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G.R. No. L-30173 September 30, 1971GAVINO A. TUMALAD and GENEROSA R. TUMALAD, plaintiffs-appellees,vs.ALBERTA VICENCIO and EMILIANO SIMEON, defendants-appellants.Castillo & Suck for plaintiffs-appellees.

Jose Q. Calingo for defendants-appellants.

REYES, J.B.L.,J.:Case certified to this Court by the Court of Appeals (CA-G.R. No. 27824-R) for the reasonthat only questions of law are involved.This case was originally commenced by defendants-appellants in the municipal court ofManila in Civil Case No. 43073, for ejectment. Having lost therein, defendants-appellantsappealed to the court a quo (Civil Case No. 30993) which also rendered a decision againstthem, the dispositive portion of which follows:

WHEREFORE, the court hereby renders judgment in favor of the plaintiffsand against the defendants, ordering the latter to pay jointly and severally

the former a monthly rent of P200.00 on the house, subject-matter of thisaction, from March 27, 1956, to January 14, 1967, with interest at the legalrate from April 18, 1956, the filing of the complaint, until fully paid, plusattorney's fees in the sum of P300.00 and to pay the costs.

It appears on the records that on 1 September 1955 defendants-appellants executed achattel mortgage in favor of plaintiffs-appellees over their house of strong materialslocated at No. 550 Int. 3, Quezon Boulevard, Quiapo, Manila, over Lot Nos. 6-B and 7-B,Block No. 2554, which were being rented from Madrigal & Company, Inc. The mortgagewas registered in the Registry of Deeds of Manila on 2 September 1955. The hereinmortgage was executed to guarantee a loan of P4,800.00 received from plaintiffs-appellees,payable within one year at 12% per annum. The mode of payment was P150.00 monthly,

starting September, 1955, up to July 1956, and the lump sum of P3,150 was payable on orbefore August, 1956. It was also agreed that default in the payment of any of theamortizations, would cause the remaining unpaid balance to becomeimmediately due andPayable and

the Chattel Mortgage will be enforceable in accordance with the provisions ofSpecial Act No. 3135, and for this purpose, the Sheriff of the City of Manila orany of his deputies is hereby empowered and authorized to sell all theMortgagor's property after the necessary publication in order to settle thefinancial debts of P4,800.00, plus 12% yearly interest, and attorney's fees... 2

When defendants-appellants defaulted in paying, the mortgage was extrajudiciallyforeclosed, and on 27 March 1956, the house was sold at public auction pursuant to the

said contract. As highest bidder, plaintiffs-appellees were issued the correspondingcertificate of sale. 3Thereafter, on 18 April 1956, plaintiffs-appellant commenced Civil CaseNo. 43073 in the municipal court of Manila, praying, among other things, that the house bevacated and its possession surrendered to them, and for defendants-appellants to pay rentof P200.00 monthly from 27 March 1956 up to the time the possession is surrendered. 4On21 September 1956, the municipal court rendered its decision

... ordering the defendants to vacate the premises described in the complaint;ordering further to pay monthly the amount of P200.00 from March 27,

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1956, until such (time that) the premises is (sic) completely vacated; plusattorney's fees of P100.00 and the costs of the suit. 5

Defendants-appellants, in their answers in both the municipal court and courtaquo impugned the legality of the chattel mortgage, claiming that they are still the owners ofthe house; but they waived the right to introduce evidence, oral or documentary. Instead,

they relied on their memoranda in support of their motion to dismiss, predicated mainly onthe grounds that: (a) the municipal court did not have jurisdiction to try and decide thecase because (1) the issue involved, is ownership, and (2) there was no allegation of priorpossession; and (b) failure to prove prior demand pursuant to Section 2, Rule 72, of theRules of Court. 6During the pendency of the appeal to the Court of First Instance, defendants-appellantsfailed to deposit the rent for November, 1956 within the first 10 days of December, 1956 asordered in the decision of the municipal court. As a result, the court granted plaintiffs-appellees' motion for execution, and it was actually issued on 24 January 1957. However,the judgment regarding the surrender of possession to plaintiffs-appellees could not beexecuted because the subject house had been already demolished on 14 January 1957

pursuant to the order of the court in a separate civil case (No. 25816) for ejectment againstthe present defendants for non-payment of rentals on the land on which the house wasconstructed.The motion of plaintiffs for dismissal of the appeal, execution of the supersedeas bond andwithdrawal of deposited rentals was denied for the reason that the liability therefor wasdisclaimed and was still being litigated, and under Section 8, Rule 72, rentals deposited hadto be held until final disposition of the appeal. 7On 7 October 1957, the appellate court of First Instance rendered its decision, thedispositive portion of which is quoted earlier. The said decision was appealed bydefendants to the Court of Appeals which, in turn, certified the appeal to this Court.Plaintiffs-appellees failed to file a brief and this appeal was submitted for decision without

it.Defendants-appellants submitted numerous assignments of error which can be condensedinto two questions, namely: .

(a) Whether the municipal court from which the case originated hadjurisdiction to adjudicate the same;(b) Whether the defendants are, under the law, legally bound to pay rentalsto the plaintiffs during the period of one (1) year provided by law for theredemption of the extrajudicially foreclosed house.

We will consider these questions seriatim.(a) Defendants-appellants mortgagors question the jurisdiction of the municipal court fromwhich the case originated, and consequently, the appellate jurisdiction of the Court of First

Instance a quo, on the theory that the chattel mortgage is void ab initio; whence it wouldfollow that the extrajudicial foreclosure, and necessarily the consequent auction sale, arealso void. Thus, the ownership of the house still remained with defendants-appellants whoare entitled to possession and not plaintiffs-appellees. Therefore, it is argued bydefendants-appellants, the issue of ownership will have to be adjudicated first in order todetermine possession. lt is contended further that ownership being in issue, it is the Courtof First Instance which has jurisdiction and not the municipal court.

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Defendants-appellants predicate their theory of nullity of the chattel mortgage on twogrounds, which are: (a) that, their signatures on the chattel mortgage were obtainedthrough fraud, deceit, or trickery; and (b) that the subject matter of the mortgage is a houseof strong materials, and, being an immovable, it can only be the subject of a real estatemortgage and not a chattel mortgage.

On the charge of fraud, deceit or trickery, the Court of First Instance found defendants-appellants' contentions as not supported by evidence and accordingly dismissed thecharge, 8confirming the earlier finding of the municipal court that "the defense ofownership as well as the allegations of fraud and deceit ... are mere allegations." 9It has been held in Supia and Batiaco vs. Quintero and Ayala 10 that "the answer is a merestatement of the facts which the party filing it expects to prove, but it is not evidence; 11 andfurther, that when the question to be determined is one of title, the Court is given theauthority to proceed with the hearing of the cause until this fact is clearly established. Inthe case ofSy vs. Dalman, 12 wherein the defendant was also a successful bidder in anauction sale, it was likewise held by this Court that in detainer cases the aim of ownership"is a matter of defense and raises an issue of fact which should be determined from the

evidence at the trial." What determines jurisdiction are the allegations or averments in thecomplaint and the relief asked for. 13Moreover, even granting that the charge is true, fraud or deceit does not render a contractvoid ab initio, and can only be a ground for rendering the contract voidable or annullablepursuant to Article 1390 of the New Civil Code, by a proper action in court. 14There isnothing on record to show that the mortgage has been annulled. Neither is it disclosed thatsteps were taken to nullify the same. Hence, defendants-appellants' claim of ownership onthe basis of a voidable contract which has not been voided fails.It is claimed in the alternative by defendants-appellants that even if there was no fraud,deceit or trickery, the chattel mortgage was still null and void ab initio because onlypersonal properties can be subject of a chattel mortgage. The rule about the status of

buildings as immovable property is stated in Lopez vs. Orosa, Jr. and Plaza TheatreInc., 15cited inAssociated Insurance Surety Co., Inc. vs. Iya, et al. 16to the effect that

... it is obvious that the inclusion of the building, separate and distinct fromthe land, in the enumeration of what may constitute real properties (art. 415,New Civil Code) could only mean one thing thata building is by itself animmovable propertyirrespective of whether or not said structure and theland on which it is adhered to belong to the same owner.

