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A.S. TOPACIO CONSTRUCTION CORPORATION AND SPOUSES

AUGUSTO S. TOPACIO AND ANTOINETTA B. TOPACIO V. PCI LEASING
AND FINANCE INC. [NOW BDO LEASING AND FINANCE, INC.

Sirs and Mesdames:

Please take notice that the Court, First Division, issued a Resolution dated June 17, 2019
which reads as follows:

"G.R. No. 227520 (A.S. Topacio Construction Corporation and Spouses Augusto S.
Topacio and Antoinetta B. Topacio v. PCI Leasing and Finance Inc. [now BDO
Leasing and Finance, Inc.])

This is an appeal by certiorari seeking to reverse and set aside the June 13, 2016
Decision[1] and October 5, 2016 Resolution[2] of the Court of Appeals (CA) in CA-G.R. CV
No. 103853, which affirmed the November 7, 2014 Decision[3] of the Regional Trial Court
of Quezon City, Branch 85 (RTC) in Civil Case No. Q-01-43745, a complaint for sum of
money.

The Antecedents

A.S. Topacio Construction Corporation (ASTCC) is a domestic corporation engaged in

general construction. Augusto S. Topacio (Augusto) and Antoinetta B. Topacio (Antoinetta),
collectively referred to as the Spouses Topacio, are the President and Corporate Secretary
of ASTCC.[4] (ASTCC and the Spouses Topacio are hereby collectively referred to as
petitioners).[5]

On May 20, 1997, PCI Leasing and Finance, Inc., now BDO Leasing and Finance, Inc.,
(respondent) and ASTCC, through Augusto, entered into a lease contract denominated as
Lease Agreement No. 023[6] (Lease Agreement) covering chattels/personal properties
(subject equipment). The terms and conditions of the lease contract are specified in Lease
Schedule No. 0084,[7] 0089,[8] 0093,[9] and 114[10] (Lease Schedules).[11]

On May 21, 1997, the Spouses Topacio executed in favor of respondent a Continuing
Guaranty of Lease Obligation (CGLO).[12] According to respondent, the spouses bound
themselves to be jointly and severally liable for the entire obligation under the said
continuing guaranty.[13]

ASTCC failed to pay several installments of rentals due under the lease. This led
respondent to demand payment of the entire unpaid balance of the obligation, which, as of

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January 18, 1999, amounted to P3,226,513.41 plus penalty charges of P244,878.51.[14]

Respondent alleged that the Lease Agreement and Lease Schedules expressly provided
that in case of default or failure to pay any installment and/or interest and other charges
provided therein or any violation of the terms and conditions of the lease contract and
schedules, the entire obligation shall become due and payable without notice to or demand
on the corporation. It further claimed that ASTCC agreed to voluntarily surrender and
deliver possession of the subject equipment, in case of default.[15]

Sometime in March 1999, ASTCC voluntarily surrendered to respondent the subject

equipment. Respondent subsequently sold the said properties for P1,490,000.00, thereby
leaving a deficiency obligation in the amount of P1,066,498.99 as of November 30,
2000.[16] Respondent then demanded from ASTCC and the Spouses Topacio the payment
of the deficiency obligation. Respondent sent a Final Demand letter dated January 9, 2001
to petitioners. However, petitioners failed and refused to pay the said obligation.[17]

As a result, respondent instituted an action for collection of sum of money. The complaint
was raffled to Branch 78 of the Quezon City Regional Trial Court (Branch 78).[18]
Simultaneous with the filing of their pre-trial brief, the Spouses Topacio moved to dismiss
the complaint as against them. They claimed that they were not real parties in interest
because they merely acted in their capacity as officers of the corporation.[19]

Proceedings concerning the Motion

to Dismiss

In its July 18, 2002 Resolution, Branch 78 granted the motion and dismissed the complaint
insofar as the Spouses Topacio were concerned.[20]

Respondent appealed the July 18, 2002 Resolution with the CA. On May 21, 2004, the CA
rendered a Decision[21] finding the complaint against the Spouses Topacio to be proper.
The CA relied on the CGLO, which showed that the contract executed by the spouses was a
surety contract wherein they bound themselves to be jointly and severally liable with
ASTCC, the principal debtor.[22] It held that since the liability of petitioners were joint and
solidary, respondent may proceed against anyone of the solidary debtors or some or all of
them simultaneously.[23]

