cred trans part 12.docx

CREDIT TRANSACTIONS (Atty. Jazzie Sarona)3RD EXAM COVERAGE - CASES

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CORDOVA v. REYES

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 146555 July 3, 2007

JOSE C. CORDOVA, Petitioner, vs.REYES DAWAY LIM BERNARDO LINDO ROSALES LAW OFFICES, ATTY. WENDELL CORONEL and the SECURITIES AND EXCHANGE COMMISSION,*** Respondents.

D E C I S I O N

CORONA, J.:

This is a petition for review on certiorari1 of a decision2 and resolution3 of the Court of Appeals (CA) dated July 31, 2000 and December 27, 2000, respectively, in CA-G.R. SP No. 55311.

Sometime in 1977 and 1978, petitioner Jose C. Cordova bought from Philippine Underwriters Finance Corporation (Philfinance) certificates of stock of Celebrity Sports Plaza Incorporated (CSPI) and shares of stock of various other corporations. He was issued a confirmation of sale.4 The CSPI shares were physically delivered by Philfinance to the former Filmanbank5 and Philtrust Bank, as custodian banks, to hold these shares in behalf of and for the benefit of petitioner.6

On June 18, 1981, Philfinance was placed under receivership by public respondent Securities and Exchange Commission (SEC). Thereafter, private respondents Reyes Daway Lim Bernardo Lindo Rosales Law Offices and Atty. Wendell Coronel (private respondents) were appointed as liquidators.7 Sometime in 1991, without the knowledge and consent of petitioner and without authority from the SEC, private respondents withdrew the CSPI shares from the custodian banks.8 On May 27, 1996, they sold the shares to Northeast Corporation and included the proceeds thereof in the funds of Philfinance. Petitioner learned about the unauthorized sale of his shares only on September 10, 1996.9 He lodged a complaint with private respondents but the latter ignored it10 prompting him to file, on May 6, 1997,11 a formal complaint against private respondents

in the receivership proceedings with the SEC, for the return of the shares.

Meanwhile, on April 18, 1997, the SEC approved a 15% rate of recovery for Philfinance’s creditors and investors.12 On May 13, 1997, the liquidators began the process of settling the claims against Philfinance, from its assets.13

On April 14, 1998, the SEC rendered judgment dismissing the petition. However, it reconsidered this decision in a resolution dated September 24, 1999 and granted the claims of petitioner. It held that petitioner was the owner of the CSPI shares by virtue of a confirmation of sale (which was considered as a deed of assignment) issued to him by Philfinance. But since the shares had already been sold and the proceeds commingled with the other assets of Philfinance, petitioner’s status was converted into that of an ordinary creditor for the value of such shares. Thus, it ordered private respondents to pay petitioner the amount of P5,062,500 representing 15% of the monetary value of his CSPI shares plus interest at the legal rate from the time of their unauthorized sale.

On October 27, 1999, the SEC issued an order clarifying its September 24, 1999 resolution. While it reiterated its earlier order to pay petitioner the amount of P5,062,500, it deleted the award of legal interest. It clarified that it never meant to award interest since this would be unfair to the other claimants.

On appeal, the CA affirmed the SEC. It agreed that petitioner was indeed the owner of the CSPI shares but the recovery of such shares had become impossible. It also declared that the clarificatory order merely harmonized the dispositive portion with the body of the resolution. Petitioner’s motion for reconsideration was denied.

Hence this petition raising the following issues:

1) whether petitioner should be considered as a preferred (and secured) creditor of Philfinance;

2) whether petitioner can recover the full value of his CSPI shares or merely 15% thereof like all other ordinary creditors of Philfinance and

3) whether petitioner is entitled to legal interest.14

To resolve these issues, we first have to determine if petitioner was indeed a creditor of Philfinance.

http://www.lawphil.net/judjuris/juri2007/jul2007/gr_146555_2007.html#fnt14















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There is no dispute that petitioner was the owner of the CSPI shares. However, private respondents, as liquidators of Philfinance, illegally withdrew said certificates of stock without the knowledge and consent of petitioner and authority of the SEC.15 After selling the CSPI shares, private respondents added the proceeds of the sale to the assets of Philfinance.16 Under these circumstances, did the petitioner become a creditor of Philfinance? We rule in the affirmative.

The SEC, after holding that petitioner was the owner of the shares, stated:

Petitioner is seeking the return of his CSPI shares which, for the present, is no longer possible, considering that the same had already been sold by the respondents, the proceeds of which are ADMITTEDLY commingled with the assets of Philfinance.

This being the case, [petitioner] is now but a claimant for the value of those shares. As a claimant, he shall be treated as an ordinary creditor in so far as the value of those certificates is concerned.17

The CA agreed with this and elaborated:

Much as we find both detestable and reprehensible the grossly abusive and illicit contrivance employed by private respondents against petitioner, we, nevertheless, concur with public respondent that the return of petitioner’s CSPI shares is well-nigh impossible, if not already an utter impossibility, inasmuch as the certificates of stocks have already been alienated or transferred in favor of Northeast Corporation, as early as May 27, 1996, in consequence whereof the proceeds of the sale have been transmuted into corporate assets of Philfinance, undercustodia legis, ready for distribution to its creditors and/or investors. Case law holds that the assets of an institution under receivership or liquidation shall be deemed in custodia legis in the hands of the receiver or liquidator, and shall from the moment of such receivership or liquidation, be exempt from any order, garnishment, levy, attachment, or execution.

Concomitantly, petitioner’s filing of his claim over the subject CSPI shares before the SEC in the liquidation proceedings bound him to the terms and conditions thereof. He cannot demand any special treatment [from] the liquidator, for this flies in the face of, and will contravene, the Supreme Court dictum that when a corporation threatened by bankruptcy is taken over by a receiver, all the creditors shall stand on equal

footing. Not one of them should be given preference by paying one or some [of] them ahead of the others. This is precisely the philosophy underlying the suspension of all pending claims against the corporation under receivership. The rule of thumb is equality in equity.18

We agree with both the SEC and the CA that petitioner had become an ordinary creditor of Philfinance.

Certainly, petitioner had the right to demand the return of his CSPI shares.19 He in fact filed a complaint in the liquidation proceedings in the SEC to get them back but was confronted by an impossible situation as they had already been sold. Consequently, he sought instead to recover their monetary value.

Petitioner’s CSPI shares were specific or determinate movable properties.20 But after they were sold, the money raised from the sale became generic21 and were commingled with the cash and other assets of Philfinance. Unlike shares of stock, money is a generic thing. It is designated merely by its class or genus without any particular designation or physical segregation from all others of the same class.22 This means that once a certain amount is added to the cash balance, one can no longer pinpoint the specific amount included which then becomes part of a whole mass of money.

It thus became impossible to identify the exact proceeds of the sale of the CSPI shares since they could no longer be particularly designated nor distinctly segregated from the assets of Philfinance. Petitioner’s only remedy was to file a claim on the whole mass of these assets, to which unfortunately all of the other creditors and investors of Philfinance also had a claim.

Petitioner’s right of action against Philfinance was a "claim" properly to be litigated in the liquidation proceedings.23 In Finasia Investments and Finance Corporation v. CA,24 we discussed the definition of "claims" in the context of liquidation proceedings:

We agree with the public respondent that the word ‘claim’ as used in Sec. 6(c) of P.D. 902-A,25 as amended, refers to debts or demands of a pecuniary nature. It means "the assertion of a right to have money paid. It is used in special proceedings like those before [the administrative court] on insolvency."

The word "claim" is also defined as:

Right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent,













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matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, unsecured.26

Undoubtedly, petitioner had a right to the payment of the value of his shares. His demand was of a pecuniary nature since he was claiming the monetary value of his shares. It was in this sense (i.e. as a claimant) that he was a creditor of Philfinance.

The Civil Code provisions on concurrence and preference of credits are applicable to the liquidation proceedings.27 The next question is, was petitioner a preferred or ordinary creditor under these provisions?

Petitioner argues that he was a preferred creditor because private respondents illegally withdrew his CSPI shares from the custodian banks and sold them without his knowledge and consent and without authority from the SEC. He quotes Article 2241 (2) of the Civil Code:

With reference to specific movable property of the debtor, the following claims or liens shall be preferred:

x x x x x x x x x

(2) Claims arising from misappropriation, breach of trust, or malfeasance by public officials committed in the performance of their duties, on the movables, money or securities obtained by them;

x x x x x x x x x

(Emphasis supplied)

He asserts that, as a preferred creditor, he was entitled to the entire monetary value of his shares.

Petitioner’s argument is incorrect. Article 2241 refers only to specific movable property. His claim was for the payment of money, which, as already discussed, is generic property and not specific or determinate.

Considering that petitioner did not fall under any of the provisions applicable to preferred creditors, he was deemed an ordinary creditor under Article 2245:

Credits of any other kind or class, or by any other right or title not comprised in the four preceding articles, shall enjoy no preference.

This being so, Article 2251 (2) states that:

Common credits referred to in Article 2245 shall be paid pro rata regardless of dates.

Like all the other ordinary creditors or claimants against Philfinance, he was entitled to a rate of recovery of only 15% of his money claim.

One final issue: was petitioner entitled to interest?

The SEC argues that awarding interest to petitioner would have given petitioner an unfair advantage or preference over the other creditors.28 Petitioner counters that he was entitled to 12% legal interest per annumunder Article 2209 of the Civil Code from the time he was deprived of the shares until fully paid.

