1
G.R. No. 107554 February 13, 1997
CEBU INTERNATIONAL FINANCE
CORPORATION, petitioner,
vs.
COURT OF APPEALS, ROBERTO ONG AND ANG
TAY, respondents.
KAPUNAN, J.:
In this petition for review on certiorari under Rule 45
of the Revised Rules of Court, petitioner seeks to set
aside the decision of the Court of Appeals in CA-
G.R C.V. No. 26257 dated 2 July 1992 which
affirmed the decision of the Regional Trial Court in
Civil Case No. CEB-6919, declaring the chattel
mortgage void and ordering petitioner and private
respondent Robert Ong to pay damages to private
respondent Ang Tay. The Court of Appeals'
resolution dated 30 September 1992 is similarly
impugned for denying petitioner's motion for
reconsideration.
Gleaned from the records are the following facts:
On 4 March 1987, Jacinto Dy executed a Special
Power of Attorney1 in favor of private respondent
Ang Tay, authorizing the latter to sell the cargo
vessel Owned by Dy and christened LCT "Asiatic."
On 28 April 1987, through a Deed of Absolute
Sale,2 Ang Tay sold the subject vessel to private
respondent Robert Ong (Ong) for P900,000.00. Ong
paid the purchase price by issuing three (3) checks
in the following amounts: P150,000.000, P600,000.00
and P150,000.00. However, since the payment was
not made in cash, it was specifically stipulated in
the deed of sale that the "LCT Asiatic shall not be
registered or transferred to Robert Ong until
complete payment." 3 Thereafter, Ong obtained
possession of the subject vessel so he could begin
deriving economic benefits therefrom. He, likewise,
obtained copies of the unnotarized deed of sale
allegedly to be shown to the banks to enable him
to acquire a loan to replenish his (Ong's) capital.
The aforequoted condition, however,which was
handwritten on the original deed of sale does not
appear on Ong's copies.
Contrary to the aforementioned agreements and
without the knowledge of Ang Tay, Ong had his
copies of the deed of sale (on which the
aforementioned prohibition does not appear)
notarized on 18 May 1987.4 Ong presented the
notarized deed to the Philippine Coast Guard
which subsequently issued him a Certificate of
Ownership5 and a Certificate of Philippine
Register6 over the subject vessel on 27 May 1987.
Ong also succeeded in having the name of the
vessel changed to LCT "Orient Hope."
On 29 October 1987, Ong acquired a loan from
petitioner in the amount of P496,008.00 to be paid
in installments as evidenced by a promissory note of
even date.7
As security for the loan, Ong executed a chattel
mortgage over the subject vessel,8 which mortgage
was registered with the Philippine Coast Guard and
annotated on the Certificate of Ownership.9 In
paragraph 3 of the Deed of Chattel Mortgage, it
was stated that:
3. The said sum of FOUR HUNDRED
NINETY SIX THOUSAND EIGHT ONLY
(496,008.00) represents the balance
due on of MORTGAGOR(S) from the
MORTGAGEE and is payable in the
office of the MORTGAGEE at Cebu
City or in the office of the latter's
assignee, in case the rights and
interests of the MORTGAGEE in the
foregoing mortgage are assigned to
a third person, under the terms of
said promissory note, as follows: (a)
TWENTY THOUSAND SIX HUNDRED
SIXTY SEVEN ONLY** Pesos
(P20,667.00) on or before . . . . . . and
(b) the balance in Twenty Four (24)
equal successive monthly
installments on the . . . . . . day of
each and every succeeding month
thereafter until the amount is fully
paid. The interest on the foregoing
installments shall be paid on the
same date that the installments
become payable and additional
interest at the rate of fourteen (14%)
per cent per annum will be charged
on all amounts, principal and
interest, not paid on due
date. 10 (Emphasis ours.)
Ong defaulted in the payment of the monthly
installments. Consequently, on 11 May 1988,
petitioner sent him a letter 11 demanding delivery of
the mortgaged vessel for foreclosure or in the
alternative to pay the balance of P437,802.00
pursuant to paragraph 11 of the deed of chattel
mortgage. 12
Meanwhile, the two checks (worth P600,000.00 and
P150,000.00) paid by Ong to Ang Tay for the
purchase of the subject vessel bounced. Ang Tay's
search for the elusive Ong and all attempts to
confer with him proved to be futile. A subsequent
investigation and inquiry with the Office of the
Coast Guard revealed that the subject vessel was
already in the name of Ong, in violation of the
express undertaking contained in the original deed
of sale.
As a result thereof, on 13 January 1988, Ang Tay
and Jacinto Dy filed a civil case for rescission and
replevin with damages against Ong and his wife
(docketed as Civil Case No. CEB-6565) with the
Regional Trial Court of Cebu . City, Branch 10. The
trial court issued a writ of replevin and the subject
vessel was seized and subsequently delivered to
Ang Tay.
On 9 March 1988, petitioner filed a motion for
intervention but withdrew the same on 29 April