Spouses Topacio filed an appeal by certiorari before the Court, docketed as G.R. No.
166243, questioning the May 21, 2004 Decision of the CA. The Court rendered a
Resolution[24] on February 16, 2005, the fallo of which reads:

ACCORDINGLY, the Court Resolved to DENY the petition for review on certiorari
of the [D]ecision dated May 21, 2004 of the Court of Appeals in CA-G.R. CV No.
76747 for failure to comply with requirement [N]o. five (5), as the verification
of the petition and certification against forum shopping was signed by only one
of the petitioners and not notarized.[25]

The February 16, 2005 Resolution of the Court became final and executory on May 23,

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2005, per the Entry of Judgment.[26]

On November 17, 2006, the instant case was re-raffled to Branch 85 because Branch 78
was designated as a Special Court for Drug Cases. The RTC conducted further proceedings
and trial ensued.[27]

The RTC Ruling

In its November 7, 2014 Decision, the RTC ordered petitioners to jointly and severally pay
respondent (1) P990,462.67 representing the unpaid deficiency obligation as of September
30, 2000, (2) interest of twelve percent (12%) per annum on the unpaid deficiency
obligation starting January 10, 2001 to June 30, 2013 and six percent (6%) per annum
from July 1, 2013 until full payment thereof, and (3) P10,086.30 as cost of litigation.[28]

It determined that the transaction entered into by the parties is one of loan and not a
lease agreement as defined by law.[29] It noted that, based on the deeds of sale presented
by petitioners, the subject equipment of the Lease Agreement were originally owned by
ASTCC. The pieces of equipment were "sold" to respondent by ASTCC for the purpose of
leasing it back to the latter.[30] The pieces of equipment "leased" to ASTCC served as
security for the loan extended by respondent, as it was owned by ASTCC prior to the
execution of the Lease Agreement.[31]

It noted that Augusto admitted the existence of their indebtedness arising from failure to
pay several monthly rentals and that they voluntarily surrendered the subject equipment.
Thus, it held that they should be made liable for whatever indebtedness they may have in
favor of respondent.[32] It noted that respondent claimed a deficiency balance of
P1,066,498.99. However, it deducted the amount of P76,036.32, representing the
"expenses during the pull out of units" from said balance because respondent failed to
substantiate or support by evidence the said expense. Accordingly, it held that the
deficiency obligation amounts only to P990,462.67.[33]

On the issue of the joint and solidary liability of the petitioners, the RTC held that the CA
already ruled that they are indeed jointly and solidarity liable on account of the CGLO
executed by the Spouses Topacio in favor of respondent. It saw no compelling reason to
disturb this pronouncement of the CA.[34]

On the issue of whether there was novation when ASTCC surrendered the subject
equipment to respondent, the RTC ruled in the negative. It held that the parties never
agreed, expressly or impliedly, to enter into a new contract. Accordingly, the existing
contract subsists and should be complied with. It declared that mere surrender of the
subject equipment will not, in itself, extinguish the existing agreement between the
parties, especially if "the said act of voluntary surrender is well within the original
agreement. It simply did not find incompatible the existing agreement with the supposed
new one.[35]

Lastly, the RTC refused to award moral damages, exemplary damages, and attorney's fees

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to petitioners for lack of basis. It also refused to award any damages to respondent. It
recognized the voluntary surrender of the subject equipment as negating any bad faith on
the part of petitioners.[36]

Unsatisfied, petitioners elevated an appeal with the CA.

The CA Ruling

In its June 13, 2016 Decision, the CA affirmed the November 7, 2014 Decision of the RTC.
It affirmed the RTC's finding that the Spouses Topacio are jointly and severally liable with
ASTCC. It noted that while they signed the Lease Agreement in their official capacity, they
can be held personally liable by virtue of the CGLO they executed in favor of respondent.
Further, it noted that the May 21, 2004 CA Decision in CA-G.R. CV No. 76747, which held
that the Spouses Topacio may be held jointly and severally liable with ASTCC, has attained
finality. The principle of the law of the case applies.[37]

It did not find meritorious petitioners' argument that the RTC correctly found that the lease
agreement entered into by the parties was in fact an equitable mortgage but that it erred
in failing to apply the principles thereof. The court a quo stated that the RTC found that the
transaction entered into by the parties was a loan. It did not pronounce the transaction to
be an equitable mortgage. Further, it noted that they did not assail the terms of the Lease
Agreement concerning default and surrender of the subject equipment. Applying the same,
it found them liable for any deficiency obligation arising from the sale of the subject
equipment. It upheld the amount of deficiency obligation found by the RTC.[38]

Petitioners moved for reconsideration of this decision, which the CA denied in its October
5, 2016 Resolution.

