ANTICHRESIS

CASE 1: Diego v. Fernando (1960)

HELD: ANTICHRESIS

FACTS: On May 26, 1950, defendant Segundo Fernando executed a

deed of mortgage in favor of plaintiff Cecilio Diego over two parcels
of land registered in his name, to secure a loan P2,000, without
interest, payable within four years from the date of the mortgage.
After the execution of the deed, possession of the mortgaged
properties were turned over to the mortagagee.

RATIO: To be antichresis, it must be expressly agreed between

creditor and debtor that the former, having been given possession of
the properties given as security, is to apply their fruits to the payment
of the interest, and thereafter to the principal of his credit; so that if a
contract of loan with security does not stipulate the payment of
interest but provides for the delivery to the creditor by the debtor of
the property given as security, in order that the latter may gather its
fruits, without stating that said fruits are to be applied to the payment
of interest, if any, and afterwards that of the principal, the contract is
a mortgage and not antichresis.

Debtor failed to pay the loan after four years, the mortagagee Diego
made several demands upon him for payment but to no avail. Diego
filed this action for foreclosure of mortgage.
Defendant Fernando's defense was that transaction between him
and plaintiff was one of antichresis and not of mortgage; and that as
plaintiff had allegedly received a total of 120 cavans of palay from
the properties given as security, which, at the rate of P10 a cavan,
represented a value of P5,200, his debt had already been paid, with
plaintiff still owing him a refund of some P2,720.00.
The Court found that there was nothing in the deed of mortgage to
show that it was not a true contract of mortgage, and that the fact
that possession of the mortgaged properties were turned over to the
mortgagee did not alter the transaction; that the parties must have
intended that the mortgagee would collect the fruits of the mortgaged
properties as interest on his loan, which agreement is not
uncommon; and that the evidence showed that plaintiff had already
received 55 cavans of palay from the properties during the period of
his possession.
Judgment was rendered for plaintiff in the amount of P2,000, the
loan he gave the defendant, with legal interest from the filing of the
action until full payment, plus P500 as attorney's fees and the costs;
and in case of default in payment, for the foreclosure of the
mortgage. Hence, this appeal.
ISSUE: WON the contract between the parties is one of mortgage or
of antichresis

In the present case, the parties having agreed that the loan was to
be without interest, and the appellant not having expressly waived
his right to the fruits of the properties mortgaged during the time they
were in appellee's possession, the latter, like an antichretic creditor,
must account for the value of the fruits received by him, and deduct it
from the loan obtained by appellant. According to the findings of the
trial court, appellee had received a net share of 55 cavans of palay
out of the mortgaged properties up to the time he filed the present
action; at the rate of P9.00 per cavan (a rate admitted by the parties),
the total value of the fruits received by appellee is P495.00.
Deducting this amount from the loan of P2,000.00 received by
appellant from appellee, the former has only P1,505.00 left to pay
the latter.
Decision: the judgment of the court is modified in the sense that the
amount of appellee's principal recovery is reduced to P1,505.00, with
an obligation on the part of appellee to render an accounting of all
the fruits received by him from the properties in question from the
time of the filing of this action until full payment, or in case of
appellant's failure to pay, until foreclosure of the mortgage thereon,
the value of which fruits shall be deducted from the total amount of
his recovery.

BBS|CREDIT-ANTICHRESIS;CHATTEL MORTGAGE|Page 1 of 12

CHATTEL MORTGAGE
CASE 2: PCI Leasing & Finance, Inc. v. Trojan Metal Industries
Inc., et al.
FACTS: TMI came to PCI to seek a loan. Instead of extending a
loan, PCI offered to buy various equipment TMI owned in exchange
for P2.8M. Deeds of sale were executed.
PCI and TMI then entered into a lease agreement: (1) Lease the
equipment it previously owned
(2) Postdated checks for 24 monthly installments (3) Guaranty
deposit of P1.03M (security for timely performance of TMI's
obligations under the lease agreement, to be automatically forfeited
should TMI return the leased equipment before expiration of the
lease agreement) (4) Sps. Dizon (President and Vice-President of
TMI) also executed in favor of PCI a Continuing Guaranty of Lease
Obligations (agreed to immediately pay obligations in case TMI
failed, under the lease agreement)

PCI argues that transaction between the parties was a sale and
leaseback financing arrangement, which is not contrary to law,
morals, good customs, public order or public policy; guaranty deposit
should be forfeited in its favor, as provided in the lease agreement
Respondents
TMI on the other hand, argues that transfer of ownership to PCI was
never the intention of the parties; guaranty deposit will only be
forfeited if TMI returned the leased equipment to PCI before
expiration of the lease agreement.
ISSUE: WON the sale with lease agreement was a financial lease or
a loan secured by the chattel mortgage
HELD: It is a loan secured by chattel mortgage
RATIO: Since TMI never returned the lease property voluntarily, but
through writ of replevin, the guaranty deposit should not be forfeited.