1988. Instead, on 26 May 1988, petitioner filed a
separate case for replevin and damages against
Ong and "John Doe" (Ang Tay) with the same trial
court, docketed as Civil Case No. CEB-6919.
The trial court granted petitioner's prayer for
replevin. The vessel was seized and placed in the
custody of the trial court. However, Ang Tay posted
a counterbond and the vessel was returned to his
possession.
On 3 October 1990 in CEB-6565, the trial court
rendered a decision in favor of Ang Tay and
Jacinto Dy. The sale of the subject vessel was
rescinded, the registration of the vessel with the
Office of the Coast Guard and other government
agencies in Ong's name nullified and the vessel's
registration in Dy's name revived. Ong was, likewise,
ordered to pay Jacinto Dy and Ang Tay actual
damages for lost income, moral damages,
attorney's fees and litigation
expenses.13
The Court of Appeals affirmed the trial court's
decision and Ong's petition for review before this
Court was dismissed for lack of merit in a resolution
dated 15 March 1993,
On the other hand, in CEB-6919, the subject of the
present appeal, the trial court in a decision dated
14 February 1990, declared the chattel mortgage
on the subject vessel null and void and ordered
petitioner and Ong to pay Ang Tay damages. The
dispositive portion states, thus:
WHEREFORE, in view of all the
foregoing, the chattel mortgage on
the vessel LCT ORIENT HOPE is
declared null and void, rendering its
annotation and registration at the
back of the Certificate of Ownership
and Certificate of Philippine Registry
respectively, to be of no force and
effect.
Plaintiff CIFC and defendant Robert
Ong are hereby ordered to pay
jointly and severally to defendant
Ang Tay the following amounts:
P50,000.00 as unrealized income
during the five-day period when the
vessel was take from Ang Tay's
possession; P100,000.00, representing
the premiums Ang Tay paid for the
redelivery of the vessel to him and
other expenses; P10,000.00 as actual
expenses for the recovery of the
vessel; P100,000.00 as moral
damages; P50,000.00 as exemplary
damages; P40,000.00 as actual
expenses in attending trials and
litigation expenses; and P30,000.00
as attorney's fees.
SO ORDERED. 14
2
On 2 July 1992, the Court of Appeals affirmed in
toto the above mentioned decision. 15 Hence, the
present petition for review on certiorari.
Petitioner enumerates the alleged errors oft he
Court of Appeals as follows:
I
THE COURT OF APPEALS ERRED IN
BASING ITS DECISION ON
SPECULATION, CONJECTURE, AND
SURMISE, WHEN IT DECLARED THAT
THE CONTRACT BETWEEN CIFC AND
ROBERT ONG WAS ONE OF SALE,
AND NOT LOAN (MUTUUM) WITH
MORTGAGE.
II
THE RULING OF THE COURT OF
APPEALS IS CONTRARY TO EXISTING
AND WELL-SETTLED JURISPRUDENCE
THAT A MORTGAGEE HAS THE RIGHT
TO RELY ON WHAT APPEARS IN THE
CERTIFICATE OF OWNERSHIP (TITLE).
III
THE DECISION OF THE COURT OF
APPEALS IS REPUGNANT TO THE
CLEAR RULING OF THE HONORABLE
COURT THAT BETWEEN TWO
INNOCENT
PERSONS, THE ONE WHO MADE THE
DAMAGE POSSIBLE BY HIS ACT OF
CONFIDENCE MUST BEAR THE LOSS. 16
We grant the petition.
In upholding the nullity of the chattel mortgage on
the subject vessel, the Court of Appeals declared
thus:
In Par. 3 of the Chattel Mortgage
Contract executed between
appellants CIFC and Robert Ong, it
was made to appear that the
subject vessel was sold by the
plaintiff Cebu International Finance
Corporation to Robert Ong on
installment. However, there is no
showing that appellant CIFC
acquired the vessel in question from
either Jacinto Dy or Ang Tay, the
owner of such vessel. Since, CIFC
appears to have sold the vessel in
question to Ong on installment basis,
the said contract is null and void,
because CIFC was never the owner
of the vessel.
Moreover, Robert Ong CIFC's
mortgagor, did not acquire
ownership of the vessel because of

an express stipulation in the Deed of
Sale that the vessel "shall not be
registered or transferred to Robert
Ong until complete payment." (Exh.
"7-C-1".) Since Ong clearly was not
the owner of the vessel at the time of
the execution of the mortgage, the
said mortgage is null and void on
that ground.
Furthermore, the evidence on record
shows the chattel mortgage in
question did not comply with the
requirements of P.D. 1521, The Ship
Mortgage Decree of 1978. . . . 17
The Court of Appeals nullified the chattel mortgage
contract between petitioner and Ong because
paragraph 3 of the said contract (where it
appeared that petitioner sold the subject vessel to
Ong on installment basis and that the amount
supposedly loaned to Ong represented the
balance due on the purchase price) seemed to
indicate that the owner of the vessel mortgaged
was petitioner although it had been duly
established that another party (Jacinto Dy) was the
true owner thereof. 18
We disagree with the aforequoted ruling of the
Court of Appeals. The chattel mortgage contract
should not be viewed in such a myopic context.
The key lies in the certificate of ownership issued in
Ong's name (which, along with the deed of sale, he
submitted to petitioner as proof that he is the owner
of the ship he gave as security for his loan). It was
plainly stated therein that the ship LCT "Orient Hope"
ex "Asiatic," by means of a Deed of Absolute Sale
dated 28 April 1987, was "sold and transferred by
Jacinto Dy to Robert Ong." 19 There can be no
dispute then that it was Dy who was the seller and
Ong the buyer of the subject vessel. Coupled with
the fact that there is no evidence euphony
transaction between Jacinto Dy or Ang Tay and
petitioner, it follows, therefore, that petitioner's role
in the picture is properly and logically that of a
creditor-mortgagee and not owner-seller. It is
paragraph 2 of the mortgage contract 20 which
accurately expresses the true nature of the
transaction between petitioner and Ong--that it is a
simple loan with chattel mortgage. The amount
petitioner loaned to Ong does not represent the
balance of any purchase price since, as we have
previously discussed, the aforementioned
documents state that Ong is already the absolute
owner of the subject vessel. Obviously, therefore,
paragraph 3 of the said contract was filled up by
mistake. Considering that petitioner used a form
contract, it is not improbable that such an oversight
may have been committed--negligently but
unintentionally and without malice. As testified to
by Mr. Benjamin C. Alfaro, petitioner's Senior Vice
President for Operations they only use one form for
several kinds of transaction:
ATTY. UY: (TO WITNESS)
3
Q: Mr. Alfaro, as a financing institution, Cebu
International finance Corporation, how
many kinds of lending transaction do you
have in a firm? Do you have financial
leasing, discounting or whatever? Can you
explain briefly to the Honorable Court?
WITNESS:
A: We have direct loan transaction. We
have financing transaction and we have
leasing transaction. Now, in the leasing
transaction, the document will show that we
are the owner of the equipment and we
leased it out. In the financing transaction,
where we used the same Chattel Mortgage
instrument, there are three parties involved,
the seller of the equipment. And then, the
seller of the equipment would sell or assign
the contract with the financing company.
That is the financing transaction. And in the
simple loan transaction, there appears only
two parties involved, the borrower and the
lender.
ATTY. UY: (TO WITNESS)
Q: Now, Mr. Alfaro, the same document,
Chattel Mortgage will apply also to
financing transaction, leasing transaction
and simple loan transaction?
WITNESS:
A: Simple loan and financing transactions.
ATTY. UY (TO WITNESS)
Q: Now, Mr. Alfaro, this paragraph 2 of
Chattel Mortgage, can this apply to a
financing transaction?
WITNESS:
A: No, the paragraph 3 will be the one that
is applicable to a financing transaction.
(Witness reading the document and after
reading continued) Paragraph 2 applies to
both financing and simple loan transaction.
ATTY. UY:
Q: And paragraph 3?
WITNESS:
A: Paragraph 3 applies to both financing
and lending transactions but paragraph 3
does not apply to Simple lending
transaction.
xxx xxx xxx 21
ATTY. LOGRONIO: (TO WITNESS)