Hence, this petition.

First, petitioners insist that the Spouses Topacio cannot be held jointly and severally liable
with ASTCC because they signed the lease agreement in their capacity as corporate
officers of ASTCC. They allege that respondent committed serious impropriety when it
made it appear that the Lease Agreement, the Lease Schedules, and the CGLO were
signed on separate occasions by the Spouses Topacio. In truth, these documents were
signed on the same date, May 21, 1997, as shown by their notarization dates. Further,
they claim that respondent inserted and typewrote the words "personal capacities" in the
CGLO. Allegedly, these words were not present when the Spouses Topacio signed the
document. Hence, such provision is void, of no effect, and unenforceable under the law.
Further, they contend that respondent did not explain to the Spouses Topacio the import of
the CGLO. They did not bother to read it because they were signing the same in their
capacity as officers of ASTCC.[39]

Second, they assert that the transaction entered into by the parties is "one of loan with
mortgage in the guise of a lease declared by law as an equitable mortgage."[40] They cite
Article 1602 of the Civil Code, which provides the instances when a contract is presumed
to be an equitable mortgage, in support of their claim. They point out that ASTCC

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remained in possession of the subject equipment throughout the transaction. As the real
purpose of the parties in entering into the transaction is to generate funds for ASTCC from
respondent by offering the subject equipment as security, it is obvious that the transaction
entered into was an equitable mortgage. Being an equitable mortgage, they argue that the
provisions of pledge/mortgage should be applied. In particular, they cite Article 2115 of the
Civil Code which provides that the sale of the thing pledged shall extinguish the principal
obligation and the creditor shall not be entitled to recover the deficiency, notwithstanding
any stipulation to the contrary. Thus, when petitioners delivered the subject equipment to
respondent on March 1999, it effectively sold those properties to respondent thereby
extinguishing or releasing their liability to it.[41]

In its February 9, 2017 Comment,[42] respondent argues that the CA, in its May 21, 2004
Decision, settled in the affirmative the issue of whether the Spouses Topacio signed the
CGLO in their personal capacities. The May 21, 2004 Decision attained finality, and thus,
the doctrine of stare decisis applies. The fact that they signed the CGLO in their personal
capacities is beyond dispute.[43]

Further, respondent emphasizes that petitioners should remain liable for the deficiency
obligation notwithstanding surrender of the subject equipment. It insisted that petitioners'
argument that the transaction was one of equitable mortgage deserves scant consideration
because it was raised for the first time on appeal. It reiterated that the CA correctly stated
that the subject transaction is not an equitable mortgage because the essential requisites
are not present. It also insisted that, even assuming arguendo that the transaction was
deemed a loan secured by a chattel mortgage, mere surrender of the subject equipment
and their eventual sale will not result in the waiver of respondent's deficiency claim.
Allegedly, petitioners' invocation of Article 2115 of the Civil Code is misplaced because the
provision refers to the rules governing "pledge" and not "chattel mortgage." It cited the
case of Superlines Transportation Co. Inc., et al. v. ICC Leasing and Financing
Corporation[44] where the Court held that both the Chattel Mortgage Law and Act 3135
governing extrajudicial foreclosure of real estate mortgage do not contain any provision
precluding the mortgagee from recovering deficiency of the principal obligation. Thus, it
concluded that it remains entitled to its deficiency claim.[45]