However, to obtain additional loan from another financing company,

TMI used the leased equipment as temporary collateral. PCI
considered the 2nd mortgage a violation of the lease agreement. PCI
sent TMI a demand letter for payment of the latter's outstanding
obligation, which was unheeded.

SC said, in a true financial leasing, 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 latter's periodic payment of a fixed amount of
rental.

PCI filed in the RTC a complaint against TMI and sps. Dizon for
recovery of sum of money and personal property, with prayer for the
issuance of a writ of replevin. RTC issued the writ of replevin. PCI
sold the leased equipment to a third party and collected the proceeds
amounting to P1.025M. Respondent claimed that the sale with lease
agreement was a mere scheme to facilitate the financial lease
between PCI and TMI, and that the true agreement between them
was a loan secured by a chattel mortgage.

Here, TMI already owned the subject equipment before it transacted

with PCI. Therefore the transaction between the parties cannot be
deemed to be in the nature of a financial leasing as defined in law.
"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."*

RTC said Lease agreement is valid; judgment in favor of PCI.

Howver, CA set aside the decision of the RTC; sale with lease was a
loan secured by chattel mortgage Directed PCI to refund P1.1M to
TMI.

"The intention of the parties was not to enable the client to acquire
and use the equipment, but to extend to him loan." Financial leasing
contemplates the extension of credit to assist a buyer in acquiring
movable property which he can use and eventually own.

BBS|CREDIT-ANTICHRESIS;CHATTEL MORTGAGE|Page 2 of 12

The transaction between the parties was simply a loan secured by

chattel mortgage. Thus upon TMI's default, PCI was entitled to seize
the mortgaged equipment, not as owner but as creditor-mortgagee
forthe purpose of foreclosing the chattel mortgage. PCI's 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 mortgageas creditor-mortagee
CASE 3: ACME Shoe, Rubber & Plastic Corporation v. CA (1996)
FACTS:
1. Petitioner Chua Pac, the president and general manager of copetitioner "Acme Shoe, Rubber & Plastic Corporation," executed on
27 June 1978, for and in behalf of the company, a chattel mortgage
in favor of private respondent Producers Bank of the Philippines.
-The mortgage stood by way of security for petitioner's
corporate loan of P3M. A provision in the chattel mortgage
agreement was to this effect "(c) If the MORTGAGOR, his heirs, executors or administrators shall well
and truly perform the full obligation or obligations above-stated according to
the terms thereof, then this mortgage shall be null and void. x x x.
"In case the MORTGAGOR executes subsequent promissory note or
notes either as a renewal of the former note, as an extension thereof,
or as a new loan, or is given any other kind of accommodations such
as overdrafts, letters of credit, acceptances and bills of exchange,
releases of import shipments on Trust Receipts, etc., this mortgage
shall also stand as security for the payment of the said promissory
note or notes and/or accommodations without the necessity of
executing a new contract and this mortgage shall have the same force
and effect as if the said promissory note or notes and/or
accommodations were existing on the date thereof. This mortgage
shall also stand as security for said obligations and any and all other
obligations of the MORTGAGOR to the MORTGAGEE of whatever kind
and nature, whether such obligations have been contracted before,
during or after the constitution of this mortgage."

2. In due time, the loan of P3M was paid by petitioner corporation.

3. Subsequently, in 1981, it obtained from respondent bank
additional financial accommodations totalling P2.7M. These
borrowings were on due date also fully paid.

4. On 10 and 11 January 1984, the bank yet again extended to

petitioner corporation a loan of 1M covered by four promissory notes
for P250K each. Due to financial constraints, the loan was not
settled at maturity.
6. Respondent bank thereupon applied for an extrajudicial
foreclosure of the chattel mortgage, prompting petitioner corporation
to forthwith file an action for injunction, with damages and a prayer
for a writ of preliminary injunction.
7. Ultimately, the court dismissed the complaint and ordered the
foreclosure of the chattel mortgage. It held petitioner corporation
bound by the stipulations, aforequoted, of the chattel mortgage.
8. Petitioner corporation appealed to the CA which affirmed, "in all
respects," the decision of the RTC.
ISSUE: Would it be valid and effective to have a clause in a chattel
mortgage that purports to likewise extend its coverage to obligations
yet to be contracted or incurred?
HELD: No.
RATIO:
Chattel mortgage can cover only obligations existing at the time
mortgage is constituted [Act 1508 Chattel Mortgage Law]
While a pledge, real estate mortgage, or antichresis may
exceptionally secure after-incurred obligations so long as these
future debts are accurately described, a chattel mortgage,
however, can only cover obligations existing at the time the
mortgage is constituted.
Although a promise expressed in a chattel mortgage to include debts
that are yet to be contracted can be a binding commitment that can
be compelled upon, the security itself, however, does not come into
existence or arise until after a chattel mortgage agreement covering
the newly contracted debt is executed either by concluding a fresh
chattel mortgage or by amending the old contract conformably with
the form prescribed by the Chattel Mortgage Law.

