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G.R. No. 143866 May 19, 2006

POLIAND INDUSTRIAL LIMITED, Petitioner,


vs.
NATIONAL DEVELOPMENT COMPANY, DEVELOPMENT BANK OF THE PHILIPPINES,
and THE HONORABLE COURT OF APPEALS (Fourteenth Division),
Respondents.

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

G.R. No. 143877 May 19, 2006

NATIONAL DEVELOPMENT COMPANY, Petitioner,


vs.
POLIAND INDUSTRIAL LIMITED, Respondent.

R E S O L U T I O N

TINGA, J.:

For resolution is the "Motion For Leave to File And To Admit The
Attached Second Motion For Partial Reconsideration" filed by
Poliand Industrial Limited (POLIAND), seeking the partial review
of the Court’s Resolution dated November 23, 2005. Poliand is the
petitioner in G.R. No. 143866 and the respondent in G.R. No.
143877. On August 22, 2005, the Court promulgated a consolidated
Decision in G.R. Nos. 143866 & 143877, the dispositive portion of
which reads:

WHEREFORE, both Petitions in G.R. No. 143866 and G.R. No. 143877
are DENIED. The Decision of the Court of Appeals in CA-G.R. CV No.
53257 is MODIFIED to the extent that National Development Company
is liable to Poliand Industrial Limited for the amount of One
Million One Hundred Ninety Three Thousand Two Hundred Ninety Eight
US Dollars and Fifty Six US Cents (US$ 1, 193, 298.56), plus
interest of 12% per annum computed from 25 September 1991 until
fully paid. In other respects, said Decision is AFFIRMED. No
pronouncement as to costs.

SO ORDERED.

Both POLIAND and National Development Company (NDC) separately


filed motions for partial reconsideration. Poliand, for its part,
asserted that the computation of interest should be reckoned from
September 12, 1984, the date of the last foreclosure sale of the
vessels, in conformity with the dispositive portion of the Court
of Appeals’ Decision. The Court denied the separate motions of
Poliand and NDC in its November 23, 2005 Resolution. More than
simply denying Poliand’s motion for reconsideration, said
Resolution passed upon for the first time the issue on the
computation of interest and, thus, modified the August 22, 2005
Decision by reckoning the computation of interest from the date of
the finality of judgment. Not satisfied with the Court’s ruling,
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Poliand filed the instant subsequent motion for reconsideration
with leave of court, praying in the alternative that the interest
rate should be computed from September 25, 1991, the date of
extrajudicial demand, that is, in conformity with the tack ordered
in the Decision dated August 22, 2005.

Ordinarily, no second motion for reconsideration of a judgment or


final resolution by the same party shall be entertained.1
Essentially, however, the instant motion is not a second motion
for reconsideration since the viable relief it seeks calls for the
review, not of the Decision dated August 22, 2005, but the
November 23, 2005 Resolution which delved for the first time on
the issue of the reckoning date of the computation of interest. In
resolving the instant motion, the Court will be reverting to the
Decision dated August 22, 2005. In so doing, the Court will be
shunning further delay so as to ensure that finis is written to
this controversy and the adjudication of this case attains
finality at the earliest possible time as it should.

After going over the instant motion, the Court is persuaded to


take a fresh scrutiny of the facts and circumstances obtaining
herein and accordingly modify its finding that Poliand’s claim
cannot be considered due and demandable until the finality of the
Court’s Decision. Indeed, there are certain factual premises which
the Court glossed over in arriving at such pronouncement. First,
the trial court had already made a factual finding to the effect
that extrajudicial demands had been made by Poliand on September
25, 1991 on NDC, Galleon Shipping Corporation and Development Bank
of the Philippines, not only with respect to the alleged loan
accommodations granted to Galleon but also, in the alternative,
with respect to the maritime lien. Second, the extrajudicial
demand on NDC for the payment of the maritime lien was for a
specified amount, which was the same amount prayed for in the
complaint and eventually upheld by the trial court. This fact
indicates that upon extrajudicial demand, Poliand’s claim for the
satisfaction of the maritime lien had already been ascertained. An
account that has been "liquidated" can also mean that the item has
been made certain as to what, and how much, is deemed to be owing.2
The amount claimed and the date of demand being both certain, to
arrive at the liquidated amount would merely be a matter of
mathematical computation.31avvphil.net

The finding of the trial court that an extrajudicial demand was


made by Poliand on September 25, 1991 on NDC for the payment of a
determinate amount equivalent to its maritime lien, unmodified as
it was by the appellate court, constitutes adequate basis to
conclude that as of said date, Poliand’s claim was already due and
demandable. Such factual finding of the trial court, duly
supported as it is by the evidence on record, deserves great
weight and respect and is binding on the Court.

Poliand’s main stance that the interest payment on its maritime


lien should be reckoned from the date of the last foreclosure sale
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of the vessels has no merit, apart from being barred by the rule
against second motions for reconsideration.

Poliand contends that the Court’s finding that the institution of


the extrajudicial foreclosure proceedings was tainted with bad
faith provides the basis to reckon the computation of legal
interest from the date of the foreclosure sale. Suffice it to say,
this theory has no basis in law. An act done in bad faith may be
the basis of some other award but not the award of legal interest.

Next, Poliand argues that the payment of legal interest should be


reckoned from the date of the last foreclosure sale of the vessels
or on September 12, 1984 on the basis of Section 17 (a) of
Presidential Decree No. 1521.4 The provision is inapplicable to the
question of interest payment as it merely enumerates the
prioritized liens which are entitled to satisfaction upon the sale
of a mortgaged vessel.

WHEREFORE, the instant "second" Motion for Partial Reconsideration


dated December 30, 2005 is GRANTED. The dispositive portion of the
Decision dated August 22, 2005 in G.R. No. 143866 and G.R. No.
143877 is REINSTATED in full.

SO ORDERED.

G.R. No. 18520 September 26, 1922

INVOLUNTARY INSOLVENCY OF PAUL STROCHECKER, appellee,


vs.
ILDEFONSO RAMIREZ, creditor and appellant.
WILLIAM EDMONDS, assignee.

Lim & Lim for appellant.


Ross & Lawrence and Antonio T. Carrascoso, jr., for the Fidelity &
Surety Co.

ROMUALDEZ, J.:

The question at issue in this appeal is, which of the two


mortgages here in question must be given preference? Is it the one
in favor of the Fidelity & Surety Co., or that in favor of
Ildefonso Ramirez. The first was declared by the trial court to be
entitled to preference.

In the lower court there were three mortgagees each of whom


claimed preference. They were the two above mentioned and
Concepcion Ayala. The latter's claim was rejected by the trial
court, and from that ruling she did not appeal.

There is no question as to the priority in time of the mortgage in


favor of the Fidelity & Surety Co. which was executed on March 10,
1919, and registered in due time in the registry of property, that

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in favor of the appellant being dated September 22, 1919, and
registered also in the registry.

The appellant claims preference on these grounds: (a) That the


first mortgage above-mentioned is not valid because the property
which is the subject-matter thereof is not capable of being
mortgaged, and the description of said property is not sufficient;
and (b) that the amount due the appellant is a purchase price,
citing article 1922 of the Civil Code in support thereof, and that
his mortgage is but a modification of the security given by the
debtor on February 15, 1919, that is, prior to the mortgage
executed in favor of the Fidelity & Surety Co.

As to the first ground, the thing that was mortgaged to this


corporation is described in the document as follows:

. . . his half interest in the drug business known as Antigua


Botica Ramirez (owned by Srta. Dolores del Rosario and the
mortgagor herein referred to as the partnership), located at
Calle Real Nos. 123 and 125, District of Intramuros, Manila,
Philippine Islands.

With regard to the nature of the property thus mortgaged, which is


one-half interest in the business above described, such interest
is a personal property capable of appropriation and not included
in the enumeration of real properties in article 335 of the Civil
Code, and may be the subject of mortgage. All personal property
may be mortgaged. (Sec. 2, Act No. 1508.)

The description contained in the document is sufficient. The law


(sec. 7, Act No. 1508) requires only a description of the
following nature:

The description of the mortgaged property shall be such as to


enable the parties to the mortgage, or any other person,
after reasonable inquiry and investigation, to identify the
same.

Turning to the second error assigned, numbers 1, 2, and 3 of


article 1922 of the Civil Code invoked by the appellant are not
applicable. Neither he, as debtor, nor the debtor himself, is in
possession of the property mortgaged, which is, and since the
registration of the mortgage has been, legally in possession of
the Fidelity & Surety Co. (Sec. 4, Act No. 1508; Meyers vs. Thein,
15 Phil., 303.)

In no way can the mortgage executed in favor of the appellant on


September 22, 1919, be given effect as of February 15, 1919, the
date of the sale of the drug store in question. On the 15th of
February of that year, there was a stipulation about a persons
security, but not a mortgage upon any property, and much less upon
the property in question.

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Moreover, the appellant cannot deny the preferential character of
the mortgage in favor of the Fidelity & Surety Co. because in the
very document executed in his favor it was stated that his
mortgage was a second mortgage, subordinate to the one made in
favor of the Fidelity & Surety Co.

The judgment appealed from is affirmed with costs against the


appellant. So ordered.

G.R. No. L-26293 March 24, 1927

Involuntary insolvency of "Central Capiz."


TIMOTEO UNSON, CLARA LACSON, ANTONIO BELO and JOSE ALTAVAS,
claimants-appellees, vs. URQUIJO, ZULOAGA & ESCUBI, claimants-
appellants.

VILLA-REAL, J.: virtual law library

This appeal was taken by Urquijo, Zuloaga and Escubi from an order
of the Court of First Instance of Iloilo, the dispositive part of
which reads as follows:

Wherefore, it is ordered that the assignee in this insolvency


proceeding, as soon as possible after this judgment has
become final, pay from the funds of the same which have been
deposited, the following amounts: virtual law library

The sum of thirty thousand pesos (P30,000) to the claimants


Timotea Unson and Clara Lacson; virtual law library

The sum of eight thousand pesos (8,000) to the claimant Jose


Altavas; and virtual law library

The sum of eleven thousand pesos (P11,000) to the claimant


Antonio Belo.virtualawlibrary virtual law library

The balance of the said funds, after the payment of the said
three claims which the court held should be given special
preference in the order above-mentioned, shall be special
distributed pro rata among the other creditors of the
insolvent whose claims have been admitted and approved, in
accordance with section 50 of Act No. 1956 on insolvency.