Q: You do not affirm the assertion made by
your counsel that paragraph 3 arise only in
case that your rights to a mortgage were
assigned by you to a third person, do you
agree that also?
WITNESS:
A: This form of chattel mortgage, in fact, you
will notice that the portion for mortgagor
and mortgagee are all blank because this is
the same form which is used by the
company, used for the parties when there is
a dealer involved, when there is installment
buyer involved and when we come in as
third party purchaser of the document
because as practiced by the different
dealer, this is the same form used between
the buyer and the dealer of the motor
vehicle. After this is being consummated
already, it is assigned to a finance company
and these are the same documents used.
Now, in this particular case, this becomes
already . . . this is a direct transaction
between the finance company and the
borrower. We, the finance company
becomes the direct lender and Mr. Ong
became the direct borrower. As I explained
earlier, this document is also the form used
between a dealer of a motor vehicle and
an installment buyer wherein after paying
the down payment, the unpaid balance
which is secured by the chattel mortgage,
the promissory note, and the disclosure
statement and this document is sold to a
third party and that is the finance company
by the dealer.
ATTY. LOGRONIO:
Q: Up to this point, when you had the
transaction with Mr. Ong, this form that you
executed, the Chattel Mortgage was in
what kind of form that was already used by
the company?
WITNESS:
A: These are forms available to us.
ATTY. LOGRONIO:
Q: This is a form used when there is a buyer
and a ...
WITNESS:
A: Third party or direct borrowing lender.
ATTY. LOGRONIO:
Q: And this refers to a direct borrower or
lending transaction.
WITNESS:
4
A: Yes.
ATTY. LOGRONIO:
Q: No third party assignment has been
involved so far?
WITNESS:
A: No.
xxx xxx xxx 22
Accordingly, the chattel mortgage contract
between petitioner and Ong is valid and
subsisting.
The next issue for our determination is whether or
not petitioner is a mortgagee in good faith whose
lien over the mortgaged vessel should be
respected.
The prevailing jurisprudence is that a mortgagee
has a right to rely in good faith on the certificate of
title of the mortgagor to the property given as
security and in the absence of any sign that might
arouse suspicion, has no obligation to undertake
further investigation. Hence, even if the mortgagor
is not the rightful owner of or does not have a valid
title to the mortgaged property, the mortgagee or
transferee in good faith is nonetheless entitled to
protection. 23 Although this rule generally pertains to
real property, particularly registered land, it may
also be applied by analogy to personal property, in
this case specifically, since shipowners are, likewise,
required by law to register their vessels with the
Philippine Coast Guard.
Private respondent Ang Tay, however, contends
that the aforementioned rule does not apply in the
case at bar in the face of the numerous "badges of
bad faith" on the part of petitioner.
Capitalizing on paragraph 3 of the chattel
mortgage contract, Ang Tay argues as follows:
. . . The fraud and conspiracy by
Robert Ong and some responsible
employees of CIFC against Jacinto
Dy and Ang Tay are thus brought to
the open by this stipulation. Since
CIFC appears in the registered
chattel mortgage to have sold the
vessel in question to Robert Ong, the
said contract is null and void
because CIFC never for a second or
a moment became the owner of the
vessel. CIFC was the one who
prepared the chattel mortgage and
the one who registered the same
without contemporaneous or
subsequent correction or
modification; it cannot, after it
notified the public by means of
registration that it acquired the
vessel and became its owner, now
 5

shy away from a stipulation which is subject vessel 27 and that the ship was delivered to
the heart and nerve-center of the Ong so that he could begin deriving economic
contract and which it made and benefits therefrom. 28 Mr. Randolph Veloso
registered. This is both the essence petitioner's collector, processing clerk, credit
and consequence of estoppel. investigator and appraiser, further testified as
Applicable is Article 1459 of the Civil follows:
Code which provides inter-alia: ". . .
the vendor must have a right to xxx xxx xxx
transfer the ownership thereof (the
thing sold) at the time it is delivered." Q: Do you know the purpose for that loan

2. Robert Ong, CIFC's mortgagor, did A: Yes.

not acquire ownership of the vessel
because of an express stipulation
Q: What was his purpose?
which he signed that the vessel "shall
not be registered or transferred to
A: He was going to mortgage the vessel to
Robert Ong until complete
us.
payment." (Exh. "7-C-1".) This
stipulation is expressly covered by
Article 1478 of the Civil Code: "The Q: What was the purpose of the loan?
parties may stipulate that ownership
in the thing shall not pass to the A: We don't usually ask our client what they
purchaser until he has fully paid the will do with it.
price." Since Ong clearly was not the
owner of the vessel at the time of the Q: You don't ask the purpose?
execution of the mortgage, the said
mortgage is null and void on that A: It is understood that whenever a client
ground. 24 approach the institution he usually has a
purpose for the money.
Ang Tay's contentions are unmeritorious. As
previously discussed, paragraph 3 of the chattel Q: Did not the corporation was what need
mortgage contract was erroneously but has he for the money?
unintentionally filled up. The failure of petitioner to
exercise due care in filling up the necessary A: He is going to use it for his business in the
provisions in the chattel mortgage contract does boat.
not, however, amount to bad faith. It was a mere
oversight and not a deliberate and malicious act.
Q: And that is his only statement? What was
his specific statement?
Petitioner's bad faith is further demonstrated, Ang
Tay avers, by its failure to comply with the following
ATTY. UY:
requirements of P.D. No. 1521 or the Ship Mortgage
Decree of 1978:
Already answered. He will use it in the
business of his boat.
1) The loan secured by the
mortgaged vessel was not for any of
ATTY. LOGRONIO:
purposes specified in Sec. 2 of P.D.
No. 1521, i.e., "financing the
construction, acquisition, purchase What was the purpose.
of vessels or initial operation of
vessels" 25 and that petitioner failed ATTY. UY:
to furnish the Central Bank a copy of
the mortgage; 26 Already answered Your Honor and besides it
is immaterial.
2) The special affidavit of good faith
required in Sec. 4 of P.D. No. 1521 ATTY. LOGRONIO:
was lacking; and
Very material and it is important Your Honor
3) Ong failed to disclose his creditors as there is a violation of the law. I am
and lienors as provided in Sec. 6 of entitled to insist for the answer.
P.D. No. 1521.
COURT:
There is no merit in private respondent's allegations.
In the 9 November 1989 hearing, Ang Tay Witness may answer, if he knows.
confirmed his statement in his affidavit, executed in
Civil Case No. CEB-6565, that Ong wanted to (TO WITNESS)
obtain a loan to replenish his capital because he
had used up his money in the purchase of the