BBS|CREDIT-ANTICHRESIS;CHATTEL MORTGAGE|Page 3 of 12

Refusal on the part of the borrower to execute the agreement so as

to cover the after-incurred obligation can constitute an act of default
on the part of the borrower of the financing agreement whereon the
promise is written but, of course, the remedy of foreclosure can only
cover the debts extant at the time of constitution and during the life of
the chattel mortgage sought to be foreclosed.
Affidavit of Good Faith requirement makes it obvious that the
obligation is current
A chattel mortgage, as hereinbefore so intimated, must comply
substantially with the form prescribed by the Chattel Mortgage Law
itself. One of the requisites, under Section 5 thereof, is an affidavit of
good faith. While it is not doubted that if such an affidavit is not
appended to the agreement, the chattel mortgage would still be valid
between the parties (not against third persons acting in good faith,
makes it obvious that the debt referred to in the law is a current, not
an obligation that is yet merely contemplated. In the chattel
mortgage here involved, the only obligation specified in the chattel
mortgage contract was the P3,000,000.00 loan which petitioner
corporation later fully paid.
By virtue of Section 3 of the Chattel Mortgage Law, the payment of
the obligation automatically rendered the chattel mortgage void or
terminated. In Belgian Catholic Missionaries, Inc., vs. Magallanes
Press, Inc., et al.,the Court said -"x x x A mortgage that contains a
stipulation in regard to future advances in the credit will take effect
only from the date the same are made and not from the date of the
mortgage."
The significance of the ruling to the instant problem would be that
since the 1978 chattel mortgage had ceased to exist coincidentally
with the full payment of the P3,000,000.00 loan, there no longer was
any chattel mortgage that could cover the new loans that were
concluded thereafter.
CASE 4: MAKATI LEASING AND
WEAREVER TEXTILE MILLS & CA

FINANCE

CORP.

v.

FACTS: Wearever Textile Mills, Inc. executed a chattel mortgage

contract in favor of Makati Leasing and Finance Corporation covering

certain raw materials and machinery. Upon default, Makati Leasing fi

led a petition for judicial foreclosure of the properties mortgaged.
Acting on Makati Leasings application for replevin, the lower court
issued a writ of seizure. Pursuant thereto, the sheriff enforcing the
seizure order seized the machinery subject matter of the mortgage.
In a petition for certiorari and prohibition, the Court of Appeals
ordered the return of the machinery on the ground that the same
can-not be the subject of replevin because it is a real property
pursuant to Article415 of the new Civil Code, the same being
attached to the ground by means of bolts and the only way to
remove it from Wearever textiles plant would be to drill out or
destroy the concrete floor. When the motion for reconsideration of
Makati Leasing was denied by the Court of Appeals, Makati Leasing
elevated the matter to the Supreme Court.
ISSUE/S: WON is real or personal property from the point of view of
the parties.
HELD: The subject property is considered as personal property.
RATIO: There is no logical justification to exclude the rule out the
present case from the application of the pronouncement in Tumalad
v Vicencio, 41 SCRA 143. If a house of strong materials, like what
was involved in the Tumalad case, may be considered as personal
property for purposes of executing a chattel mortgage thereon as
long as the parties to the contract so agree and no innocent third
party will be prejudiced thereby, there is absolutely no reason why a
machinery, which is movable in its nature and becomes immobilized
only by destination or purpose, may not be likewise treated as such.
This is really because one who has so agreed is estopped from the
denying the existence of the chattel mortgage.
In rejecting petitioners assertion on the applicability of
the Tumalad doctrine, the CA lays stress on the fact that the house
involved therein was built on a land that did not belong to the owner
of such house. But the law makes no distinction with respect to the
ownership of the land on which the house is built and We should not
lay down distinctions not contemplated by law.