In support of their appeal the appellants assign the following


alleged errors as committed by the trial court in its order, to
wit:

I. The lower court erred in not holding that the attachment


in favor of Timoteo Unson and Clara Lacson did not constitute
a lien due to fatal defects in the levy
thereof.virtualawlibrary virtual law library

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II. The lower court erred in not holding that there is no
sufficient evidence in the record of this case as to the levy
of an attachment in favor of either Antonio Belo or Jose
Altavas.virtualawlibrary virtual law library

III. The lower court erred in holding that the appellants


cannot invoke in favor of their claim a vendor's lien as
preference taking the ground that the property sold by the
appellants to the Central Capiz were real property and not
personal property.virtualawlibrary virtual law library

IV. The lower court erred in holding that the sale of all the
property of the Central Capiz for a lump sum, including the
personal property on which the appellants claim a vendor's
lien, is fatal to their right to establish a
preference.virtualawlibrary virtual law library

V. The lower court erred in not allowing the appellants to


introduce evidence as to the value of the personal property
on which they claim a vendor's lien, in proportion to what
realized at the sale of all the property of the Central
Capiz.virtualawlibrary virtual law library

VI. Assuming that the appellees had acquired a valid lien by


attachment, the lower court erred in holding that said lien
is superior to the preferred credit of the appellants.

The pertinent facts necessary for the solution of the questions


raised in this appeal, and regarding which there is no question,
are the following: virtual law library

On July 14, 1919, Urquijo, Suloaga and Escubi sold certain


personal property described in Exhibit 10-D to the Capiz Central
for the sum of P210,000 of which only P50,000 was
paid.virtualawlibrary virtual law library

On August 9, 1920, Urquijo, Zuloaga and Escubi filed a complaint


in the Court if First Instance of Iloilo (civil case No. 1794)
against the Capiz Central for the recovery of the sum of P160,000
plus interest, said amount being the unpaid balance of the price
of the machinery. In that complaint the herein appellants prayed
that their claim against the Capiz Central be given preference,
but the lower court held that the was a matter for the insolvency
court to decide.virtualawlibrary virtual law library

On August 12, 1921, Timoteo Unson and Clara Lacson file a


complaint in the Court of First Instance of Capiz (civil cause No.
1475) against the Capiz Central for the recovery of P163,643.88 as
indemnity for damages. On the same date a writ of attachment
(Exhibit C) was issued in favor of the plaintiffs and levied upon
all of the property of the defendant company.virtualawlibrary
virtual law library

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Subsequently, Jose Altavas (civil case No. 1543) and Antonio
Belo(civil cause No. 1548) each filed a complaint against the
Capiz Central praying for an attachment, which was issued, the
same having been levied on the property of said Central on March
29, 1922 and April 26,1922, respectively.virtualawlibrary virtual
law library

While the four aforementioned causes against the Capiz Central


were pending, it was adjudged insolvent on September 5, 1922, an
assignee having been appointed to whom, in accordance with the
law, all of the property of the Capiz Central was
conveyed.virtualawlibrary virtual law library

Before Urquijo, Zuloaga and Escubi filed their claim in the


insolvency proceeding, all of the property of the Capiz Central,
including the personal property sold by the former to the latter,
was sold to the Pilar Sugar Central for the sum of P80,000, plus
interest, which amounted to P266. All of these sums were, by order
of the court, deposited in the Iloilo Branch of the Bank of the
Philippine Islands, in order to protect the interests of the
preferred creditors, the assignee being enjoined from making any
payment out of said funds without judicial authorization. The
appellants were not notified of said sale.virtualawlibrary virtual
law library

On March 26, 1925, judgment was rendered in favor of Urquijo,


Zuloaga and Escubi for the sum of P90,000, in accordance with an
agreement entered into between the latter and the
assignee.virtualawlibrary virtual law library

On August 7, 1925, the plaintiffs Timoteo Unson and Clara Lacson,


with the authorization of the Court of Iloilo in which the
insolvency proceedings were being held, entered into a compromise
agreement with Walter A. Smith, as petition the Court of First
Instance of Capiz to render judgment in civil case No. 1475 of
said court in favor of the said plaintiffs Timoteo Unson and Clara
Lacson for the sum of P30,000 as indemnity for liquidated damages,
leaving it to the court of First Instance of Iloilo to decide the
question on the preference of said claim in view of the attachment
on all the personal property of the Capiz Central secured by them
on August 12, 1921, and considering the judgment to be rendered as
a claim duly presented in accordance with the Insolvency Law. In
view of said agreement and in accordance with the terms thereof,
on August 10, 1925, the Court of First Instance of Capiz rendered
judgment in favor of Timoteo Unson and Clara Lacson for the sum of
P30,000.virtualawlibrary virtual law library

On August 3, 1923, Jose Altavas and Walter A. Smith, as assignee


of the Capiz Central, with the authorization of the competent
court entered into a compromise agreement by virtue of which they
petitioned the Court of First Instance of Capiz to render judgment
in civil cause 1543, in which Jose Altavas was plaintiff and the
Capiz Central the defendant, for the sum of P8,000 in favor of
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said plaintiff, reserving the right to the latter to raise in the
Court of First Instance of Iloilo the question of preference of
said claim in view of the attachment he had obtained in said case
on the property of the Capiz Central, through the presentation of
said judgment, which should be considered as a claim duly
presented in the insolvency proceeding. In view of said compromise
agreement and in accordance therewith, on August 11, 1925, the
Court of First Instance of Capiz rendered judgment in favor of
Jose Altavas for the sum of P8,000.virtualawlibrary virtual law
library

On the same date, that is, August 3, 1925, Antonio Belo and Walter
A. Smith, as assignee of the Capiz, Central, entered into a
compromise agreement in civil case No. 1548 of the Court of First
Instance of Capiz, in which Antonio Belo was the plaintiff and the
Capiz Central the defendant, by virtue of which they petitioned
said court to render judgment in favor of the said plaintiff for
the sum of P11,000, as full payment of all his claims, reserving
the right to said plaintiff to raise the question of preference in
view of the attachment, which had been obtained in said civil
cause against the property of the Capiz Central, through the
presentation of the said judgment which should be considered as a
claim duly presented in the insolvency proceeding. In view of this
agreement and in accordance therewith, the Court of the First
Instance of Capiz rendered judgment in favor of Jose Belo for the
sum of P11,000.virtualawlibrary virtual law library

The court holding the proceeding in insolvency approved all of


said compromise agreements.virtualawlibrary virtual law library

In accordance with the compromise agreement entered into between


Timoteo Unson and Clara Lacson and the assignee, the former on
August 11, 1925 presented their claim in the insolvency proceeding
for the sum of P30,000, based upon the judgment in their favor
above mentioned, claiming a right of preference by virtue of the
first attachment secured by them and levied on the property of the
insolvent company the "Central Capiz". Urquijo, Suloaga and
Escubi, in an objection dated August 15, 1925, opposed said claim
of preference of Timoteo Unson and Clara Lacson.virtualawlibrary
virtual law library

On August 17, 1925, Urquijo, Zuloaga and Escubi filed a claim for
the sum of P30,000 based on the judgment rendered in their favor,
claiming a right of preference by virtue of their lien as sellers
of certain movable property specified in the claim. On the same
date, August 17, 1925, Timoteo Unson and Clara Lacson filed an
opposition to this claim of preference.virtualawlibrary virtual
law library

On August 18, 1925, Jose Altavas filed a claim for the sum of
P8,000, based upon the judgment entered in his favor, alleging
that he had a preferential right though inferior to that of
Timoteo Unson and Clara Lacson by virtue of the second attachment
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levied upon the property of the Capiz Central in his favor.
Urquijo , Zuloaga and Escubi objected to this claim of preference
at the hearing on August 25, 1925.virtualawlibrary virtual law
library

On August 18, 1925, Antonio Belo filed a claim for the sum of
P11,000, based on the judgment entered in his favor, alleging that
he had a preferential right subordinate to that of Timoteo Unson
and Clara Lacson by virtue of the third attachment levied on the
property of the Capiz Central in his favor. At the hearing held on
August 25, 1925, Urquijo, Zuloaga and Escubi also objected to this
claim of preference.virtualawlibrary virtual law library

The four claims above-mentioned, together with others, were heard


on August 25,1925, and on September 24, 1925, the lower court
issued an order from which this appeal was taken.virtualawlibrary
virtual law library

The first assignment of error raises the question of the validity


of the attachment levied in favor of Timoteo Unson and Clara
Lacson on the property of the Capiz Central, and the second
assignment of error raises the question of the alleged attachments
levied on the property of the Capiz Central in favor of Jose
Altavas and Antonio Belo, respectively.virtualawlibrary virtual
law library

Aside from the substantial compliance with the law for the
validity of the attachment issued in favor of Timoteo Unson and
Clara Lacson and levied on the property of the Capiz Central, the
assignee, who represents the creditors (Alexandria Bank vs.
Herbert, 3 Law. ed., 479) entered into a compromise agreement with
each of the creditors, impliedly acknowledging the existence of
the respective liens in his favor and leaving, for the
determination of the court in the insolvency proceeding, the
question of the preferential right of said creditors. This
compromise agreements entered into between the assignee and the
respective creditors were approved by the competent court, and the
appellants, as creditors, are bound by the acts of their legal
representative, approved by the court. (32 C. J., par. 125, page
860).virtualawlibrary virtual law library

The third error alleged to have been committed by the trial court
is the fact that it found that the appellants had lost their
preferential right to the price of the machinery and the grinder
which had been sold to the Capiz Central, from the moment that it
was installed on the estate and became real property by
destination.virtualawlibrary virtual law library

The only question, then, to determine under this assignment of


error is whether or not the vendor of personal property which has
become real by destination loses his preferential right to the
purchase price of the same.virtualawlibrary virtual law library

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Article 1922, paragraph No. 1, of the Civil Code, reads as
follows:

With respect to determinate personal property of the debtor,


the following are preferred: virtual law library

Credits for the construction, repair, preservation, or


purchase price of personal property in the possession of the
debtor, to the extent of the value of the same.