Petitioners filed a Reply[46] dated June 14, 2017. Therein, they argued that the May 21,
2004 Decision of the CA pertained only to the issue of whether respondent had a cause of
action against the Spouses Topacio. Allegedly, it did not touch on the issue of the validity
and enforceability of the insertion of the phrase "personal capacities" in the CGLO. They
reiterate that such insertion is invalid and unenforceable. Consequently, the Spouses
Topacio cannot be held jointly and severally liable with ASTCC.[47] Furthermore, they also
insist that the voluntary surrender of the subject equipment and their sale by respondent
effectively extinguished the obligation arising from the loan. This is because the
transaction entered into by the parties is in the nature of an equitable mortgage. The
provisions governing pledge/mortgage, including Article 2115 of the Civil Code, apply.[48]

ISSUES

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WHETHER THE COURT MAY VALIDLY CONSIDER THE ISSUE OF THE SPOUSES
TOPACIO'S SOLIDARY LIABILITY DESPITE THE FINAL AND EXECUTORY MAY 21,
2004 DECISION OF THE CA.

WHETHER PETITIONERS ARE OBLIGED TO PAY THEIR DEFICIENCY OBLIGATION

TO RESPONDENT.

The Court's Ruling

The petition is denied for lack of merit.

The issue of the Spouses Topacio's solidary liability with ASTCC to respondent has been
decided with finality in the May 21, 2004 Decision of the CA. The disposition contained in
the said decision constitutes the law of the case. The Court will not disturb what has been
decided.

The transaction entered into by the parties is a loan secured by a chattel mortgage.
Contrary to petitioners' assertions, the applicable law is not the provisions on pledge
contained in the Civil Code but those of Act No. 1508, otherwise known as the Chattel
Mortgage Law. Under established jurisprudence, any deficiency resulting from an
extrajudicial foreclosure of a chattel mortgage may be recovered by the mortgagee
through the institution of an independent civil action.[49] Accordingly, respondent is
entitled to payment of its deficiency claim.

The May 21, 2004 Decision of the CA,

as affirmed by the Court in its
February 16, 2005 Resolution,
constitutes the law of the case. The
solidary liability of the Spouses
Topacio has been decided and may no
longer be disturbed.

The issue of the Spouses Topacio's solidary liability was raised on appeal before the CA
when the RTC dismissed the complaint as against them. The CA, in its May 21, 2004
Decision, ruled that, by virtue of the CGLO, the Spouses Topacio bound themselves to be
jointly and solidarily liable with ASTCC for the obligation under the Lease Agreement. It
observed that the CGLO would be of no use if it was executed by the Spouses Topacio in
their capacity as corporate officers as it would still be ASTCC who would be bound thereby.
The CGLO would serve no purpose in such a case. Finally, it held that a reading of the
CGLO would show that it was a surety contract where the spouses bound themselves to be
jointly and solidarily liable with ASTCC.[50]

In its February 16, 2005 Resolution, this Court denied the Spouses Topacio's appeal
assailing the May 21, 2004 Decision of the CA. The said resolution attained finality on May
23, 2005 and was entered in the Book of Entries of Judgments.

The May 21, 2004 Decision of the CA, as affirmed by this Court, constitutes the law of the
case. It is controlling herein and may no longer be disturbed.

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The Court discussed the doctrine of "law of the case" in Spouses Bañes, et al. v. Lutheran
Church in the Philippines, et al.,[51] to wit:

Law of the case is the opinion delivered on a former appeal. It applies to an

established rule that when an appellate court passes on a question and
remands the case to the lower court for further proceedings, the question there
settled becomes the law of the case upon subsequent appeal. It further means
that whatever is once irrevocably established as the controlling legal rule or
decision between the same parties in the same case continues to be the law of
the case, whether correct on general principles or not, so long as the facts on
which such decision was predicated continue to be the facts of the case before
the court.

As a rule, a decision on a prior appeal of the same case is held to be the law of
the case whether that question is right or wrong, the remedy of the party
deeming himself aggrieved being to seek a rehearing. Indeed, courts must
adhere thereto, whether the legal principles laid down were "correct on general
principles or not," or "whether the question is right or wrong" because public
policy, judicial orderliness and economy require such stability in the final
judgments of courts or tribunals of competent jurisdiction.[52] (citations
omitted)

The May 21, 2004 Decision of the CA squarely passed upon the issue of whether the
Spouses Topacio are solidarity liable with ASTCC by virtue of the CGLO they signed. It
specifically discussed whether the same was executed by the Spouses Topacio in their
capacity as corporate officers or as individuals. These were answered in the affirmative by
the May 21, 2004 Decision. The said decision constitutes the controlling legal rule between
the parties and it continues to be the law of the case herein.