The guidelines for awarding interest were laid down in Eastern Shipping Lines, Inc. v. CA:29

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6%per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until






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the demand can be established with reasonable certainty.

Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date of the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount of finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.30 (Emphasis supplied)

Under this ruling, petitioner was not entitled to legal interest of 12% per annum (from demand) because the amount owing to him was not a loan31 or forbearance of money.32

Neither was he entitled to legal interest of 6% per annum under Article 2209 of the Civil Code33 since this provision applies only when there is a delay in the payment of a sum of money.34 This was not the case here. In fact, petitioner himself manifested before the CA that the SEC (as liquidator) had already paid him P5,062,500 representing 15% of P33,750,000.35

Accordingly, petitioner was not entitled to interest under the law and current jurisprudence.

Considering that petitioner had already received the amount of P5,062,500, the obligation of the SEC as liquidator of Philfinance was totally extinguished.36

We note that there is an undisputed finding by the SEC and CA that private respondents sold the subject shares without authority from the SEC. Petitioner evidently has a cause of action against private respondents for their bad faith and unauthorized acts, and the resulting damage caused to him.37

WHEREFORE, the petition is hereby DENIED.

SO ORDERED.

BARRETTO v. VILLANUEVA


Manila

EN BANC

G.R. No. L-14938 January 28, 1961

MAGDALENA C. DE BARRETO, ET AL., plaintiffs-appellants, vs.JOSE G. VILLANUEVA, ET AL., defendants-appellees.

Bausa, Ampil & Suarez for plaintiffs-appellants.Esteban Ocampo for defendants-appellees.

GUTIERREZ DAVID, J.:

On May 10, 1948, Rosario Cruzado, for herself and as administratix of the intestate estate of her deceased husband Pedro Cruzado in Special Proceedings No. 4959 of the Court of First Instance of Manila, obtained from the defunct Rehabilitation Finance Corporation (hereinafter referred to as the RFC a loan in the amount of P11,000.00. To secure payment thereof, she mortgaged the land then covered by Transfer Certificate of Title No. 61358 issued in her name and that of her deceased. husband. As she failed to pay certain installments on the loan, the mortgage was foreclosed and the RFC acquired the property for P11,000.00, subject to her rights as mortgagor to re-purchase the same. On July 26, 1951, upon her application, the land was sold back to her conditionally for the amount of P14,269.03, payable in seven years.

About two years thereafter, or on February 13, 1953 Rosario Cruzado, as guardian of her minor children in Special Proceedings No. 14198 of the Court of First Instance of Manila, was authorized by the court, to sell with the previous consent of the RFC the land in question together with the improvements thereon for a sum not less than P19,000. Pursuant to such authority and with the consent of the RFC, she sold to Pura L. Villanueva for P19,000.00 "all their rights, interest,' title and dominion and over the herein described parcel of land together with the existing improvements thereon, including one use and an annex thereon; free from all charges and encumbrances, , with the exception of the sum of P11,009.52, is stipulated interest thereon, which the vendor, is still presently obligated to the RFC and which the vendee herein now assumes to pay to










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the RFC under the same terms and conditions specified in that deed of sale dated July 26, 1951." Having paid in advance the sum of P500.00, Pura L. Villanueva, the vendee, in consideration of the aforesaid sale, executed in favor of the vendor Rosario Cruzado a promissory note dated March 9, 1953, undertaking to pay the balance of P17,500.00 in monthly installments. On April 22, 1953, she made an additional payment of P5,500.00 on the promissory note. She was, subsequently, able to secure in her name Transfer Certificate of Title No. 32526 covering the house and lot above referred to, and on July 10, 1953, she mortgaged the said property to Magdalena C. Barretto as security for a loan the amount of P30,000.00.

As said Pura L. Villanueva had failed to pay the remaining installments on the unpaid balance of P12,000.00 her promissory note for the sale of the property in question, a complaint for the recovery of the same from her and her husband was filed on September 21, 1963 by Rosario Cruzado in her own right and in her capacity as judicial guardian of her minor children. Pending trial of the case, a lien was constituted upon the property in the nature of a levy in attachment in favor of the Cruzados said lien being annotated at the back of Transfer Certificate of Title No. 32526. After trial, decision was rendered ordering Pura Villanueva and her husband, jointly and severally, to pay Rosario Cruzado the sum of P12,000.00, with legal interest thereon from the date of the filing of the complaint until fully paid plus the sum of P1,500.00 as attorney's fees.

Pura Villanueva having, likewise, failed to pay her indebtedness of P30,000.00 to Magdalena C. Barretto, the latter, jointly with her husband, instituted against the Villanueva spouses an action for foreclosure of mortgage, impleading Rosario Cruzado and her children as parties defendants. On November 11, 1956, decision was rendered in the case absolving the Cruzados from the complaint and sentencing the Villanuevas to pay the Barrettos, jointly and severally, the sum of P30,000.00, with interest thereon at the rate of 12% per annum from January 11, 1954 plus the sum of P4,000.00 as attorney's fees. Upon the finality of this decision, the Barrettos filed a motion for the issuance of a writ of execution which was granted by the lower court on July 31, 1958. On August 14, 1958, the Cruzados filed their "Vendor's Lien" in the amount of P12,000.00, plus legal interest, over the real property subject of the foreclosure suit, the said amount representing the unpaid balance of the purchase price of the said property. Giving due course to the line, the court on August 18, 1958 ordered the

same annotated in Transfer Certificate of Title No. 32526 of the Registry of Deeds of Manila, decreeing that should the realty in question be sold at public auction in the foreclosure proceedings, the Cruzados shall be credited with their pro-rata share in the proceeds thereof, "pursuant to the provision of articles 2248 and 2249 of the new Civil Code in relation to Article 2242, paragraph 2 of the same Code." The Barrettos filed a motion for reconsideration on September 12, 1958, but on that same date, the sheriff of Manila, acting in pursuance of the order of the court granting the writ of execution, sold at public auction the property in question. As highest bidder, the Barrettos themselves acquired the properties for the sum of P49,000.00.

On October 4, 1958, 'the Court of First Instance issued an order confirming the aforesaid sale and directing the Register of Deeds of the City of Manila to issue to the Barrettos the corresponding certificate of title, subject, however, to the order of August 18, 1958 concerning,. the vendor's lien. On the same date, the motion of the Barettos seeking reconsideration of the order of the court giving due course to the said vendor's lien was denied. From this last order, the Barretto spouses interposed the present appeal.

The appeal is devoid of merit.

In claiming that the decision of the Court, of First Instance of Manila in Civil Case No. 20075 . awarding the amount of P12,000.00 in favor of Rosario Cruzado and her minor children . cannot constitute a basis for the vendor's lien filed by the appellee Rosario Cruzado, appellants allege that the action in said civil case was merely to recover the balance of a promissory note. But while, apparently, the action was to recover the remaining obligation of promissor Pura Villanueva on the note, the fact remains that Rosario P. Cruzado as guardian of her minor children, was an unpaid vendor., of the realty in question, and the promissory note, was, precisely, for the unpaid balance of the price of the property bought by, said Pura Villanueva.

Article 2242 of the new Civil, Code enumerates the claims, mortgage and liens that constitute an encumbrance on specific immovable property, and among them are: .

(2) For the unpaid price of real property sold, upon the immovable sold; and

(5) Mortgage credits recorded in the Registry of Property."


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Article 2249 of the same Code provides that "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 assessment upon the immovable property or real rights.

Application of the above-quoted provisions to the case at bar would mean that the herein appellee Rosario Cruzado as an unpaid vendor of the property in question has the right to share pro-rata with the appellants the proceeds of the foreclosure sale.

The appellants, however, argue that inasmuch as the unpaid vendor's lien in this case was not registered, it should not prejudice the said appellants' registered rights over the property. There is nothing to this argument. Note must be taken of the fact that article 2242 of the new Civil Code enumerating the preferred claims, mortgages and liens on immovables, specifically requires that . unlike the unpaid price of real property sold . mortgage credits, in order to be given preference, should be recorded in the Registry of Property. If the legislative intent was to impose the same requirement in the case of the vendor's lien, or the unpaid price of real property sold, the lawmakers could have easily inserted the same qualification which now modifies the mortgage credits. The law, however, does not make any distinction between registered and unregistered vendor's lien, which only goes to show that any lien of that kind enjoys the preferred credit status.

Appellants also argue that to give the unrecorded vendor's lien the same standing as the registered mortgage credit would be to nullify the principle in land registration system that prior unrecorded interests cannot prejudice persons who subsequently acquire interests over the same property. The Land Registration Act itself, however, respects without reserve or qualification the paramount rights of lien holders on real property. Thus, section 70 of that Act provides that .

Registered land, and ownership therein shall in all respects be subject to the same burdens and incidents attached by law to unregistered land. Nothing contained in this Act shall in any way be construed to relieve registered land or the owners thereof from any rights incident to the relation of husband and wife, or from liability to attachment on mesne process or levy, on execution, or from liability to any lien of any description established by law on land and the buildings thereon, or the interest of the owners of such land or buildings, or to change the laws of descent, or

the rights of partition between co-owners, joint tenants and other co-tenants or the right to take the same by eminent domain, or to relieve such land from liability to be appropriated in any lawful manner for the payment of debts, or to change or affect in any other way any other rights or liabilities created by law and applicable to unregistered land, except as otherwise expressly provided in this Act or in the amendments thereof, (Emphasis supplied)

As to the point made that the articles of the Civil Code on concurrence and preference of credits are applicable only to the insolvent debtor, suffice it to say that nothing in the law shows any such limitation. If we are to interpret this portion of the Code as intended only for insolvency cases, then other creditor-debtor relationships where there are concurrence of credits would be left without any rules to govern them, and it would render purposeless the special laws an insolvency.