Q: Did he tell you what was the purpose?
A: For the business of the boat.
ATTY. LOGRONIO: (TO WITNESS)
Q: That's all, that he is going to use the
money for the business of the boat?
A: Yes.
xxx xxx xxx 29
From the foregoing, therefore, it can be readily
deduced that the loan was for the initial operation
of the subject vessel and thus falls under the
purposes laid down in the Ship Mortgage Decree.
The special affidavit of good faith, on the other
hand, is required only for the purpose of
transforming an already valid mortgage into a
"preferred mortgage." 30 Thus, the abovementioned
affidavit is not necessary for the validity of the
chattel mortgage itself but only to give it a
preferred status.
As to the disclosure requirement in Sec. 6 of the Ship
Mortgage Decree, 31 it was intentional on Ong's
part not to inform petitioner that he had yet to pay
in full the purchase price of the subject vessel. Ong
presented himself to petitioner as the absolute
owner of the LCT "Orient Hope" ex "Asiatic." The
Certificate of Ownership in Ong's name showed
that the ship was conveyed to him by means of a
Deed of Absolute Sale which gave the idea that
the purchase price had been fully paid and the
sale completed.
Petitioner had every right to rely on the Certificate
of Ownership and Certificate of Philippine Register
duly issued by the Philippine Coast Guard in Ong's
name. Petitioner had no reason to doubt Ong's
ownership over the subject vessel. The documents
presented by Ong, upon petitioner's insistence
before accepting the said vessel as loan security,
were all in order and properly issued by the duly
constituted authorities. There was no circumstance
that might have aroused petitioner's suspicion or
alerted it to any infirmity committed by Ong. It had
no participation in and was not privy to the sale
transaction between Jacinto Dy (through Ang Tay)
and Ong. Petitioner, thus, had no obligation to
undertake further investigation since it had the
necessary documents to prove Ong's ownership. In
addition petitioner even took pains to inspect the
subject vessel which was in Ong's possession. Mr.
Benjamin C. Alfaro testified thus: . . .
xxx xxx xxx
ATTY. LOGRONIO:
Q: In your credit investigation of Mr. Robert
Ong did you have a chance yourself or any
of your employees to verify the condition
6
and the location of the vessel at the very
time?
WITNESS:
A: Yes.
ATTY. LOGRONIO:
Q: Will you tell the Court where was the
vessel at the time that he applied for a loan
with your bank?
WITNESS:
A: It was under finishing touches in the
drydock in . . . think in Lapulapu or
Mandaue.
ATTY. LOGRONIO:
Q: So, more or less, you are sure that at the
time that he applied for a loan and you
approved the same, this vessel was still at
the drydock?
WITNESS:
A: Yes finishing touches. In fact, it had
pictures to support the application. I don't
know if we have it now.
ATTY. UY:
We have. (Counsel producing a picture of a
vessel and handing it to the witness).
WITNESS: (Cont)
This is the picture of the vessel because we
required him to submit.
ATTY. LOGRONIO:
Q: You are referring to the picture which you
asked the Court to mark as Exhibit . . . .
ATTY. UY:
No, we are requesting now Your Honor. This
has not been marked yet. We asked that
the picture showing the back portion of the
vessel, Orient Hope be marked as Exhibit "I"
and the picture showing the front portion of
the vessel as Exhibit "I-1".
COURT: (TO INTERPRETER)
Mark it.
ATTY. LOGRONIO: (TO WITNESS)
Q: So, at the time that the vessel was
submitted to you as collateral for the loan,
the condition of the vessel was as it is

reflected in this exhibit? (Cross- examiner
referring to the picture).
WITNESS:
A: Yes.
xxx xxx xxx 32
Anent the last issue, although Ang Tay may also be
an innocent person, a similar victim of Ong's
fraudulent machinations, it was his act of
confidence which led to the present fiasco. Ang
Tay readily agreed to execute a deed of absolute
sale in Ong's favor even though Ong had yet to
make a complete payment of the purchase price.
It is true that in the copy of the said deed submitted
by Ang Tay there was an undertaking that
ownership will not vest in Ong until full
payment.33 However, Ong was able to obtain
several copies of the deed 34 with Ang Tay's
signature and had these notarized without the
aforementioned undertaking as evidenced by the
copy of the deed of sale presented by
petitioner. 35 The Deed of Absolute Sale consisted of
two (2) pages. The signatures of Ang Tay and Ong
appeared only on the first page of the deed. The
Second page contained the continuation of the
acknowledgment and the undertaking. Ong could
have easily reproduced the second page without
the undertaking since this page was not signed by
the contracting parties. To complete the
deception, Ang Tay unwittingly allowed Ong to
have possession of the ship. Hence, in consonance
with our ruling that:
. . . as between two innocent
persons, the mortgagee and the
owner of the mortgaged property,
one of whom must suffer the
consequence of a breach of trust,
the one who made it possible by his
act of confidence must bear the
loss. 36
it is Ang Tay and his principal Jacinto Dy
who must, unfortunately, suffer the
consequences thereof. They are considered
bound by the chattel mortgage on the
subject vessel.
WHEREFORE, this Court GRANTS the Petition for
Review and REVERSES the questioned decision and
resolution of the Court of Appeals. The validity of
the chattel mortgage on the vessel LCT ORIENT
HOPE is hereby upheld without prejudice to
whatever legal remedies private respondent Ang
Tay may have against private1 respondent Robert
Ong in the premises.
SO ORDERED.
Padilla, Bellosillo, Vitug and Hermosisima, Jr., JJ.,
concur.
[ GR No. L-11466, May 23, 1958 ]
7
LUIS G. ABLAZA v. GABRIEL A. IGNACIO +
DECISION
BAUTISTA ANGELO, J.:
This is an action for deficiency arising from a
foreclosure of a chattel mortgage instituted when
the new Civil Code has already taken effect.
Defendant, after having been served with the
summons and the complaint, failed to answer
within the reglementary period. Upon motion of
plaintiff, defendant was declared in default. Then
plaintiff presented his evidence and submitted the
case for decision.
On August 30, 1956, the court rendered decision
dismissing the complaint on the ground that, under
the provisions of Articles 2141 and 2115 of the new
civil Code, "plaintiff is not entitled to deficiency
judgment notwithstanding defendant being
declared in default for the reason that it is
manifestly against the law." Hence the present
appeal.
It appears that defendant borrowed from plaintiff
the amount of 52,250, payable after sixty days, with
interest at 12% per annum, and to secure the loan,
he executed a chattel mortgage on an Oldsmobile
car. Defendant failed to pay the indebtedness on
its date of maturity, thereby violating one of the
conditions of the mortgage. Thereupon, plaintiff
proceeded to foreclose the mortgage
extrajudicially and the mortgaged chattel was sold
at public auction for the amount of P700.00.
Deducting this amount from, the total obligation, in
addition to the interest and liquidated damages
agreed upon, the remaining balance was P2,675.
To collect this balance, plaintiff instituted the
present action.
The lower court dismissed this case in spite of the
fact that defendant was declared in default and
plaintiff presented enough evidence to support his
claim because, being an action for deficiency oh a
chattel mortgage, it opined that the mortgage
creditor is no longer entitled to it under the
provisions of the new Civil Code. Said the lower
court:
"It is clear from the evidence presented that plaintiff
in the instant case seeks deficiency judgment on a
chattel mortgage.
"The Civil Code provides:
'Art. 2141. The provisions of this Code on pledge
insofar as they are not in conflict with the Chattel
Mortgage Law, shall be applicable to chattel
mortgages.'
"Art. 2115. The sale of the thing pledged shall
extinguish the principal obligation, whether or not
the proceeds of the 3ale are equal to the amount
of the principal obligation, interest and expenses in
a proper case. If the price of the sale is more than
said amount, the debtor shall not be entitled to the