Spouses Topacio attempt to circumvent the May 21, 2004 Decision of the CA by arguing
that it is not binding as it failed to discuss the validity and enforceability of the insertion of
the phrase "personal capacities" in the CGLO.

The Court finds the argument to be deserving of scant consideration.

First, the fact that the May 21, 2004 Decision of the CA did not specifically discuss the
supposed insertion of the phrase "personal capacities" in the CGLO appears to be entirely
attributable to the Spouses Topacio. It appears that they failed to raise the same as an
argument before the CA and is only raising it now in the appeal of a separate, though
related, decision. Most importantly, the May 21, 2004 Decision has become final and
executory. Clearly, the supposed error ascribed to the CA arose out of the Spouses
Topacio's own act or inaction. The Court cannot and will not disturb a final judgment,
especially on such flimsy basis. Besides, the issue raised involves a question of fact: did
respondent insert the phrase "personal capacities" without the consent of the Spouses
Topacio? This question, being a question of fact, is not within the province of an appeal
under Rule 45 of the Rules of Court. Only questions of law may be raised in an appeal by
certiorari before this Court as it is not a trier of facts.[53]

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Second, the existence of the phrase "personal capacities" in the CGLO is not integral to the
CA's May 21, 2004 ruling.

A perusal of the CGLO shows that it expressly states that "[t]he obligations of the
undersigned hereunder shall be absolute and unconditional under all circumstances, being
joint and several with those of Lessee, and shall be performed by the undersigned
regardless of (a) whether Lessor shall have taken any steps to collect any of the
Obligations from Lessee or shall have otherwise exercised any of its rights or remedies
under the Lease against Lessee or the equipment..."[54] By this provision alone, it is clear
that the undersigned, the Spouses Topacio, bound themselves jointly and severally with
ASTCC in the fulfillment of the obligations.

Further, the CA expressly held that the Spouses Topacio could not have signed the CGLO in
their capacity as corporate officers because it would render the CGLO ineffectual. ASTCC
cannot be the surety to an obligation principally contracted by it. It would render nugatory
the entire purpose of the surety agreement. This is made more significant by the fact that
the CGLO provides that "[i]n order to induce you (the "Lessor") to purchase equipment
(the "Equipment"), and lease the same to [ASTCC] (the "Lessee") under a Lease
Agreement...," the CGLO was executed by the Spouses Topacio. Considering this purpose,
it is obvious that respondent would not have been induced to enter into the Lease
Agreement if the very party bound already in the Lease Agreement would be the surety as
well.

Similarly, the Spouses Topacio's contention that respondent misleads the Court by alleging
that the Lease Agreement, the Lease Schedules, and the CGLO were signed on separate
dates when, in truth, they were all signed on May 21, 1997, deserves scant consideration.
The fact that they were all signed on the same day is irrelevant in determining the
propriety of passing upon an issue already settled in a final and executory decision. It is
also irrelevant in determining the nature of the Spouses Topacio's liability.

Finally, the contention that respondent did not bother to explain to them the import of the
CGLO also deserves scant consideration of this Court. This matter should have been raised
before the CA, when it was resolving the propriety of the RTC dismissal of the complaint as
against the Spouses Topacio. They cannot belatedly raise it after the finality of the
judgment holding them capable of being solidarity liable with ASTCC by virtue of said
CGLO. Further, they admit that they did not even bother to read the CGLO. The Court will
not reward their negligence by considering such argument in their hopes that it will allow
reversal of a long final judgment.

The issue of the nature of the Spouses Topacio's liability to respondent has been settled.
The nature of such liability is joint and several. This is the law of the case, which the Court
cannot and will not disturb.

The transaction entered into by the

parties is in the nature of a loan
secured by a chattel mortgage over
the subject equipment. The

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provisions of the Chattel Mortgage

Law govern. Respondent is entitled
to payment of the deficiency
obligation.