Premises considered, the order appealed from is hereby affirmed. Costs against the appellants.

Bengzon, Padilla, Bautista Angelo, Labrador, Paredes and Dizon, JJ., concur.Concepcion, Reyes, J.B.L. and Barrera, JJ., concur in the result.

RESOLUTION ON MOTION TO RECONSIDER

December 29, 1962

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

Appellants, spouses Barretto, have filed a motion vigorously urging, for reason to be discussed in the course of this 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 interests 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 I. Villanueva for P19,000.00. The purchaser paid Pl,500 in advance, and executed a promissory note for the balance of P17,506.00. 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


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able to secure a clean certificate of title (No. 32626), and mortgaged the property to appellant Magdalena C. Barretto, married to Jose C. 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 Pl2,000.00, 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 of 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 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 proceeds if necessary.

Under the system of the Civil Code of the Philippines 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 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 rights."

But in order to make this prorating fully effective, the preferred creditors enumerated in Nos. 2 to 14 of Article 2242 (or such of their, 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 be first some proceedings where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency, the settlement of decedents 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 articles" shall be considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency . . . (Emphasis supplied),

And the rule is further clarified in he 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 Insolvency 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 will not enable the Court to ascertain the pro-rata dividend corresponding to each, because the rights of the other creditors likewise"


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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 registered 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 require 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 loathed (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 a contraction of credit unforeseeable proportions that could lead to economic disaster.

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 lasts strong doubt on the proposition that appellees 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 Cruzado, for herself and as administratrix of her husband's state, mortgaged the property to the Rehabilitation Finance Corporation (RFC) to secure payment of a loan of P11,000, installments, but that the debtor failed to pay some of the installments; wherefore the RFC, on 24 August 1949, foreclosed the mortgage, and acquired the property, subject to the debtor's 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 Corporation (RFC) until after said purchase price, advances and interests 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 interest 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


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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 appellants Cruzados sold to Villanueva "their rights, title, interest and dominion" to the property, they merely assigned whatever rights or claims they might still have thereto; the ownership of the property rested with the RFC. The sale from Cruzado to Villanueva, therefore, was not so much a sale of the land and its improvements as it was a quit-claim deed in favor of Villanueva. In law, the 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 that property that should stand on an equal footing with the mortgaged credit held by appellant 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 reversing the judgment appealed from and declaring the appellants Barretto entitled to full satisfaction of their mortgaged credit out of the proceeds of the foreclosure sale in the hands of the Sheriff of the City of Manila. No costs.

PHILIPPINE SAVINGS v. LANTIN

FIRST DIVISION

[G.R. No. L-33929. September 2, 1983.]

PHILIPPINE SAVINGS BANK, Petitioner, v. HON. GREGORIO T. LANTIN, Presiding Judge, Court of First Instance of Manila, Branch VII, and CANDIDO RAMOS, Respondents.

Jose Diokno for Petitioner.

Romeo C . Carlos for Private Respondent.

SYLLABUS

1. CIVIL LAW; CREDIT TRANSACTION; CONCURRENCE AND PREFERENCE OF CREDITS; INSUFFICIENT ASSETS OF DEBTOR RAISES QUESTION OF PREFERENCE AS WELL AS QUESTION OF CONSEQUENCE IN CONCURRENCE OF CREDITS. — Concurrence of credits occurs when the same specific property of the debtor or all of his property is subjected to the claims of several creditors. The concurrence of credits raises no questions of consequence were the value of the property or the value of all assets of the debtor is sufficient to pay in fall all the creditors. However, it becomes material when said assets are insufficient for then some creditors of necessity will not be paid or some creditors will not obtain the full satisfaction of their claims. In this situation, the question of preference will then arise, that is to say who of the creditors will be paid the all of the others (Caguioa, Comments and Cases on Civil Law, 1970 ed., Vol. VI, p. 472).

2. ID.; ID.; PREFERENCE OF CREDITS; ARTICLES 2249 AND 2242 OF THE NEW CIVIL CODE OF THE PHILIPPINES; CONSTRUED. — Under the system established by Article 2249 of the civil Code of the Philippines, only taxes and assessments upon immovable property enjoy absolute preference. All the remaining specified classes of preferred creditors under Article 2242 enjoy no priority among themselves. Their credits shall be satisfied pro-rata, i.e., in proportion to the amount of the respective credits.

3. ID.; ID.; ARTICLE 2249 AND 2242 OF THE NEW CIVIL CODE; PAIL REQUISITE TO THEIR FULL APPLICATION UNDER THE DE BARRETO CASE. — Under the De Barreto decision, the full application of Articles 2242 and 2249 demands that there must first be some proceeding where the class 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.

4. REMEDIAL LAW; INSOLVENCY PROCEEDINGS AND SETTLEMENT OF A DECEDENT’S ESTATE; BOTH PROCEEDINGS IN REM, OTHER EQUIVALENT GENERAL LIQUIDATION OF SIMILAR


10

NATURE. — Insolvency proceedings end settlement of a decedent’s estate are both proceedings in rem which are binding the whole world. All persons having interest in the subject matter involved, whether they were notified or not, are equally bound. Consequently, a liquidation of similar import or other equivalent general liquidation must also necessarily be a proceeding in rem so that all interested persons whether known to the parties or not may be bound by such proceeding.

3. ID.; ACTION FOR COLLECTION OF UNPAID CONTRACTOR’S FEE; NOT AN ACTION IN REM. — The proceedings in the court below do not partake of the insure of insolvency proceedings or settlement of a decedent’s estate. The action filed by Ramos was only to collect the unpaid cost of the construction of the duplex apartment. It is far from being a general liquidation of the estate of the Tabligan spouses.

6. CIVIL LAW; CREDIT TRANSACTION; ANNOTATION OF CLAIMS AND CREDITS AS STATUTORY LIENS; RELEVANCE TO THE STABILITY OF THE TORRENS SYSTEM. — In the case at bar, although the lower court found that "there were no known creditors other than the plaintiff and the defendant herein," this cannot be conclusive. It will not bar other creditors in the event they show up and present their claims State petitioner bank, claiming that they also have preferred liens against the property involved. Consequently, Transfer Certificate of Title No. 101864 issued in favor of the bank which is supposed to be indefeasible would remain constantly unstable and questionable. Such could not have been the intention of Article 2243 of the Civil Code although it considers claims and credits under Article 2242 as statutory liens. Neither does the De Barreto case sanction such instability. In fact, an annotation, as suggested above, would insure to the benefit of the public, particularly those who may subsequently wish to buy the property in question or who have a business transaction in connection therewith. It would facilitate the enforcement of a legal statutory right which cannot be barred by laches (See Manila Railroad Co. v. Luzon Stevedoring Co., 100 Phil. 135).

7. ID.; SALE; BUYER IN GOOD FAITH OF REALTY; TAKES IT FEE FROM LIENS AND ENCUMBRANCES OTHER THAN STATUTORY LIENS AND THOSE ANNOTATED IN THE TITLE; CASE AT BAR. — Since the action filed by the private respondent is not one which can be considered as "equivalent general liquidation" having the same import as an insolvency or settlement of the decedent’s estate proceeding, the well established principle must be applied that a

purchaser in good faith and for value takes register land free from liens and encumbrances other than statutory liens and those recorded in the Certificate of Title. It Is an limited fact that at the time the deeds of real estate mortgage in favor of the petitioner bank were constituted, the transfer certificate of title of the spouses Tabligan was free from any recorded lien and encumbrances, so that the only registered liens in the title were deeds in favor of the petitioner.

D E C I S I O N

GUTIERREZ, JR., J.:

This is a petition for review of the decision of the Court of First Instance of Manila, Branch VII, presided over by respondent Judge Gregorio T. Lantin, in Civil Case No. 79914 entitled Candido Ramos v. Philippine Savings Bank and of the order denying a motion for its reconsideration. The dispositive portion of the decision reads:jgc:chanrobles.com.ph

"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant ordering the defendant to pay the plaintiff the sum of P15,000.00 as his pro-rata share in the value of the duplex-apartment house which was built by the plaintiff for the spouses likewise Filomeno Tabligan and Socorro Espiritu, which is now registered in the name of the defendant under Transfer Certificate of Title No. 101864 issued by the Register of Deeds of the City of Manila, on August 6, 1970, with legal interest from the date of the filing of the complaint until fully paid; to pay the sum of P500.00 as attorney’s fees; and to pay the costs.

"The counterclaim interposed by the defendant is hereby dismissed."cralaw virtua1aw library

Involved in this case is a duplex-apartment house on a lot covered by TCT No. 86195 situated at San Diego Street, Sampaloc, Manila, and owned by the spouses Filomeno and Socorro Tabligan.

The duplex-apartment house was built for the spouses by private respondent Candido Ramos, a duly licensed architect and building contractor, at a total cost of P32,927.00. The spouses paid private respondent the sum of P7,139.00 only. Hence, the latter used his own money, P25,788.50 in all, to finish the construction of the duplex-apartment.chanrobles.com:cralaw:red


11

Meanwhile, on December 16, 1966, February 1, 1967, and February 28, 1967, the spouses Tabligan obtained from petitioner Philippine Savings Bank three (3) loans in the total amount of P35,000.00, the purpose of which was to complete the construction of the duplex-apartment. To secure payment of the l2oans, the spouses executed in favor of the petitioner three (3) promissory notes and three (3) deeds of real estate mortgages over the property subject matter of this litigation.

