during which the lessee has the right to
hold and use the leased property with the right to expense the lease rentals paid to
the lessor and bears the cost of repairs, maintenance, insurance and preservation thereof,
but with no obligation or option on his part to purchase the leased property from the
owner-lessor at the end of the lease contract.

Thus, in a true financial leasing, whether under RA 5980 or RA 8556, a finance

company purchases on behalf of a cash-strapped lessee the equipment the latter wants
to buy but, due to financial limitations, is incapable of doing so. The finance company
then leases the equipment to the lessee in exchange for the latters periodic payment of
a fixed amount of rental.

In this case, however, TMI already owned the subject equipment before it transacted
with PCILF. Therefore, the transaction between the parties in this case cannot be
deemed to be in the nature of a financial leasing as defined by law.

The facts in the instant case are analogous to those in Cebu Contractors Consortium
Co. v. Court of Appeals.21 There, Cebu Contractors Consortium Co. (CCCC)
approached Makati Leasing and Finance Corporation (MLFC) to obtain a loan. MLFC
agreed to extend financial assistance to CCCC but, instead of a loan with collateral,
MLFC induced CCCC to adopt a sale and leaseback scheme. Under the scheme,
several of CCCCs equipment were made to appear as sold to MLFC and then leased
back to CCCC, which in turn paid lease rentals to MLFC. The rentals were treated as
installment payments to repurchase the equipment.
The Court held in Cebu Contractors Consortium Co. v. Court of Appeals22 that the
transaction between CCCC and MLFC was not one of financial leasing as defined by
law, but simply a loan secured by a chattel mortgage over CCCCs equipment. The
Court went on to explain that where the client already owned the equipment but
needed additional working capital and the finance company purchased such
equipment with the intention of leasing it back to him, the lease agreement was
simulated to disguise the true transaction that was a loan with security. In that
instance, continued the Court, the intention of the parties was not to enable the client
to acquire and use the equipment, but to extend to him a loan.

Similarly, in Investors Finance Corporation v. Court of Appeals,23 a borrower came to

Investors Finance Corporation (IFC) to secure a loan with his heavy equipment and
machinery as collateral. The parties executed documents where IFC was made to
appear as the owner of the equipment and the borrower as the lessee. As consideration
for the lease, the borrower-lessee was to pay monthly amortizations over a period of
36 months. The parties executed a lease agreement covering various equipment
described in the lease schedules attached to the lease agreement. As security, the
borrower-lessee also executed a continuing guaranty.

The Court in Investors Finance Corporation v. Court of Appeals24 held that the
transaction between the parties was not a true financial leasing because the intention
of the parties was not to enable the borrower-lessee to acquire and use the heavy
equipment and machinery, which already belonged to him, but to extend to him a loan
to use as capital for his construction and logging businesses. The Court held that the
lease agreement was simulated to disguise the true transaction between the parties,
which was a simple loan secured by heavy equipment and machinery owned by the
borrower-lessee. The Court differentiated between a true financial leasing and a loan
with mortgage in the guise of a lease. The Court said that financial leasing
contemplates the extension of credit to assist a buyer in acquiring movable property
which he can use and eventually own. If the movable property already belonged to the
borrower-lessee, the transaction between the parties, according to the Court, was a
loan with mortgage in the guise of a lease.
In the present case, since the transaction between PCILF and TMI involved equipment
already owned by TMI, it cannot be considered as one of financial leasing, as defined
by law, but simply a loan secured by the various equipment owned by TMI.

Articles 1359 and 1362 of the Civil Code provide:

Art. 1359. When, there having been a meeting of the minds of the parties to a contract,
their true intention is not expressed in the instrument purporting to embody the
agreement, by reason of mistake, fraud, inequitable conduct, or accident, one of the
parties may ask for the reformation of the instrument to the end that such true intention
may be expressed.

Art. 1362. If one party was mistaken and the other acted fraudulently or inequitably in
such a way that the instrument does not show their true intention, the former may ask for
the reformation of the instrument.

Under Article 1144 of the Civil Code, the prescriptive period for actions based upon a
written contract and for reformation of an instrument is ten years.25 The right of action
for reformation accrued from the date of execution of the lease agreement on 8 April
1997. TMI timely exercised its right of action when it filed an answer26 on 14
February 2000 asking for the reformation of the lease agreement.