The law gives the vendor a real right in the personal property
sold for the price of the sale while said property remains in the
possession of the purchaser. It certainly would be contrary to
equity and justice if the owner of the article sold could not
collect the purchase price of the same while it is in the
possession of the purchaser.virtualawlibrary virtual law library

Manresa, commenting on the article under consideration, says the


following:

And as to credits arising from the purchase price of personal


property in the possession of the debtor, it is, of course,
evident that the persons to whom such credits belong are, in
a sense, creditors by reason of ownership, and it may be said
as to them, as well as with respect to prior ones, that there
is no person bound, but that a juridical relation exists
between the creditor, rather than the debtor, and the object
with which the credit must be paid. This is the reason why
said preference is not absolutely, but relatively, granted,
and limited only to those specific things which subject the
obligation, from which said credits arise, directly to their
performance. (Vol XII, p. 679.)

If the personal property sold, while in the possession of the


purchaser is subject to the payment of its price, and the vendor
has a real right therein, whatever use the purchaser may make of
it, so long as it does not lose its form and substance and
conserves its identity, the vendor does not lose his right to said
thing for its price. Not because it suits the purchaser's purpose
to give it a destination that, according to article 334, case 5,
converts it into real property must the vendor lose his right
while the thing sold remains in the possession of the purchaser in
its entirety in order to protect his credit. To hold otherwise
would be to violate the spirit of the law and to permit the right
of preference, which the law grants the vendor, to be subject to
the will of the purchaser.virtualawlibrary virtual law library

The eminent French jurist, M. Troplong, first Chief Justice of the


French Court of Cassation, commenting on the creditor's right of
preference to the purchase price of personal property in
possession of the debtor which becomes real by destination, says
in his work entitled "Driot Civil Explique. - Privileges et

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Hypotheques," paragraph 113, p. 125, translated into English, the
following:

While the price is unpaid, the vendor has a real right to the
thing. It cannot be admitted that the purchaser in imparting
to it a purely metaphysical character, and in changing its
destination for his won convenience, has been able to alter
the precise and intimate rights of the vendor and to deprive
him of his compensation; it is not within his power to give
to things sold but an imperfect destination subordinate to
the rights of the vendor.virtualawlibrary virtual law library

It is a different thing when the acquirer has changed the


species of the thing, and when by means of this
transformation the thing delivered is no longer what it was.
In this case, it is understood that the loss of the privilege
is based on the loss of the thing itself.virtualawlibrary
virtual law library

But in the present hypothesis, the thing subsists in all its


parts, as it originally existed. There has been only one
change, - that of its destination. This change, as it affects
only the moral quality of the thing, is widely different from
the change arising from the conversion of one species into
another, and it would seem that it should not produce the
same effects.

This opinion of the said French commentator merited the honor of


being cited and adopted in various decisions of the Supreme Court
and of the Circuit Court of Appeals of Louisiana.virtualawlibrary
virtual law library

In the case of Lapene and Jack vs. McCan & Son (28 La. Ann., 749,
751), which dealt with steam boilers which were installed on a
sugar-cane plantation, Mr. Justice Wyly, in his concurring
opinion, said:

'I agree with the district judge that defendants, having


judgment with vendor's privileged on the four boilers could
endorce it by seizing and selling the said boilers separately
from the plantation. When they were set up at the sugar-house
the vendor's privilege was upon them, and I now of no law
whereby the purchasers could destroy the privilege by using
the property for the purpose it was adapted. I cannot consent
that a vendor's privilege on a movable can be lost simply
because the purchaser may use it on his plantation. If such
were the case, the vendor's privilege would furnish but
little security in an agricultural district. The law has not
declared that the use of a movable by a purchaser shall
destroy the vendor's privilege.'

The foregoing opinion was cited with approval by the Supreme Court
of Louisiana in the case of Carlin vs. Gordy (32 La. Ann., 1285).
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This was a case between a mortgagee and a subsequent vendor of a
mill and machinery for the manufacture of sugar, who claimed a
right of preference by virtue of the sale, and the court said:

Defendant had a privilege on these movables, perfectly valid


not only as between the parties but against all third
persons. The purchaser subsequently set up this mill and
machinery upon his plantation. They were thereby converted
into immovables by destination; but this conversion did not
and could not operate to the prejudice of the vendor's
privilege existing thereon prior to their attachment to the
plantation. . . . The evidence fully establishes that the
mill and machinery in this case can be removed without damage
to the sugar-house; and the case falls fully within the facts
and principles of the case of Lapene and Jacks vs. McCan (28
La. Ann., 749), the doctrine of which case is much more
satisfactory to our minds than the contrary doctrine of Gray
vs. Burguieres (12 La. Ann., 227), where we think the court
puts too narrow an interpretation upon the expressions of
Troplong. The concurring opinion of Justice Wyly in the case
of Lapene and Jacks vs. McCan, while perhaps too broad in its
general statements, we think is thoroughly correct so far as
it applies to movables, which, though attached to a
plantation, are capable of removal without damage to the
structures in which they are contained, or with which they
are connected. In such case there is no reason why the
vendor's privilege which attached to them as movables are, in
some cases, affected by the changes which may take place in
the nature or destination of the things. But such changes
must be so radical as to create a new species of things and
destroy that species which originally existed - as to use the
illustration of Cujas, when a pine or cypress log is
converted into a ship, or when wool is converted into a
garment, or when marble is made into a statue. In the case at
bar the mill and machinery has made of them. They remain the
mill and machinery which were sold; and the privilege
subsists in all its force. Had their destination as
immovables been effected in such manner as to preclude their
detachment without injury to independent rights to ownership
in the soil or structures, the privilege might have been
subjected to such limitation in its exercise as would prevent
the separate sale or removal of the thing subjected to it.
But where, as in this case, no such difficulty exists, or, if
at all, to an inappreciable extent, we see no reason for
imposing any restriction upon the rights of the privileged
creditor. The privilege of the vendor is founded on the right
of property. Payment of the price is essential to the vesting
of an indefeasible title in the vendee. The vendor's right
to, and securities for, the payment of the price have always
commended themselves to the favorable consideration of our
courts.

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See also case of Baldwin vs. Young (47 La. Ann., 1466); Walburn-
Swenson Co. vs. Darell (49 La. Ann., 1044); Hall vs. Hawley (49
La. Ann., 1046); Association vs. Johnston (51 la. Ann., 470); and
Swoop vs. St. Martin (110 La. 237).virtualawlibrary virtual law
library

And, finally, in the case of the State Trust Co. vs. De La Vergne
Refrigerating Mach. Co. (105 Fed. Rep., 468), the Circuit Court of
Appeals of Louisiana, after citing with approval the doctrines
laid down in the cases above cited, said the following: "This
seems to be in accord with the equities of the case as they are
regarded in De L'Isle vs. Succession of Moss (34 La. Ann., 166):

The privilege accorded for the payment of the unpaid price of


sale, is one of great value, resting on considerations of the
plainest equity. It would indeed be unjust to place an unpaid
vendor on a footing of equality with the other creditors of
the purchaser, and permit these to devour his substance; for
it is only on the condition that the price of the thing sold
has been paid, that the purchaser acquires indefeasible title
of ownership to the property, and that his creditors can be
paid. It confers rights of a high character, superior to
those which flow from a mortgage. . . . It is the price which
is protected by the privilege. By the sale the vendor
increase the estate of the purchaser. It would be iniquitous
to permit the property sold to become the prey of the
creditors of the purchaser, without requiring, as a condition
precedent, the payment of its cost. . . . The word "price"
signifies the sum stipulated as the equivalent of the things
sold, and also every incident taken into consideration for
the fixing of the price, put to the debit of the vendee, and
agreed to by him.

In view of the authoritative opinion of the distinguished French


commentator on the matter, and of the doctrine laid down by the
Supreme Court of Louisiana, whose Civil Code is based on the Code
Napoleon, confirmed by the Circuit Court of Appeals of the same
State, there cannot be the slightest doubt that in Civil law, the
vendor of personal property converted into real by destination but
retaining its form, substance and identity, does not lose the
privilege to the purchase price granted him, as against any other
creditor, by article 1922, paragraph No. 1, of the Civil Code,
notwithstanding said metaphysical change.virtualawlibrary virtual
law library

The fourth assignment of error raises the question as to whether


or not after the sale of the Capiz Central for a lump sum without
the machinery in question having been separated therefrom before
the sale, appellants may still claim their preferential right to
the purchase price of the machinery.virtualawlibrary virtual law
library

13
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It is not disputed that the machinery in question, in spite of
having been incorporated in the Capiz Central, conserves its form
and substance, and its identity has not been altered in any manner
whatsoever. Having reached the conclusion that the vendor's lien
for the price of the personal property sold continues even when
the latter is converted into real property by destination, the
fact that the machinery was not separated from the Capiz Central
to be sold apart does not deprive the vendor of such lien because
even though said machinery was sold together with the Central for
a lump sum, its proportional value in the sale may be
determined.virtualawlibrary virtual law library

In the case of McMicking vs. Tremoya (14 Phil., 252), cited by the
appellees, this court held that Holliday, Wise & Co. and no
preferential right to the proceeds of the sale of the goods
because they had not been able to prove that the goods selected
and claimed by them as sold on credit had not been paid
for.virtualawlibrary virtual law library

In the case of McMicking vs. Co Piaco (24 Phil., 439) also cited
by the appellees, the goods sold by the sheriff came partly from
one creditor and partly from another, and neither had been able to
identify which came from him; and due to the lack of
identification, this court held that neither of the claimants had
established his right of preference.virtualawlibrary virtual law
library

On the other hand, in the case of Rubert & Guamis vs. Luengo &
Martinez (8 Phil., 554), in which the sheriff sold under a writ of
execution issued in favor of Rubert and Guamis, for the lump sum
of P500 not only the cinematographic films to which the plaintiffs
had preferential right for the unpaid purchase price, but also the
cinematographic apparatus in which they had neither interest nor
right this court held that notwithstanding that conjunction, said
plaintiffs had preferential right to a proportional part of the
proceeds of the sale corresponding to the films, inasmuch as the
proportional value of the same in the sale could be determined and
deducted from the P500 received from the joint
sale.virtualawlibrary virtual law library

Briefly, then, since the machinery in question has not lost its
identity either before, during, or after its sale as an integral
part of the Capiz Central for the lump sum of P80,266 its
proportional value in the sale can be determined and the
appellants have a preferential right to said proportional value
for the unpaid price.virtualawlibrary virtual law library

The fifth assignment of error is a corollary of the former, and


having arrived at the conclusion that the appellants have
preferential right to a proportional part of the proceeds of the
sale of the Capiz Central, corresponding to the machinery in
question, the lower court erred in not permitting the appellants
to introduce evidence in order to determine such proportional part
14
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of the proceeds of the sale, which amounted to
P80,266.virtualawlibrary virtual law library