On December 19, 1966, the petitioner registered the December 16, 1966 deed of real estate mortgage with the Register of Deeds of Manila. The subsequent mortgages of February 1, 1967, and February 28, 1967, were registered with the Register of Deeds of Manila on February 2, 1967 and March 1, 1967, respectively. At the time of the registration of these mortgages, Transfer Certificate of Title No. 86195 was free from all liens and encumbrances.

The spouses failed to pay their monthly amortizations. As a result thereof, the petitioner bank foreclosed the mortgages, and at the public auction held on July 23, 1969, was the highest bidder.

On August 5, 1969, the petitioner bank registered the certificate of sale issued in its favor. On August 9, 1970, the bank consolidated its ownership over the property in question, and Transfer Certificate of Title No. 101864 was issued by the Register of Deeds of Manila in the name of the petitioner bank.

Upon the other hand, the private respondent filed an action against the spouses to collect the unpaid cost of the construction of the duplex-apartment before the Court of First Instance of Manila, Branch I, which case was docketed therein as Civil Case No. 69228. During its pendency, the private respondent succeeded in obtaining the issuance of a writ of preliminary attachment, and pursuant thereto, had the property in question attached. Consequently, a notice of adverse claim was annotated at the back of Transfer Certificate of Title No. 86195.

On August 26, 1968, a decision was rendered in Civil Case No. 69228 in favor of the private respondent and against the spouses. A writ of execution was accordingly issued but was returned unsatisfied.

As the spouses did not have any properties to satisfy the judgment in Civil Case No. 69228, the private respondent addressed a letter to the petitioner for the delivery to him (private respondent) of his pro-rata share in the value of the duplex-apartment in

accordance with Article 2242 of the Civil Code. The petitioner refused to pay the pro-rata value prompting the private respondent to file the instant action. As earlier stated, a decision was rendered in favor of the private Respondent.chanrobles virtual lawlibrary

The parties are agreed that the only issue is whether or not the private respondent is entitled to claim a pro-rata share in the value of the property in question. The applicable provision, Article 2242 of the Civil Code, reads as follows:jgc:chanrobles.com.ph

"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:jgc:chanrobles.com.ph

"(1) Taxes due upon the land or building;

"(2) For the unpaid price of real property sold, upon the immovable sold;

"(3) Claims of laborers, masons, mechanics and other workmen, as well as of architects, engineers and contractors, engaged in the construction, reconstruction or repair of buildings, canals or other works, upon said buildings, canals or other works;

"(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;

"(6) Expenses for the preservation or improvement of real property when the law authorizes reimbursement, upon the immovable preserved or improved;

"(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;

"(8) Claims of co-heirs for warranty in the partition of an immovable among them, upon the real property thus divided;

"(9) Claims of donors of real property for pecuniary charges or other conditions imposed upon the donee, upon the immovable donated;

"(10) Credits of insurers upon the property insured, for the insurance premium for two years."cralaw virtua1aw


12

library

Both the petitioner bank and private respondent Ramos rely on the case of De Barreto v. Villanueva (6 SCRA 928).

The petitioner bank would impress upon this Court that the proceedings had before the court below is not one of the proceedings contemplated in the De Barreto case that will sustain the authority of the respondent court to adjudicate the claims of all preferred creditors under Article 2242 of the Civil Code. Petitioner argues that for Article 2242 of the Civil Code to apply, there must have been an insolvency proceeding or other liquidation proceedings of similar import. And under the facts then obtaining, there could have been no insolvency proceeding as there were only two known creditors. ** Consequently, it is argued that private respondent’s unpaid contractor’s claim did not acquire the character of a statutory lien equal to the petitioner’s registered mortgage.

Upon the other hand, private respondent Ramos maintains that the proceedings had before the court below can qualify as a general liquidation of the estate of the spouses Tabligan because the only existing property of said spouses is the property subject matter of this litigation.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph

Concurrence of credits occurs when the same specific property of the debtor or all of his property is subjected to the claims of several creditors. The concurrence of credits raises no questions of consequence where the value of the property or the value of all assets of the debtor is sufficient to pay in full all the creditors. However, it becomes material when said assets are insufficient for then some creditors of necessity will not be paid or some creditors will not obtain the full satisfaction of their claims. In this situation, the question of preference will then arise, that is to say who of the creditors will be paid ahead of the others. (Caguioa, Comments and Cases on Civil Law, 1970 ed., Vol. VI, p. 472.)

Under the system established by Article 2249 of the Civil Code of the Philippines, only taxes and assessments upon immovable property enjoy absolute preference. All the remaining specified classes of preferred creditors under Article 2242 enjoy no priority among themselves. Their credits shall be satisfied pro-rata, i.e., in proportion to the amount of the respective credits.

Under the De Barreto decision, the full application of

Articles 2242 and 2249 demands that there must first be 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.

The pertinent ruling reads:jgc:chanrobles.com.ph

"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 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 registered lands; that a purchaser in good faith and for value (as the appellant concededly is) takes registered property free from liens and encumbrances other then 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."cralaw virtua1aw library

The resolution of this petition, therefore, hinges on the determination of whether an insolvency proceeding or other liquidation proceeding of similar import may be considered to have been conducted in the court below.

The respondent court ruled in the affirmative holding that:jgc:chanrobles.com.ph

"There were no known creditors, other than the plaintiff and defendant herein, and the proceedings in the present case may ascertain and bindingly adjudicate the respective claims of the plaintiff and the defendant, serving as a substantial compliance with what the Supreme Court stated:jgc:chanrobles.com.ph


13

"‘. . . it is thus apparent that the full application of Articles 2242 and 2249 demands that 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 of the Rules of Court, or other liquidation proceedings of similar import. (de Barretto v. Villanueva, Et Al., G.R. No. L-14938, December 29, 1962).’"

A careful considering of this petition leads us to agree with the petitioner. The conclusions of the lower court are not supported by the law and the facts.

The proceedings in the court below do not partake of the nature of the insolvency proceedings or settlement of a decedent’s estate. The action filed by Ramos was only to collect the unpaid cost of the construction of the duplex apartment. It is far from being a general liquidation of the estate of the Tabligan spouses.

Insolvency proceedings and settlement of a decedent’s estate are both proceedings in rem which are binding against the whole world. All persons having interest in the subject matter involved, whether they were notified or not, are equally bound. Consequently, a liquidation of similar import or "other equivalent general liquidation’ must also necessarily be a proceeding in rem so that all interested persons whether known to the parties or not may be bound by such proceeding.

In the case at bar, although the lower court found that "there were no known creditors other than the plaintiff and the defendant herein", this can not be conclusive. It will not bar other creditors in the event they show up and present their claims against the petitioner bank, claiming that they also have preferred liens against the property involved. Consequently, Transfer Certificate of Title No. 101864 issued in favor of the bank which is supposed to be indefeasible would remain constantly unstable and questionable. Such could not have been the intention of Article 2243 of the Civil Code although it considers claims and credits under Article 2242 as statutory liens. Neither does the De Barretto case sanction such instability. It emphasized the following:jgc:chanrobles.com.ph

"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 enumerated 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 a contraction of credit to unforeseable proportions that could lead to economic disaster.

"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.

In fact, an annotation, as suggested above, would inure to the benefit of the public, particularly those who may subsequently wish to buy the property in question or who have a business transaction in connection therewith. It would facilitate the enforcement of a legal statutory right which cannot be barred by laches. (See Manila Railroad Co. v. Luzon Stevedoring Co., 100 Phil. 135).chanrobles law library

Respondent Ramos admitted in the partial stipulation of facts submitted by both parties that at the time of the loans to the spouses, the petitioner’s bank had no actual or constructive knowledge of any lien against the property in question. The duplex apartment house was built for P32,927.00. The spouses Tabligan borrowed P35,000.00 for the construction of the apartment house. The bank could not have known of any contractor’s lien because, as far as it was concerned, it financed the entire construction even if the stated purpose of the loans was only to "complete" the construction.

Since the action filed by the private respondent is not one which can be considered as "equivalent general liquidation" having the same import as an insolvency or settlement of the decedent’s estate proceeding, the well established principle must be applied that a purchaser in good faith and for value takes registered land free from liens and encumbrances other than statutory liens and those recorded in the Certificate of Title. It is an admitted fact that at the time the deeds of real estate mortgage in favor of the petitioner bank were constituted, the transfer certificate of title of the


14

spouses Tabligan was free from any recorded lien and encumbrances, so that the only registered liens in the title were deeds in favor of the petitioner.

Prescinding from the foregoing, the private respondent’s claim must remain subordinate to the petitioner bank’s title over the property evidenced by TCT No. 101864.

WHEREFORE, the petition is granted. The decision of the Court of First Instance of Manila, Branch VII is, hereby, reversed and set aside. The complaint and the counterclaim are dismissed.

SO ORDERED.

J.L. BERNARDO v. CA

THIRD DIVISION

[G.R. No. 105827. January 31, 2000]

J.L. BERNARDO CONSTRUCTION, represented by attorneys-in-fact Santiago R. Sugay, Edwin A. Sugay and Fernando S.A. Erana, SANTIAGO R. SUGAY, EDWIN A. SUGAY and FERNANDO S. A. ERANA, petitioners, vs. COURT OF APPEALS and MAYOR JOSE L. SALONGA, respondents.