BBS|CREDIT-ANTICHRESIS;CHATTEL MORTGAGE|Page 4 of 12

It must be pointed out that the characterization by the private

respondent is indicative of the intention and impresses upon the
property the character determined by the parties. As stated
in Standard Oil Co. of New York v. Jaramillo, 44 Phil. 630, it
is undeniable that the parties to a contract may, by agreement, treat
as personal property that which by nature would be a real
property as long as no interest of third parties would be prejudiced
thereby.

5. Wilfredo Dy executed a deed of absolute sale in favor of the

petitioner over the tractor in question. At this time, the subject tractor
was in the possession of Libra Finance due to Wilfredo Dys failure to
pay the amortizations.

The status of the subject matter as movable or immovable property

was not raised as an issue before the lower court and the CA, except
in a supplemental memorandum in support of the petition filed in the
appellate court. There is no record showing that the mortgage has
been annulled, or that steps were taken to nullify the same. On the
other hand, respondent has benefited from the said contract.

7. Petitioner was able to convince his sister to purchase the truck so

that full payment can be made for both

Equity dictates that one should not benefit at the expense of another.

9. Meanwhile, Civil Case entitled Gelac Trading, Inc. v. Wilfredo

Dy, a collection case to recover the sum of P12,269.80 was pending
in another court

As such, private respondent could no longer be allowed to impugn

the efficacy of the chattel mortgage after it has benefited therefrom.
Therefore, the questioned machinery should be considered as
personal property.

CASE 5: Dy v. CA (1991)
FACTS:
1. The petitioner, Perfecto Dy and Wilfredo Dy are brothers.
2. Sometime in 1979, Wilfredo Dy purchased a truck and a farm
tractor through financing extended by Libra Finance and Investment
Corporation (Libra). Both truck and tractor were mortgaged to Libra
as security for the loan.
3. The petitioner wanted to buy the tractor from his brother so, he
wrote a letter to Libra requesting that he be allowed to purchase from
Wilfredo Dy the said tractor and assume the mortgage debt of the
latter.

6. Despite the offer of full payment by the petitioner to Libra for the
tractor, the immediate release could not be effected because
Wilfredo Dy had obtained financing not only for said tractor but also
for a truck and Libra insisted on full payment for both.

8. A PNB check was issued in the amount of P22,000.00 in favor of

Libra, thus settling in full the indebtedness of Wilfredo Dy with the
financing firm. Libra insisted that it be cleared first before releasing
the chattels

10. On the strength of an alias writ of execution issued, the provincial

sheriff was able to seize and levy on the tractor which was in the
premises of Libra in Carmen, Cebu. The tractor was subsequently
sold at public auction where Gelac Trading was the alone bidder.
Later, Gelac sold the tractor to one of its stockholders, Antonio
Gonzales.
11. It was only when the check was cleared that the petitioner
learned about GELAC having already taken custody of the subject
tractor
12. Petitioner filed an action to recover the subject tractor against
GELAC Trading
13. RTC rendered judgment in favor of the petitioner
14. CA reversed the decision of the RTC (held that the tractor in
question still belonged to Wilfredo Dy when it was seized and levied
by the sheriff)

4. Libra thru its manager, Cipriano Ares approved the petitioners

request.

BBS|CREDIT-ANTICHRESIS;CHATTEL MORTGAGE|Page 5 of 12

ISSUE: WON ownership of the farm tractor had already passed to

herein petitioner when said tractor was levied on by the sheriff
pursuant to an alias writ of execution issued in another case in favor
of respondent GELAC Trading Inc.
HELD: Yes.
RATIO:
SPECIAL CONTRACTS; CHATTEL MORTGAGE; RIGHT OF
MORTGAGOR TO SELL THE PROPERTY MORTGAGED; RULE.
The mortgagor who gave the property as security under a chattel
mortgage did not part with the ownership over the same. He had the
right to sell it although he was under the obligation to secure the
written consent of the mortgagee or he lays himself open to criminal
prosecution under the provision of Article 319 par. 2 of the Revised
Penal Code. And even if no consent was obtained from the
mortgagee, the validity of the sale would still not be affected.
APPLICABLE IN CASE AT BAR. We see no reason why Wifredo
Dy, as the chattel mortgagor can not sell the subject tractor. There is
no dispute that the consent of Libra Finance was obtained in the
instant case. Libra allowed the petitioner to purchase the tractor and
assume the mortgage debt of his brother. The sale between the
brothers was therefore valid and binding as between them and to the
mortgagee, as well.
REMEDY OF MORTGAGEE IN CASE MORTGAGOR FAILED TO
PAY THE DEBT. It was Libra Finance which was in possession of
the subject tractor due to Wilfredos failure to pay the amortization as
a preliminary step to foreclosure. As mortgagee, he has the right of
foreclosure upon default by the mortgagor in the performance of the
conditions mentioned in the contract of mortgage. The law implies
that the mortgagee is entitled to possess the mortgaged property
because possession is necessary in order to enable him to have the
property sold. While it is true that Wilfredo Dy was not in actual
possession and control of the subject tractor, his right of ownership
was not divested from him upon his default. Neither could it be said
that Libra was the owner of the subject tractor because the
mortgagee can not become the owner of or convert and appropriate
to himself the property mortgaged (Article 2088, Civil Code). Said