The following facts are not in dispute: (1) ASTCC originally owned the subject equipment;
(2) it sold the subject equipment to respondent; (3) ASTCC and respondent then entered
into a lease contract covering the subject equipment, wherein ASTCC leased the subject
equipment from respondent; (4) the Spouses Topacio executed the CGLO; and (5) ASTCC
defaulted in the payment of the "rentals" under the lease agreement.

In order to determine the nature of the contract entered into by the parties, a review of its
pertinent provisions is essential.

Section 19.2(k) of the Lease Agreement, as found by the CA, provides that "...Upon
occurrence of any breach or default by LESSEE, LESSOR is authorized to sell at public or
private sale, such monies, securities and/or properties of value for the purpose of applying
the proceeds thereof to the payment of the LESSEE'S obligation under this
Agreement."[55]

Further, Section 19.3 of the Lease Agreement, per the CA, states that "[t]he proceeds
derived from the sale or releasing of the PROPERTY, shall, as and when received by the
LESSOR be applied first to the expenses incurred by the LESSOR in connection with the
repossession, sale or re-leasing of the PROPERTY, is reasonable compensation for
undertaking such sale or re-lease, all legal costs and fees, OTHER AMOUNTS, and the
balance, if any, to the RENTAL due from the LESSEE. In case the proceeds from such sale
or re-lease are not sufficient to cover all amounts payable by the LESSEE to the LESSOR,
the LESSEE shall be liable to the LESSOR for the deficiency."[56]

The Court finds, based on the foregoing provisions, that the transaction entered into by
the parties is a loan secured by a chattel mortgage. The parties charged the subject
equipment as security for the performance of ASTCC's obligation under the loan. It is
security for the payment of the supposed rentals under the lease agreement.

Article 2140 of the Civil Code provides that "[b]y chattel mortgage, personal property is
recorded in the Chattel Mortgage Register as a security for the performance of an
obligation. If the movable, instead of being recorded, is delivered to the creditor or a third
person, the contract is a pledge and not a chattel mortgage."

The Court is not unmindful of the fact that there is no evidence on record that the chattel
mortgage herein was registered by the parties in the Chattel Mortgage Register. However,
the mortgage is binding between the parties despite its non-registration pursuant to Article
2125, in relation to the last paragraph of Article 2124,[57] of the Civil Code. Article 2125
provides that "if the instrument is recorded, the mortgage is nevertheless binding between
the parties."

Petitioners claim that the provisions on pledge/mortgage apply to the transaction it

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entered into with respondent. In particular, they argue that their obligation to respondent
was extinguished when respondent sold the subject equipment. Further, they contend that
respondent is barred from recovering the deficiency by virtue of Article 2115 of the Civil
Code.

Article 2115 applies to the contract of pledge. Petitioners appear to have based their
argument on its applicability in the instant case on Article 2140 of the Civil Code, which
provides that if the movable is not recorded in the Chattel Mortgage Register but is
delivered to the creditor or third person, the contract is deemed a pledge and not a chattel
mortgage. Petitioners' logic seems to be that since they delivered the subject equipment to
respondent and the chattel mortgage was not recorded in the Chattel Mortgage Register,
the contract became a pledge. This is patently erroneous.

The delivery contemplated in Article 2140 of the Civil Code, for a chattel mortgage to
become a pledge, is a delivery to the mortgagee of the chattel subject of the mortgage at
the time of the execution of the contract. Respondent should have been placed in
possession of the subject equipment at the time of the execution of the Lease Agreement
and its Schedules for the mortgage to have become a pledge. This is evident in Article
2093 of the Civil Code, which states that it is necessary that the thing pledged be placed in
the possession of the creditor, or a third person, in order to constitute the contract of
pledge. Without delivery, there can be no pledge.

In the instant case, ASTCC did not deliver possession of the subject equipment to
respondent upon execution of the Lease Agreement and its Schedules. It retained
possession of the subject equipment and used it for its own purposes. No pledge was
constituted.

It is true that ASTCC voluntarily delivered possession of the subject equipment to

respondent upon its default or failure to pay the agreed upon "rental fees." Did this act
convert the chattel mortgage to a pledge?

The Court answers in the negative.