D E C I S I O N

GONZAGA-REYES, J.:

This petition for certiorari under Rule 65 seeks to annul and set aside the following:

1. Decision dated February 6, 1992 issued by the Eleventh Division of the Court of Appeals in CA-G.R. No. 26336 which nullified the order of the Regional Trial Court of Cabanatuan City in Civil Case No. 1016-AF granting plaintiffs (petitioners herein) a writ of attachment and a contractor’s lien upon the San Antonio Public Market; and

2. Resolution dated June 10, 1992 issued by the former Eleventh Division of the Court of Appeals in CA-G.R. No. 26336 denying the motions for reconsideration filed by both parties.

The factual antecedents of this case, as culled from the pleadings, are as follows:

Sometime in 1990, the municipal government of San Antonio, Nueva Ecija approved the construction of the San Antonio Public Market. The construction of the market was to be funded by the Economic Support Fund Secretariat (ESFS), a government agency working with the USAID. Under ESFS’ "grant-loan-equity" financing program, the funding for the market would be composed of a (a) grant from ESFS, (b) loan extended by ESFS to the Municipality of San Antonio, and (c) equity or counterpart funds from the Municipality.

It is claimed by petitioners Santiago R. Sugay, Edwin A. Sugay, Fernando S.A. Erana and J.L. Bernardo Construction, a single proprietorship owned by Juanito L. Bernardo, that they entered into a business venture for the purpose of participating in the bidding for the public market. It was agreed by petitioners that Santiago Sugay would take the lead role and be responsible for the preparation and submission of the bid documents, financing the entire project, providing and utilizing his own equipment, providing the necessary labor, supplies and materials and making the necessary representations and doing the liaison work with the concerned government agencies.

On April 20, 1990, J.L. Bernardo Construction, thru petitioner Santiago Sugay, submitted its bid together with other qualified bidders. After evaluating the bids, the municipal pre-qualification bids and awards committee, headed by respondent Jose L. Salonga (then incumbent municipal mayor of San Antonio) as Chairman, awarded the contract to petitioners. On June 8, 1990, a Construction Agreement was entered into by the Municipality of San Antonio thru respondent Salonga and petitioner J.L. Bernardo Construction.

It is claimed by petitioners that under this Construction Agreement, the Municipality agreed to assume the expenses for the demolition, clearing and site filling of the construction site in the amount of P1,150,000 and, in addition, to provide cash equity of P767,305.99 to be remitted directly to petitioners.

Petitioners allege that, although the whole amount of the cash equity became due, the Municipality refused to pay the same, despite repeated demands and notwithstanding that the public market was more than ninety-eight percent (98%) complete as of July 20, 1991. Furthermore, petitioners maintain that Salonga induced them to advance the expenses for the demolition, clearing and site filling work by making representations that the Municipality had the financial capability to reimburse them later on. However,


15

petitioners claim that they have not been reimbursed for their expenses.[1]

On July 31, 1991, J.L. Bernardo Construction, Santiago Sugay, Edwin Sugay and Fernando Erana, with the latter three bringing the case in their own personal capacities and also in representation of J.L. Bernardo Construction, filed a complaint for breach of contract, specific performance, and collection of a sum of money, with prayer for preliminary attachment and enforcement of contractor’s lien against the Municipality of San Antonio, Nueva Ecija and Salonga, in his personal and official capacity as municipal mayor. After defendants filed their answer, the Regional Trial Court held hearings on the ancillary remedies prayed for by plaintiffs.[2]

On September 5, 1991, the Regional Trial Court issued the writ of preliminary attachment prayed for by plaintiffs. It also granted J.L. Bernardo Construction the right to maintain possession of the public market and to operate the same. The dispositive portion of the decision provides:

IN VIEW OF THE FOREGOING DISQUISITION, the Court finds the auxiliary reliefs of attachment prayed for by the plaintiffs to be well-taken and the same is hereby GRANTED. Conformably thereto, let a writ of preliminary attachment be issued upon the filing by the plaintiffs of a bond in the amount of P2,653,576.84 to answer for costs and damages which the defendants may suffer should the Court finally adjudged (sic) that the plaintiffs are not entitled to the said attachment, and thereafter, the Deputy Sheriff of this court is hereby ordered to attach the properties of the defendants JOSE LAPUZ SALONGA and the MUNICIPALITY OF SAN ANTONIO, NUEVA ECIJA which are not exempt from execution.

CORROLARILY, the Court grants the plaintiffs J.L. BERNARDO CONSTRUCTION, represented by SANTIAGO R. SUGAY, EDWIN A. SUGAY and FERNANDO S.A. ERANA, the authority to hold on to the possession of the public market in question and to open and operate the same based on fair and reasonable guidelines and other mechanics of operation to be submitted by plaintiffs within fifteen (15) days from their receipt of this Order which shall be subject to Court’s approval and to deposit the income they may derive therefrom to the Provincial Treasurer of Nueva Ecija after deducting the necessary expenses for the operation and management of said market, subject to further orders from this Court.

SO ORDERED.

The trial court gave credence to plaintiffs’ claims that defendants were guilty of fraud in incurring their contractual obligations as evidenced by the complaint and the affidavits of plaintiffs Santiago Sugay and Erana. The court ruled that defendants’ acts of "…obtaining property, credit or services by false representations as to material facts made by the defendant to the plaintiff with intent to deceive constitutes fraud warranting attachment" and that "… a debt is considered fradulently contracted if at the time of contracting it, the debtor entertained an intention not to pay."

With regards to the contractor’s lien, the trial court held that since plaintiffs have not been reimbursed for the cash equity and for the demolition, clearing and site filling expenses, they stand in the position of an unpaid contractor and as such are entitled, pursuant to articles 2242 and 2243 of the Civil Code, to a lien in the amount of P2,653,576.84 (as of August 1, 1991), excluding the other claimed damages, attorney’s fees and litigation expenses, upon the public market which they constructed. It was explained that, although the usual way of enforcing a lien is by a decree for the sale of the property and the application of the proceeds to the payment of the debt secured by it, it is more practical and reasonable to permit plaintiffs to operate the public market and to apply to their claims the income derived therefrom, in the form of rentals and goodwill from the prospective stallholders of the market, as prayed for by plaintiffs.

The trial court made short shrift of defendants’ argument that the case was not instituted in the name of the real parties-in-interest. It explained that the plaintiff in the cause of action for money claims for unpaid cash equity and demolition and site filling expenses is J.L. Bernardo Construction, while the plaintiffs in the claim for damages for violation of their rights under the Civil Code provisions on human relations are plaintiffs Santiago Sugay, Edwin Sugay and Erana.[3]

The defendants moved for reconsideration of the trial court’s order, to which the plaintiffs filed an opposition. On October 10, 1991 the motion was denied. The following day, the trial court approved the guidelines for the operation of the San Antonio Public Market filed by plaintiffs.

Respondent Salonga filed a motion for the approval of his counterbond which was treated by the trial court in its October 29, 1991 order as a motion to fix counterbond and for which it scheduled a hearing on November 19, 1991.

http://sc.judiciary.gov.ph/jurisprudence/2000/jan2000/105827.html#_ftn3




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On October 21, 1991, during the pendency of his motion, respondent Salonga filed with the Court of Appeals a petition for certiorari under Rule 65 with prayer for a writ of preliminary injunction and temporary restraining order which case was docketed as CA-G.R. SP No. 26336.[4] Petitioners opposed the petition, claming that respondent had in fact a plain, speedy and adequate remedy as evidenced by the filing of a motion to approve counter-bond with the trial court.[5]

On February 6, 1992, the Court of Appeals reversed the trial court’s decision and ruled in favor of Salonga. The dispositive portion of its decision states –

FOR ALL THE FOREGOING, the petition is hereby granted as follows:

1. The respondent judge’s ORDER dated September 5, 1991 for the issuance of a writ of attachment and for the enforcement of a contractor’s lien, is hereby NULLIFIED and SET ASIDE; the writ of attachment issued pursuant thereto and the proceedings conducted by the Sheriffs assigned to implement the same are, as a consequence, also hereby NULLIFIED and SET ASIDE;

2. The respondent judge’s ORDER dated October 11, 1991 further enforcing the contractor’s lien and approving the guidelines for the operation of the San Antonio Public Market is also NULLIFIED and SET ASIDE.

Petitioner’s prayers for the dismissal of Civil Case No. 1016 (now pending before respondent judge) and for his deletion from said case as defendant in his private capacity are, however, DENIED.

The respondent judge may now proceed to hearing of Civil Case No. 1016 on the merits.

SO ORDERED.

The appellate court reasoned that since the Construction Agreement was only between Juanito Bernardo and the Municipality of San Antonio, and since there is no sworn statement by Juanito Bernardo alleging that he had been deceived or misled by Mayor Salonga or the Municipality of San Antonio, it is apparent that the applicant has not proven that the defendants are guilty of inceptive fraud in contracting the debt or incurring the obligation, pursuant to Rule 57 of the Rules of Court, and therefore, the writ of

attachment should be struck down for having been improvidently and irregularly issued.

The filing of a motion for the approval of counter-bond by defendants did not, according to the Court of Appeals, render the petition for certiorari premature. The appellate court held that such motion could not cure the defect in the issuance of the writ of attachment and that, moreover, the defendants’ motion was filed by them "without prejudice to the petition for certiorari."

As to the contractor’s lien, the appellate court ruled that Articles 2242 of the Civil Code finds application only in the context of insolvency proceedings, as expressly stated in Article 2243. Even if it is conceded that plaintiffs are entitled to retain possession of the market under its contractor’s lien, the appellate court held that the same right cannot be expanded to include the right to use the building. Therefore, the trial court’s grant of authority to plaintiffs to operate the San Antonio Public Market amounts to a grave abuse of discretion.