property continues to belong to the mortgagor. The only remedy

given to the mortgagee is to have said property sold at public auction
and the proceeds of the sale applied to the payment of the obligation
secured by the mortgagee (See Martinez vs. PNB, 93 Phil. 765, 767
[1953]). There is no showing that Libra Finance has already
foreclosed the mortgage and that it was the new owner of the subject
tractor. Undeniably, Libra gave its consent to the sale of the subject
tractor to the petitioner. It was aware of the transfer of rights to the
petitioner.
PURCHASER OF MORTGAGED PROPERTY STEPS INTO THE
SHOES OF THE MORTGAGOR. Where a third person purchases
the mortgaged property, he automatically steps into the shoes of the
original mortgagor. His right of ownership shall be subject to the
mortgage of the thing sold to him. In the case at bar, the petitioner
was fully aware of the existing mortgage of the subject tractor to
Libra. In fact, when he was obtaining Libras consent to the sale, he
volunteered to assume the remaining balance of the mortgage debt
of Wilfredo Dy which Libra undeniably agreed to.
SALE; DELIVERY OF PROPERTY VESTS OWNERSHIP TO THE
VENDEE. Article 1496 of the Civil Code states that the ownership
of the thing sold is acquired by the vendee from the moment it is
delivered to him in any of the ways specified in Articles 1497 to 1501
or in any other manner signifying an agreement that the possession
is transferred from the vendor to the vendee. We agree with the
petitioner that Articles 1498 and 1499 are applicable in the case at
bar.
RULE ON CONSTRUCTIVE DELIVERY. In the instant case,
actual delivery of the subject tractor could not be made. However,
there was constructive delivery already upon the execution of the
public instrument pursuant to Article 1498 and upon the consent or
agreement of the parties when the thing sold cannot be immediately
transferred to the possession of the vendee (Article 1499).
CONSUMMATION OF SALE; NOT DEPENDENT ON THE
ENCASHMENT OF CHECK. The payment of the check was
actually intended to extinguish the mortgage obligation so that the
tractor could be released to the petitioner. It was never intended nor
could it be considered as payment of the purchase price because the
relationship between Libra and the petitioner is not one of sale but
BBS|CREDIT-ANTICHRESIS;CHATTEL MORTGAGE|Page 6 of 12

still a mortgage. The clearing or encashment of the check which

produced the effect of payment determined the full payment of the
money obligation and the release of the chattel mortgage. It was not
determinative of the consummation of the sale. The transaction
between the brothers is distinct and apart from the transaction
between Libra and the petitioner. The contention, therefore, that the
consummation of the sale depended upon the encashment of the
check is untenable.
The sale of the subject tractor was consummated upon the execution
of the public instrument on September 4, 1979. At this time
constructive delivery was already effected. Hence, the subject tractor
was no longer owned by Wilfredo Dy when it was levied upon by the
sheriff in December, 1979. Well settled is the rule that only properties
unquestionably owned by the judgment debtor and which are not
exempt by law from execution should be levied upon or sought to be
levied upon. For the power of the court in the execution of its
judgment extends only over properties belonging to the judgment
debtor. (Consolidated Bank and Trust Corp. v. Court of Appeals,
G.R. No. 78771, January 23, 1991).
CASE 6: RCBC v. ROYAL CARGO CORP.
FACTS: 1. Terrymanila, Inc. (Terrymanila) filed a petition for
voluntary insolvency with the Regional Trial Court (RTC) of
Bataan on February 13, 1991. 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.
2. 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.