excess, unless it is otherwise agreed, if the price of
the sale is less neither shall the creditor be entitled
to recover the deficiency, notwithstanding any
stipulation to the contrary.'
"With the above-quoted provisions of the Civil
Code, this Court is of the opinion that plaintiff is not
entitled to deficiency judgment notwithstanding
defendant being declared in default for the reason
that it is manifestly against the law."
We are of the opinion that the trial court is in error. It
is clear from Article 2141 that the provisions of the
new Civil Code on pledge shall apply to a chattel
mortgage only in so far as they are not in conflict
with the Chattel Mortgage Law. In other words, the
provisions of the new Civil Code on pledge can
only apply if they do not run counter to any
provision of the Chattel Mortgage Law, otherwise,
the provisions of the latter law shall apply. Here we
find tint the provisions of the Chattel Mortgage Law
with regard to the effects of the foreclosure of a
chattel mortgage are precisely contrary to the
provisions of Article 2115 which were applied by the
trial court. This can be seen from a perusal of
Section 14 of said law, which we quote:
"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 assign, shall notify the
mortgagor or person holding under him and the
person holding subsequent mortgages of the time
and place of sale, either by notice in writing direct
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 sale.
"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
the 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
8
persons holding under him on demand."
(Underlining supplied)
Interpreting the nature of a chattel mortgage and
the effects of its foreclosure in case of non-payment
of the obligation, this Court made the following
pronouncement:
"While it is true that section 3 of Act no. 1506
provides that 'a chattel mortgage is a conditional
sale,1 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 a security
and not as a payment of the debt, in case of a
failure of payment.
"The theory of the lower court would lead to the
absurd conclusion that if the chattels mentioned in
the mortgage, given as security, should sell for more
than the amount of the indebtedness secured, that
the creditor would be entitled to the full amount for
which it might be sold, even though the amount
was greatly in excess of the indebtedness. Such a
result certainly was not contemplated by the
legislature when it adopted Act no. 1508. There
seems to be no reason supporting that theory under
the provision of the law. The value of 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 er action for the
deficiency, if any should occur.1 And the fact that
Act No. 1508 permits a private sale, such sale is not,
in fact, a satisfaction of the 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." (Manila Trading and Supply
Go. vs. Tamaraw Plantation Co., 47 Phil., 513;
Underlining supplied)
Considering that the provisions of the Chattel
Mortgage law regarding the effects of the
foreclosure of a chattel mortgage are contrary to
the provisions of Article 2115 of the new Civil Code,
we find no plausible reason why the latter should
apply to the present case.
Wherefore, the decision appealed from is reversed.
Judgment is hereby rendered ordering defendant

to pay to plaintiff the amount of P2,675, with interest
thereon from January 3, 1955, and the costs of
action.
Paras, C. J., Bengzon, Montemayor, Reyes, A.,
Bautista Angelo, Labrador, Comcepcion, Reyes, J.
B. L., Edencia, and Felix, JJ., concur.
[G.R. No. 107846. April 18, 1997]
LEOVILLO C. AGUSTIN, petitioner, vs. COURT OF
APPEALS and FILINVEST FINANCE
CORP., respondents.
RESOLUTION
FRANCISCO, J.:
This is an appeal by certiorari from the decision
of respondent Court of Appeals in CA-G.R. No.
24684[1] which affirmed the order of Regional Trial
Court, Branch 40, Manila, in Civil Case No. 84804.[2]
The dispute stemmed from an unpaid
promissory note dated October 28, 1970, executed
by petitioner Leovillo C. Agustin in favor of ERM
Commercial for the amount of P43,480.80. The note
was payable in monthly installments[3] and secured
by a chattel mortgage over an Isuzu diesel
truck,[4] both of which were subsequently assigned
to private respondent Filinvest Finance
Corporation.[5] When petitioner defaulted in paying
the installments, private respondent demanded
from him the payment of the entire balance or,
in lieu thereof, the possession of the mortgaged
vehicle. Neither payment nor surrender was
made. Aggrieved, private respondent filed a
complaint with the Regional Trial Court of Manila,
Branch 26 (RTC Branch 26) against petitioner
praying for the issuance of a writ of replevin or, in
the alternative, for the payment of P32,723.97 plus
interest at the rate of 14% per annum from due
date until fully paid.[6] Trial ensued and, thereafter,
a writ of replevin was issued by RTC Branch 26. By
virtue thereof, private respondent acquired
possession of the vehicle. Upon repossession, the
latter discovered that the vehicle was no longer in
running condition and that several parts were
missing which private respondent replaced. The
vehicle was then foreclosed and sold at public
auction.
Private respondent subsequently filed a
supplemental complaint claiming additional
reimbursement worth P8,852.76 as value of
replacement parts[7] and for expenses incurred in
transporting the mortgaged vehicle from Cagayan
to Manila. In response, petitioner moved to dismiss
the supplemental complaint arguing that RTC
Branch 26 had already lost jurisdiction over the
case because of the earlier extra-judicial
foreclosure of the mortgage. The lower court
granted the motion and the case was
dismissed.[8] Private respondent elevated the matter
to the appellate court, docketed as CA-G.R. No.
56718-R, which set aside the order of dismissal and
ruled that repossession expenses incurred by private
respondent should be reimbursed.[9] This decision
became final and executory, hence the case was
9
accordingly remanded to the Regional Trial Court
of Manila, Branch 40 (RTC Branch 40) for reception
of evidence to determine the amount due from
petitioner.[10] After trial, RTC Branch 40 found
petitioner liable for the repossession expenses,
attorney's fees, liquidated damages, bonding fees
and other expenses in the seizure of the vehicle in
the aggregate sum of P18,547.38. Petitioner moved
for reconsideration. Acting thereon, RTC Branch 40
modified its decision by lowering the monetary
award to P8,852.76, the amount originally prayed
for in the supplemental complaint.[11] Private
respondent appealed the case with respect to the
reduction of the amount awarded. Petitioner,
likewise, appealed impugning the trial courts order
for him to pay private respondent P8,852.76, an
amount over and above the value received from
the foreclosure sale. Both appeals were
consolidated and in CA- G.R. No. 24684, the
modified order of RTC Branch 40 was affirmed.
Petitioner filed a motion for reconsideration, but to
no avail[12] Hence, this petition for review
on certiorari.
Petitioner contends that the award of
repossession expenses to private respondent as
mortgagee is "contrary to the letter, intent and spirit
of Article 1484[13] of the Civil Code".[14] He asserts
that private respondents repossession expenses
have been amply covered by the foreclosure of
the chattel mortgage, hence he could no longer
be held liable. The arguments are devoid of merit.
Petitioners contentions, we note, were
previously rejected by respondent court in its
decision in CA-G.R. No. 56718-R the dispositive
portion of which provides as follows:
"WHEREFORE, the order dismissing the case is hereby
set aside and the case is remanded to the lower
court for reception of evidence of `expenses
properly incurred in effecting seizure of the chattel
(and) of recoverable attorney's fees in prosecuting
the action for replevin' as `repossession expenses'
prayed for in the supplemental complaint, without
pronouncement as to costs."[15]
which ruling has long acquired finality. It is clear,
therefore, that the appellate court had already
settled the propriety of awarding repossession
expenses in favor of private respondent. The
remand of the case to RTC Branch 40 was for the
sole purpose of threshing out the correct amount of
expenses and not for relitigating the accuracy of
the award. Thus, the findings of RTC Branch 40, as
affirmed by the appellate court in CA-G.R. No.
24684, was confined to the appreciation of
evidence relative to the repossession expenses for
the query or issue passed upon by the respondent
court in CA-G.R. No. 56718-R (propriety of the
award for repossession expenses) has become the
law of the case. This principle is defined as a term
applied to an established rule that when an
appellate court passes on a question and remands
the cause to the lower court for further
proceedings, the question there settled becomes
the law of the case upon subsequent
appeal.[16] Having exactly the same parties and