With regard to the allegations of defendants that plaintiffs are not the proper parties, the Court of Appeals ruled that such issue should be assigned as an error by defendants later on should the outcome of the case be adverse to the latter.[6]

Petitioners are now before this Court assailing the appellate court’s decision. In their petition, they make the following assignment of errors:

1. THE DECISION IS CONTRARY TO LAW IN THAT THE COURT OF APPEALS OVERLOOKED AND/OR DISREGARDED THE FUNDAMENTAL REQUIREMENT AND ESTABLISHED SUPREME COURT DECISIONS IN ACTIONS FOR CERTIORARI CONSIDERING THAT THE FILING OF THE PETITION BY RESPONDENT SALONGA WITH THE COURT OF APPEALS IS OBVIOUSLY PREMATURE AND IMPROPER SINCE THERE ADMITTEDLY EXISTS A PLAIN, SPEEDY AND ADEQUATE REMEDY AVAILABLE TO RESPONDENT SALONGA WHICH IS HIS UNRESOLVED "MOTION TO APPROVE COUNTERBOND" PENDING WITH THE TRIAL COURT.

2. IN COMPLETE DISREGARD OF ESTABLISHED JURISPRUDENCE, THE COURT OF APPEALS HAS SKIRTED AND/OR FAILED TO CONSIDER/DISREGARDED THE EQUALLY CRUCIAL ISSUE THAT THE QUESTIONED ORDERS ARE CLEARLY AND ADMITTEDLY





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INTERLOCUTORY IN NATURE AND THEREFORE THEY CANNOT BE THE PROPER SUBJECT OF AN ACTION FOR CERTIORARI; PROOF THAT THE ORDERS ASSAILED BY RESPONDENT SALONGA ARE INTERLOCUTORY IN CHARACTER IS THE DISPOSITIVE PORTION OF THE DECISION WHEN THE COURT OF APPEALS SAID "THE RESPONDENT JUDGE MAY NOW PROCEED TO HEARING OF SAID CIVIL CASE NO. 1016 ON THE MERITS"; PETITION FILED BY RESPONDENT SALONGA WITH THE COURT OF APPEALS SHOULD HAVE BEEN DISMISSED OUTRIGHTLY AS SOUGHT BY HEREIN PETITIONERS IN THEIR VARIOUS UNACTED PLEADINGS.

3. THE DECISION IS BASED ON FINDINGS OF FACTS AND CONCLUSIONS WHICH ARE NOT ONLY GROSSLY ERRONEOUS BUT ARE SQUARELY CONTRADICTED BY THE EVIDENCE ON RECORD.

4. THE COURT OF APPEALS HAS CLEARLY MISAPPRECIATED, MISREAD AND DISREGARDED HEREIN PETITIONERS’ CAUSES OF ACTION AGAINST RESPONDENT SALONGA AND HIS CO-RESPONDENT MUNICIPALITY OF SAN ANTONIO, NUEVA ECIJA.

5. THE COURT OF APPEALS HAS MADE ERRONEOUS AND CONTRADICTORY CONCLUSIONS AND FINDINGS ON THE ISSUE OF "REAL PARTY IN INTEREST" IN COMPLETE DISREGARD OF THE POWERS AND AUTHORITY GRANTED BY JUANITO L. BERNARDO CONSTRUCTION TO HEREIN PETITIONERS.

6. THE COURT OF APPEALS HAS SKIRTED THE IMPORTANT ISSUE OF "AGENCY COUPLED WITH AN INTEREST."

7. THE COURT OF APPEALS WENT BEYOND THE ISSUES OF THE CERTIORARI CASE AND ITS FINDINGS AND CONCLUSIONS ON ISSUES NOT RELATED TO THE CASE FOR CERTIORARI ARE CONTRARY TO THE PLEADINGS AND DO NOT CONFORM TO THE EVIDENCE ON RECORD.

8. THE COURT OF APPEALS HAS LIKEWISE DISREGARDED THE PRECEPT THAT CONCLUSIONS AND FINDINGS OF FACT OF THE TRIAL COURT ARE ENTITLED TO GREAT WEIGHT ON APPEAL AND SHOULD NOT BE DISTURBED SINCE THERE IS NO STRONG AND COGENT REASON WHATSOVER TO OVERCOME THE WELL-

WRITTEN AND DETAILED AND ESTABLISHED FACTUAL FINDINGS OF THE TRIAL COURT.

9. PETITIONERS HAVE STRONG REASONS TO BELIEVE THAT THE DECISION OF THE COURT OF APPEALS WAS ISSUED WITH SERIOUS INJUSTICE AND AGAINST THE TENETS OF FAIR PLAY SINCE THE DECISION HAD BEEN KNOWN TO AS IT WAS OPENLY AND PUBLICLY ANNOUNCED BY RESPONDENT SALONGA LONG BEFORE IT WAS "PROMULGATED" BY THE COURT OF APPEALS.

The various issues raised by petitioners may be restated in a more summary manner as -

1. Whether or not the Court of Appeals correctly assumed jurisdiction over the petition for certiorari filed by respondents herein assailing the trial court’s interlocutory orders granting the writ of attachment and the contractor’s lien?

2. Whether or not the Court of Appeals committed reversible errors of law in its decision?

A petition for certiorari may be filed in case a tribunal, board or officer exercising judicial or quasi-judicial functions has acted without or in excess of jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal, or any plain, speedy, and adequate remedy in the ordinary course of law.[7]

The office of a writ of certiorari is restricted to truly extraordinary cases wherein the act of the lower court or quasi-judicial body is wholly void.[8] We held in a recent case that certiorari may be issued "only where it is clearly shown that there is a patent and gross abuse of discretion as to amount to an evasion of positive duty or to virtual refusal to perform a duty enjoined by law, or to act at all in contemplation of law, as where the power is exercised in an arbitrary and despotic manner by reason of passion or personal hostility."[9]

As a general rule, an interlocutory order is not appealable until after the rendition of the judgment on the merits for a contrary rule would delay the administration of justice and unduly burden the courts.[10]However, we have held that certiorari is an appropriate remedy to assail an interlocutory order (1) when the tribunal issued such order without or in excess of jurisdiction or with grave abuse of discretion and (2) when the assailed interlocutory order is patently erroneous and the remedy of appeal would not afford adequate and expeditious relief.[11]







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We hold that the petition for certiorari filed by Salonga and the Municipality with the Court of Appeals questioning the writ of attachment issued by the trial court should not have been given due course for they still had recourse to a plain, speedy and adequate remedy - the filing of a motion to fix the counter-bond, which they in fact filed with the trial court, the grant of which would effectively prevent the issuance of the writ of attachment. Moreover, they could also have filed a motion to discharge the attachment for having been improperly or irregularly issued or enforced, or that the bond is insufficient, or that the attachment is excessive.[12] With such remedies still available to the Municipality and Salonga, the filing of a petition for certiorari with the Court of Appeals insofar as it questions the order of attachment was clearly premature.

However, with regards to the contractor’s lien, we uphold the appellate court’s ruling reversing the trial court’s grant of a contractor’s lien in favor of petitioners.

Articles 2241 and 2242 of the Civil Code enumerates certain credits which enjoy preference with respect to specific personal or real property of the debtor. Specifically, the contractor’s lien claimed by petitioners is granted under the third paragraph of Article 2242 which provides that the claims of contractors engaged in the construction, reconstruction or repair of buildings or other works shall be preferred with respect to the specific building or other immovable property constructed.[13]

However, Article 2242 only finds application when there is a concurrence of credits, i.e. when the same specific property of the debtor is subjected to the claims of several creditors and the value of such property of the debtor is insufficient to pay in full all the creditors. In such a situation, the question of preference will arise, that is, there will be a need to determine which of the creditors will be paid ahead of the others.[14] Fundamental tenets of due process will dictate that this statutory lien should then only be enforced in the context of some kind of a proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency proceedings.[15]

This is made explicit by Article 2243 which states that the claims and liens enumerated in 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.[16]

The action filed by petitioners in the trial court does not partake of the nature of an insolvency proceeding. It is basically for specific performance and damages.[17] Thus, even if it is finally adjudicated that petitioners herein actually stand in the position of unpaid contractors and are entitled to invoke the contractor’s lien granted under Article 2242, such lien cannot be enforced in the present action for there is no way of determining whether or not there exist other preferred creditors with claims over the San Antonio Public Market. The records do not contain any allegation that petitioners are the only creditors with respect to such property. The fact that no third party claims have been filed in the trial court will not bar other creditors from subsequently bringing actions and claiming that they also have preferred liens against the property involved.[18]

Our decision herein is consistent with our ruling in Philippine Savings Bank v. Lantin,[19] wherein we also disallowed the contractor from enforcing his lien pursuant to Article 2242 of the Civil Code in an action filed by him for the collection of unpaid construction costs.

It not having been alleged in their pleadings that they have any rights as a mortgagee under the contracts, petitioners may only obtain possession and use of the public market by means of a preliminary attachment upon such property, in the event that they obtain a favorable judgment in the trial court. Under our rules of procedure, a writ of attachment over registered real property is enforced by the sheriff by filing with the registry of deeds a copy of the order of attachment, together with a description of the property attached, and a notice that it is attached, and by leaving a copy of such order, description, and notice with the occupant of the property, if any.[20] If judgment be recovered by the attaching party and execution issue thereon, the sheriff may cause the judgment to be satisfied by selling so much of the property as may be necessary to satisfy the judgment.[21] Only in the event that petitioners are able to purchase the property will they then acquire possession and use of the same.