Certain deviations, however, have been allowed for various reasons. In the caseofManarang and Manarang vs. Ofilada, 17 this Court stated that "it is undeniable that theparties to a contract may by agreement treat as personal property that which by naturewould be real property", citing Standard Oil Company of New York vs. Jaramillo. 18In the

latter case, the mortgagor conveyed and transferred to the mortgagee by way of mortgage"the following describedpersonal property." 19The "personal property" consisted ofleasehold rights and a building. Again, in the case ofLuna vs. Encarnacion, 20 the subject ofthe contract designated as Chattel Mortgage was a house of mixed materials, and this Courthold therein that it was a valid Chattel mortgage because it was so expressly designatedandspecifically that the property given as security "is a house of mixed materials, which by itsvery nature is considered personal property." In the later case ofNavarro vs. Pineda, 21 thisCourt stated that

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The view that parties to a deed of chattel mortgage may agree to consider ahouse as personal property for the purposes of said contract, "is good onlyinsofar as the contracting parties are concerned. It is based, partly, upon theprinciple of estoppel" (Evangelista vs. Alto Surety, No. L-11139, 23 April1958). In a case, a mortgaged house built on a rented landwas held to be a

personal property, not only because the deed of mortgage considered it assuch, but also because it did not form part of the land (Evangelists vs. Abad,[CA]; 36 O.G. 2913), for it is now settled that an object placed on land by onewho had only a temporary right to the same, such as the lessee orusufructuary, does not become immobilized by attachment (Valdez vs.Central Altagracia, 222 U.S. 58, cited in Davao Sawmill Co., Inc. vs. Castillo, etal., 61 Phil. 709). Hence, if a house belonging to a person stands on a rentedland belonging to another person, it may be mortgaged as a personalproperty as so stipulated in the document of mortgage. (Evangelista vs.Abad, Supra.) It should be noted, however that the principle is predicated onstatements by the owner declaring his house to be a chattel, a conduct that may

conceivably estop him from subsequently claiming otherwise. (Ladera vs. C.N.Hodges, [CA] 48 O.G. 5374): 22

In the contract now before Us, the house on rented land is not only expressly designated asChattel Mortgage; it specifically provides that "the mortgagor ... voluntarily CEDES, SELLSand TRANSFERS by way of Chattel Mortgage 23 the property together with its leaseholdrights over the lot on which it is constructed and participation ..." 24Although there is nospecific statement referring to the subject house as personal property, yet by ceding, sellingor transferring a property by way of chattel mortgage defendants-appellants could onlyhave meant to convey the house as chattel, or at least, intended to treat the same as such, sothat they should not now be allowed to make an inconsistent stand by claiming otherwise.Moreover, the subject house stood on a rented lot to which defendats-appellants merely

had a temporary right as lessee, and although this can not in itself alone determine thestatus of the property, it does so when combined with other factors to sustain theinterpretation that the parties, particularly the mortgagors, intended to treat the house aspersonalty. Finally unlike in the Iya cases,Lopez vs. Orosa, Jr. and Plaza Theatre,Inc. 25and Leung Yee vs. F. L. Strong Machinery and Williamson, 26wherein third

persons assailed the validity of the chattel mortgage, 27 it is the defendants-appellantsthemselves, as debtors-mortgagors, who are attacking the validity of the chattel mortgagein this case. The doctrine of estoppel therefore applies to the herein defendants-appellants,having treated the subject house as personalty.(b) Turning to the question of possession and rentals of the premises in question. TheCourt of First Instance noted in its decision that nearly a year after the foreclosure sale the

mortgaged house had been demolished on 14 and 15 January 1957 by virtue of a decisionobtained by the lessor of the land on which the house stood. For this reason, the said courtlimited itself to sentencing the erstwhile mortgagors to pay plaintiffs a monthly rent ofP200.00 from 27 March 1956 (when the chattel mortgage was foreclosed and the housesold) until 14 January 1957 (when it was torn down by the Sheriff), plus P300.00 attorney'sfees.Appellants mortgagors question this award, claiming that they were entitled to remain inpossession without any obligation to pay rent during the one year redemption period after

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the foreclosure sale, i.e., until 27 March 1957. On this issue, We must rule for theappellants.Chattel mortgages are covered and regulated by the Chattel Mortgage Law, Act No.1508. 28 Section 14 of this Act allows the mortgagee to have the property mortgaged sold atpublic auction through a public officer in almost the same manner as that allowed by Act

No. 3135, as amended by Act No. 4118, provided that the requirements of the law relativeto notice and registration are complied with. 29In the instant case, the parties specificallystipulated that "the chattel mortgage will be enforceable in accordance with the provisions ofSpecial Act No. 3135... ." 30(Emphasis supplied).Section 6 of the Act referred to 31provides that the debtor-mortgagor (defendants-appellants herein) may, at any time within one year from and after the date of the auctionsale, redeem the property sold at the extra judicial foreclosure sale. Section 7 of the sameAct32allows the purchaser of the property to obtain from the court the possession duringthe period of redemption: but the same provision expressly requires the filing of a petitionwith the proper Court of First Instance and the furnishing of a bond. It is only upon filing ofthe proper motion and the approval of the corresponding bond that the order for a writ of

possession issues as a matter of course. No discretion is left to the court. 33In the absenceof such a compliance, as in the instant case, the purchaser can not claim possession duringthe period of redemption as a matter of right. In such a case, the governing provision isSection 34, Rule 39, of the Revised Rules of Court34which also applies to properties

purchased in extrajudicial foreclosure proceedings. 35 Construing the said section, this Courtstated in the aforestated case ofReyes vs. Hamada.

In other words, before the expiration of the 1-year period within which thejudgment-debtor or mortgagor may redeem the property, the purchaserthereof is not entitled, as a matter of right, to possession of the same. Thus,while it is true that the Rules of Court allow the purchaser to receive therentals if the purchased property is occupied by tenants, he is, nevertheless,

accountable to the judgment-debtor or mortgagor as the case may be, for theamount so received and the same will be duly credited against theredemption price when the said debtor or mortgagor effects theredemption.Differently stated, the rentals receivable from tenants, althoughthey may be collected by the purchaser during the redemption period, do not

belong to the latter but still pertain to the debtor of mortgagor. The rationalefor the Rule, it seems, is to secure for the benefit of the debtor or mortgagor,the payment of the redemption amount and the consequent return to him ofhis properties sold at public auction. (Emphasis supplied)

The Hamada case reiterates the previous ruling in Chan vs. Espe. 36Since the defendants-appellants were occupying the house at the time of the auction sale,

they are entitled to remain in possession during the period of redemption or within oneyear from and after 27 March 1956, the date of the auction sale, and to collect the rents orprofits during the said period.It will be noted further that in the case at bar the period of redemption had not yet expiredwhen action was instituted in the court of origin, and that plaintiffs-appellees did notchoose to take possession under Section 7, Act No. 3135, as amended, which is the lawselected by the parties to govern the extrajudicial foreclosure of the chattel mortgage.Neither was there an allegation to that effect. Since plaintiffs-appellees' right to possess

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was not yet born at the filing of the complaint, there could be no violation or breachthereof. Wherefore, the original complaint stated no cause of action and was prematurelyfiled. For this reason, the same should be ordered dismissed, even if there was noassignment of error to that effect. The Supreme Court is clothed with ample authority toreview palpable errors not assigned as such if it finds that their consideration is necessary

in arriving at a just decision of the cases.37

It follows that the court below erred in requiring the mortgagors to pay rents for the yearfollowing the foreclosure sale, as well as attorney's fees.FOR THE FOREGOING REASONS, the decision appealed from is reversed and another oneentered, dismissing the complaint. With costs against plaintiffs-appellees.Concepcion, C.J., Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo, Villamor

and Makasiar, JJ., concur.

TUMALAD V. VICENCIO41 SCRA 143

FACTS:Vicencio and Simeon executed a chattel mortgage in favor of plaintiffs Tumalad overtheir house, which was being rented by Madrigal and company. This was executedto guarantee a loan, payable in one year with a 12% per annum interest.

The mortgage was extrajudicially foreclosed upon failure to pay the loan. The house wassold at a public auction and the plaintiffs were the highest bidder. A correspondingcertificate of sale was issued. Thereafter, the plaintiffs filed an action for ejectmentagainst the defendants, praying that the latter vacate the house as they were the properowners.

HELD:Certain deviations have been allowed from the general doctrine that buildings areimmovable property such as when through stipulation, parties may agree to treat aspersonal property those by their nature would be real property. This is partly based onthe principle of estoppel wherein theprinciple is predicated on statements by the owner declaring his house as chattel, aconduct that may conceivably stop him from subsequently claiming otherwise.

In the case at bar, though there be no specific statement referring to the subject house aspersonal property, yet by ceding, selling or transferring a property through chattelmortgage could only have meant that defendant conveys the house as chattel, or at

least, intended to treat the same assuch, so that they should not now be allowed to make an inconsistent stand byclaiming otherwise.

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MALACAANGM a n i l a

PRESIDENTIAL DECREE No. 1521THE SHIP MORTGAGE DECREE OF 1978

WHEREAS, it is the declared policy of the State to accelerate the growth and development

of the shipping industry;

WHEREAS, due to the heavy capital requirement for ship acquisition and operation, theshipping industry has turned to financial institutions, both local and foreign, for assistance;

WHEREAS, Philippine laws on ship mortgage have not been responsive to the needs ofvessel financing such that it has deterred the extensions of needed loans to the industry;

WHEREAS, there is a recognized need for extending the benefits accorded to overseasshipping under Presidential Decree No. 214 to domestic shipping.

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of thepowers vested in me by the Constitution, do hereby order the enactment of a ship mortgagelaw as follows:

Section 1. Title. This Decree shall be known as "The Ship Mortgage Decree of 1978."

Section 2. Who may Constitute a Ship Mortgage. Any citizen of the Philippines, or anyassociation or corporation organized under the laws of the Philippines, at least sixty percent of the capital of which is owned by citizens of the Philippines may, for the purpose offinancing the construction, acquisition, purchase of vessels or initial operation of vessels,freely constitute a mortgage or any other lien or encumbrance on his or its vessels and its

equipment with any bank or other financial institutions, domestic or foreign.