issues, the decision in the former appeal (CA-G.R.
No. 56718-R) is now the established and controlling
rule. Petitioner may not therefore be allowed in a
subsequent appeal (CA-G.R. No. 24684) and in this
petition to resuscitate and revive formerly settled
issues. Judgment of courts should attain finality at
some point in time, as in this case, otherwise, there
will be no end to litigation.
At any rate, even if we were to brush aside the
law of the case doctrine we find the award for
repossession expenses still proper. In Filipinas
Investment & Finance Corporation v. Ridad,[17] the
Court recognized an exception to the rule stated
under Article 1484(3) upon which petitioner
relies. Thus:
x x x Where the mortgagor plainly refuses to deliver
the chattel subject of the mortgage upon his failure
to pay two or more installments, or if he conceals
the chattel to place it beyond the reach of the
mortgagee, what then is the mortgagee expected
to do? x x x It logically follows as a matter of
common sense, that the necessary expenses
incurred in the prosecution by the mortgagee of
the action for replevin so that he can regain
possession of the chattel, should be borne by the
mortgagor. Recoverable expenses would, in our
view, include expenses properly incurred in
effecting seizure of the chattel and reasonable
attorneys fees in prosecuting the action for
replevin.[18]
Anent the denial of the award for attorneys
fees, we find the same in order. The trial court, as
well as respondent court, found no evidence to
support the claim for attorney's fees which factual
finding is binding on us.[19] We find no compelling
reason, and none was presented, to set aside this
ruling.
ACCORDINGLY, the petition is DENIED for lack
of merit, and the decision of the Court of Appeals is
hereby AFFIRMED in toto.
SO ORDERED.
Narvasa, C.J. (Chairman), Davide, Jr.,
Melo, and Panganiban, JJ., concur.
[ GR No. 10630, Dec 21, 1915 ]
US v. EUGENIO KILAYKO +
DECISION
32 Phil. 619
CARSON, J.:
The information in this case charges the defendant
and appellee with a violation of the penal
provisions of section 12 of the Chattel Mortgage
Law (Act No. 1508), in that, as it is alleged, he sold
10
certain property, mortgaged by him under the
provisions of that Act, without the consent of the
mortgagee, and notwithstanding the fact that the
debt secured by the chattel mortgage had not
been paid in full.
After the defendant had been arraigned and
pleaded not guilty, and before any of the witnesses
were called to the witness stand, counsel for the
accused interposed what he called a demurrer to.
the information, wherein; after admitting the truth of
the facts alleged in the information, he insisted, that
the information should be dismissed, because, as
he urged, certain facts within the knowledge of the
court made it clear that the pending criminal
action could not be successfully maintained.
After some discussion by counsel, the so-called
demurrer, which was in truth a motion to dismiss the
information, was submitted with the understanding
that both parties admitted and agreed upon the
following statement of facts: First, that the
defendant did in fact sell the. mortgaged property
described in the information without the consent of
the mortgagee, and without having first paid the
mortgage debt in full. Second, that at the time
when the mortgaged properly was sold a
substantial part of the indebtedness secured by the
mortgage still remained unpaid. Third, that at the
time of the institution of this action the total amount
of the indebtedness had been discharged either by
payment direct to the creditor, or by the deposit of
the total amount of the unpaid balance of the
mortgage debt in the hands of the clerk of the
court, after formal tender of the creditor and his
refusal to accept the amount thus tendered in
settlement of the indebtedness.
The contention of counsel for the defendant in the
court below was based on the erroneous
assumption that the penal provisions of section 12,
of Act No. 1508, do not authorize the enforcement
of the penalties therein prescribed, in any case
wherein it appears that the mortgage indebtedness
has been discharged in full at the time of the
institution of criminal proceedings. In support of this
contention, counsel assumes that the protection of
the mortgagee, in any case in which criminal
proceedings are instituted, is the sole purpose and
object of the penal provisions of the statute. The
argument would seem to be that since the statute
prescribes that the fine which the courts are
authorized to impose on conviction of a wrongful
sale of mortgaged property must be equal in
amount to double the value of the property sold,
one-half of which1 is to go to the mortgagee, it
could not have been the intention of the legislator
to permit the mortgagee to recover such a fine in
any case in which he had already recovered the
amount of the indebtedness secured by the