Clearly, the trial court’s order of September 5, 1991 granting possession and use of the public market to petitioners does not adhere to the procedure for attachment laid out in the Rules of Court. In issuing such an order, the trial court gravely abused its discretion and the appellate court’s nullification of the same should be sustained.

At this stage of the case, there is no need to pass upon the question of whether or not petitioners herein












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are the real parties-in-interest. In the event that judgment is rendered against Salonga and the Municipality, this issue may be assigned as an error in their appeal from such judgment.

WHEREFORE, we UPHOLD the Court of Appeal’s Decision dated February 6, 1992 in CA-G.R. SP No. 26336 insofar as it nullifies the contractor’s lien granted by the trial court in favor of petitioners in its September 5, 1991 Order. Consequently, we also UPHOLD the appellate court’s nullification of the trial court’s October 11, 1991 Order approving the guidelines for the operation of the San Antonio Public Market. However, we REVERSE the appellate court’s order nullifying the writ of attachment granted by the trial court.

No pronouncement as to costs.

SO ORDERED.

ATLANTIC v. HERBAL COVE

THIRD DIVISION

[G.R. No. 148568. March 20, 2003]

ATLANTIC ERECTORS, INC., petitioner, vs. HERBAL COVE REALTY CORPORATION, respondent.

D E C I S I O N

PANGANIBAN, J.:

The pendency of a simple collection suit arising from the alleged nonpayment of construction services, materials, unrealized income and damages does not justify the annotation of a notice of lis pendens on the title to a property where construction has been done.

Statement of the Case

Before the Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court, challenging the May 30, 2000 Decision[2] of the Court of Appeals (CA) in CA-GR SP No. 56432. The dispositive portion of the Decision is reproduced as follows:

“WHEREFORE, the petition is granted and the assailed November 4, 1998 and October 22, 1999 orders annulled and set aside. The July 30, 1998 order of respondent judge is reinstated granting the cancellation of the notices of lis pendens subject of this petition.”[3]

In its July 21, 2001 Resolution,[4] the CA denied petitioner’s Motion for Reconsideration.

The Facts

The factual antecedents of the case are summarized by the CA in this wise:

“On June 20, 1996, [respondent] and [petitioner] entered into a Construction Contract whereby the former agreed to construct four (4) units of [townhouses] designated as 16-A, 16-B, 17-A and 17-B and one (1) single detached unit for an original contract price of P15,726,745.19 which was late[r] adjusted to P16,726,745.19 as a result of additional works. The contract period is 180 days commencing [on] July 7, 1996 and to terminate on January 7, 1997. [Petitioner] claimed that the said period was not followed due to reasons attributable to [respondent], namely: suspension orders, additional works, force majeure, and unjustifiable acts of omission or delay on the part of said [respondent]. [Respondent], however, denied such claim and instead pointed to [petitioner] as having exceeded the 180 day contract period aggravated by defective workmanship and utilization of materials which are not in compliance with specifications.

x x x x x x x x x

“On November 21, 1997, [petitioner] filed a complaint for sum of money with damages (Civil Case No. 97-2707) with the Regional Trial Court of Makati entitled ‘Atlantic Erectors, Incorporated vs. Herbal Cove Realty Corp. and Ernest C. Escal[e]r’. This case was raffled to Branch 137, x x x Judge Santiago J. Ranada presiding. In said initiatory pleading, [petitioner] AEI asked for the following reliefs:

‘AFTER DUE NOTICE AND HEARING, to order x x x defendant to:

1. Pay plaintiff the sum of P4,854,229.94 for the unpaid construction services already rendered;

http://sc.judiciary.gov.ph/jurisprudence/2003/mar2003/148568.htm#_ftn4





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2. To x x x pay plaintiff the sum of P1,595,551.00 for the construction materials, equipment and tools of plaintiff held by defendant;

3. To x x x pay plaintiff the sum of P2,250,000.00 for the [loss] x x x of expected income from the construction project;

4. [T]o x x x pay plaintiff the sum of P800,000.00 for the cost of income by way of rental from the equipment of plaintiff held by defendants;

5. To x x x pay plaintiff the sum of P5,000,000.00 for moral damages;

6. To x x x pay plaintiff the sum of P5,000,000.00 for exemplary damages;

7. To x x x pay plaintiff the sum equivalent of 25% of the total money claim plus P200,000.00 acceptance fee and P2,500.00 per court appearance;

8. To x x x pay the cost of suit.’

“On the same day of November 21, 1997, [petitioner] filed a notice of lis pendens for annotation of the pendency of Civil Case No. 97-707 on titles TCTs nos. T-30228, 30229, 30230, 30231 and 30232. When the lots covered by said titles were subsequently subdivided into 50 lots, the notices of lis pendens were carried over to the titles of the subdivided lots, i.e., Transfer Certificate of Title Nos. T-36179 to T-36226 and T-36245 to T-36246 of the Register of Deeds of Tagaytay City.

“On January 30, 1998, [respondent] and x x x Ernest L. Escaler, filed a Motion to Dismiss [petitioner’s] Complaint for lack of jurisdiction and for failure to state a cause of action. They claimed [that] the Makati RTC has no jurisdiction over the subject matter of the case because the parties’ Construction Contract contained a clause requiring them to submit their dispute to arbitration.

x x x x x x x x x

“On March 17, 1998, [RTC Judge Ranada] dismissed the Complaint as against [respondent] for [petitioner’s] failure to comply with a condition precedent to the filing of a court action which is the prior resort to arbitration and as against x x x Escaler for failure of the Complaint to state a cause of action x x x.

“[Petitioner] filed a Motion for Reconsideration of the March 17, 1998 dismissal order. [Respondent] filed its Opposition thereto.

“On April 24, 1998, [respondent] filed a Motion to Cancel Notice of Lis Pendens. It argued that the notices of lis pendens are without basis because [petitioner’s] action is a purely personal action to collect a sum of money and recover damages and x x x does not directly affect title to, use or possession of real property.

“In his July 30, 1998 Order, [Judge Ranada] granted [respondent’s] Motion to Cancel Notice of Lis Pendens x x x:

“[Petitioner] filed a Motion for Reconsideration of the aforesaid July 30, 1998 Order to which [respondent] filed an Opposition.

“In a November 4, 1998 Order, [Judge Ranada,] while finding no merit in the grounds raised by [petitioner] in its Motion for Reconsideration, reversed his July 30, 1998 Order and reinstated the notices of lis pendens, as follows:

‘1. The Court finds no merit in plaintiff’s contention that in dismissing the above-entitled case for lack of jurisdiction, and at the same time granting defendant Herbal Cove’s motion to cancel notice of lis pendens, the Court [took] an inconsistent posture. The Rules provide that prior to the transmittal of the original record on appeal, the court may issue orders for the protection and preservation of the rights of the parties which do not involve any matter litigated by the appeal (3rd par., Sec. 10, Rule 41). Even as it declared itself without jurisdiction, this Court still has power to act on incidents in this case, such as acting on motions for reconsideration, for correction, for lifting of lis pendens, or approving appeals, etc.

‘As correctly argued by defendant Herbal Cove, a notice of lis pendens serves only as a precautionary measure or warning to prospective buyers of a property that there is a pending litigation involving the same.

‘The Court notes that when it issued the Order of 30 July 1998 lifting the notice of lis pendens, there was as yet no appeal filed by plaintiff. Subsequently, on 10 September 1998, after a notice of appeal was filed by plaintiff on 4 September 1998, the Branch Clerk of Court was ordered by the Court to elevate the entire records of the above-entitled case to the Court of


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Appeals. It therefore results that the above-entitled case is still pending. After a careful consideration of all matters relevant to the lis pendens, the Court believes that justice will be better served by setting aside the Order of 30 July 1998.’

“On November 27, 1998, [respondent] filed a Motion for Reconsideration of the November 4, 1998 Order arguing that allowing the notice of lis pendens to remain annotated on the titles would defeat, not serve, the ends of justice and that equitable considerations cannot be resorted to when there is an applicable provision of law.

x x x x x x x x x

“On October 22, 1999, [Judge Ranada] issued an order denying [respondent’s] Motion for Reconsideration of the November 4, 1998 Order for lack of sufficient merit.”[5]

Thereafter, Respondent Herbal Cove filed with the CA a Petition for Certiorari.

Ruling of the Court of Appeals

Setting aside the Orders of the RTC dated November 4, 1998 and October 22, 1999, the CA reinstated the former’s July 30, 1998 Order[6] granting Herbal Cove’s Motion to Cancel the Notice of Lis Pendens. According to the appellate court, the re-annotation of those notices was improper for want of any legal basis. It specifically cited Section 76 of Presidential Decree No. 1529 (the Property Registration Decree). The decree provides that the registration of such notices is allowed only when court proceedings directly affect the title to, or the use or the occupation of, the land or any building thereon.

The CA opined that the Complaint filed by petitioner in Civil Case No. 97-2707 was intended purely to collect a sum of money and to recover damages. The appellate court ruled that the Complaint did not aver any ownership claim to the subject land or any right of possession over the buildings constructed thereon. It further declared that absent any claim on the title to the buildings or on the possession thereof, the notices of lis pendens had no leg to stand on.