In regard to the sixth assignment of error, the lien established


by article 1922, paragraph No. 1, of the Civil Code on personal
property sold in possession of the purchaser for the price thereof
is superior to any real right of lien, such as mortgage and
attachment, and, as we have seen, if is recognized not only in
this jurisdiction (Hunter, Kerr & Co. vs. Murray, 48 Phil., 499;
Roman vs. Herridge, 47 Phil., 98; Tec Bi & Co. vs. Chartered Bank
of India, Australia and China, 41 Phil., 819; Kuenzle & Streiff
vs. Villanueva, 41 Phil., 611), but also in the State of Louisiana
whose Revised Civil Code is based on the Code on the matter
(Carlin vs. Gordy, 32 La. 1285; De L'Isle vs. Succession of Moss,
34 La. Ann., 166; Baldwin vs. Refrigerating Mach. Co., 105 Fed.
Rep., 468).virtualawlibrary virtual law library

In the last mentioned case, State Trust Co., vs. De la Vergne


Refrigerating Machine Co., the Circuit of Appeals held that:

Under the statute of Louisiana (Rev. Civ. Code, arts. 3271,


3273, 3274), as construed by the supreme court of the state,
a vendor's privilege in respect to a movable which has been
attached to realty is not lost as against a mortgagee of the
realty by a failure to record the same, but the thing sold
remains a movable, and subject to the privilege, so long as
it has not lost its identity, and can be separated from the
land, tenement, or building to which it has been attached
without injury thereto.

Summarizing we have: virtual law library

(a) That the right of preference established by article 1922,


paragraph No. 1, of the Civil Code, in favor of the vendor to
personal property sold and in the possession of the purchaser, for
the price thereof is not lost by the mere fact that such personal
property is converted into real property by destination, whenever
the form and substance are not changed and it has not lost its
identity.virtualawlibrary virtual law library

(b) That neither does the vendor lose such preference


notwithstanding the fact that the personal property converted into
real property, without having lost its identity, is sold with the
real property to which it is attached, for a lump sum, and the
vendor has not requested its separation before the
sale.virtualawlibrary virtual law library

(c) That by article 1922, paragraph No. 1, of the Civil Code and
the decisions of this court, interpreting it, as will as by the
Revised Civil Code of Louisiana and the decisions of the Supreme
Court and Circuit Court of Appeals of said State, the preference
granted the vendor to the personal property sold and in possession
of the purchaser for the price thereof, is superior to any other
15
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real right or lien, such as mortgage and
attachment.virtualawlibrary virtual law library

In view of the foregoing the order appealed from is reversed; the


credit of the appellants Urquijo, Zuloaga and Escubi to the
proportional part of the proceeds of the sale of the Capiz Central
corresponding to the proportional part of the machinery not paid
for is declared preferential, and it is ordered that the record be
remanded to the court of origin for the determination of said
proportional part to which the appellants have preferential right.
So ordered.

Johnson, Street, Villamor and Romualdez, JJ., concur.

Separate Opinions

MALCOLM and OSTRAND, JJ., dissenting: virtual law library

We regret very much to have to dissent from the learned opinion of


the majority prepared by Mr. Justice Villa-Real, but duty compels
us to do so.virtualawlibrary virtual law library

In the first place, we are doubtful if, under the facts, the
appellants can invoke in their favor a vendor's lien on the sugar
machinery. The said machinery was sold by Urquijo, Zuloaga y
Escubi to the Central Capiz for the manufacture of sugar.
Thereafter the Central Capiz sold all the property of the central
for a lump sum to another. The machinery thus became immobilized,
and the vendor was charged with notice of immobilization by
destination. Not only this, but the vendor now recognizing the
futility of attempting to identify and segregate the machinery,
only that he be allowed the value of the machinery in proportion
to the sum realized from the sale of all of the property of the
Central Capiz. Predicated on these facts, the decision of the
United States Supreme Court in the case of Valdes vs. Central
Altagracia ([1912], 225 U. S., 58), is in point. Citing Aubry and
Rau, Mr. Chief Justice White draws a distinction between
immobilization by the owner and immobilization by the lessee. Said
Mr. Chief Justice White: "The machinery placed by the corporation
in the plant, by the fact of its being so placed, lost its
character as a movable by destination." (See also Bank LeCompte
vs. Le Compte Cotton Oil Co. [1910], 125 La.,
844).virtualawlibrary virtual law library

Conceding, however, that the appellants have preferential vendor's


lien, yet under the Bankruptcy and Insolvency law, said preferred
credit is not superior to the lien by attachment of the appellees.
Under the Bankruptcy and Insolvency Law, which should govern, the
lien creditor is prior in right and prior in distribution. The
doctrines announced in the series of cases, Smith, Bell & Co. vs.
Estate of Maronilla ([1916], 41 Phil., 558); Tec Bi & Co. vs.
16
Credit Transactions
Chartered Bank of India, Australia and China ([1917], 41 Phil.,
819); Kuenzle & Streiff vs. Villanueva ([1916], 41 Phil., 611);
and E. Viegelmann & Company vs. Perez, ([1918], 37 Phil., 678),
offer little to commend them, and should be reexamined and
revoked. (Roman vs. Herridge ([1924], 47 Phil., 98, 106.) virtual
law library

For all of the above reasons, we vote for the affirmance of the
judgment.

DECISION ON MOTION FOR RECONSIDERATION

March 30, 1927

VILLA-REAL, J.: virtual law library

This matter is before the court upon a motion for the


reconsideration of this court's decision rendered on March 24,
1927, upon its merits, or, if that is not possible, an explanation
of the dispositive part thereof.virtualawlibrary virtual law
library

The motion is denied in regard to the first part and granted in


regard to the second, the dispositive part being amended so as to
read as follows:

For the foregoing, it is adjudged: virtual law library

(a) That the right of preference of the appellants Urquijo,


Zuloaga and Escubi is only on the value (art. 1922 par. No.
1, of the Civil Code), which must first be proven, has not
been paid for and which was included among other property of
the Capiz Central which has not been paid for and which was
included among other property of Capiz Central in the sale of
the same; and that in no case must the preference exceed the
sum of thirty thousand pesos (P30,000), the only amount on
which they claim a preference.virtualawlibrary virtual law
library

(b) That the claim of the appellees Timoteo Unson and Clara
Lacson, Jose Altavas and Antonio Belo, by reason of the fact
that the attachments secured by them were declared valid and
held to constitute liens, are also preferential in character
and must be paid in full out of the available funds of the
insolvent estate after the extinction and payment of the
credit of the appellants Urquijo, Zuloaga and Escubi, and
with preference over any and all other ordinary unpaid
claims, following in the payment of the claims of the
appellees, the order of the dates of the respective
attachments.

In virtue whereof of the judgment appealed from is hereby affirmed


in so far as it is in harmony herewith and reversed in so far as
17
Credit Transactions
it is not, and it is ordered that the record be remanded to the
court of origin for further proceedings in accordance herewith. So
ordered.

G.R. No. L-12812 September 29, 1959

FILIPINAS COLLEGES, INC., plaintiff-appellee,


vs.
MARIA GARCIA TIMBANG, ET AL., defendants.

------------------------------

G.R. No. L-12813 September 29, 1959

MARIA GARCIA TIMBANG, ET AL., plaintiffs.


MARIA GARICA TIMBANG, plaintiff-appellant,
vs.
MARIA GERVACIO BLAS, defendant-appellee.

De Guzman and Fernandez for appellee Filipinas Colleges, Inc.


San Huan, Africa and Benedicto for appellant Maria Garcia Timbang.
Nicanor S. Sison for appellee Maria Gervacio Blas.

BARRERA, J.:

This is an appeal taken from an order of the Court of


First Instance of Manila dated May 10, 1957 (a) declaring the
Sheriff's certificate of sale covering a school building sold at
public auction null and void unless within 15 days from notice of
said order the successful bidders, defendants-appellants spouses
Maria Garcia Timbang and Marcelino Timbang, shall pay to, appellee
Maria Gervacio Blas directly or through the Sheriff of Manila the
sum of P5,750.00 that the spouses Timbang had bid for the building
at the Sheriff's sale; (b) declaring the other appellee Filipinas
Colleges, Inc. owner of 24,500/3,285,934 undivided interest in Lot
No. 2-a covered by certificate of tile No 45970, on which the
building sold in the auction sale is situated; and (c) ordering
the sale in public auction of the said undivided interest of the
Filipinas Colleges, Inc., in lot No. 2-a aforementioned to satisfy
the unpaid portion of the judgment in favor of appellee Blas and
against Filipinas Colleges, Inc. in the amount of P8,200.00 minus
the sum of P5,750.00 mentioned in (a) above.

The order appealed from is the result of three motions


filed in the court a quo in the course of the execution of a final
judgment of the Court of Appeals rendered in 2 cases appealed to
it in which the spouses Timbang, the Filipinas Colleges, Inc., and
Maria Gervacio Blas were the parties. IN that judgment of the
Court of Appeals, the respective rights of the litigants have been
adjudicated as follows:1âwphïl.nêt

(1) Filipinas Colleges, Inc. was declared to have acquired


the rights of the spouses Timbang in and to lot No. 2-a
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mentioned above and in consideration thereof, Filipinas
Colleges, Inc., was ordered to pay the spouses Timbang the
amount of P15,807.90 plus such other amounts which said
spouses might have paid or had to pay after February, 1953,
to Hoskins and Co. Inc., agent of the Urban Estates, Inc.,
original vendor of the lot. Filipinas Colleges, Inc. original
vendor of the total amount with the court within 90 days
after the decision shall have become final.

(2) Maria Gervacio Blas was declared to be a builder in good


faith of the school building constructed on the lot in
question and entitled to be paid the amount of P19,000.00 for
the same. Filipinas Colleges, Inc., purchaser of the said
building was ordered to deliver to Blas stock certificate
(Exh. C) for 108 shares of Filipinas Colleges, Inc. with a
par value of P10,800.00 and to pay Blas the sum of P8,200.00
of the house.