This act did not convert the chattel mortgage to a pledge. ASTCC delivered possession of
the subject equipment to respondent pursuant to the terms of the supposed Lease
Agreement, in particular Section 19.3 thereof. Its delivery was in performance of its
obligation under the chattel mortgage entered into with respondent. It was done merely in
performance of the terms of the chattel mortgage and cannot be interpreted to mean the
constitution of a pledge over the subject equipment. There could have been no pledge at
this point because the principal obligation, the payment of the loan, had already been
breached by non-payment on the specified due dates. The subject equipment was
delivered in order to satisfy the obligation arising from the default, not to constitute
another security for the loan through a pledge.

Most importantly, to sustain this position would result in the absurd scenario where, upon
breach of the principal obligation, every chattel mortgage is converted to a pledge by
delivery of the properties subject of the mortgage to the mortgagee in order to satisfy the
obligation secured thereby. This cannot be the scenario contemplated by the laws

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governing pledge and chattel mortgages. This would render nugatory the entire concept of
a chattel mortgage.

Petitioners also cannot seek solace from Article 2141 of the Civil Code, which makes
applicable to chattel mortgages the provisions of the Code on pledge, insofar as they are
not in conflict with the Chattel Mortgage Law.

Article 2115, in relation to Article 2141, is not applicable to chattel mortgages. The Court
has previously held that the provisions of Article 2115 may not be applied to chattel
mortgages as it is contrary to the provisions of the Chattel Mortgage Law regarding the
effects of foreclosure of chattel mortgage, viz.:[58]

Section 14 of Act No. 1508, as amended, or the Chattel Mortgage Law, states:

xxx xxx
xxx

The officer making the sale shall, within thirty days thereafter, make in writing a
return of his doings and file the same in the office of the Registry of Deeds
where the mortgage is recorded, and the Register of Deeds shall record the
same. The fees of the officer for selling the property shall be the same as the
case of sale on execution as provided in Act Numbered One Hundred and
Ninety, and the amendments thereto, and the fees of the Register of Deeds for
registering the officer's return shall be taxed as a part of the costs of sale,
which the officer shall pay to the Register of Deeds. The return shall particularly
describe the articles sold, and state the amount received for each article, and
shall operate as a discharge of the lien thereon created by the mortgage. 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
mortgage, shall be paid to the mortgagor or persons holding under him on
demand." (Emphasis supplied)

It is clear from the above provision that the effects of foreclosure under the
Chattel Mortgage Law run inconsistent with those of pledge under
Article 2115. Whereas, in pledge, the sale of the thing pledged
extinguishes the entire principal obligation, such that the pledgor may
no longer recover proceeds of the sale in excess of the amount of the
principal obligation, Section 14 of the Chattel Mortgage Law expressly
entitles the mortgagor to the balance of the proceeds, upon satisfaction
of the principal obligation and costs.

Since the Chattel Mortgage Law bars the creditor-mortgagee from

retaining the excess of the sale proceeds there is a corollary obligation
on the part of the debtor-mortgagee to pay the deficiency in case of a
reduction in the price at public auction.[59] (emphasis supplied)

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This ruling was echoed in Superlines Transportation Co. Inc. v. ICC Leasing and Financing
Corporation:[60]

xxx This Court had consistently ruled that if in an extrajudicial foreclosure of a

chattel mortgage a deficiency exists, an independent civil action may be
instituted for the recovery of said deficiency. To deny the mortgagee the right to
maintain an action to recover the deficiency after foreclosure of the chattel
mortgage would be to overlook the fact that the chattel mortgage is only given
as security and not as payment for the debt in case of failure of payment. Both
the Chattel Mortgage Law and Act 3135 governing extrajudicial foreclosure of
real estate mortgage, do not contain any provision, expressly or impliedly,
precluding the mortgagee from recovering deficiency of the principal obligation.

In a case of recent vintage, this Court held that if the proceeds of the sale are
insufficient to cover the debt in an extrajudicial foreclosure of the mortgage, the
mortgagee is still entitled to claim the deficiency from the debtor:

To begin with, it is settled that if the proceeds of the sale are

insufficient to cover the debt in an extrajudicial foreclosure of the
mortgage, the mortgagee is entitled to claim the deficiency from the
debtor. For when the legislature intends to deny the right of a
creditor to sue for any deficiency resulting from foreclosure of
security given to guarantee an obligation it expressly provides as in
the case of pledges [Civil Code, Art. 2115] and in chattel mortgages,
while silent as to the mortgagee's right to recover, does not, on the
other hand, prohibit recovery of deficiency. Accordingly, it has been
held that a deficiency claim arising from the extrajudicial foreclosure
is allowed.[61] (citations omitted)

To recapitulate, the transaction entered into by the parties is a loan secured by a chattel
mortgage. Considering it is a chattel mortgage, the Chattel Mortgage Law and
jurisprudence interpreting said law apply. Jurisprudence is clear that the mortgagee in a
chattel mortgage is entitled to recover any deficiency after an extrajudicial foreclosure of
the property mortgaged.