3. On April 12, 1991, the Bataan RTC declared Terrymanila

insolvent.
4. On June 11, 1991, the Manila RTC, by Decision of even date,
rendered judgment in the collection case in favor of respondent.
5. 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.
6. 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
[9]
the inclusion in the auction sale of some of the properties which it
had attached, respondent questioned the failure to duly notify it of
the sale at least 10 days before the sale, citing Section 14 of Act No.
1508 or the Chattel Mortgage Law.
7. RTC of Manila ruled in favor of defendant and ordered petitioner to
pay the former for the computed damages. The RTC ratiocinated
that respondent had a right to be timely informed of the foreclosure
sale.
ISSUE/S: WON the petitioner, as mortgagee, had the duty to notify
the respondent of the public auction sale.
HELD: YES, the petitioner had to inform the respondent of the 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.
RATIO: Section 13 of the Chattel Mortgage Law allows the wouldbe redemptioner thereunder to redeem the mortgaged property
only before its sale. Consider the following pronouncement
in Paray:

[T]here is no law in our statute books which vests

the right of redemption over personal property. Act
BBS|CREDIT-ANTICHRESIS;CHATTEL MORTGAGE|Page 7 of 12

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.

The right of redemption applies to real properties,

not personal properties, sold on execution.

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 before the sale of the
property to clear it from the encumbrance of the mortgage. It is not
the same as right of redemption which is the right of the mortgagor
to redeem the mortgaged property after registration of the
foreclosure sale, and even after confirmation of the sale.
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.
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.
However, 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. 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. Equitable considerations
thus sway against it. 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.
In any event, even if respondent would have participated in the
auction sale and matched petitioners bid, the superiority of
petitioners (mortgagee) 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
cannot
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.
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.
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, the right of respondent, as an attaching creditor or as purchaser,
had it purchased the mortgaged chattel at the auction sale, is
BBS|CREDIT-ANTICHRESIS;CHATTEL MORTGAGE|Page 8 of 12

subordinate to the lien of the mortgagee who has in his favor a valid
chattel mortgage
CASE 7: Servicewide Specialists, Inc. v. Court of Appeals, G.R.
No. 110048, November 19, 1999,318 SCRA 493.
FACTS: 1. Leticia Laus purchased on credit a Colt Galant xxx from
Fortune Motors (Phils.) Corporation and executed a promissory note
for the amount of P56,028.00, inclusive of 12% annual interest,
payable within a period of 48 months. In case of default in the
payment of any installment, the total principal sum, together with the
interest, shall become immediately due and payable.
2. As a security for the promissory note, a chattel mortgage was
constituted over the said motor vehicle, with a deed of assignment
incorporated therein such that the credit and mortgage rights were
assigned by Fortune Motors Corp. in favor of Filinvest Credit
Corporation with the consent of the mortgagor-debtor Laus. Filinvest
in turn assigned the credit in favor of Servicewide Specialists, Inc.
3. Laus failed to pay the monthly installment for April 1977 and the
succeeding 17 months. Servicewide demanded payment of the
entire outstanding balance with interests but Laus failed to pay
despite formal demands.
4. As a result of Laus failure to settle her obligation, or at least to
surrender possession of the motor vehicle for foreclosure,
Servicewide instituted a complaint for replevin, impleading Hilda Tee
and John Dee in whose custody the vehicle was believed to be at the
time of the filing of the suit. Plaintiff alleged, among others, that it had
superior lien over the mortgaged vehicle. The court approved the
replevin bond.
5. Alberto Villafranca filed a third party claim contending that he is
the absolute owner of the subject motor vehicle after purchasing it
from a certain Remedios Yang free from all lien and emcumbrances;
and that on July 1984, the said automobile was taken from his
residence by Deputy Sheriff Bernardo Bernabe pursuant to the
seizure order issued by the court a quo.

6. Upon motion of the plaintiff, Villafranca was substituted as

defendant and summons was served upon him. Villafranca moved
for the dismissal of the complaint on the ground that there is another
action pending between the same parties before the Makati RTC.
The court granted the the motion but subsequently set aside the
order of dismissal. For failure to file his Answer as required by the
court a quo, Villafranca was declared in default and plaintiffs
evidence was received ex parte.
6. The lower court later on dismissed the complaint for insufficiency
of evidence. Its motion for reconsideration having been denied,
petitioner appealed to CA on the ground that a suit for replevin aimed
at the foreclosure of a chattel is an action quasi in rem, and does not
require the inclusion of the principal obligor in the Complaint.
9. CA affirmed the RTC decision. It also denied petitioners MR,
hence, the present petition for review on certiorari
ISSUE: WON a case for replevin may be pursued against the
defendant, Alberto Villafranca, without impleading the absconding
debtor-mortgagor