Section 3. Mortgage of Vessel of Domestic Ownership; records.(a) No mortgage, which at the time such mortgage is made includes a vessel ofdomestic ownership as this term is defined in Presidential Decree No. 761, or anyportion thereof, as the whole or any part of the property mortgaged, shall be valid,in respect to such vessel, against any person other than the mortgagor, his heir orassign, and a person having actual notice thereof, until such mortgage is recorded inthe office of the Philippine Coast Guard of the port of documentation of such vessel.(b) The Coast Guard District or Station Commander shall record mortgagesdelivered to him, in the order of their reception, in books to be kept for that purpose

and indexed to show1. The name of the vessel;2. The names of the parties tot he mortgage;3. The time and date of reception of the instrument;4. The interest in the vessel so mortgaged;5. The amount and date of maturity of the mortgage;6. Name, citizenship, nationality and residence of owner, and7. Any material change of condition in respect to any of the preceding items.

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A copy of the instrument or mortgage shall be furnished the Central Bank of thePhilippines.

Section 4. Preferred Mortgages(a) A valid mortgage which at the time it is made includes the whole of any vessel of

domestic ownership shall have, in respect to such vessel and as of the date ofrecordation, the preferred status given by the provisions of Section 17 hereof, if

1. The mortgage is recorded as provided in Section 3 hereof;2. An affidavit is filed with the record of such mortgage to the effect that themortgage is made in good faith and without any design to hinder, delay, ordefraud any existing or future creditor of the mortgagor or any lien or of themortgaged vessel;3. The mortgage does not stipulate that the mortgagee waives the preferredstatus thereof;

(b) Any mortgage which complies with the above conditions is hereafter called a"preferred mortgage". For purposes of this Decree, a vessel holding a Provisional

Certificate of Philippine Registry is considered a vessel of domestic ownership suchthat it can be subject of preferred mortgage. The Philippine Coast Guard is herebyauthorized to enter a vessel holding a Provisional Certificate of Philippine Registryin the Registry of Vessels and to record any mortgage executed thereon. Suchmortgage shall have the preferred status as of the date of recordation uponcompliance with the above conditions.(c) There shall be endorsed upon the documents of a vessel covered by a preferredmortgage

1. The names of the mortgagor and mortgagee;2. The time and date the endorsement is made;3. The amount and date of maturity of the mortgage; and

4. Any amount required to be endorsed by the provisions of paragraphs (e)or (f) of this Section.

(d) Such endorsement shall be made (1) by the Coast Guard District or StationCommander of the port of documentation of the mortgaged vessel, or (2) by theCoast Guard District or Station Commander of any port in which the vessel is found,if such Coast Guard District or Station Commander is directed to make theendorsement by the Coast Guard District or Station Commander of the port ofdocumentation. The Coast Guard District or Station Commander of the port ofdocumentation shall give such direction by wire of letter at the request of themortgagee and upon the tender of the cost of communication of such direction.Whenever any new document is issued for the vessel, such endorsement shall be

transferred to and endorsed upon the new document by the Coast Guard District orStation Commander.In the case of a vessel holding a provincial certificate of Philippine Registry, theendorsement shall be made by the Philippine consul abroad upon direction by wireor letter from the Maritime Industry Authority at the request of the mortgagee andupon tender of the cost of communication of such direction. A certificate of suchendorsement, giving the place, time and description of the endorsement, shall be

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recorded with the records of registration to be maintained at the PhilippineConsulate.(e) A mortgage which includes property other than a vessel shall not be held apreferred mortgage unless the mortgage provides for the separate discharge of suchproperty by the payment of a specified portion of the mortgage indebtedness. If a

preferred mortgage so provides for the separate discharge, the amount of theportion of such payment shall be endorsed upon the documents of the vessel.(f) A preferred mortgage includes more than one vessel and provides for theseparate discharge of each vessel by the payment of a portion of mortgageindebtedness, the amount of such portion of such payment shall be endorsed uponthe documents of the vessel. In case such mortgage does not provide for theseparate discharge of a vessel and the vessel is to be sold upon the order of a districtcourt of the Philippines in a suit in rem in admiralty, the court shall determine theportion of the mortgage indebtedness increased by 20 per centum (1) which, in theopinion of the court, the approximate value of all the vessels covered by themortgage, and (2) upon the payment of which the vessel shall be discharged from

the mortgage.

Section 5. Certified Copies of Mortgage; exhibition. The Coast Guard District or StationCommander upon the recording of a preferred mortgage shall deliver two certified copiesthereof to the mortgagor who shall place, and use due diligence to retain, one copy onboard the mortgaged vessel notice of which shall be posted in a conspicuous place thereatand cause such copy and the documents of the vessel to be exhibited by the master to anyperson having business with the vessel, which give rise to a maritime lien upon the vesselor to the sale, conveyance, or mortgage thereof. The master of the vessel shall upon therequest of any such person, exhibit to him the documents of the vessel placed on boardthereof. The requirement of this Section that a copy of a preferred mortgage be placed and

retained on board the mortgaged vessel shall not apply in the case of a mortgaged vesselwhich is not self-propelled (including but not limited to, barges, scors, lighters, and carfloats).If the master of the vessel willfully fails to exhibit the documents of the vessel or the copy ofany preferred mortgage thereof, the Philippine Coast Guard may suspend or cancel themaster's license.

Section 6. Prior and Subsequent Maritime Liens on Mortgaged Vessel. The mortgagor (1)shall, upon request of the mortgagee, disclose in writing to him prior to the execution ofany preferred mortgage, the existence of any maritime lien, prior mortgage, or otherobligation or liability upon the vessel to be mortgaged, that is known to the mortgagor, and

(2) without the consent of the mortgagee, shall not incur, after the execution of suchmortgage and before the mortgagee has had a reasonable time in which to record themortgage and have indorsements in respect thereto made upon the documents of thevessel, any contractual obligation creating a lien upon the vessel other than a lien for wagesof stevedores when employed directly by the owner, operator, master, ship's husband, oragent of the vessel, for wages of the crew of the vessel, for general average, or for salvage,including contract salvage, in respect to the vessel, tonnage dues and all other charges (notto exceed P20,000) of the Philippine Government in respect to the vessel.

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A mortgagor, who, with intent to defraud, violates the above provision and if the mortgagoris a corporation or association, the president or other principal executive officer of thecorporation or association, shall be punished by a fine of not, more than P5,000 orimprisonment of not more than two years, or both. The mortgage indebtedness shallthereupon become immediately due and payable at the election of the mortgagee.

Section 7. Record of Notice of Claim of Lien on Mortgaged Vessel; discharge of lien(a) The Coast Guard District or Station Commander of the port of documentationshall, upon the request of any person, record notice of his claim of a lien upon avessel covered by a preferred mortgage, together with the nature, date of creation,and amount of the lien, and the name and address of the person. Any person whohas caused notice of his claim of lien to be so recorded shall, upon a discharge inwhole or in part of the indebtedness, forthwith file with the Coast Guard District orStation Commander a certificate of such discharge. The Coast Guard District orStation Commander shall thereupon record the certificate.(b) The mortgagor upon a discharge in whole or in part of the mortgage

indebtedness, shall forthwith file with the Coast Guard District or StationCommander for the port of documentation of the vessel, a certificate of suchdischarge duly executed by the mortgagee. Such Coast Guard District or StationCommander shall there upon record the certificate. In case of a vessel covered by apreferred mortgage, the Coast Guard District or Station Commander at the port ofdocumentation shall endorse upon the documents of the vessel, or direct the CoastGuard District or Station Commander at any port in which the vessel is found, to soendorse, the fact of such discharge.

A certificate of such endorsement, giving the time, place and description of theendorsement, shall be recorded with the Philippine Coast Guard. Where the endorsement ismade by a person other than the Coast Guard District or Station Commander such

certificate shall be promptly forwarded to the Philippine Coast Guard.

Section 8. Conditions Precedent to Record; interest on Preferred Mortgage(a) No mortgage shall be recorded unless it states the interest of the mortgagor inthe vessel, and the interest so mortgaged.(b) No mortgage, notice of claim of lien, or certificate of discharge thereof, shall berecorded unless previously acknowledged before the Coast Guard District or StationCommander of the port of documentation or a notary public or other officerauthorized by a law of the Philippines to take acknowledgment of deeds or before aPhilippine consul or consular agent.(c) In case of a change in the port of documentation of a vessel of the Philippines, no

mortgage shall be recorded at the new port of documentation unless there isfurnished to the Coast Guard District or Station Commander of such port, togetherwith the copy of the mortgage to be recorded, a certified copy of the record of thevessel at the former port of documentation furnished by the Coast Guard District orStation Commander of such port. The Coast Guard District or Station Commander atthe new port of documentation is authorized and directed to record such certifiedcopy.