Hence, had the true transaction between the parties been expressed in a proper
instrument, it would have been a simple loan secured by a chattel mortgage, instead of
a simulated financial leasing. Thus, upon TMIs default, PCILF was entitled to seize
the mortgaged equipment, not as owner but as creditor-mortgagee for the purpose of
foreclosing the chattel mortgage. PCILFs sale to a third party of the mortgaged
equipment and collection of the proceeds of the sale can be deemed in the exercise of
its right to foreclose the chattel mortgage as creditor-mortgagee.

The Court of Appeals correctly ruled that the transaction between the parties was
simply a loan secured by a chattel mortgage. However, in reckoning the amount of the
principal obligation, the Court of Appeals should have taken into account the proceeds
of the sale to PCILF less the guaranty deposit paid by TMI. After deducting payments
made by TMI to PCILF, the balance plus applicable interest should then be applied
against the aggregate cash already in PCILFs hands.
Records show that PCILF paid TMI P2,865,070.0027 as consideration for acquiring
the mortgaged equipment. In turn, TMI gave PCILF a guaranty deposit
of P1,030,350.00.28 Thus, the amount of the principal loan was P1,834,720.00,
which was the net amount actually received by TMI (proceeds of the sale of the
equipment to PCILF minus the guaranty deposit). Against the principal loan
of P1,834,720.00plus the applicable interest should be deducted loan payments,
totaling P1,717,091.00.29 Since PCILF sold the mortgaged equipment to a third party
for P1,025,000.00,30 the proceeds of the said sale should be applied to offset the
remaining balance on the principal loan plus applicable interest.

However, the exact date of the sale of the mortgaged equipment, which is needed to
compute the interest on the remaining balance of the principal loan, cannot be gleaned
from the facts on record. We thus remand the case to the RTC for the computation of
the total amount due from the date of demand on 8 December 1998 until the date of
sale of the mortgaged equipment to a third party, which amount due shall be offset
against the proceeds of the sale.

In the absence of stipulation, the applicable interest due on the remaining balance of
the loan is the legal rate of 12% per annum, computed from the date PCILF sent a
demand letter to TMI on 8 December 1998. No interest can be charged prior to this
date because TMI was not yet in default prior to 8 December 1998. The interest due
shall also earn legal interest from the time it is judicially demanded, pursuant to
Article 2212 of the Civil Code, which provides:

Art. 2212. Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.

The foregoing provision has been incorporated in the comprehensive summary of

existing rules on the computation of legal interest laid down by the Court
in EasternShipping Lines, Inc. v. Court of Appeals,31 to wit:
 1. When an obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest
due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12%
per annum to be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of the Civil
Code.

2. When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidatedclaims or damages except
when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty,
the interest shall begin to run from the time the claim is made judicially
or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot
be so reasonably established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes

final and executory, the rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above, shall be 12% per annum
from such finality until its satisfaction, this interim period being deemed
to be by then an equivalent to a forbearance of credit. (Emphasis supplied)

Applying the rules in the computation of interest, the remaining balance of the
principal loan subject of the chattel mortgage must earn the legal interest of 12% per
annum, which interest, as long as unpaid, also earns legal interest of 12% per annum,
computed from the filing of the complaint on 7 May 1999.

In accordance with the rules laid down in Eastern Shipping Lines, Inc. v. Court of
Appeals,32 we derive the following formula for the RTCs guidance:

TOTAL AMOUNT DUE = [principal partial payments made] + [interest + interest on

interest], where
 Interest = remaining balance x 12% per annum x no. of years from due date (8 December
1998 when demand was made) until date of sale to a third party

Interest on interest = interest computed as of the filing of the complaint on 7 May 1999 x
12% x no. of years until date of sale to a third party

From the computed total amount should be deducted P1,025,000.00 representing the
proceeds of the sale already in PCILFs hands. The difference represents overpayment
by TMI, which the law requires PCILF to refund to TMI.

Section 14 of Act No. 1508, otherwise known as the Chattel Mortgage Law, provides:

Section 14. Sale of property at public auction; officers return; fees; disposition of
proceeds.x x x The proceeds of such sale shall be applied to the payment, first, of the
costs and expenses of keeping and sale, and then to the payment of the demand or
obligation secured by such mortgage, and the residue shall be paid to persons holding
subsequent mortgages in their order, and the balance, after paying the mortgages, shall be
paid to the mortgagor or person holding under him on demand.