(3) In case Filipinas Colleges, Inc. failed to deposit the


value of the land, which after liquidation was fixed at
P32,859.34, within the 90-day period set by the court,
Filipinas Colleges would lose all its rights to the land and
the spouses Timbang would then become the owners thereof. In
that eventuality, the Timbangs would make known to the court
their option under Art. 448 of the Civil Code whether they
would appropriate the building in question, in which even
they would have to pay Filipinas Colleges, Inc. the sum of
P19,000.00, or would compel the latter to acquire the land
and pay the price thereof.

Filipinas Colleges, Inc. having failed to pay or deposit


the sum of P32,859.34 within the time prescribed, the spouses
Timbang, in compliance with the judgment of the Court of Appeals,
on September 28, 1956, made known to the court their decision that
they had chosen not of appropriate the building but to compel
Filipinas Colleges, Inc., for the payment of the sum of
P32,859,34. The motion having been granted, a writ of execution
was issued on January 8, 1957.

On January 16, 1957, appellee Blas in turn filed a


motion for execution of her judgment of P8,200.00 representing the
unpaid portion of the price of the house sold to Filipinas
Colleges, Inc. Over the object of the Timbangs, the court grated
the motion and the corresponding writ of execution was issued on
January 30, 1957, date of the granting of the motion for
execution, Blas through counsel, sent a letter to the Sheriff of
Manila advising him of her preferential claim or lien on the house
to satisfy the unpaid balance of the purchase price thereof under
Article 2242 of the Civil Code, and to withhold from the proceed
of the auction sale the sum of P8,200.00. Levy having been made on
the house in virtue of the writs of execution, the Sheriff of
Manila on March 5, 1957, sold the building in public auction in
favor of the spouses Timbang, as the highest bidders, in the
19
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amount of P5,750.00. Personal properties of Filipinas Colleges,
Inc. were also auctioned for P245.00 in favor of the spouses
Timbang.

As a result of these actuation, three motion were


subsequently filed before the lower court:

(1) By appellee Blas, praying that the Sheriff of Manila


and/or the Timbang spouses be ordered to pay and deliver to
her the sum of P5,750.00 representing the proceeds of the
auction sale of the building of Filipinas Colleges, Inc. over
which she has a lien of P8,200.00 for the unpaid balance of
the purchase price thereof;.

(2) Also by the appellee Bals, praying that there being still
two unsatisfied executions, one for the sum of P32,859.34 in
favor the land involved, Lot No. 2-a, be sold at public
auction; and (3) By Filipinas Colleges, Inc. praying that
because its properties, the house and some personal
properties, have been auctioned for P5,750.00 and P245.00
respectively in favor of the Timbang spouses who applied the
proceeds to the partial payment of the sum of P32,859.34
value of the land, Lot No. 2-a, it (Filipinas Colleges, Inc.)
be declared part owner of said lot to the extent of the total
amount realized from the execution sale of its
properties.1âwphïl.nêt

The Timbang spouses presented their opposition to each


and all of these motion. After due hearing the lower court
rendered its resolution in the manner indicated at the beginning
of this decision, from which the Timbangs alone have appealed.

In assailing the order of the court a quo directing the


appellants to pay appellee Blas the amount of their bid
(P5,750.00) made at the public auction, appellants' counsel has
presented a novel, albeit ingenious, argument. It is contended
that because the builder in good faith has failed to pay the price
of the land after the owners thereof exercised their option under
Article 448 of the Civil Code, the builder lost his right of
retention provided in Article 546 and by operation of Article 445,
the appellants as owners of the land automatically became the
owners ipso facto, the execution sale of the house in their favor
was superfluous. Consequently, they are not bound to make good
their bid of P5,750.00 as that would be to make goods to pay for
their own property. By the same token, Blas claim for preference
on account of the unpaid balance of the purchase price of the
house does not apply because preference applies only with respect
to the property of the debtor, and the Timbangs, owners of the
house, are not the debtors of Blas.

This Court cannot accept this oversimplification of


appellants' position. Article 448 and 546 of the Civil Code
defining the right of the parties in case a person in good faith
20
Credit Transactions
builds, sows or plants on the land of another, respectively
provides:

ART. 448. The owner of the land on which anything


has been built, sown or plated in good faith shall have the
right to appropriate as his own the works, sowing or
planting, after payment of the indemnify provided for in
article 546 and 548, or to obligate the one who built or
planted to pay the price of the land, and the one who sowed,
the proper rent. However, the builder or planter cannot be
obliged to buy the land if its value is considerably more
than that of the building or trees. In such case, he shall
pay reasonable rent, if the owner of the land does not choose
to appropriate the building or trees after proper indemnity.
The parties shall agree upon the terms of the lease and in
case of disagreement, the court shall fix the terms thereof.

ART. 546. Necessary expenses shall be refunded to


every possessor; but only the possessor in good faith may
retain the thing until he has reimbursed therefor.

Useful expenses shall be refunded only to the


possessor in good faith with the same right of retention the
person who has defeated him in the possession having to
option of refunding the amount of expenses or of paying the
case in value which thing may have acquired by reason
thereof.

Under the terms of these article, it is true that the


owner of the land has the right to choose between appropriating
the building by reimbursing the builder of the value thereof or
compelling the builder in good faith to pay for his land. Even
this second right cannot be exercised if the value of the land is
considerably more than that of the building. In addition to the
right of the builder to be paid the value of his improvement,
Article 546 gives him the corollary right of retention of the
property until he is indemnified by the owner of the land. There
is nothing in the language of these two article, 448 and 546,
which would justify the conclusion of appellants that, upon the
failure of the builder to pay the value of the land, when such is
demanded by the land-owner, the latter becomes automatically the
owner of the improvement under Article 445. The case of Bernardo
vs. Bataclan, 66 Phil., 590 cited by appellants is no authority
for this conclusion. Although it is true it was declared therein
that in the event of the failure of the builder to pay the land
after the owner thereof has chosen this alternative, the builder's
right of retention provided in Article 546 is lost, nevertheless
there was nothing said that as a consequence thereof, the builder
loses entirely all rights over his own building. The question is;
what is the recourse or remedy left to the parties in such
eventuality where the builder fails to pay the value of the land?
While the Code is silent on this Court in the cases of Miranda vs.
Fadullon, et al., 97 Phil., 801; 51 Off. Gaz., [12] 6226; Ignacio
21
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vs. Hilario, 76 Phil., 605 and the cited case of Bernardo vs.
Bataclan, supra.

In the first case, this Court has said:

A builder in good faith not be required to pay


rentals. he has right to retain the land on which he has
built in good faith until he is reimbursed the expenses
incurred by him. Possibly he might be made to pay rental only
when the owner of the land chooses not to appropriate the
improvement and requires the builder in good faith to pay for
the land but that the builder is unwilling or unable to pay
the land, and then they decide to leave things as they are
and assume the relation of lessor and lessee, and should they
disagree as to the amount of rental then they can go to the
court to fix that amount. (Emphasis supplied)

Should the parties not agree to leave things as they are


and to assume the relation of lessor and lessee, another remedy is
suggested in the case of Ignacio vs. Hilario, supra, wherein the
court has ruled that the owner of the land in entitled to have the
improvement removed when after having chosen to sell his land to
the other party, i.e., the builder in good faith fails to pay for
the same.

A further remedy is indicated in the case of Bernardo


vs. Bataclan, supra, where this Court approved the sale of the
land and the improvement in a public auction applying the proceeds
thereof first to the payment of the value of the land and the
excess, if any, to be delivered to the owner of the house in
payment thereof.

The appellants herein, owners o the land, instead of


electing any of the alternative above indicated chose to seek
recovery of the value of their land by asking for a writ of
execution; levying on the house of the builder; and selling the
same in public auction. Sand because they are the highest bidder
in their own auction sale, they now claim they acquired title to
the building without necessity of paying in cash on account of
their bid. In other words, they in effect pretend to retain their
land and acquire the house without paying a cent therefor.

This contention is without merit. This Court has already


held in Matias vs. The Provincial Sheriff of Nueva Ecija (74
Phil., 326) that while it is the inveriable practice, dictated by
common sense, that where the successful bidder is the execution
creditor himself, he need not pay down the amount of the bid if it
does not exceed the amount of his judgement, nevertheless, when
their is a claim by a third-party, to the proceeds of the sale
superior to his judgment credit, the execution creditor, as
successful bidder, must pay in cash the amount of his bid as a
condition precedent to the issuance to him of the certificate of
sale. In the instant case, the Court of Appeals has already
22
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adjudged that appellee Blas is entitled to the payment of the
unpaid balance of the purchase price of the school building. Blas
is actually a lien on the school building are concerned. The order
of the lower court directing the Timbang spouses, as successful
bidders, to pay in cash the amount of their bid in the sum of
P5,750.00 is therefore correct.

With respect to the order of the court declaring


appellee Filipinas Colleges, Inc. part owner of the land to the
extent of the value of its personal properties sold at public
auction in favor of the Timbang, this Court Likewise finds the
same as justified, for such amount represents, in effect, a
partial payment of the value of the land. If this resulted in the
continuation of the so-called involuntary partnership questioned
by the difference between P8,200.00 — the unpaid balance of the
purchase price of the building and the sum of P5,750.00 — amount
to be paid by the Timbangs, the order of the court directing the
sale of such undivided interest of the Filipinas Colleges, Inc. is
likewise justified to satisfy the claim of the appellee Blas.

Considering that the appellant spouses Marcelino Timbang


and Maria Garcia Timbang may not voluntarily pay the sum of
P5,750.00 as ordered, thereby further delaying the final
termination of this case, the first part of the dispositive
portion of the order appealed from is modified in the sense that
upon failure of the Timbang spouses to pay to the Sheriff or to
Manila Gervacio Blas said sum of P5,750.00 within fifteen (15)
days from notice of the final judgment, an order of execution
shall issue in favor of Maria Gervasio Blas to be levied upon all
properties of the Timbang spouses not exempt from execution for
the satisfaction of the said amount.

In all other respects, the appealed order of the court a


quo is hereby affirmed, with costs against the appellants.

It is so ordered.

G.R. No. L-14938 December 29, 1962

MAGDALENA C. DE BARRETTO and JOSE G. BARRETTO, plaintiffs-


appellants,
vs.
JOSE G. VILLANUEVA, ET AL., defendants-appellees.

Bausa, Ampil and Suarez for plaintiffs-appellants.


Esteban Ocampo and Mariano H. de Joya for defendants-appellees.