mortgage. Thus, in the case at bar, in which the
mortgage debt of P10,200 had been paid in full
when the criminal action was instituted, it is urged
that it would be unjust and unreasonable to impose
a fine of P20,400, and turn over one-half of that
amount, to the mortgage creditor, thereby
permitting him to recover double the amount of the
original indebtedness.
To these contentions of counsel we answer: First,
that we know of no limitation on the power of the
legislator to prescribe lawful penalties for wrongful
acts such as that with which the accused was
charged in the case at bar; and that on principle,
and in accordance with a like usage in cases of
robbery, theft, embezzlement and estafa, the mere
fact that the indebtedness secured by the
mortgage has been paid in whole or in part, after a
wrongful sale of the mortgaged property, does not
necessarily relieve the wrongdoer of criminal liability
for the offense committed by him: Second, that the
penalty prescribed by the statute is either a fine, or
imprisonment for not more than six months, or both;
so that it is left to the sound discretion of the courts
whether or not a fine will be imposed in case of
conviction; and in any case wherein the imposition
of the prescribed fine would seem to be excessive
or to work an undue hardship on the debtor, the
courts are empowered to limit the penalty imposed
to imprisonment for a period which may not
exceed six months and may be of as short duration
as the court may deem proper under all the
circumstances of the case: and third, that the
object of the penal provisions of the Chattel
Mortgage Law is not merely to protect the
mortgagee in particular cases in which criminal
actions are instituted, and to secure the payment
of the mortgage indebtedness in such cases
(although they may, and should have that effect in
many instances), but also to give the necessary
sanction to the provision of the statute in the
interest of the public at large, so that in all cases
wherein loans are made and secured under the
terms of the statute, the mortgage debtors may be
deterred from the violation of its provisions and the
mortgage creditors may be protected against loss
or inconvenience resulting from the wrongful
removal or sale of the mortgaged property.
The trial judge granted the motion by counsel for
the accused and dismissed the complaint, relying,
as it would appear from his opinion, on the
fallacious contentions of counsel for the accused.
The parties seem to have treated the action of the
judge merely as a ruling on a demurrer and not as
a decision of the cause on the merits; and the
provincial fiscal brought the case here on appeal
without objection.
11
In dismissing the complaint the trial judge refers to
the motion of counsel for the accused as a "so-
called demurrer;" but it does not clearly appear
whether he regarded the entry of his order
dismissing the complaint as a decision of the case
on the merits, or a ruling sustaining a demurrer.
We are of opinion, however, that the ruling of the
trial judge on the motion of counsel for the accused
was in truth and in effect a final judgment on the
merits from which no appeal lay on behalf of the
Government. The accused had been arraigned
and pleaded "not guilty," and the judgment of the
court was entered upon an agreed statement of
facts. The agreed statement of facts disclosed
everything which the prosecution and the accused
were prepared to prove by the testimony of their
respective witnesses. After the submission of the
agreed statement of facts, the trial was regularly
terminated, and it only remained for the trial judge
to enter his judgment convicting and sentencing
the accused, or acquitting him and dismissing the
information upon which the proceedings had been
instituted. Manifestly, the accused was in jeopardy
of conviction from the moment the case was
submitted on the agreed statement of facts until
judgment was entered dismissing the information.
Indeed, there can be no doubt that but for the
erroneous view of the trial judge as to the nature
and effect of the penal provision of section 12 of
the Chattel Mortgage Law, a judgment of
conviction would have been lawfully entered upon
the agreed statement of facts, followed by the
imposition of the prescribed penalty.
The judgment entered in the court below was not a
mere order sustaining a demurrer, but a final
judgment disposing of the case on the merits; so
that were we to reverse the judgment and direct
the court below to proceed with the trial, the
accused would be entitled to have the information
dismissed on the plea of double jeopardy.
The provincial fiscal perfected an appeal from the
judgment on the erroneous theory that the
judgment of dismissal was an order sustaining a
demurrer to the information; and without objection
on the part of the accused, the record was brought
here, and the case argued and submitted on that
theory. Clearly the Government had no right of
appeal from the judgment entered in the court
below, and the appeal must be dismissed with the
costs de oficio. We have, however, deemed it
proper to discuss the questions actually submitted
with relation to the construction which should be
placed upon the statute, partly, in order to make
clear the grounds upon which we base our ruling as
to the nature and character of the proceedings
had in the court below, and partly, to avoid any
possible misapprehension which might arise as a

result of the fact that our dismissal of the appeal
leaves the judgment of the court below, dismissing
the information, in full force and effect.
Ten days hereafter let judgment be entered
dismissing the appeal in this case with costs de
oficio, and ten days thereafter let the record be
returned to the court wherein it originated. So
ordered.
Arellano, C.J., Torres, Johnson, Trent, and Araullo,
JJ., concur.
G.R. No. 106435 July 14, 1999
PAMECA WOOD TREATMENT PLANT, INC., HERMINIO
G. TEVES, VICTORIA V. TEVES and HIRAM DIDAY R.
PULIDO, petitioners,
vs.
HON. COURT OF APPEALS and DEVELOPMENT BANK
OF THE PHILIPPINES, respondents.
GONZAGA-REYES, J.:
Before Us for review on certiorari is the decision of
the respondent Court of Appeals in C.A. G.R. C.V.
No. 27861, promulgated on April 23,
1992, 1 affirming in toto the decision of the Regional
Trial Court of Makati 2 to a award respondent bank's
deficiency claim, arising from a loan secured by
chattel mortgage.
The antecedents of the case are as follows:
On April 17, 1980, petitioner PAMECA Wood
Treatment Plant, Inc. (PAMECA) obtained a loan of
US$267,881.67, or the equivalent of P2,000,000.00
from respondent Bank. By virtue of this loan,
petitioner PAMECA, through its President, petitioner
Herminio C. Teves, executed a promissory note for
the said amount, promising to pay the loan by
installment. As security for the said loan, a chattel
mortgage was also executed over PAMECA's
properties in Dumaguete City, consisting of
inventories, furniture and equipment, to cover the
whole value of the loan.
On January 18, 1984, and upon petitioner
PAMECA's failure to pay, respondent bank
extrajudicially foreclosed the chattel mortgage,
and, as sole bidder in the public auction,
purchased the foreclosed properties for a sum of
P322,350.00. On June 29, 1984, respondent bank
filed a complaint for the collection of the balance
of P4,366,332.46 3 with Branch 132 of the Regional
Trial Court of Makati City against petitioner PAMECA
and private petitioners herein, as solidary debtors
with PAMECA under the promissory note.
On February 8, 1990, the RTC of Makati rendered a
decision on the case, the dispositive portion of
which we reproduce as follows:
12
WHEREFORE, judgment is hereby
rendered ordering the defendants to
pay jointly and severally plaintiff the
(1) sum of P4,366,332.46 representing
the deficiency claim of the latter as
of March 31, 1984, plus 21% interest
per annum and other charges from
April 1, 1984 until the whole amount
is fully paid and (2) the costs of the
suit. SO ORDERED." 4
The Court of Appeals affirmed the RTC decision.
Hence, this Petition.
The petition raises the following
grounds:
1. Respondent appellate court
gravely erred in not reversing the
decision of the trial court, and in not
holding that the public auction sale
of petitioner PAMECA's 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.
2. Respondent appellate court
gravely erred in not applying by
analogy Article 1484 and Article 2115
of the Civil Code by reading the
spirit of the law, and taking into
consideration the fact that the
contract of loan was a contract of
adhesion.
3. The appellate court gravely erred
in holding the petitioners Herminio
Teves, Victoria Teves and Hiram
Diday R. Pulido solidarily liable with
PAMECA Wood Treatment Plant, Inc.
when the intention of the parties was
that the loan is only for the
corporation's benefit.
Relative to the first ground, petitioners contend that
the amount of P322,350.00 at which respondent
bank bid for and purchased the mortgaged
properties was unconscionable and inequitable
considering that, at the time of the public sale, the
mortgaged properties had a total value of more
than P2,000,000.00. According to petitioners, this is
evident from an inventory dated March 31, 1980 5,
which valued the properties at P2,518,621.00, in
accordance with the terms of the chattel
mortgage contract 6 between the parties that
required that the inventories "be maintained at a
level no less than P2 million". Petitioners argue that
respondent bank's act of bidding and purchasing
the mortgaged properties for P322,350.00 or only
about 1/6 of their actual value in a public sale in
which it was the sole bidder was fraudulent,
unconscionable and inequitable, and constitutes