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Section 9. Inspection of the Copies for Records; fees. Each Coast Guard District or StationCommander shall permit records made under the provisions of this decree to be inspectedduring office hours, under such reasonable regulation as the Philippine Coast Guard mayestablish. Upon the request of any person the Coast Guard District or Station Commandershall furnish him from the records of the Coast Guard's office (1) a certificate setting forth

the names of the owners of any vessel, the interest held by each owner, and the materialfacts as to any mortgage covering, or any lien or other encumbrance upon, a specifiedvessel, (2) a certified copy of any mortgage, notice of claim of lien, or certified copydischarge in respect to such vessel, or (3) a certified copy as required by subsection (c) ofSection 8 hereof. The Philippine Coast Guard shall collect the fees as provided for underexisting laws and regulations for any mortgage recorded, or any certificate or certified copyfurnished by it.

Section 10. Lien of preferred Mortgage; foreclosure; jurisdiction; procedure A preferredmortgage shall constitute a lien upon the mortgaged vessel in the amount of theoutstanding mortgage indebtedness secured by such vessel. Upon the default of any term

or condition of the mortgage such lien may be enforced by the mortgagee by suit inremaining admiralty, wherein the vessel itself may be made a partly defendant and bearrested in the manner as provided in Section 11 hereof. Original jurisdiction of all suchsuits is granted to the Court of First Instance of the Philippines exclusively. In addition toany notice by publication, actual notice of commencement of any such suit shall direct, to(1) the master, other ranking officer, or caretaker of the vessel, and (2) any person who hasrecorded a notice of claim of an undischarged lien upon the vessel, as provided in Section 7hereof, unless after search by the mortgage satisfactory to the court, such mortgagor,master, other ranking officer, caretaker, or claimant is not found within the Philippines.Failure to give notice to any such person, as required by this Section, shall be liable to suchperson for damages in the amount of his interest in the vessel terminated by the suit.

In case of judicial foreclosure as provided herein, the provisions of Rule 68 of the NewRules of Court, if not inconsistent herewith, shall apply.The lien of a preferred ship mortgage may also be enforced by a suit in rem in admiralty orotherwise in any foreign country in which the vessel may be found pursuant to theprocedure of said country for the enforcement of ship mortgages constituting maritimeliens on vessels documented under the laws of said country.

Section 11. Arrest of Vessels Upon the filing of the petition for the judicial foreclosure of aPreferred Ship Mortgage, or immediately thereafter, the applicant may apply ex-parte foran order for the arrest of the mortgaged vessel or vessels and the judge shall immediatelyissue the same, provided that it is made to appear by affidavit of the applicant, or of some

other person who personally knows the facts that a default in the mortgage has occurredand that applicant files a bond executed to the adverse party in an amount to be fixed bythe judge, not exceeding the applicant's claim, conditioned that the latter will pay all thecosts which may be adjudged to the adverse party and all damages which he may sustainby reason of such arrest, if the court shall finally adjudge that the applicant was not entitledthereto.

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Section 12. Discharge of Order of Arrest; Counterbond At any time after an order of arresthas been granted, the party whose vessel or vessels had been arrested, or the personappearing in his behalf, may, upon reasonable notice to the applicant, apply to the judgewho granted the order, or to the judge of the court in which the action is pending, for anorder discharging the order of arrest. That judge shall order the discharge of the arrest if a

cash deposit is made, or counterbond executed to the creditor is filed, on behalf of theadverse party, with the clerk or judge of the court where the application is made in anamount double the value of the claim to secure the payment of any judgment that thecreditor may recover in the action. Upon the filing of such counterbond, copy thereof shallforthwith be served on the creditor or his lawyer. Upon discharge of the order of arrest, theproperty arrested or seized shall be delivered to the party making the deposit or giving thecounterbond, or the person appearing in his behalf, the deposit or counterbond aforesaidstanding in place of the vessel or vessels released. Should such deposit or counterbond forany reason be found to be, or become insufficient, and the party furnishing the same fails tofile an additional co-counterbond, the attaching creditor may apply for a new order ofarrest or seizure.

Section 13. Discharge of Order of Arrest for Improper or Irregular Issuance The partywhose vessel/s has been arrested may also, at any time either before or after the release ofthe arrested vessel, or before any arrest or seizure has been effected, upon reasonablenotice to the creditor, apply to the judge who granted the order, or to the judge of the courtin which the action is pending, for an order to discharge the order of arrest or seizure onthe ground that the same improperly or irregularly issued. After hearing, the judge shallorder the discharge of the order of arrest or seizure if it appears that it was improperly orirregularly issued and the defect is not cured forthwith.

Section 14. Extrajudicial Foreclosure The provisions of the Chattel Mortgage Law on the

remedy of extra-judicial foreclosure of mortgages in so far as they are not inconsistentherewith shall still apply. For the purpose of taking possession of the vessel or vessels, theforeclosing creditor may secure from a judge of the Court of First Instance of the provincewhere the vessel may be found or where the creditor or debtor resides an order for thearrest or seizure of the vessel. Upon such order of seizure or arrest being issued, the sheriffshall immediately take possession of the vessel or vessels for the purpose of foreclosureand sale. The vessel may only be released in accordance with the provisions of Section 13of this Act, or when the debtor pays the outstanding obligation.

Section 15. Foreign Ship Mortgages As used in Sections 10 to 18 hereof, the term"preferred mortgage" shall include, in addition to a preferred mortgage made pursuant to

the provisions of this Decree, any mortgage, hypothecation, or similar charge created assecurity upon any documented foreign vessel if such mortgage, hypothecation, or similarcharge has been duly and validly executed in accordance with the laws of the foreign nationunder the laws of which the vessel is documented and has been duly registered inaccordance with such laws in a public register either at the port of registry of the vessel orat a central office; and the term "preferred mortgage lien" shall also include the lien of suchmortgage, hypothecation, or similar charge: Provided, however, That such "preferredmortgage lien" in the case of a foreign vessel shall be subordinate to maritime liens for

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repairs, supplies, towage, use of drydock or marine railway, or other necessaries,performed or supplied in the Philippines.

Section 16. Receiver in Foreclosure; possession by sheriff In any suit in rem in admiraltyfor the enforcement of the preferred mortgage lien, the court may appoint a receiver and,

in its discretion, authorize the receiver to operate the mortgaged vessel. The sheriff may beauthorized and directed by the court to take possession of the mortgaged vesselnotwithstanding the fact that the vessel is in the possession or under the control of anyperson claiming a possessory common law lien.

Section 17. Preferred Maritime Lien, Priorities, Other Liens (a) Upon the sale of anymortgaged vessel in any extra-judicial sale or by order of a district court of the Philippinesin any suit in rem in admiralty for the enforcement of a preferred mortgage lien thereon, allpre-existing claims in the vessel, including any possessory common-law lien of which alienor is deprived under the provisions of Section 16 of this Decree, shall be heldterminated and shall thereafter attach in like amount and in accordance with the priorities

established herein to the proceeds of the sale. The preferred mortgage lien shall havepriority over all claims against the vessel, except the following claims in the order stated:(1) expenses and fees allowed and costs taxed by the court and taxes due to theGovernment; (2) crew's wages; (3) general average; (4) salvage; including contract salvage;(5) maritime liens arising prior in time to the recording of the preferred mortgage; (6)damages arising out of tort; and (7) preferred mortgage registered prior in time.

(b) If the proceeds of the sale should not be sufficient to pay all creditors included inone number or grade, the residue shall be divided among them pro rata. All creditsnot paid, whether fully or partially shall subsist as ordinary credits enforceable bypersonal action against the debtor. The record of judicial sale or sale by publicauction shall be recorded in the Record of Transfers and Encumbrances of Vessels in

the port of documentation.

Section 18. Suit in Personam in Admiralty on Default(a) Upon the default of any term or condition of a preferred mortgage upon a vessel,the mortgagee may, in addition to all other remedies granted by this Decree, bringsuit in personal in admiralty in a district court of the Philippines, against themortgagor for the amount of the outstanding mortgage indebtedness secured bysuch vessel or any deficiency in the full payment thereof.(b) This Decree shall not be construed, in the case of a mortgage covering, inaddition to vessels, realty or personality other than vessels, or both, to authorize theenforcement by suit in rem in admiralty of the rights of the mortgage in respect to

such realty or personality other than vessels.

Section 19. Surrender of Documents; termination of mortgagee's interest; sale ofmortgaged vessel

(a) The documents of a vessel of the Philippines covered by a preferred mortgagedmay not be surrendered (except in the case of the forfeiture of the vessel or its saleby the order of any court of the Philippines or any foreign country) without the

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approval of the Maritime Industry Authority. The Administrator shall not grant suchapproval without the mortgagee's consent.(b) The interest of the mortgage in a vessel of the Philippines covered by amortgage, shall not be terminated by the forfeiture of the vessel for a violation ofany law of the Philippines, unless the mortgage authorized, consented, or conspired

to effect the illegal act, failure, or omission which constituted such violation. Neithershall the chance by the shipowner in the use or character of the vessel or in thebusiness of the mortgagor, without the consent of the mortgagee, nor the failure bythe mortgagor to comply with the provisions of Section 5 hereof affect the validityor preference of the preferred ship mortgage as against third persons.(c) Upon the sale of any vessel of the Philippines covered by a preferred mortgage inany extrajudicial sale or by order of a district court of the Philippines in any suit inrem in admiralty for the enforcement of a maritime lien other than a preferredmaritime lien, the vessel shall be sold free from all pre-existing claims thereon; butthe court shall, upon the request of the mortgagee, the plaintiff, or any intervenor,require the purchase at such sale to give and the mortgagee to accept a new

mortgage of the vessel for the balance of the term of the original mortgage. Theconditions of such new mortgage shall be the same, so far as practicable, as those ofthe original mortgage and shall be subject to the approval of the court. If such newmortgage is given, the mortgagee shall not be paid from the proceeds of the sale andthe amount payable as the purchase price shall be held diminished in the amount ofthe new mortgage indebtedness.(d) No vessel of domestic ownership shall be mortgaged, nor, any rights under saidmortgage shall be assigned, to any person not a citizen of the Philippines withoutthe approval of the Maritime Industry Authority. The penalties and sanctionsprovided for under Commonwealth Act No. 606 shall apply in case of any violationhereof.