R E S O L U T I O N

REYES, J.B.L., J.:

Appellants, spouses Barretto, have filed a motion vigorously


urging, for reason to be discussed in the courts of this
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resolution, that our decision of 28 January 1961 be reconsidered
and set aside, and a new one entered declaring that their right as
mortgagees remain superior to the unrecorded claim of herein
appellee for the balance of the purchase price of her rights,
title, and interest in the mortgaged property.

It will be recalled that, with Court authority, Rosario Cruzado


sold all her right, title, and interest and that of her children
in the house and lot herein involved to Pura L. Villanueva for
P19,000.00. The purchaser paid P1,500 in advance, and executed a
promissory note for the balance of P17,500.00. However, the buyer
could only pay P5,500 on account of the note, for which reason the
vendor obtained judgment for the unpaid balance. In the meantime,
the buyer Villanueva was able to secure a clean certificate of
title (No. 32526), and mortgaged the property to appellant
Magdalena C. Barretto, married to Jose G. Barretto, to secure a
loan of P30,000.03, said mortgage having been duly recorded.

Pura Villanueva defaulted on the mortgage loan in favor of


Barretto. The latter foreclosed the mortgage in her favor,
obtained judgment, and upon its becoming final asked for execution
on 31 July 1958. On 14 August 1958, Cruzado filed a motion for
recognition for her "vendor's lien" in the amount of P12,000.00
plus legal interest, invoking Articles 2242, 2243, and 2249 of the
new Civil Code. After hearing, the court below ordered the "lien"
annotated on the back of Certificate of Title No. 32526, with the
proviso that in case of sale under the foreclosure decree the
vendor's lien and the mortgage credit of appellant Barretto should
be paid pro rata from the proceeds. Our original decision affirmed
this order of the Court of First Instance of Manila.

Appellants insist that:

(1) The vendor's lien, under Articles 2242 and 2243 of the new
Civil Code of the Philippines, can only become effective in the
event of insolvency of the vendee, which has not been proved to
exist in the instant case; and

(2) That the appellee Cruzado is not a true vendor of the


foreclosed property.

We have given protracted and mature consideration to the facts and


law of this case and have reached the conclusion that our original
decision must be reconsidered and set aside, for the following
reasons:

A. The previous decision failed to take fully into account the


radical changes introduced by the Civil Code the Philippines into
the system of priorities among creditors ordained by the Civil
Code of 1889.

Pursuant to the former Code, conflicts among creditors entitled to


preference as to specific real property under Article 1923 were to
24
Credit Transactions
be resolved according to an order of priorities established by
Article 1927, whereby one class of creditors could exclude the
creditors of lower order until the claims of the former were fully
satisfied out of the proceeds of the sale of the real property
subject of the preference, and could even exhaust such proceeds if
necessary.

Under the system of the Civil Code of the Philippine however, only
taxes enjoy a similar absolute preference. All the remaining
thirteen classes of preferred creditors under Article 2242 enjoy
no priority among themselves but must be paid pro rata, i.e., in
proportion to the amount of the respective credits. Thus, Article
2249 provides:

if there are two or more credits with respect to specific


real property or real rights, they shall be satisfied pro
rata, after the payment of the taxes and assessments upon the
immovable property or real right.

But in order to make this prorating fully effective, the preferred


creditors enumerated in Nos. 2 to 14 of Article 2242 (or such of
them as have credits outstanding) must necessarily be convened,
and the import of their claims ascertained. It is thus apparent
that the full application of Articles 2249 and 2242 demands that
there must first some proceeding where the claims of all the
preferred creditors may be bindingly adjudicated, such as
insolvency, the settlement of a decedent's estate under Rule 87 of
the Rules of Court, or other liquidation proceedings of similar
import.

This explains the rule of Article 2243 of the new Civil Code that

The claims or credits enumerated in the two preceding


articles1 shall be considered as mortgages or pledges of real
or personal property or liens within the purview of legal
provision governing insolvency . . . . (Emphasis supplied).

and the rule is further clarified in the Report of the Code


Commission, as follows:

The question as to whether the Civil Code and the Insolvency


Law can be harmonized is settled by this Article (2243). The
preferences named in Articles 2261 and 2262 (now 2241 and
2242) are to be enforced in accordance with the Involvency
Law. (Emphasis supplied.)

Thus, it becomes evident that one preferred creditor's third-party


claim to the proceeds of a foreclosure sale (as in the case now
before us) is not the proceeding contemplated by law for the
enforcement of preferences under Article 2242, unless the claimant
were enforcing a credit for taxes that enjoy absolute priority. If
none of the claims is for taxes, a dispute between two creditors
25
Credit Transactions
will not enable the Court to ascertain the pro rata dividend
corresponding to each, because the rights of the other creditors
likewise enjoying preference under Article 2242 can not be
ascertained. Wherefore, the order of the Court of First Instance
of Manila now appealed from decreeing that the proceeds of the
foreclosure sale be apportioned only between appellant and
appellee, is incorrect and must be reversed.

In the absence of insolvency proceedings (or other equivalent


general liquidation of the debtor's estate), the conflict between
the parties now before us must be decided pursuant to the well
established principle concerning register lands; that a purchaser
in good faith and for value (as the appellant concededly is) takes
registered property free from liens and encumbrances other than
statutory liens and those recorded in the certificate of title.
There being no insolvency or liquidation, the claim of the
appellee, as unpaid vendor, did not acquire the character and rank
of a statutory lien co-equal to the mortgagee's recorded
encumbrance, and must remain subordinate to the latter.

We are understandably loath (absent a clear precept of law so


commanding) to adopt a rule that would undermine the faith and
credit to be accorded to registered Torrens titles and nullify the
beneficient objectives sought to be obtained by the Land
Registration Act. No argument is needed to stress that if a person
dealing with registered land were to be held to take it in every
instance subject to all the fourteen preferred claims enumerate in
Article 2242 of the new Civil Code, even if the existence and
import thereof can not be ascertained from the records, all
confidence in Torrens titles would be destroyed, and credit
transactions on the faith of such titles would be hampered, if not
prevented, with incalculable results. Loans on real estate
security would become aleatory and risky transactions, for no
prospective lender could accurately estimate the hidden liens on
the property offered as security, unless he indulged in
complicated, tedious investigations. The logical result might well
be contraction of credit to unforeseable proportions that could
lead to economic disaster.lawphil.net

Upon the other hand, it does not appear excessively burdensome to


require the privileged creditors to cause their claims to be
recorded in the books of the Register of Deeds should they desire
to protect their rights even outside of insolvency or liquidation
proceedings.

B. The close study of the facts disclosed by the records casts


strong doubt on the proposition that appelle Cruzados should be
regarded as unpaid vendors of the property (land, buildings, and
improvements) involved in the case at bar so as to be entitled to
preference under Article 2242. The record on appeal, specially the
final decision of the Court of First Instance of Manila in the
suit of the Cruzados against Villanueva, clearly establishes that
after her husband's death, and with due court authority, Rosario
26
Credit Transactions
Cruzado, for herself and as administratrix of her husband's
estate, mortgaged the property to the Rehabilitation Finance
Corporation (RFC) to secure repayment of a loan of P11,000, in
installments, but that the debtor failed to pay some of the
installment wherefore the RFC, on 24 August 1949, foreclosed the
mortgage, and acquired the property, subject to the debtors right
to redeem or repurchase the said property; and that on 25
September 1950, the RFC consolidated its ownership, and the
certificate of title of the Cruzados was cancelled and a new
certificate issued in the name of the RFC.

While on 26 July 1951 the RFC did execute a deed selling back the
property to the erstwhile mortgagors and former owners Cruzados in
installments, subject to the condition (among others) that the
title to the property and its improvements "shall remain in the
name of the Corporation (RFC) until after said purchase price,
advances and interest shall have been fully paid", as of 27
September 1952, Cruzado had only paid a total of P1,360, and had
defaulted on six monthly amortizations; for which reason the RFC
rescinded the sale, and forfeited the payments made, in accordance
with the terms of the contract of 26 July 1951.

It was only on 10 March 1953 that the Cruzados sold to Pura L.


Villanueva all "their rights, title, interest and dominion on and
over" the property, lot, house, and improvements for P19,000.00,
the buyer undertaking to assume payment of the obligation to the
RFC, and by resolution of 30 April 1953, the RFC approved "the
transfer of the rights and interests of Rosario P. Cruzado and her
children in their property herein above-described in favor of Pura
L. Villanueva"; and on 7 May 1953 the RFC executed a deed of
absolute sale of the property to said party, who had fully paid
the price of P14,269.03. Thereupon, the spouses Villanueva
obtained a new Transfer Certificate of Title No. 32526 in their
name.

On 10 July 1953, the Villanuevas mortgaged the property to the


spouses Barretto, appellants herein.

It is clear from the facts above-stated that ownership of the


property had passed to the Rehabilitation Finance Corporation
since 1950, when it consolidated its purchase at the foreclosure
sale and obtained a certificate of title in its corporate name.
The subsequent contract of resale in favor of the Cruzados did not
revest ownership in them, since they failed to comply with its
terms and conditions, and the contract itself provided that the
title should remain in the name of the RFC until the price was
fully paid.

Therefore, when after defaulting in their payments due under the


resale contract with the RFC the appellant Cruzados sold to
Villanueva "their rights, title, interest and dominion" to the
property, they merely assign whatever rights or claims they might
still have thereto; the ownership of the property rested with the
27
Credit Transactions
RFC. The sale from Cruzado to Villanueva, therefore, was not much
a sale of the land and its improvements as it was a quitclaim deed
in favor of Villanueva. In law, operative sale was that from the
RFC to the latter, and it was the RFC that should be regarded as
the true vendor of the property. At the most, the Cruzados
transferred to Villanueva an option to acquire the property, but
not the property itself, and their credit, therefore, can not
legally constitute a vendor's lien on the corpus of the property
that should stand on an equal footing with mortgaged credit held
by appellants Barretto.

IN VIEW OF THE FOREGOING, the previous decision of this Court,


promulgated on 28 January 1961, is hereby reconsidered and set
aside, and a new one entered reverse the judgment appealed from
and declaring the appellant Barrettos entitled to full
satisfaction of their mortgage credit out of the proceeds of the
foreclosure sale in the hands of the Sheriff of the City of
Manila. No costs.

G.R. No. L-23888 March 18, 1967

FRANCISCO C. MANABAT, in his capacity as Provincial Sheriff of


Laguna, Branch I, plaintiff-appellee,
vs.
LAGUNA FEDERATION OF FACOMAS, INC., ET AL., defendants-appellees.
FLORENTINO CAYCO and JOSE FERNANDEZ ZORILLA, defendants-
appellants.