HELD: NO
RATIO: In a suit for replevin, a clear right of possession must be
established. A foreclosure under a chattel mortgage may properly be
commenced only once there is default on the part of the mortgagor
of his obligation secured by the mortgage. The replevin in this case
has been resorted to in order to pave the way for the foreclosure of
what is covered by the chattel mortgage. The conditions essential
for such foreclosure would be to show, firstly, the existence of the
chattel mortgage and, secondly, the default of the mortgagor. These
requirements must be shown because the validity of the plaintiffs
exercise of the right of foreclosure is inevitably dependent thereon.
Since the mortgagees right of possession is conditioned upon the
actual fact of default which itself may be controverted, the inclusion
of other parties, like the debtor or the mortgagor himself, may be
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required in order to allow a full and conclusive determination of the

case. When the mortgagee seeks a replevin in order to effect the
eventual foreclosure of the mortgage, it is not only the existence of,
but also the mortgagors default on, the chattel mortgage that,
among other things, can properly uphold the right to replevy the
property. The burden to establish a valid justification for such action
lies with the plaintiff. An adverse possessor, who is not the
mortgagor, cannot just be deprived of his possession, let alone be
bound by the terms of the chattel mortgage contract, simply because
the mortgagee brings up an action for replevin.

4. RTC-Makati: ordered Pameca to pay the P4mil. CA affirmed.

Leticia Laus, being an indispensable party, should have been

impleaded in the complaint for replevin and damages. An
indispensable party is one whose interest will be affected by the
courts action in the litigation, and without whom no final
determination of the case can be had. The partys interest in the
subject matter of the suit and in the relief sought are so inextricably
intertwined with the other parties that his legal presence as a party to
the proceeding is an absolute necessity. In his absence, there
cannot be a resolution of the dispute of the parties before the Court
which is effective, complete, or equitable.

Petition in SC, Pameca argues:

5. CA ruling: Disregarded documents (inventory dated March 1980)

for failure to present them in evidence, or allude to them before the
LC and said that it is not unlikely that the chattels deteriorated as
thereby fetching a low price at the auction sale.
- Did not find anything fraudulent in the circumstance that
DBP was the sole bidder, as all legal procedures for the conduct of a
foreclosure sale were complied with, thus giving rise to the
presumption of regularity in the performance of public duties.
-

CASE 8: PAMECA Wood Treatment Plant, Inc. v. CA (1999)

FACTS:
1.1980: Pameca loaned P2mil from DBP. By virtue of this loan,
Pameca (through its Pres, Teves) executed a promissory note
promising to pay by installment.
2. SECURITY for the LOAN: Chattel mortgage over PAMECAs
properties in Dumaguete (inventories, furniture, equipment)
3. 1984: PAMECA failed to pay, so DBP extrajudicially foreclosed the
chattel mortgage. DBP was the sole bidder and bought it for
P322,000. After which, DBP filed a complaint for collection of the
balance of around P4mil.
- Complaint filed against Pameca and Herminio Teves and
Victoria Teves as solidary debtors with Pameca under the
promissory note.

Public auction sale were tainted with fraud. Claims the

chattels were bought by DBP as sole bidder in only 1/6 of
the market value, hence unconscionable and inequitable,
and so it is null and void. (claims the market value was for
more than P2mil) --- evidenced from an inventory dated
March 1980 (valued at around P2.5mil), in accordance with
the terms of the chattel mortgage contract that required that
the inventories "be maintained at a level no less than P2
mil".
NCC 1484 and 2115 should be applied by analogy reading
the spirit of the law, and taking into consideration that the
contract of loan was a contract of adhesion
Teves, Teves, and Pulido were not solidarily liable with
Pameca because the intention was that the loan is only for
the Corps benefit

ISSUE/S:
1.WON the public auction sale of petitioner PAMECAs chattels were
tainted with fraud, as the chattels of the said petitioner were bought
by private respondent as sole bidder in only 1/6 of the market value
of the property, hence unconscionable and inequitable, and therefore
null and void. -NO
2. WON Article 1484 and Article 2115 of the Civil Code should be
applied by analogy -NO
3. WON petitioners Herminio Teves, Victoria Teves and Hiram
Diday R. Pulido are solidarily liable with PAMECA Wood Treatment
BBS|CREDIT-ANTICHRESIS;CHATTEL MORTGAGE|Page 10 of 12