(e) The foreclosure sale of vessels mortgaged under the provisions of this Decree,whether judicially or extra- judicially, shall not require the approval of the MaritimeIndustry Authority.

Section 20. Who May Bid in the Foreclosure Sale The following persons are qualified to bidin the foreclosure sale of the mortgaged vessel:

(a) Citizens of the Philippines or corporations 60% of the capital of which is ownedby Filipino citizens.(b) A foreign mortgagee or foreign national whose country has diplomatic relationswith the Philippines or whose country grants reciprocal rights to Filipino citizens.

In case the purchaser is a foreign individual or entity, the Philippine Coast Guard shall,

upon presentation of the certificate of sale, cancel the registration of the vessel and issue acertificate to that effect upon request.

Section 21. Maritime Lien for Necessaries; persons entitled to such lien Any personfurnishing repairs, supplies, towage, use of dry dock or marine railway, or othernecessaries to any vessel, whether foreign or domestic, upon the order of the owner of suchvessel, or of a person authorized by the owner, shall have a maritime lien on the vessel,

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which may be enforced by suit in rem, and it shall be necessary to allege or prove thatcredit was given to the vessel.

Section 22. Persons Authorized to Procure Repairs, Supplies, and Necessaries Thefollowing persons shall be presumed to have authority from the owner to procure repairs,

supplies, towage, use of dry dock or marine railway, and other necessaries for the vessel:The managing owner, ship's husband, master or any person to whom the management ofthe vessel at the port of supply is entrusted. No person tortuously or unlawfully inpossession or charge of a vessel shall have authority to bind the vessel.

Section 23. Notice to Person Furnishing Repairs, Supplies, and Necessaries The officersand agents of a vessel specified in Section 22 of this Decree shall be taken to include suchofficers and agents when appointed by a character, by an owner pro hac vice, or by anagreed purchaser in possession of the vessel; but nothing in this Decree shall be construedto confer a lien when the furnisher know, or by exercise of reasonable diligence could haveascertained, that because of the terms of a charter party, agreement for sale of the vessel,

or for any other reason, the person ordering the repairs, supplies, or other necessaries waswithout authority to bind the vessel therefor.

Section 24. Waiver of Right to Lien Nothing in this Decree shall be construed to preventthe furnisher of repairs, supplies, towage, use of dry dock or marine railway, or othernecessaries, or the mortgagee, from waiving his right to a lien, or in the case of a preferredmortgage lien, to the preferred status of such lien, at any time by agreement or otherwise.

Section 25. Existing Mortgages Not Affected; exception This Decree shall not apply (1) toany existing mortgage, or (2) to any mortgage hereafter placed at any vessel under anexisting mortgage, so long as such existing mortgage remains undischarged. The Decree

shall, however, apply to mortgages executed pursuant to Presidential Decree No. 214,provided, that no vested rights of third parties are affected thereby.

Section 26. Rules and Regulations by Philippine Coast Guard and the Maritime IndustryAuthority The Philippine Coast Guard and the Maritime Industry Authority are herebyauthorized to make such rules and regulations within their respective spheres ofjurisdiction, as they may deem necessary for the efficient execution of the provisions of thisDecree.

Section 27. Port of Documentation Whenever in the Ship Mortgage Decree of 1978 thewords "port of documentation" are used, they shall be deemed to mean the port of registry

of the vessel.

Section 28. Instruments and Acts Validated All mortgages of any vessel of any part thereof,and all documentations, recordations, indorsements and indexing thereof, and proceedingsincidental thereto made or done, prior to the effectivity of this Decree are declared valid tothe extent they would have been valid if the port or ports at which it should have beendocumented in accordance with law; and this Section is declared retroactive so as to

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accomplish such validations: Provided, That nothing herein contained shall be construed todeprive any person of any vested right.

Section 29. Repealing Clause The provisions of the New Civil Code, the Code of Commerce,the Chattel Mortgage Law, the Revised Rules of Court and of such other laws, decrees,

executive orders, rules and regulations which are in conflict or inconsistent with theprovisions of this Decree are hereby repealed, amended or modified accordingly. If for anyreason, any section, subsection, sentence, clauses or term of this Decree is held to beunconstitutional such decision shall not affect the validity of the other provisions of thisDecree.

Section 30. Effectivity This Decree shall take a effect upon its approval.Done in the City of Manila, this 11th day of June, in the year of Our Lord, nineteen hundredand seventy-eight.

CASE Digest

Case Digest on Philippine National Bank vs. Court of AppealsPhilippine National Bank vs. Court of Appeals [337 SCRA 381 (Aug. 8, 2000)]Preference of Credit: Maritime LienFacts: To finance the acquisition of 7 shipping vessels, the Philippine InternationalShipping Corporation (PISC) applied for and was granted by National InvestmentDevelopment Corporation (NIDC) guaranty accomodations. As security for these guarantyaccomodations, PISC executed chattel mortgages on the vessels to be acquired by it.Meanwhile, PISC entered into a contract with Hong Kong United Dockyards, Ltd. for therepair and conversion of one of the vessels, M/V Asean Liberty. The Central Bank of the

Phils. authorized PISC to open with China Banking Corporation (CBC) a standby letter ofcredit for US$545,000 in favor of Citibank, N.A. to cover the repair and partial conversion ofthe vessel M/V Asean Liberty.PISC executed an Application and Agreement for Commercial Letter of Credit forUS$545,000 with CBC in favor of Citibank. CBC then issued its Irrevocable Standby Letterof Credit for US$545,000 in favor of Citibank for the account of PISC. PISC executed apromissory note for US$545,000 in favor of Citibank pursuant to the Loan Agreementbetween PISC and Citibank. Upon failure of PISC to fulfill its obligations, Citibank sent CBCa letter drawing on the Letter of Credit. CBC then instructed its correspondent Irving TrustCo. to pay to Citibank the amount of US$242,225. Subsequently, for failure of PISC to settleits obligations under the guaranty accommodations, the Philippine National Bank (PNB)

conducted an auction sale of the mortgaged vessels. NIDC emerged as the highest bidder inthese auctions. PISC, claiming that the foreclosure sale of its mortgaged vessels was illegaland irregular, instituted a civil case for the annulment of the foreclosure and auction sale.CBC filed a complaint in intervention for recovery upon a maritime lien against theproceeds of the sale of the foreclosed vessels.

Issue: Whether or not CBCs claim as evidenced by its Irrevocable Letter of Credit is in thenature of a maritime lien under the provisions of P.D. No. 1521; and if so, whether or not

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said maritime lien is preferred over the mortgage lien of PNB/NIDC on the foreclosedvessel M/V Asean Liberty

Held: Under the provisions of P.D. No. 1521, any person furnishing repairs, supplies, orother necessities to a vessel on credit will have a maritime lien. Such maritime lien, if it

arose prior to the recording of a preferred mortgage lien, shall have priority over the saidmortgage lien. In this case, it was Hongkong United Dockyards, Ltd. which originallypossessed a maritime lien over the vessel M/V Asean Liberty by virtue of its repair of thesaid vessel on credit. CBC, however, stands as guarantor of the loan extended by Citibankto PISC. It was Citibank which advanced the money to PISC. It was only upon the failure ofPISC to fulfill its obligations under its promissory note to Citibank that CBC was called uponby Citibank to exercise its duties under the Standby Letter of Credit. The applicable law,which is the Shipping Mortgage Decree of 1978, was patterned closely after the U.S. ShipMortgage Act of 1920. Being of foreign origin, the provisions of the Ship Mortgage Decreeof 1978 may thus be construed with the aid of foreign jurisprudence. Under Americanjurisprudence, furnishing money to a master in good faith to obtain repairs or supplies or

to remove liens, in order to forward the voyage of the vessel, raises a lien just as though thethings for which money was obtained to pay for had been furnished by the lender. This isin accord with Art5. 1302 of the Civil Code which provides that there is legal subrogationwhen a third person, not interested in the fulfillment of the obligation, pays with the

express or tacit approval of the debtor. In this case, the amount for the repair of vesselM/V Asean Liberty was advanced by Citibank and was used for the purpose of paying offthe original maritime lienor, Hongkong United Dockyards, Ltd. As a person not interestedin the fulfillment of the obligation between PISC and Hongkong United Dockyards, Ltd.,Citibank was subrogated to the rights of Hongkong United Dockyards, Ltd. as maritimelienor over the vessel. CBC, as guarantor, was itself subrogated to all the rights of Citibankas against PISC, the latters debtor. Art. 2067 of the civil Code provides that the guarantor

who pays is subrogated by virtue thereof to all the rights which the creditor had against thedebtor.