E. Voltaire Garcia for defendants-appellants.


Enrique C. Villanueva and Felixberto V. Castillo for plaintiff-
appellee.

BENGZON, J.P., J.:

In a suit filed by Laguna Federation of Facomas, Inc. against


Nieves M. Vda. de Roxas,1a judgment for the plaintiff was rendered.
And pursuant to it, a writ of execution was issued on February, 8,
1960, by virtue of which Francisco Manabat, the provincial
sheriff, sold at public auction on November 24, 1960 all rights,
titles and interests of Nieves M. Vda. de Roxas in ten (10)
parcels of land for a total price of P37,000.

Discovering, however, that the parcels of land sold were subject


to registered liens such as writs of execution and attachment
annotated at the back of the respective title certificates, the
sheriff instituted an action for interpleader on February 21, 1961
in the same Court of First Instance of Laguna,2for the different
creditors or lienholders to litigate among themselves and
determine their rights to the P37,000 proceeds of the sale.

As a result, the following pertinent claims were thereafter


asserted:

28
Credit Transactions
Date of
Nature of Registration Amount of
Claimant Annotation of Credit Claim
1. Laguna Attachment October 10, P17,448.00
Federation writ in CFI 1958
of Facomas, Laguna Case
Inc. sc-152.
2. Valeriana Attachment October 13, 3,735.00
&Limaco de writ in CFI 1958
Almeda Laguna Case
SC-153
3. Cosmopolitan Attachment October 20, 12,650.00
Insurance writ in CFI 1958
Co., Inc. Manila Case
No. 38118
4. Florentino Attachment October 29, 26,787.50
Cayco and writ in CFI 1958
Jose Rizal Case No.
Fernandez 5238
Zorilla
5. Victoria Attachment May 23, 1960 12,500.00
Dimayuga writ in CFI
Manila Case
No. 3878
6. Jose Marfori Execution writ September 9,410.00
and Josefina CFI Cavite 26, 1960
Reyes Case No. 6480-
R
7. Pastor Attachment November 23, 25,552.00
Canillas writ in CFI 1960
Manila Case
No. 38872
8. Trinidad Execution writ November 29, 3,450.00
Calatin in CFI Laguna 1960
Case No. B-191
9. Rosauro Reg. of Deeds Not 9,000.00
Taningco and denied registered
Simplicio registration
Ramos of deed
mortgage;
registrability
became object
of suit in
Supreme Court,
L-15242.3

After stipulation of facts and submission of documentary evidence


by the parties, the Court of First Instance ruled, in its decision
29
Credit Transactions
of December 6, 1961, that the aforementioned defendants-claimants
are entitled to the proceeds of the sale in the order of
preference in accordance with the dates of the registration of
their credits.

From said judgment only Florentino Cayco and Jose Fernandez


Zorilia appealed.4And finding that it involves a question purely of
law, the Court of Appeals, by resolution of November 12, 1964, has
certified their appeal to Us.

The only issue presented is whether the rule to follow in the


satisfaction of the credits involved is that of preference in the
order of dates of registration, as held by the court a quo, or
distribution pro rata, as appellants maintain.

Appellants' reasoning is that this is an instance of several


credits referring to the same specific real property; and that the
rule in such case is to satisfy all the aforesaid credits pro
rata, following Article 2249 of the Civil Code:

ART. 2249. If there are two or more credits with respect to


the same specific real property or real rights, they shall be
satisfied pro rata, after the payment of the taxes and
assessments upon the immovable property or real
right.1äwphï1.ñët

The above provision of the new Civil Code altered the set-up under
the old one5in that while previously the rule provided for was
priority of payment in regard to credits referring to the same
specific real property, now the general rule is pro rata.

Nonetheless, even under the new system, not all credits referring
to the same specific real property come under the pro rata rule.
Article 2249 itself, supra, expressly provides that taxes and
assessments upon the real property are to be paid first.

Similarly, the rule of pro rata does not apply to the credits
mentioned in subpar. (7) of Article 2242 of the Civil Code:

ART. 2242. With reference to specific immovable property and


real rights of the debtor, the following claims, mortgages
and liens shall be preferred, and shall constitute an
encumbrance on the immovable or real right:

x x x x x x x x x

(7) Credits annotated in the Registry of Property, in virtue


of a judicial order, by attachments or executions, upon the
property affected, and only as to later credits.

It being expressly provided that said credits are preferred "only


as to later credits", it follows that the same limitation applies
as to their preference among themselves; i.e., for purposes of
30
Credit Transactions
satisfying several credits annotated by attachments or executions,
the rule is still preference according to priority of the credits
in the order of time. For, otherwise, the result would be absurd:
the preference of an attachment or execution lien over later
credits, as above provided for, could easily be defeated by simply
obtaining writs of attachment or execution, and annotating them,
no matter how much later.

It not being disputed that appellants' credit is "later" than


those of appellees Laguna Federation of Facomas, Inc., Valeriana
Lim-aco de Almeda and Cosmopolitan Insurance Co., Inc., the
appellees' credits must be deemed preferred to that of appellants.
To satisfy them pro rata would erase the difference between
earlier and later credits provided for by subpar. (7) of Article
2242 aforementioned.

Wherefore, the judgment appealed from ruling preference is hereby


affirmed. No costs. So ordered.

G.R. No. L-21836 April 22, 1975

CARRIED LUMBER COMPANY, plaintiff-appellee,


vs.
AGRICULTURAL CREDIT AND COOPERATIVE FINANCING ADMINISTRATION
(ACCFA), defendant-appellant.

Primicias, Del Castillo and Macaraeg for plaintiff-appellee.

Deogracias E. Lerma and Domingo D. Panis for defendant-appellant.

AQUINO, J.:ñé+.£ªwph!1

This is a case regarding concurrence and preference of credits.

The Agricultural Credit and Cooperative Financing Administration


(ACCFA) * appealed on pure questions of law from the decision of
the Court of First Instance of Pangasinan, holding that the
Carried Lumber Company has a lien over the warehouse and ricemill
building of the Sta. Barbara Facoma in the amount of P5,610.50
plus P45 as sheriff's fee (Civil Case No. D-1174).

In that decision it was further held that the lien was superior to
the ACCFA's mortgage credit and that the company was entitled to
the material possession of the warehouse and ricemill building if
the ACCFA did not satisfy its claim. Moreover, the ACCFA was
ordered to pay the company the sum of P2,000 as expenses, damages
and attorney's fees plus costs (99-100 Record on Appeal).

The documentary evidence and the parties' stipulation disclose the


following facts:

31
Credit Transactions
Lumber company's materialman's lien. — From October 11 to November
8, 1954 the Sta. Barbara Farmer's Cooperative Marketing
Association, Inc. (Facoma) purchased on credit from the Carried
Lumber Company lumber and materials which were used in the
construction of the Facoma's warehouse (Exh. H and H-1). The
company extended credit to the Facoma after having been informed
by the ACCFA's General Manager in a telegram dated October 23,
1954 that a loan of P27,200 had been approved for the construction
of the Facoma's warehouse (Exh. G and G-1).

On October 27, 1954, after the company had supplied the Facoma
with lumber and construction materials worth P4,999.40, they
executed a contract whereby it was agreed that the company would
sell lumber and construction materials to the Facoma with a value
not exceeding P27,200 (Exh. F-1).

For the construction of the warehouse, the company actually


delivered to the Facoma Lumber and construction materials valued
at P8,233.55. The Facoma made partial payments. As of January 1,
1955 it had not paid to the company the balance of its account
amounting to P4,733.55. On May 18, 1959 the company sued the
Facoma for the recovery of that amount (Exh. F). In a decision
dated September 26, 1960, based on a compromise, the lower court
ordered the Facoma to pay the company the sum of P5,500 in monthly
installments from October 31, 1960 to March 31, 1961, subject to
the acceleration proviso that failure on the part of the Facoma to
pay any installment would render the whole unpaid balance due and
demandable (Exh. A, Civil Case No. D-899; 24-25 Record on Appeal).

In view of the Facoma's failure to pay the stipulated


installments, the Carried Lumber Company secured a writ of
execution to enforce the judgment. The sheriff levied upon the
Facoma's lease rights, warehouse and ricemill building. On
January, 3, 1961 he issued a notice scheduling the sale of the
attached properties on January 31, 1961 (Exh. C; 28-30 Record on
Appeal).

On January 25, 1961 the ACCFA filed a third-party claim with the
sheriff. Its provincial director informed the sheriff that the
properties levied upon had already been sold to the ACCFA on
November 5, 1960. For that reason, it contended that the same
could not again be sold at public auction. It formally objected to
the proposed auction sale (Exh. 7; 79-81 Record on Appeal).

As scheduled, the sheriff on January 31, 1961 sold for P5,610.50


the Facoma's lease rights, warehouse and ricemill building to the
Carried Lumber Company, as the highest bidder. On that same date,
he issued a certificate of sale to the company (Exh. D; 31-32
Record on Appeal).

There being no redemption within the one-year period, the sheriff


on June 29, 1962 issued a final deed of sale in favor of the

32
Credit Transactions
Carried Lumber Company for the said lease rights, warehouse and
ricemill building (Exh. E).

ACCFA's mortgage lien. — As already stated, the Facoma obtained


from the ACCFA a loan of P27,200 for the construction of its
warehouse. As security for that loan, the Facoma on November 10,
1954 mortgaged to the ACCFA its lease rights over a parcel of land
located at Barrio Maningding Sta. Barbara, Pangasinan and the
warehouse to be constructed on the said land together with the
other improvements existing thereon (Exh. 1). The mortgage was
recorded on November 13, 1954 in the registration book provided
for in Act No. 3344 (53 Record on Appeal).

Two supplementary mortgages dated February 19 and October 19, 1955


were executed by the Facoma in favor of the ACCFA as security for
other loans amounting to P11,600 and P15,408.80, respectively. The
other loans were used by the Facoma for the construction of a
ricemill building and for the purchase of a ricemill which were
also mortgaged to the ACCFA (Exh. 2 and 3). The two instruments
were recorded in the chattel mortgage register on February 22 and
November 17, 1955, respectively (59, 66 Record on Appeal).