Plant, Inc. when the intention of the parties was that the loan is only
for the corporations benefit. -YES
RATIO:
SC unable to find merit that the public auction sale is void on
grounds of fraud and inadequacy of price.
Petitioners never assailed the validity of the sale in the RTC, and
only in the Court of Appeals did they attempt to prove inadequacy of
price through the documents, i.e., the Open-End Mortgage on
Inventory and inventory dated March 31, 1980, likewise attached to
their Petition before this Court. Basic is the rule that parties may not
bring on appeal issues that were not raised on trial.
Having nonetheless examined the inventory and chattel mortgage
document as part of the records, We are not convinced that they
effectively prove that the mortgaged properties had a market value of
at least P2,000,000.00 on January 18, 1984, the date of the
foreclosure sale. At best, the chattel mortgage contract only
indicates the obligation of the mortgagor to maintain the inventory at
a value of at least P2,000,000.00, but does not evidence compliance
therewith. The inventory, in turn, was as of March 31, 1980, or even
prior to April 17, 1980, the date when the parties entered into the
contracts of loan and chattel mortgage, and is far from being an
accurate estimate of the market value of the properties at the time of
the foreclosure sale four years thereafter. Thus, even assuming that
the inventory and chattel mortgage contract were duly submitted as
evidence before the trial court, it is clear that they cannot suffice to
substantiate petitioners allegation of inadequacy of price.
Furthermore, the mere fact that respondent bank was the sole bidder
for the mortgaged properties in the public sale does not warrant the
conclusion that the transaction was attended with fraud. Fraud is a
serious allegation that requires full and convincing evidence, and
may not be inferred from the lone circumstance that it was only
respondent bank that bid in the sale of the foreclosed properties.
The sparseness of petitioners evidence in this regard leaves Us no
discretion but to uphold the presumption of regularity in the conduct
of the public sale.

NCC 2115 in relation to the Chattel Mortgage Law: they are

INCONSISTENT
It is clear from Sec. 14 of Chattel Mortgage Law that the effects of
foreclosure 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.
While it is true that section 3 of Act No. 1508 provides that a chattel
mortgage is a conditional sale, it further provides that it is a
conditional sale of personal property as security for the payment of a
debt, or for the performance of some other obligation specified
therein. The lower court overlooked the fact that the chattels
included in the chattel mortgage are only given as security and not
as a payment of the debt, in case of a failure of payment.
The value of the chattels changes greatly from time to time, and
sometimes very rapidly. If, for example, the chattels should greatly
increase in value and a sale under that condition should result in
largely overpaying the indebtedness, and if the creditor is not
permitted to retain the excess, then the same token would require
the debtor to pay the deficiency in case of a reduction in the
price of the chattels between the date of the contract and a
breach of the condition.
Mr. Justice Kent, in the 12th Edition of his Commentaries, as well as
other authors on the question of chattel mortgages, have said, that
in case of a sale under a foreclosure of a chattel mortgage, there is
no question that the mortgagee or creditor may maintain an action
for the deficiency, if any should occur. And the fact that Act No. 1508
permits a private sale, such sale is not, in fact, a satisfaction of the
BBS|CREDIT-ANTICHRESIS;CHATTEL MORTGAGE|Page 11 of 12

debt, to any greater extent than the value of the property at the time
of the sale. The amount received at the time of the sale, of course,
always requiring good faith and honesty in the sale, is only a
payment, pro tanto, and an action may be maintained for a
deficiency in the debt.
NCC 1484 applies solely to the sale of personal property the price of
which is payable in installments.
- Although NCC 1484, par (3) bars any action against the purchaser
to recover an unpaid balance of the price, where theseller opts to
foreclose the chattel mortgage, should the buyer s failure to pay
cover 2 or more installments, this provisionis specifically applicable
to a sale on instalments.
- To accommodate Pamecos prayer even on the basis of equity
would be to expand the application of the provisions of NCC 1484 to
situations beyond its specific purview, and ignore the language and
intent of the Chattel Mortgage Law.

jointly and severally bind ourselves to pay for

attorney's fees as provided for in the mortgage
contract
o Promissory note was signed:
Pameca by: (followed by the) sgd.
Teveses and Pulido
Clear that Teveses intended to bind themselves solidarily
with Pameca in the loan.
They are not made to answer for the corporate act of
Pameca, but are made liable because they made
themselves co-makers with Pameca under the promissory
note.
o

- Equity, "justice outside legality", is applied only in the absence of,

and never against, statutory law or judicial rules of procedure
Teveses are solidarily liable
-

As found by the TC and CA, the terms of the promissory

note unmistakably set forth the solidary nature of the
Teveses commitment:
o we hereby bind ourselves, jointly and severally , to
make partial payments as follows:
o in case of default in the payment of any
installment above, we bind ourselves to pay DBP for
advance
o bind ourselves to pay additional interest and
penalty charges on loan amortizations or portion
thereof in arrears as follows
o bind ourselves to pay for bank advances for
insurance premiums, taxes
o bind ourselves to reimburse DBP on a pro-rata
basis for all costs incurred by DBP on the foreign
currency borrowings from where the loan shall be
drawn
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