Section 14 of the Chattel Mortgage Law expressly entitles the debtor-mortgagor to the
balance of the proceeds, upon satisfaction of the principal loan and costs. Prevailing
jurisprudence33 also holds that the Chattel Mortgage Law bars the creditor-mortgagee
from retaining the excess of the sale proceeds.

TMIs right to the refund accrued from the time PCILF received the proceeds of the
sale of the mortgaged equipment. However, since TMI never made a counterclaim or
demand for refund due on the resulting overpayment after offsetting the proceeds of
the sale against the remaining balance on the principal loan plus applicable interest, no
interest applies on the amount of refund due. Nonetheless, in accord with prevailing
jurisprudence,34 the excess amount PCILF must refund to TMI is subject to interest at
12% per annum from finality of this Decision until fully paid.

WHEREFORE, we DENY the petition. We AFFIRM with MODIFICATION the

5 October 2006 Decision and the 23 January 2007 Resolution of the Court of Appeals
in CA-G.R. CV No. 75855. Petitioner PCI Leasing and Finance, Inc. is
hereby ORDERED to PAYrespondent Trojan Metal Industries, Inc., by way of
refund, the excess amount to be computed by the Regional Trial Court based on the
formula specified above, with interest at 12% per annum from finality of this Decision
until fully paid.

Costs against petitioner.

SO ORDERED.

G.R. No. 171569 August 1, 2011

UNION BANK OF THE PHILIPPINES,

vs.
ALAIN* JUNIAT, WINWOOD APPAREL, INC., WINGYAN APPAREL, INC., NONWOVEN FABRIC
PHILIPPINES, Respondents.

DECISION

DEL CASTILLO, J.:

To have a binding effect on third parties, a contract of pledge must appear in a public instrument.1

This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the June 23, 2005
Decision3 and the February 9, 2006 Resolution4 of the Court of Appeals (CA) in CA-G.R. CV No.
66392.

Factual Antecedents

Petitioner Union Bank of the Philippines (Union Bank) is a universal

banking corporation organized and existing under Philippine laws.5

Respondents Winwood Apparel, Inc. (Winwood) and Wingyan Apparel, Inc. (Wingyan) are domestic
corporations engaged in the business of apparel manufacturing.6 Both respondent corporations are
owned and operated by respondent Alain Juniat (Juniat), a French national based in
Hongkong.7Respondent Nonwoven Fabric Philippines, Inc. (Nonwoven) is a Philippine corporation
engaged in the manufacture and sale of various types of nonwoven fabrics.8

On September 3, 1992, petitioner filed with the Regional Trial Court (RTC) of Makati, Branch 57, a
Complaint9 with prayer for the issuance of ex-parte writs of preliminary attachment and replevin
against Juniat, Winwood, Wingyan, and the person in possession of the mortgaged motorized
sewing machines and equipment.10 Petitioner alleged that Juniat, acting for and in behalf of Winwood
and Wingyan, executed a promissory note11 dated April 11, 1992 and a Chattel Mortgage12 dated
March 27, 1992 over several motorized sewing machines and other allied equipment to secure their
obligation arising from export bills transactions to petitioner in the amount of ₱1,131,134.35;13 that as
additional security for the obligation, Juniat executed a Continuing Surety Agreement14 dated April
11, 1992 in favor of petitioner;15 that the loan remains unpaid;16 and that the mortgaged motorized
sewing machines are insufficient to answer for the obligation.17

On September 10, 1992, the RTC issued writs of preliminary attachment and replevin in favor of
petitioner.18 The writs were served by the Sheriff upon Nonwoven as it was in possession of the
motorized sewing machines and equipment.19Although Nonwoven was not impleaded in the
complaint filed by petitioner, the RTC likewise served summons upon Nonwoven since it was in
possession of the motorized sewing machines and equipment.20

On September 28, 1992, Nonwoven filed an Answer,21 contending that the unnotarized Chattel
Mortgage executed in favor of petitioner has no binding effect on Nonwoven and that it has a better
title over the motorized sewing machines and equipment because these were assigned to it by
Juniat pursuant to their Agreement22 dated May 9, 1992.23 Juniat, Winwood, and Wingyan, on the
other hand, were declared in default for failure to file an answer within the reglementary period.24