The Facoma also defaulted in the payment of its mortgage


obligations. The ACCFA in a letter dated September 19, 1960
requested the Provincial Sheriff of Pangasinan to foreclose the
mortgages extrajudicially (Exh. 4). The sheriff issued a notice of
auction sale dated October 13, 1960. He scheduled the sale on
November 5, 1960 (Exh. 5).

In a letter dated October 20, 1960 the Carried Lumber Company


notified the sheriff and the Facoma that pursuant to article
2242(4) of the Civil Code, it had a preferential lien over the
warehouse of the Facoma for having furnished the lumber and
materials used in its construction and the cost of which had not
been fully paid for. The company specified that its unpaid claim
amounted to P5,500 and that it was evidenced by a judgment dated
September 26, 1960 (Exh. B; 26-28 Record on Appeal).

The sheriff proceeded with the foreclosure sale. On November 5,


1960 he sold the mortgaged properties to the ACCFA, as the highest
bidder for the sum of P68,067.35. On that date, he issued a
certificate of sale covering the Facoma's lease rights, warehouse,
ricemill, ricemill building and a diesel engine (Exh. 6). Upon
application with the Court of First Instance, the ACCFA was placed
in possession of the mortgaged properties by virtue of a writ of
possession dated January 27, 1961 (Exh. 8, 9 and 10) or four days
before the auction sale which the sheriff conducted at the
instance of the Carried Lumber Company (Exh. D). The certificate
of sale was registered on March 23, 1961.

Proceedings in this case. — On March 1, 1961 or after the


execution of the Carried Lumber Company's judgment against the
Facoma and the issuance of the certificate of sale in its favor,
33
Credit Transactions
the company sued the ACCFA for the purpose of asserting its
preferential lien over the Facoma's warehouse and ricemill
building and in order to obtain possession thereof. One of ACCFA's
defenses was that the company waived its lien when it filed an
ordinary action to recover its claim instead of enforcing its
lien.

After trial, the lower court held that the lumber company's
materialman's lien was superior to the ACCFA's mortgage lien
because the company's lien is sanctioned by paragraph 4 of article
2242 of the Civil Code, whereas the ACCFA's mortgage lien is
covered by paragraph 5 of the same article. The lower court
reasoned out that the company's lien "existed ahead" of the
ACCFA's mortgage lien. It noted that the ACCFA was aware of the
company's claim because the company sent to the ACCFA on October
23, 1954 a telegraphic inquiry as to the loan which the ACCFA
would extend to the Facoma for the construction of its warehouse
and the ACCFA confirmed in a telegraph answer that the loan would
be granted to the Facoma (Exh. G).

The ACCFA contends in this appeal that the lumber company's


unregistered judgment credit was not preferred; that while its
materialman's lien might have enjoyed preference under article
2242 of the Civil Code, that preferential status was lost when it
secured a judgment for its credit as an ordinary claim, and that,
in the alternative, the company's credit, if preferred, and the
ACCFA's mortgage credit should be paid pro rata pursuant to
article 2249, of the Civil Code.

Ruling. — As this is a clear case of concurrence of credits with


respect to an immovable property, the Facoma warehouse, it has to
be resolved under the following provisions of the Civil Code:têñ.
£îhqwâ£

ART. 2242. With reference to specific immovable property


and real rights of the debtor, the following claims,
mortgages and liens shall be preferred, and shall
constitute an encumbrance on the immovable or real
right:

xxx xxx xxx

(4) Claims of furnishers of materials used in the


construction, reconstruction, or repair of buildings,
canals or other works, upon said buildings, canals or
other works:

(5) Mortgage credits recorded in the Registry of


Property, upon the real estate mortgaged;

xxx xxx xxx (1923a)

34
Credit Transactions
ART. 2243. The claims or credits enumerated in the
preceding articles (2241 and 2242) shall be considered
as mortgages or pledges of real or personal property, or
liens within the purview of legal provisions governing
insolvency. Taxes mentioned in No. 1, article 2241, and
No. 1 article 2242, shall first be satisfied. (n)

ART. 2249. If there are two or more credits with respect


to the same specific real property or real rights, they
shall be satisfied pro rata, after the payment of the
taxes and assessments upon the immovable properties or
real right. (1927a)

The term pro rata in article 2249 means in proportion or ratably


or a division according to share, interest or liability of each
(72 C.J.S. 967-8).

The trial court erred in holding that the lumber company's lien
over the warehouse is superior to the ACCFA's mortgage lien. It
was mistaken in assuming that the enumeration of ten claims,
mortgages and liens in article 2242 creates an order of
preference. It is not correct to say that the materialman's
(mechanic's) lien or refectionary credit of the lumber company,
being listed as No. 4 in article 2242, is superior to the ACCFA's
mortgage credit which is listed as No. 5. The enumeration in
article 2242 is not an order of preference. That article lists the
credits which may concur with respect to specific real properties
and which would be satisfied pro rata according to article 2249.

There is no dispute that the Facoma warehouse was constructed by


means of the materials supplied by Carried Lumber Company and that
the construction was financed by the ACCFA which had loaned
P27,200 to the Facoma (Exh. 1). Therefore, it is just and proper
that the two creditors should have pro rata shares in that
warehouse.

The lower court's solution of awarding the warehouse to the lumber


company was an unwarranted disregard of the ACCFA's claim. On the
other hand, the sheriff's adjudication of the whole warehouse to
the ACCFA nullifies the lumber company's claim. Neither solution
is just because it results in unjust enrichment by one party at
the expense of the other.

The instant case is different from Luzon Lumber & Hardware Co. vs.
Quiambao, 94 Phil, 663, where the defendant spouses mortgaged
their three lots and the two buildings to be constructed thereon
to the Rehabilitation Finance Corporation (RFC) to secure a loan.
The mortgage was registered on September 13, 1948. The materials
used in the construction of the two buildings were bought on
credit by the defendant spouses from plaintiff lumber company
during the period from October, 1948 to March, 1949 or after the
registration of the mortgage. To cover the unpaid balance of the
price of the materials, plaintiff lumber company sued defendant
35
Credit Transactions
spouses. The RFC was impleaded as a defendant after it had
foreclosed the mortgage and bought the lots and building as the
highest bidder at the auction sale.

It was held that the mortgage credit of the RFC was superior to
the refectionary credit (credito refacionario) held by the lumber
company. The RFC loan was used to defray the cost of constructing
the two buildings. By express stipulation, the mortgage included
all the improvements which would be constructed on the lots. The
mortgage lien over the buildings attached thereto as of the
recording of the mortgage and not as of the time of their
construction. (Under article 1923 of the old Code a refectionary
credit should be registered and, if not recorded, it is inferior
to a registered mortgage credit).

Also inapplicable to this case is the ruling that in order to


implement the pro rata sharing among the creditors mentioned in
article 2242, as directed in article 2249, the said creditors
"must necessarily be convened and the import of their claims
ascertained" and that, to do so, "there must be first some
proceeding where the claims of all the preferred creditors may be
bindingly adjudicated, such as insolvency, the settlement of a
decedent's estate under Rule 87 (now 86) of the Rules of Court, or
other liquidation proceedings of similar import" (Resolution of
the motion for reconsideration in De Barretto vs. Villanueva, 110
Phil. 896, 904, 906).

The Barretto ruling was predicated on the assumption that such an


insolvency proceeding is necessary in order "to enable the court
to ascertain the pro rata dividend corresponding to each" of the
two creditors as well as the "other creditors" entitled to
preference under article 2242.

Where, as in this case, it appears that there are no other


creditors aside from the Carried Lumber Company and the ACCFA, the
requirement that the pro rata dividend should be ascertained in an
insolvency or similar proceeding should not be enforced.

Moreover, the instant case has features that easily distinguish it


from the Barretto case. Here, the lumber company, before the
registration of the mortgage, inquired from the ACCFA whether it
would extend a loan to the Facoma. The lumber company continued to
supply lumber to the Facoma after the ACCFA had made the
telegraphic assurance that it would extend a loan of P27,200 to
the Facoma. In effect, the ACCFA had prior notice of the lumber
company materialman's lien.

Furthermore, in the Barretto case, the controversy was between the


supposed unpaid vendor and the mortgage who had acted in good
faith and was unaware of the vendor's lien for the unpaid price
(No. 2 in article 2242). This Court found that the vendor's lien
was questionable and could not stand on equal footing with the
mortgage lien.
36
Credit Transactions
As already noted, the ACCFA has been in possession of the
warehouse since January 27, 1961 (Exh. 10). The trial court should
ascertain whether the warehouse has yielded any income during the
time that the ACCFA has been in possession thereof. In any event,
the rental value of the warehouse should be determined. The ACCFA
is entitled to deduct from the earnings of the warehouse or its
rental value the taxes and necessary and useful expenses which it
had incurred for the said warehouse. By reason of its lien, the
Carried Lumber Company has a pro rata share in the net earnings or
rental value of the warehouse.

There is another aspect of this case which has eluded the


attention of the parties. The lumber company in its original
complaint asserted a lien not only over the Facoma's warehouse but
also over its ricemill building. The trial court sustained the
lumber company's lien over the Facoma's ricemill building. That is
an error.

The evidence for the lumber company shows that it supplied


materials only for the construction of the warehouse (Exh. F, F-
1). The company in its letter to the sheriff specified that it was
asserting a lien only over the warehouse (Exh. B). It did not
mention the ricemill building. It has no materialman's lien on the
ricemill building. On the other hand, the ACCFA had a mortgage
lien on the ricemill building (Exh. 2). It foreclosed its mortgage
and bought the ricemill building at the auction sale held on
November 5, 1960 (Exh. 5, 6).

WHEREFORE, the trial court's judgment is reversed. It is hereby


adjudged that the Carried Lumber Company and the ACCFA have
concurrent liens on the Sta. Barbara Facoma warehouse in the
proportion of their credits amounting to P5,655.50 (including the
sheriff's fee of P45) and P41,370.11 (Exh. 4), respectively.

Should the parties within a period of thirty (30) days from the
finality of this judgment be unable to agree as to how their liens
over the Facoma warehouse should be satisfied, then the Warehouse
may be sold at public auction by the sheriff to the highest
bidder, and the net proceeds of the sale should be allocated pro
rata to the lumber company and the ACCFA.

The trial court should ascertain the net earnings or net rental
value of the warehouse from January 27, 1961, when the ACCFA was
placed in possession thereof, up to the time the carried Lumber
Company's lien is satisfied. Such net earnings or net rental value
should also be allocated pro rata to the lumber company and the
ACCFA. No pronouncement as to costs.

37

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