When CBC honored its contract of guaranty with Citibank on March 30, 1983, it alsoacquired by subrogation the maritime lien over the vessel which attached to it on March12, 1979 in favor of Hongkong United Drydocks, Ltd. The maritime lien of CBC thus aroseprior to the recording of PNB/NIDCs mortgage on September 25, 1979. As such, the saidmaritime lien has priority over the said mortgage lien.

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Republic of the PhilippinesSUPREME COURT

ManilaFIRST DIVISION

G.R. No. 103576 August 22, 1996ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners,vs.HON. COURT OF APPEALS, BANK OF THE PHILIPPINES and REGIONAL SHERIFF OFCALOOCAN CITY,respondents.

VITUG,J.:pWould it be valid and effective to have a clause in a chattel mortgage that purports tolikewise extend its coverage to obligations yet to be contracted or incurred? This questionis the core issue in the instant petition for review oncertiorari.Petitioner Chua Pac, the president and general manager of co-petitioner "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. Themortgage stood by way of security for petitioner's corporate loan of three million pesos(P3,000,000.00). A provision in the chattel mortgage agreement was to this effect

(c) If the MORTGAGOR, his heirs, executors or administrators shall well andtruly perform the full obligation or obligations above-stated according to theterms thereof, then this mortgage shall be null and void. . . .In case the MORTGAGOR executes subsequent promissory note or noteseither as a renewal of the former note, as an extension thereof, or as a newloan, or is given any other kind of accommodations such as overdrafts, lettersof credit, acceptances and bills of exchange, releases of import shipments on

Trust Receipts, etc., this mortgage shall also stand as security for thepayment of the said promissory note or notes and/or accommodationswithout the necessity of executing a new contract and this mortgage shallhave the same force and effect as if the said promissory note or notes and/oraccommodations were existing on the date thereof. This mortgage shall alsostand as security for said obligations and any and all other obligations of theMORTGAGOR to the MORTGAGEE of whatever kind and nature, whether suchobligations have been contracted before, during or after the constitution ofthis mortgage. 1

In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in1981, it obtained from respondent bank additional financial accommodations totalling

P2,700,000.00. 2 These borrowings were on due date also fully paid.On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan ofone million pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each.Due to financial constraints, the loan was not settled at maturity. 3 Respondent bankthereupon applied for an extra judicial foreclosure of the chattel mortgage, herein beforecited, with the Sheriff of Caloocan City, prompting petitioner corporation to forthwith filean action for injunction, with damages and a prayer for a writ of preliminary injunction,before the Regional Trial Court of Caloocan City (Civil Case No. C-12081). Ultimately, the

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court dismissed the complaint and ordered the foreclosure of the chattel mortgage. It heldpetitioner corporation bound by the stipulations, aforequoted, of the chattel mortgage.Petitioner corporation appealed to the Court of Appeals 4 which, on 14 August 1991,affirmed, "in all respects," the decision of the court a quo. The motion for reconsiderationwas denied on 24 January 1992.

The instant petition interposed by petitioner corporation was initially dinied on 04 March1992 by this Court for having been insufficient in form and substance. Private respondentfiled a motion to dismiss the petition while petitioner corporation filed a compliance andan opposition to private respondent's motion to dismiss. The Court denied petitioner's firstmotion for reconsideration but granted a second motion for reconsideration, therebyreinstating the petition and requiring private respondent to comment thereon. 5Except in criminal cases where the penalty ofreclusion perpetua or death isimposed 6 which the Court so reviews as a matter of course, an appeal from judgments oflower courts is not a matter of right but of sound judicial discretion. The circulars of theCourt prescribing technical and other procedural requirements are meant to weed outunmeritorious petitions that can unnecessarily clog the docket and needlessly consume the

time of the Court. These technical and procedural rules, however, are intended to helpsecure, not suppress, substantial justice. A deviation from the rigid enforcement of therules may thus be allowed to attain the prime objective for, after all, the dispensation ofjustice is the core reason for the existence of courts. In this instance, once again, the Courtis constrained to relax the rules in order to give way to and uphold the paramount andoverriding interest of justice.Contracts of security are either personal or real. In contracts of personal security, such as aguaranty or a suretyship, the faithful performance of the obligation by the principal debt oris secured by the personalcommitment of another (the guarantor or surety). In contracts ofreal security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured byan encumbrance of property in pledge, the placing of movable property in the possession

of the creditor; in chattel mortgage, by the execution of the corresponding deedsubstantially in the form prescribed by law; in real estate mortgage, by the execution of apublic instrument encumbering the real property covered thereby; and in antichresis, by awritten instrument granting to the creditor the right to receive the fruits of an immovableproperty with the obligation to apply such fruits to the payment of interest, if owing, andthereafter to the principal of his credit upon the essential condition that if the obligationbecomes due and the debtor defaults, then the property encumbered can be alienated forthe payment of the obligation, 7 but that should the obligation be duly paid, then thecontract is automatically extinguished proceeding from the accessory character 8 of theagreement. As the law so puts it, once the obligation is complied with, then the contract ofsecurity becomes, ipso facto, null and void. 9

While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately described, 10a chattelmortgage, however, can only cover obligations existing at the time the mortgage isconstituted. Although a promise expressed in a chattel mortgage to include debts that areyet to be contracted can be a binding commitment that can be compelled upon, the securityitself, however, does not come into existence or arise until after a chattel mortgageagreement covering the newly contracted debt is executed either by concluding a freshchattel mortgage or by amending the old contract conformably with the form prescribed by

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the Chattel Mortgage Law. 11 Refusal on the part of the borrower to execute the agreementso as to cover the after-incurred obligation can constitute an act of default on the part ofthe borrower of the financing agreement whereon the promise is written but, of course, theremedy of foreclosure can only cover the debts extant at the time of constitution andduring the life of the chattel mortgage sought to be foreclosed.

A chattel mortgage, as hereinbefore so intimated, must comply substantially withthe form prescribed by the Chattel Mortgage Law itself. One of the requisites, underSection 5 thereof, is an affidavit of good faith. While it is not doubted that if such anaffidavit is not appended to the agreement, the chattel mortgage would still be validbetween the parties (not against third persons acting in good faith 12), the fact,however, that the statute has provided that the parties to the contract must executean oath that

. . . (the) mortgage is made for the purpose of securing the obligationspecified in the conditions thereof, and for no other purpose, and that thesame is a just and valid obligation, and one not entered into for the purposeof fraud. 13

makes it obvious that the debt referred to in the law is a current, not an obligationthat is yet merely contemplated. In the chattel mortgage here involved, the onlyobligation specified in the chattel mortgage contract was the P3,000,000.00 loanwhich petitioner corporation later fully paid. By virtue of Section 3 of the ChattelMortgage Law, the payment of the obligation automatically rendered the chattelmortgage void or terminated. In Belgian Catholic Missionaries, Inc., vs. MagallanesPress, Inc., et al., 14the Courtsaid

. . . A mortgage that contains a stipulation in regard to future advances in thecredit will take effect only from the date the same are made and not from thedate of the mortgage. 15

The significance of the ruling to the instant problem would be that since the 1978chattel mortgage had ceased to exist coincidentally with the full payment of theP3,000,000.00 loan, 16 there no longer was any chattel mortgage that could coverthe new loans that were concluded thereafter.

We find no merit in petitioner corporation's other prayer that the case should be remandedto the trial court for a specific finding on the amount of damages it has sustained "as aresult of the unlawful action taken by respondent bank against it." 17 This prayer is notreflected in its complaint which has merely asked for the amount of P3,000,000.00 by wayofmoral damages. 18 In LBC Express, Inc. vs. Court of Appeals,19 we have said:

Moral damages are granted in recompense for physical suffering, mentalanguish, fright, serious anxiety, besmirched reputation, wounded feelings,

moral shock, social humiliation, and similar injury. A corporation, being anartificial person and having existence only in legal contemplation, has nofeelings, no emotions, no senses; therefore, it cannot experience physicalsuffering and mental anguish. Mental suffering can be experienced only byone having a nervous system and it flows from real ills, sorrows, and griefs oflife all of which cannot be suffered by respondent bank as an artificialperson. 20

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While Chua Pac is included in the case, the complaint, however, clearly states that hehas merely been so named as a party in representation of petitioner corporation.