On November 23, 1992, petitioner filed a Motion to Sell Chattels Seized by Replevin,25 praying that
the motorized sewing machines and equipment be sold to avoid depreciation and
deterioration.26 However, on May 18, 1993, before the RTC could act on the motion, petitioner sold
the attached properties for the amount of ₱1,350,000.00.27

Nonwowen moved to cite the officers of petitioner in contempt for selling the attached properties, but
the RTC denied the same on the ground that Union Bank acted in good faith.28

Ruling of the Regional Trial Court

On May 20, 1999, the RTC of Makati, Branch 145,29rendered a Decision30 in favor of petitioner. The
RTC ruled that both the Chattel Mortgage dated March 27, 1992 in favor of petitioner and the
Agreement dated May 9, 1992 in favor of Nonwoven have no obligatory effect on third persons
because these documents were not notarized.31 However, since the Chattel Mortgage in favor of
petitioner was executed earlier, petitioner has a better right over the motorized sewing machines and
equipment under the doctrine of "first in time, stronger in right" (prius tempore, potior jure).32 Thus,
the RTC disposed of the case in this wise:

WHEREFORE, above premises considered, judgment is hereby rendered as follows:

1.] Declaring the [petitioner] UNION BANK OF THE PHILIPPINES, as having the better right
to the goods and/or machineries subject of the Writs of Preliminary Attachment and Replevin
issued by this Court on September 10, 1992.
 2.] Declaring the [petitioner] as entitled to the proceeds of the sale of the subject machineries
in the amount of ₱1,350,000.00;

3.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and Wingyan Apparel, Inc.
to be jointly and severally liable to the [petitioner], for the deficiency between the proceeds of
the sale of the machineries subject of this suit [₱1,350,000.00] and original claim of the
plaintiff [₱1,919,907.03], in the amount of ₱569,907.03, with legal interest at the rate of 12%
per annum from date of this judgment until fully paid; and

4.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and Wingyan Apparel, Inc.
to be jointly and severally liable to the [petitioner] for the amount of ₱50,000.00 as
reasonable attorneys fees; and

5.] Cost of this suit against the [respondents].

SO ORDERED.33

Nonwoven moved for reconsideration34 but the RTC denied the same in its

Order35 dated July 14, 1999.

Ruling of the Court of Appeals

On appeal, the CA reversed the ruling of the RTC. The CA ruled that the contract of pledge entered
into between Juniat and Nonwoven is valid and binding, and that the motorized sewing machines
and equipment were ceded to Nonwoven by Juniat by virtue of a dacion en pago.36 Thus, the CA
declared Nonwoven entitled to the proceeds of the sale of the attached properties.37 The fallo reads:

WHEREFORE, premises considered, the assailed decision is hereby REVERSED and SET ASIDE.
[Petitioner] Union Bank of the Philippines is hereby DIRECTED to pay Nonwoven Fabric Philippines,
Inc. ₱1,350,000.00, the amount it holds in escrow, realized from the May 18, 1993 sale of the
machineries to avoid deterioration during pendency of suit. No pronouncement as to costs.

SO ORDERED.38

Petitioner sought reconsideration39 which was denied by the CA in a Resolution40 dated February 9,
2006.

Issues

Hence, the present recourse where petitioner interposes the following issues:

1. Whether x x x the Court of Appeals committed serious reversible error in setting aside the
Decision of the trial court holding that Union Bank of the Philippines had a better right over
the machineries seized/levied upon in the proceedings before the trial court and/or the
proceeds of the sale thereof;

2. Whether x x x the Court of Appeals seriously erred in holding that [Nonwoven] has a valid
claim over the subject sewing machines.41

Petitioner’s Arguments
Echoing the reasoning of the RTC, petitioner insists that it has a better title to the proceeds of the
sale.42 Although the Chattel Mortgage executed in its favor was not notarized, petitioner insists that it
is nevertheless valid, and thus, has preference over a subsequent unnotarized
agreement.43 Petitioner further claims that except for the said agreement, no other evidence was
presented by Nonwoven to show that the motorized sewing machines and equipment were indeed
transferred to them by Juniat/Winwood/Wingyan.44

Respondent Nonwoven’s Arguments

Nonwoven, on the other hand, claims ownership over the proceeds of the sale under Article 154445of
the Civil Code on double sale, which it claims can be applied by analogy in the instant
case.46Nonwoven contends that since its prior possession over the motorized sewing machines and
equipment was in good faith, it has a better title over the proceeds of the sale.47 Nonwoven likewise
maintains that petitioner has no right over the proceeds of the sale because the Chattel Mortgage
executed in its favor was unnotarized, unregistered, and without an affidavit of good faith.48

Our Ruling

The petition has merit.