Applying the foregoing to the instant case, respondent is entitled to the payment of the
deficiency obligation resulting from the sale of the subject equipment. Further, since the
Spouses Topacio's solidary liability has been settled with finality by the May 21, 2004
Decision of the CA, respondent is entitled to such payment from ASTCC, Augusto, and
Antoinetta, jointly and severally. The CA did not err when it affirmed the RTC's ruling in the
wise.

WHEREFORE, the petition is DENIED. The June 13, 2016 Decision and October 5, 2016
Resolution of the Court of Appeals in CA-G.R. CV No. 103853 are AFFIRMED.

SO ORDERED." Del Castillo, J., no part; Reyes, Jr., J.C., J., designated additional
member per Raffle dated June 10, 2019.

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Very truly yours,

(Sgd.)LIBRADA
C. BUENA
Division Clerk of
Court

[1]Rollo, pp. 35-50; penned by Associate Justice Renato C. Francisco with Associate
Justices Apolinario D. Bruselas, Jr. and Danton Q. Bueser, concurring.

[2]Id. at 52-54.

[3]Id. at 56-71; penned by Acting Presiding Judge Luisito G. Cortez.

[4]Id. at 36.

[5]Id.

[6]Id. at 81-83.

[7]Id. at 86.

[8]Id. at 89.

[9]Id. at 92.

[10]Id. at 95.

[11]Id. at 36-38.

[12]Id. at 97.

[13]Id. at 39.

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[14]Id.

[15]Id. at 38.

[16]Supra note 13.

[17]Id.

[18]Id. at 56.

[19]Id. at 40.

[20]Id. at 40.

[21]Id.at 153-159; copy provided is incomplete. Based on the rollo, pp. 69 to 79, of G.R.
No. 166243, entitled Spouses Augusto S. Topacio and Antoinetta B. Topacio v. PCI Leasing
and Finance, Inc., the May 21, 2004 Decision of the CA is penned by Justice Mariano C.
Del Castillo and concurred in by Associate Justice Marina L. Buzon and Associate Justice
Noel G. Tijam.

[22]Id. at 40.

[23]Id.

[24]Id. at 161-162.

[25]Id. at 161.

[26]Supra note 24.

[27]Id. at 57.

[28]Id. at 70.

[29]Id. at 67.

[30]Id. at 66.

[31]Supra note 29.

[32]Id.

[33]Id. at 68.

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[34]Id. at 68-69.

[35]Id. at 69.

[36]Id. at 69-70.

[37]Id. at 45-46.

[38]Id. at 46-49.

[39]Id. at 21-23.

[40]Id. at 23.

[41]Id. at 23-28.

[42]Id. at 174-186.

[43]Id. at 178-182.

[44]446 Phil. 669 (2003).

[45]Rollo, pp. 184-185.

[46]Id. at 190-196.

[47]Id. at 190-191.

[48]Id. at 191-195.

[49]See Superlines Transportation Co. Inc. v. ICC Leasing and Financing Corp., supra note
44, at 688-689.

[50]Rollo, pp. 157-158.

[51]511 Phil. 458 (2005).

[52]Id. at 476-477.

[53]Mangahas, et al. v. Court of Appeals, et al, 588 Phil. 61, 77 (2008).

[54]Rollo, p. 97.

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[55]Id. at 48.

[56]id.

[57]ARTICLE 2124. Only the following property may be the object of a contract of
mortgage:

(1) Immovables;

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

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

[58]PAMECA Wood Treatment Plant, Inc., et al. v. Court of Appeals, et al, 369 Phil 544
551-552 (1999).

[59]Id.

[60]Supra note 44.

[61]Id. at 688-689.

URES

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