Petitioner corporation's counsel could be commended for his zeal in pursuing his client'scause. It instead turned out to be, however, a source of disappointment for this Court toread in petitioner's reply to private respondent's comment on the petition his so-called

"One Final Word;" viz:In simply quoting in toto the patently erroneous decision of the trial court,respondent Court of Appeals should be required to justify its decision whichcompletely disregarded the basic laws on obligations and contracts, as wellas the clear provisions of the Chattel Mortgage Law and well-settledjurisprudence of this Honorable Court; that in the event that its explanationis wholly unacceptable, this Honorable Court should impose appropriatesanctions on the erring justices. This is one positive step in ridding our courtsof law of incompetent and dishonest magistrates especially members of a

superior court of appellate jurisdiction. 21 (Emphasis supplied.)The statement is not called for. The Court invites counsel's attention to the

admonition in Guerrero vs.Villamor; 22 thus:(L)awyers . . . should bear in mind their basic duty "to observe and maintainthe respect due to the courts of justice and judicial officers and . . . (to) insiston similar conduct by others." This respectful attitude towards the court is tobe observed, "not for the sake of the temporary incumbent of the judicialoffice, but for the maintenance of its supreme importance." And it is througha scrupulous preference for respectful language that a lawyer bestdemonstrates his observance of the respect due to the courts and judicialofficers . . . 23

The virtues of humility and of respect and concern for others must still live on evenin an age of materialism.

WHEREFORE, the questioned decisions of the appellate court and the lower court are setaside without prejudice to the appropriate legal recourse by private respondent as may stillbe warranted as an unsecured creditor. No costs.Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealingwith the courts.SO ORDERED.Kapunan and Hermosisima, Jr., JJ., concur.

Padilla, J., took no part.

Bellosillo, J., ic on leave.

Case DigestCASE DIGEST (Credit Transactions): ACME vs. Court of AppealsACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC vs.HON. COURT OFAPPEALS, BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN CITY

G.R. No. 103576 August 22, 1996

FACTS:

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Petitioner Chua Pac, the president and general manager of co-petitioner Acme executed achattel mortgage in favor of private respondent Producers Bank as a security for a loan ofP3,000,000. A provision in the chattel mortgage agreement was to this effect:

"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 otherkind of accommodations such as overdrafts, letters of credit, acceptances and bills ofexchange, releases of import shipments on Trust Receipts, etc., this mortgage shall alsostand as security for the payment of the said promissory note or notes and/oraccommodations without the necessity of executing a new contract and this mortgage shallhave the same force and effect as if the said promissory note or notes and/oraccommodations were existing on the date thereof. This mortgage shall also stand assecurity for said obligations and any and all other obligations of the MORTGAGOR to theMORTGAGEE of whatever kind and nature, whether such obligations have been contractedbefore, during or after the constitution of this mortgage."

In due time, the loan of P3,000,000.00 was paid. Subsequently it obtained additional loantotalling P2,700,000.00 which was also duly paid.

Another loan was again extended (P1,000,000.00) covered by four promissory notes forP250,000.00 each, but went unsettled prompting the bank to apply for an extrajudicialforeclosure with the Sheriff.

ISSUE:Would it be valid and effective to have a clause in a chattel mortgage that purports tolikewise extend its coverage to obligations yet to be contracted or incurred?

HELD:No. While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately described, a chattelmortgage, however, can only cover obligations existing at the time the mortgage isconstituted. Although a promise expressed in a chattel mortgage to include debts that areyet to be contracted can be a binding commitment that can be compelled upon, the securityitself, however, does not come into existence or arise until after a chattel mortgageagreement covering the newly contracted debt is executed either by concluding a freshchattel mortgage or by amending the old contract conformably with the form prescribed bythe Chattel Mortgage Law. Refusal on the part of the borrower to execute the agreement soas 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, theremedy of foreclosure can only cover the debts extant at the time of constitution andduring the life of the chattel mortgage sought to be foreclosed.

EN BANC

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Torres vs. LimjapNo. 34385, No. 34386, 56 Phil. 141, September 21, 1931

ALEJANDRA TORRES, ET AL., plaintiff-appellees,

vs.FRANCISCO LIMJAP, Special Administrator of the estate of the deceased Jose B.

Henson,defendant-appellant.

Duran, Lim and Tuason for appellant.

Guevara, Francisco and Recto for appellees.JOHNSON,J.:These two actions were commenced in the Court of First Instance of Manila on April 16,

1930, for the purpose of securing from the defendant the possession of two drug storeslocated in the City of Manila, covered by two chattel mortgages executed by the deceasedJose B. Henson in favor of the plaintiffs.In the first case the plaintiffs alleged that Jose B. Henson, in his lifetime, executed in theirfavor a chattel mortgage (Exhibit A) on his drug store at Nos. 101-103 Calle Rosario, knownas Farmacia Henson, to secure a loan of P7,000, although it was made to appear in theinstrument that the loan was for P20,000.In the second case the plaintiffs alleged that they were the heirs of the late Don FlorentinoTorres; and that Jose B. Henson, in his lifetime, executed in favor of Don Florentino Torres achattel mortgage (also Exhibit A) on his three drug stores known as Henson's Pharmacy,Farmacia Henson and Botica Hensonina, to secure a loan of P50,000, which was later

reduced to P26,000, and for which, Henson's Pharmacy at Nos. 71-73 Escolta, remained asthe only security by agreement of the parties.In both cases the plaintiffs alleged that the defendant violated the terms of the mortgageand that, in consequence thereof they became entitled to the possession of the chattels andto foreclose their mortgages thereon. Upon the petition of the plaintiffs and after the filingof the necessary bonds, the court issued in each case an order directing the sheriff of theCity of Manila to take immediate possession of said drug stores.The defendant filed practically the same answer to both complaints. He denied generallyand specifically the plaintiffs' allegations, and set up the following special defenses:

(1) That the chattel mortgages (Exhibit A, in G.R. No. 34385 and Exhibit A, in G.R. No.34286) are null and void for lack of sufficient particularity in the description of theproperty mortgaged; and(2) That the chattels which the plaintiffs sought to recover were not the same propertydescribed in the mortgage.

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The defendant also filed a counterclaim for damages in the sum of P20,000 in the first caseand P100,000 in the second case.

Upon the issue thus raised by the pleadings, the two causes were tried together by

agreement of the parties. After hearing the evidence adduced during the trial and on July17, 1930, the Honorable Mariano Albert, judge, in a very carefully prepared opinion,arrived at the conclusion (a) that the defendant defaulted in the payment of interest on theloans secured by the mortgages, in violation of the terms thereof; (b) that by reason of saidfailure said mortgages became due, and (c) that the plaintiffs, as mortgagees, were entitledto the possession of the drug stores Farmacia Henson at Nos. 101-103 Calle Rosario andHenson's Pharmacy at Nos. 71-73 Escolta. Accordingly, a judgment was rendered in favorof the plaintiffs and against the defendant, confirming the attachment of said drug stores bythe sheriff of the City of Manila and the delivery thereof to the plaintiffs. The dispositivepart of the decision reads as follows:

En virtud de todo lo expuesto, el Juzgado dicta sentencia confirmado en todas sus partes losordenes de fechas 16 y 17 de abril de presente ano, dictadas en las causas Nos. 37096 y37097, respectivamente, y declara definitiva la entrega hecha a los demandantes por elSheriff de Manila de las boticas en cuestion. Se condena en costas al demandado en ambascausas.

From the judgment the defendant appealed, and now makes the following assignments oferror:

I. The lower court erred in failing to make a finding on the question of the sufficiency of thedescription of the chattels mortgaged and in failing to hold that the chattel mortgages werenull and void for lack of particularity in the description of the chattels mortgaged.

II. The lower court erred in refusing to allow the defendant to introduce evidence tendingto show that the stock of merchandise found in the two drug stores was not in existence orowned by the mortgagor at the time of the execution of the mortgages in question.

III. The lower court erred in holding that the administrator of the deceased is now estoppedfrom contesting the validity of the mortgages in question.

IV. The lower court erred in failing to make a finding on the counterclaims of the defendant.

With reference to the first assignment of error, we deem it unnecessary to discuss the

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question therein raised, inasmuch as according to our view on the question of estoppel, aswe shall hereinafter set forth in our discussion of the third assignment of error, thedefendant is estopped from questioning the validity of these chattel mortgages.

In his second assignment of error the appellant attacks the validity of the stipulation in saidmortgages authorizing the mortgagor to sell the goods covered thereby and to replacethem with other goods thereafter acquired. He insists that a stipulation authorizing thedisposal and substitution of the chattels mortgaged does not operate to extend themortgage to after-acquired property, and that such stipulation is in contravention of theexpress provision of the last paragraph of section 7 Act No. 1508, which reads as follows:

A chattel mortgage shall be deemed to cover only the property described therein and notlike or substituted property thereafter acquired by the mortgagor and placed in the samedepository as the property originally mortgaged, anything in the mortgage to the contrary

notwithstanding.