Nonwoven lays claim to the attached motorized sewing machines and equipment pursuant to the
Agreement it entered into with Juniat, to wit:

Hong Kong, 9th May, 1992

With reference to talks held this morning at the Holiday Inn Golden Mile Coffee Shop, among the
following parties:

a. Redflower Garments Inc. – Mrs. Maglipon

b. Nonwoven Fabrics Phils. Inc. – Mr. J. Tan

c. Winwood Apparel Inc./Wing Yan Apparel, Inc. – Mr. A. Juniat, Mrs. S. Juniat

IT WAS AGREED THAT:

a. Settlement of the accounts between Nonwoven Fabrics Phils. Inc. and Winwood Apparel
Inc./Wing Yan Apparel, Inc. should be effected as agreed through partial payment by L/C with the
balance to be settled at a later date for which Winwood Apparel, Inc. agrees to consign 94 sewing
machines, 3 snap machines and 2 boilers, presently in the care of Redflower Garments Inc., to the
care of Nonwoven Fabrics Phils., Inc. as guarantee. Meanwhile, Nonwoven will resume delivery to
Winwood/Win Yang as usual.

x x x x49 (Emphasis supplied.)

It insists that since the attached properties were assigned or ceded to it by Juniat, it has a better
right over the proceeds of the sale of the attached properties than petitioner, whose claim is based
on an unnotarized Chattel Mortgage.

We do not agree.
Indeed, the unnotarized Chattel Mortgage executed by Juniat, for and in behalf of Wingyan and
Winwood, in favor of petitioner does not bind Nonwoven.50 However, it must be pointed out that
petitioner’s primary cause of action is for a sum of money with prayer for the issuance of ex-parte
writs of attachment and replevin against Juniat, Winwood, Wingyan, and the person in possession of
the motorized sewing machines and equipment.51Thus, the fact that the Chattel Mortgage executed
in favor of petitioner was not notarized does not affect petitioner’s cause of action. Petitioner only
needed to show that the loan of Juniat, Wingyan and Winwood remains unpaid and that it is entitled
to the issuance of the writs prayed for. Considering that writs of attachment and replevin were issued
by the RTC,52 Nonwoven had to prove that it has a better right of possession or ownership over the
attached properties. This it failed to do.
1avv phil

A perusal of the Agreement dated May 9, 1992 clearly shows that the sewing machines, snap
machines and boilers were pledged to Nonwoven by Juniat to guarantee his obligation. However,
under Article 2096 of the Civil Code, "[a] pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not appear in a public instrument."
Hence, just like the chattel mortgage executed in favor of petitioner, the pledge executed by Juniat in
favor of Nonwoven cannot bind petitioner.

Neither can we sustain the finding of the CA that: "The machineries were ceded to THIRD PARTY
NONWOVEN by way of dacion en pago, a contract later entered into by WINWOOD/WINGYAN and
THIRD PARTY NONWOVEN."53 As aptly pointed out by petitioner, no evidence was presented by
Nonwoven to show that the attached properties were subsequently sold to it by way of a dacion en
pago. Also, there is nothing in the Agreement dated May 9, 1992 to indicate that the motorized
sewing machines, snap machines and boilers were ceded to Nonwoven as payment for the
Wingyan’s and Winwood’s obligation. It bears stressing that there can be no transfer of ownership if
the delivery of the property to the creditor is by way of security.54 In fact, in case of doubt as to
whether a transaction is one of pledge or dacion en pago, the presumption is that it is a pledge as
this involves a lesser transmission of rights and interests.55

In view of the foregoing, we are constrained to reverse the ruling of the CA. Nonwoven is not entitled
to the proceeds of the sale of the attached properties because it failed to show that it has a better
title over the same.

WHEREFORE, the petition is hereby GRANTED. The assailed June 23, 2005 Decision and the
February 9, 2006 Resolution of the Court of Appeals in CA-G.R. CV No. 66392 are hereby
REVERSED and SET ASIDE. The May 20, 1999 Decision of the Regional Trial Court of Makati,
Branch 145, is hereby REINSTATED and AFFIRMED.

SO ORDERED.