sufficient ground for the annulment of the auction
sale.
To this, respondent bank contends that the above-
cited inventory and chattel mortgage contract
were not in fact submitted as evidence before the
RTC of Makati, and that these documents were first
produced by petitioners only when the case was
brought to the Court of Appeals. 7 The Court of
Appeals, in turn, disregarded these documents for
petitioners' failure to present them in evidence, or
to even allude to them in their testimonies before
the lower courtr. 8 Instead, respondent court
declared that it is not at all unlikely for the chattels
to have sufficiently deteriorated as to have fetched
such a low price at the time of the auction
sale. 9 Neither did respondent court find anything
irregular or fraudulent in the circumstance that
respondent bank was the sole bidder in the sale, as
all the legal procedures for the conduct of a
foreclosure sale have been complied with, thus
giving rise to the presumption of regularity in the
performance of public duties. 10
Petitioners also question the ruling of respondent
court, affirming the RTC, to hold private petitioners,
officers and stockholders of petitioner PAMECA,
liable with PAMECA for the obligation under the
loan obtained from respondent bank, contrary to
the doctrine of separate and distinct corporate
personality. 11 Private petitioners contend that they
became signatories to the promissory note "only as
a matter of practice by the respondent bank", that
the promissory note was in the nature of a contract
of adhesion, and that the loan was for the benefit
of the corporation, PAMECA, alone. 12
Lastly, invoking the equity jurisdiction of the
Supreme Court, petitioners submit that Articles
1484 13 and 2115 14 of the Civil Code be applied in
analogy to the instant case to preclude the
recovery of a deficiency claim. 15
Petitioners are not the first to posit the theory of the
applicability of Article 2115 to foreclosures of
chattel mortgage. In the leading case of Ablaza vs.
Ignacio 16, the lower court dismissed the complaint
for collection of deficiency judgment in view of
Article 2141 of the Civil Code, which provides that
the provisions of the Civil Code on pledge shall also
apply to chattel mortgages, insofar as they are not
in conflict with the Chattel Mortgage Law. It was
the lower court's opinion that, by virtue of Article
2141, the provisions of Article 2115 which deny the
creditor-pledgee the right to recover deficiency in
case the proceeds of the foreclosire sale are less
than the amount of the principal obligation, will
apply.
This Court reversed the ruling of the lower court and
held that the provisions of the Chattel Mortgage
Law regarding the effects of foreclosure of chattel
mortgage, being contrary to the provisions of
Article 2115, Article 2115, in relation to Article 2141,
may not be applied to the case.
13
Sec. 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.
As explained in Manila Trading and Supply Co. vs.
Tamaraw Plantation Co. 17, cited in Ablaza vs.
Ignacio, supra:
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 theory of the lower court would
lead to the absurd conclusion that if
the chattels mentioned in the
mortgage, given as security, should
sell for more than the amount of the
indebtedness secured, that the
creditor would be entitled to the full
amount for which it might be sold,
even though that amount was
greatly in excess of the
indebtedness. Such a result certainly
was not contemplated by the
legislature when it adopted Act No.
1508. There seems to be no reason
supporting that theory under the
provision of the law. 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
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.
We find no reason to disturb the ruling in Ablaza vs
Ignacio, and the cases reiterating it. 18
14
Neither do We find tenable the application by
analogy of Article 1484 of the Civil Code to the
instant case. As correctly pointed out by the trial
court, the said article applies clearly and solely to
the sale of personal property the price of which is
payable in installments. Although Article 1484,
paragraph (3) expressly bars any further action
against the purchaser to recover an unpaid
balance of the price, where the vendor opts to
foreclose the chattel mortgage on the thing sold,
should the vendee's failure to pay cover two or
more installments, this provision is specifically
applicable to a sale on installments.
To accommodate petitioners' prayer even on the
basis of equity would be to expand the application
of the provisions of Article 1484 to situations beyond
its specific purview, and ignore the language and
intent of the Chattel Mortgage Law. Equity, which
has been aptly described as "justice outside
legality", is applied only in the absence of, and
never against, statutory law or judicial rules of
procedure. 19
We are also unable to find merit in petitioners'
submission 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, 20 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'
 15

evidence in this regard leaves Us no discretion but entrust the case to its attorneys, we jointly
to uphold the presumption of regularity in the and severally bind ourselves to pay for
conduct of the public sale. attorney's fees as provided for in the
mortgage contract, in addition to the legal
We likewise affirm private petitioners' joint and fees and other incidental expenses. In the
several liability with petitioner corporation in the event of foreclosure of the mortgage
loan. As found by the trial court and the Court of securing this note, we further bind ourselves
Appeals, the terms of the promissory note jointly and severally to pay the deficiency, if
unmistakably set forth the solidary nature of private any. (Emphasis supplied) 21
petitioners' commitment. Thus:
The promissory note was signed by private
On or before May 12, 1980, for value petitioners in the following manner:
received, PAMECA WOOD TREATMENT
PLANT, INC., a corporation organized and PAMECA WOOD TREATMENT PLANT,
existing under the laws of the Philippines, INC.
with principal office at 304 El Hogar Filipina
Building, San Juan, Manila, promise to pay By:
to the order of DEVELOPMENT BANK OF THE
PHILIPPINES at its office located at corner (Sgd) HERMINIO G. TEVES
Buendia and Makati Avenues, Makati,
Metro Manila, the principal sum of TWO
(For himself & as President of above-
HUNDRED SIXTY SEVEN THOUSAND EIGHT
named corporation)
HUNDRED AND EIGHTY ONE & 67/100 US
DOLLARS (US$ 267,881.67) with interest at the
(Sgd) HIRAM DIDAY PULIDO
rate of three per cent (3%) per annum over
DBP's borrowing rate for these funds. Before
the date of maturity, we hereby bind (Sgd) VICTORIA V. TEVES 22
ourselves, jointly and severally, to make
partial payments as follows: From the foregoing, it is clear that private
petitioners intended to bind themselves solidarily
xxx xxx xxx with petitioner PAMECA in the loan. As correctly
submitted by respondent bank, private petitioners
are not made to answer for the corporate act of
In case of default in the payment of any
petitioner PAMECA, but are made liable because
installment above, we bind ourselves to pay
they made themselves co-makers with PAMECA
DBP for advances . .
under the promissory note.
xxx xxx xxx
IN VIEW OF THE FOREGOING, the Petition is DENIED
and the Decision of the Court of Appeals dated
We further bind ourselves to pay additional
April 23, 1992 in CA G.R. CV No. 27861 is hereby
interest and penalty charges on loan
AFFIRMED. Costs against petitioners.
amortizations or portion thereof in arrears as
follows:
SO ORDERED.
xxx xxx xxx
Romero, Vitug Pananganiban and Purisima, JJ.,
concur.
In addition to the above, we also bind
ourselves to pay for bank advances for
insurance premiums, taxes . . .

xxx xxx xxx

We further 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 . . .

xxx xxx xxx

In case of non-payment of the amount of

this note or any portion of it on demand,
when due, or any other amount or amounts
due on account of this note, the entire
obligation shall become due and
demandable, and if, for the enforcement of
the payment thereof, the DEVELOPMENT
BANK OF THE PHILIPPINES is constrained to