In order to give a correct construction to the above-quoted provision of our ChattelMortgage Law (Act No. 1508), the spirit and intent of the law must first be ascertained.When said Act was placed on our statute books by the United States Philippine Commissionon July 2, 1906, the primary aim of that law-making body was undoubtedly to promotebusiness and trade in these Islands and to give impetus to the economic development of thecountry. Bearing this in mind, it could not have been the intention of the PhilippineCommission to apply the provision of section 7 above quoted to stores open to the publicfor retail business, where the goods are constantly sold and substituted with new stock,

such as drug stores, grocery stores, dry-goods stores, etc. If said provision were intended toapply to this class of business, it would be practically impossible to constitute a mortgageon such stores without closing them, contrary to the very spirit about a handicap to tradeand business, would restrain the circulation of capital, and would defeat the purpose forwhich the law was enacted, to wit, the promotion of business and the economicdevelopment of the country.In the interpretation and construction of a statute the intent of the law-maker shouldalways be ascertained and given effect, and courts will not follow the letter of a statutewhen it leads away from the true intent and purpose of the Legislature and to conclusionsinconsistent with the spirit of the Act. On this subject, Sutherland, the foremost authorityon statutory construction, says:

The Intent of Statute is the Law. If a statute is valid it is to have effect according to thepurpose and intent of the lawmaker. The intent is the vital part, the essence of the law, andthe primary rule of construction is to ascertain and give effect to that intent. The intentionof the legislature in enacting a law is the law itself, and must be enforced when ascertained,although it may not be consistent with the strict letter of the statute. Courts will not followthe letter of a statute when it leads away from the true intent and purpose of the legislature

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and to conclusions inconsistent with the general purpose of the act. Intent is the spiritwhich gives life to a legislative enactment. In construing statutes the proper course is tostart out and follow the true intent of the legislature and to adopt that sense whichharmonizes best with the content and promotes in the fullest manner the apparent policyand objects of the legislature. (Vol. II Sutherland, Statutory Construction, pp. 693-695.)

A stipulation in the mortgage, extending its scope and effect to after-acquired property, isvalid and binding

. . . where the after-acquired property is in renewal of, or in substitution for, goods on handwhen the mortgage was executed, or is purchased with the proceeds of the sale of suchgoods, etc. (11 C.J., p. 436.)

Cobbey, a well-known authority on Chattel Mortgages, recognizes the validity ofstipulations relating to after-acquired and substituted chattels. His views are based on the

decisions of the supreme courts of several states of the Union. He says: "A mortgage may,by express stipulations, be drawn to cover goods put in stock in place of others sold outfrom time to time. A mortgage may be made to include future acquisitions of goods to beadded to the original stock mortgaged, but the mortgage must expressly provide that suchfuture acquisitions shall be held as included in the mortgage. ... Where a mortgage coveringthe stock in trade, furniture, and fixtures in the mortgagor's store provides that "all goods,stock in trade, furniture, and fixtures hereafter purchased by the mortgagor shall beincluded in and covered by the mortgage," the mortgage covers all after-acquired propertyof the classes mentioned, and, upon foreclosure, such property may be taken and sold bythe mortgagee the same as the property in possession of the mortgagor at the time themortgage was executed." (Vol. I, Cobbey on Chattel Mortgages, sec. 361, pp. 474, 475.)

In harmony with the foregoing, we are of the opinion (a) that the provision of the lastparagraph of section 7 of Act No. 1508 is not applicable to drug stores, bazaars and allother stores in the nature of a revolving and floating business; (b) that the stipulation in thechattel mortgages in question, extending their effect to after-acquired property, is valid andbinding; and (c) that the lower court committed no error in not permitting the defendant-appellant to introduce evidence tending to show that the goods seized by the sheriff werein the nature of after-acquired property.With reference to the third assignment of error, we agree with the lower court that, fromthe facts of record, the defendant-appellant is estopped from contenting the validity of themortgages in question. This feature of the case has been very ably and fully discussed by

the lower court in its decision, and said discussion is made, by reference, a part of thisopinion.

As to the fourth assignment of error regarding the counterclaims of the defendant-appellant, it may be said that in view of the conclusions reached by the lower court, whichare sustained by this court, the lower court committed no error in not making any expressfinding as to said counterclaims. As a matter of form, however, the counter-claims shouldhave been dismissed, but as the trial court decided both cases in favor of the plaintiffs and

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confirmed and ratified the orders directing the sheriff to take possession of the chattels onbehalf of the plaintiffs, there was, in effect, a dismissal of the defendant's counterclaims.

For all of the foregoing, we are of the opinion and so hold that the judgment appealed fromis in accordance with the facts and the law, and the same should be and is hereby affirmed,

with costs. So ordered.

Avancea, C.J., Street, Malcolm, Villamor, Ostrand, Romualdez, Villa-Real, and Imperial,

JJ., concur.

Case Digest

Torres V. Limjap 56 Phil. 141 GR No.34386 , Sept. 21, 1931

Facts:

On 16 April 1930, Torres raised cases against Limjap before the Court of First Instance tosecure thepossession of 2 drug stores located in the city of Manila, covered by twochattel mortgageexecuted by the deceased John B. Henson in favor of the plaintiff

In the first case the plaintiffs alleged that Jose B. Henson, had executed in their favor, achattelmortgage on his drug store at Nos. 101-103 Calle Rosario, known as FarmaciaHenson, to secure aloan of P7,000, although it was made to appear in the instrumentthat the loan wasfor P20,000.

In the second case the plaintiffs alleged that they were the heirs of the lateDonFlorentino Torres; and that Jose B. Henson executed in favor of Don Florentino Torres achattelmortgage on his three drug stores known as Henson's Pharmacy, FarmaciaHenson and BoticaHensonina, to secure a loan of P50,000, which was later reduced toP26,000, and for

which, Henson's Pharmacy at Nos. 71-73 Escolta, remained as the onlysecurity byagreement of the parties.

In both cases the plaintiff argues that the defendant had violated the terms ofthemortgage, thus, they have the right to take in possession and foreclose the chattelmortgage

Issue: Should Torres camp be allowed to take possession of thedrugstores? Lower Court Decision: In favor of Torres Higher Court Decision: Affirmed Reasons: A stipulation in the mortgage, extending its scope and effect to after-acquired property, is

valid and binding . . . where the after-acquired property is in renewal of, or insubstitution for, goods on hand when the

mortgage was executed, oris purchased with the proceeds of the sale of such goods, etc. (11C.J.,p. 436.)

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Republic of the PhilippinesSUPREME COURT

ManilaTHIRD DIVISION

G.R. No. 74225 April 17, 1989

REPUBLIC OF THE PHILIPPINES, petitioner,vs.INTERMEDIATE APPELLATE COURT, SIMPLICIO BERDON, GAUDIOSA BERDON andLUIS BERDON,respondents.The Solicitor General for petitioner.

Bernardito A. Florido for private respondents.

CORTES,J.:The Republic assails as erroneous the decision of the Intermediate Appellate Courtaffirming that of the Court of First Instance which dismissed the petition for forfeiture ofunexplained wealth under Republic Act No. 1379 filed against private respondents herein.

The dismissed petition charged Simplicio Berdon, an Assistant Staff Civil Engineer assignedto Regional Office No. VII of the Bureau of Public Highways in Cebu City, with havingacquired unexplained wealth in violation of Republic Act No. 1379. It alleged that duringthe period from 1963 to 1969 he and his wife Gaudiosa Mangubat Berdon purchasedparcels of land and constructed a house, the purchase prices and costs of which were notcommensurate to their incomes, savings or declared assets. Pleaded as defendants in thepetition were Berdon, his wife, and Luis Berdon, his father. Petitioner Republic of thePhilippines, which valued the unexplained wealth at P124,495.82, thus sought theforfeiture of the properties and the issuance of a writ of attachment. Upon orders of thetrial court, the properties enumerated in the petition were attached.During the course of the trial, the following evidence was adduced by the parties:

xxx xxx xxxThe evidence for the petitioner as testified to by Joselito Magno and Atty.David Macayayong may be summarized as follows:That on the basis of a letter complaint sent to the Office of the President by acertain George Valde against Simplicio Berdon, the Complaint andInvestigation Office, Malacaang, Manila, sent Joselito Magno and Atty. DavidMacayayong to conduct an actual field investigation on Mr. Simplicio Berdon.Both investigators went to Cebu City, Danao City and the Northern Towns ofBogo and Borbon, Cebu and secured pertinent documents relative to the casesuch as the service record of the respondent Simplicio Berdon (Exh. 'B')copies of sworn statement of financial condition, assets, income and

liabilities of respondent-spouses Berdon, Exhibit "C" for the year 1962;Exhibit "D" for 1963; Exhibit "E" for 1965; Exhibit "F" for 1967 and Exhibit"G" for 1969. Copies of documents regarding the acquisition of respondentSimplicio Berdon were also obtained, to wit: Exhibit 'H' which is a Deed ofAbsolute Sale of a parcel of land in favor of respondents-spouses Berdon for aconsideration of P3,700.00 executed on July 19,1967; Exh. "I" is a contract tosell by installments of a parcel of land of the Singson Village Subdivision,Cebu City, in favor of respondent Simplicio Berdon for a monthly installment

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of P107.00, more or less, and with a total consideration of P9,000.00; Exh. "J"is a Deed of Absolute Sale of a parcel of agricultural land dated September6,1967 also in favor of respondent Simplicio Berdon for a consideration ofP3,000.00; Exh. "K" is another Deed of Absolute Sale of a parcel of landsituated in Cebu City, containing an area of 623 square meters in favor of

respondent Simplicio Berdon for the sum of P15,825.00 executed onNovember 9, 1967; Exh. "L" is a Deed of Sale With Right to Repurchase withina period of 5 years of a parcel of agricultural land situated at Managasa,Borbon, Cebu executed by Fidel Sepulveda in favor of respondent SimplicioBerdon on November 27, 1967 for a con