Likewise, the CA held that Judge Ranada should have maintained the notice cancellations, which he had directed in his July 30, 1998 Order. Those notices were no longer necessary to protect the rights of

petitioner, inasmuch as it could have procured protective relief from the Construction Industry Arbitral Commission (CIAC), where provisional remedies were available. The CA also mentioned petitioner’s admission that there was already a pending case before the CIAC, which in fact rendered a decision on March 11, 1999.

The appellate court further explained that the re-annotation of the Notice of Lis Pendens was no longer warranted after the court a quo had ruled that the latter had no jurisdiction over the case. The former held that the rationale behind the principle of lis pendens -- to keep the subject matter of the litigation within the power of the court until the entry of final judgment -- was no longer applicable. The reason for such inapplicability was that the Makati RTC already declared that it had no jurisdiction or power over the subject matter of the case.

Finally, the CA opined that petitioner’s Complaint had not alleged or claimed, as basis for the continued annotation of the Notice of Lis Pendens, the lien of contractors and laborers under Article 2242 of the New Civil Code. Moreover, petitioner had not even referred to any lien of whatever nature. Verily, the CA ruled that the failure to allege and claim the contractor’s lien did not warrant the continued annotation on the property titles of Respondent Herbal Cove.

Hence, this Petition.[7]

The Issues

Petitioner raises the following issues for our consideration:

“I. Whether or not money claims representing cost of materials [for] and labor [on] the houses constructed on a property [are] a proper lien for annotation of lis pendens on the property title[.]

“II. Whether or not the trial court[,] after having declared itself without jurisdiction to try the case[,] may still decide on [the] substantial issue of the case.”[8]

This Court’s Ruling

The Petition has no merit.






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First Issue:Proper Basis for aNotice of Lis Pendens

Petitioner avers that its money claim on the cost of labor and materials for the townhouses it constructed on the respondent’s land is a proper lien that justifies the annotation of a notice of lis pendens on the land titles. According to petitioner, the money claim constitutes a lien that can be enforced to secure payment for the said obligations. It argues that, to preserve the alleged improvement it had made on the subject land, such annotation on the property titles of respondent is necessary.

On the other hand, Respondent Herbal Cove argues that the annotation is bereft of any factual or legal basis, because petitioner’s Complaint[9] does not directly affect the title to the property, or the use or the possession thereof. It also claims that petitioner’s Complaint did not assert ownership of the property or any right to possess it. Moreover, respondent attacks as baseless the annotation of the Notice of Lis Pendens through the enforcement of a contractor’s lien under Article 2242 of the Civil Code. It points out that the said provision applies only to cases in which there are several creditors carrying on a legal action against an insolvent debtor.

As a general rule, the only instances in which a notice of lis pendens may be availed of are as follows: (a) an action to recover possession of real estate; (b) an action for partition; and (c) any other court proceedings that directly affect the title to the land or the building thereon or the use or the occupation thereof.[10] Additionally, this Court has held that resorting to lis pendens is not necessarily confined to cases that involve title to or possession of real property. This annotation also applies to suits seeking to establish a right to, or an equitable estate or interest in, a specific real property; or to enforce a lien, a charge or an encumbrance against it.[11]

Apparently, petitioner proceeds on the premise that its money claim involves the enforcement of a lien. Since the money claim is for the nonpayment of materials and labor used in the construction of townhouses, the lien referred to would have to be that provided under Article 2242 of the Civil Code. This provision describes a contractor’s lien over an immovable property as follows:

“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

“(3) Claims of laborers, masons, mechanics and other workmen, as well as of architects, engineers and contractors, engaged in the construction, reconstruction or repair of buildings, canals or other works, upon said buildings, canals or other works;

“(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[.]” (Emphasis supplied)

However, a careful examination of petitioner’s Complaint, as well as the reliefs it seeks, reveals that no such lien or interest over the property was ever alleged. The Complaint merely asked for the payment of construction services and materials plus damages, without mentioning -- much less asserting -- a lien or an encumbrance over the property. Verily, it was a purely personal action and a simple collection case. It did not contain any material averment of any enforceable right, interest or lien in connection with the subject property.

As it is, petitioner’s money claim cannot be characterized as an action that involves the enforcement of a lien or an encumbrance, one that would thus warrant the annotation of the Notice of Lis Pendens. Indeed, the nature of an action is determined by the allegations of the complaint.[12]

Even assuming that petitioner had sufficiently alleged such lien or encumbrance in its Complaint, the annotation of the Notice of Lis Pendens would still be unjustified, because a complaint for collection and damages is not the proper mode for the enforcement of a contractor’s lien.

In J.L. Bernardo Construction v. Court of Appeals,[13] the Court explained the concept of a contractor’s lien under Article 2242 of the Civil Code and the proper mode for its enforcement as follows:

“Articles 2241 and 2242 of the Civil Code enumerates certain credits which enjoy preference with respect to specific personal or real property of the debtor. Specifically, the contractor’s lien claimed by the petitioners is granted under the third paragraph of Article 2242 which provides that the claims of contractors engaged in the construction, reconstruction or repair of buildings or other works shall be preferred with respect to the






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specific building or other immovable property constructed.

“However, Article 2242 finds application when there is a concurrence of credits, i.e., when the same specific property of the debtor is subjected to the claims of several creditors and the value of such property of the debtor is insufficient to pay in full all the creditors. In such a situation, the question of preference will arise, that is, there will be a need to determine which of the creditors will be paid ahead of the others. Fundamental tenets of due process will dictate that this statutory lien should then only be enforced in the context of some kind of a proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency proceedings.”[14] (Emphasis supplied)

Clearly then, neither Article 2242 of the Civil Code nor the enforcement of the lien thereunder is applicable here, because petitioner’s Complaint failed to satisfy the foregoing requirements. Nowhere does it show that respondent’s property was subject to the claims of other creditors or was insufficient to pay for all concurring debts. Moreover, the Complaint did not pertain to insolvency proceedings or to any other action in which the adjudication of claims of preferred creditors could be ascertained.

Another factor negates the argument of petitioner that its money claim involves the enforcement of a lien or the assertion of title to or possession of the subject property: the fact that it filed its action with the RTC of Makati, which is undisputedly bereft of any jurisdiction over respondent’s property in Tagaytay City. Certainly, actions affecting title to or possession of real property or the assertion of any interest therein should be commenced and tried in the proper court that has jurisdiction over the area, where the real property involved or a portion thereof is situated.[15] If petitioner really intended to assert its claim or enforce its supposed lien, interest or right over respondent’s subject properties, it would have instituted the proper proceedings or filed a real action with the RTC of Tagaytay City, which clearly had jurisdiction over those properties.[16]

Narciso Peña, a leading authority on the subject of land titles and registration, gives an explicit exposition on the inapplicability of the doctrine of lis pendens to certain actions and proceedings that specifically include money claims. He explains in this wise:

“By express provision of law, the doctrine of lis pendens does not apply to attachments, levies of

execution, or to proceedings for the probate of wills, or for administration of the estate of deceased persons in the Court of First Instance. Also, it is held generally that the doctrine of lis pendens has no application to a proceeding in which the only object sought is the recovery of a money judgment, though the title or right of possession to property be incidentally affected. It is essential that the property be directly affected, as where the relief sought in the action or suit includes the recovery of possession, or the enforcement of a lien, or an adjudication between conflicting claims of title, possession, or the right of possession to specific property, or requiring its transfer or sale”[17] (Emphasis supplied)

Peña adds that even if a party initially avails itself of a notice of lis pendens upon the filing of a case in court, such notice is rendered nugatory if the case turns out to be a purely personal action. We quote him as follows:

“It may be possible also that the case when commenced may justify a resort to lis pendens, but during the progress thereof, it develops to be purely a personal action for damages or otherwise. In such event, the notice of lis pendens has become functus officio.”[18] (Emphasis supplied)

Thus, when a complaint or an action is determined by the courts to be in personam, the rationale for or purpose of the notice of lis pendens ceases to exist. To be sure, this Court has expressly and categorically declared that the annotation of a notice of lis pendens on titles to properties is not proper in cases wherein the proceedings instituted are actions in personam.[19]

Second Issue:Jurisdiction of the Trial Court

Petitioner argues that the RTC had no jurisdiction to issue the Order canceling the Notice of Lis Pendens as well as the Order reinstating it. Supposedly, since both Orders were issued by the trial court without jurisdiction, the annotation made by the Register of Deeds of Tagaytay City must remain in force.

Petitioner avers that the trial court finally declared that the latter had no jurisdiction over the case on July 27, 1998, in an Order denying the former’s Motion for Reconsideration of the March 17, 1998 Order dismissing the Complaint. Petitioner insists that the








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subsequent July 30, 1998 Order cancelling the subject Notice of Lis Pendens is void, because it was issued by a court that had no more jurisdiction over the case.

Rule 41 of the 1997 Rules on Civil Procedure, which governs appeals from regional trial courts, expressly provides that RTCs lose jurisdiction over a case when an appeal is filed. The rule reads thus:

“SEC. 9. Perfection of appeal; effect thereof. -- A party’s appeal by notice of appeal is deemed perfected as to him upon the filing of the notice of appeal in due time.

x x x x x x x x x

“In appeals by notice of appeal, the court loses jurisdiction over the case upon the perfection of the appeals filed in due time and the expiration of the time to appeal of the other parties.” (Emphasis supplied)

On the basis of the foregoing rule, the trial court lost jurisdiction over the case only on August 31, 1998, when petitioner filed its Notice of Appeal.[20] Thus, any order issued by the RTC prior to that date should be considered valid, because the court still had jurisdiction over the case. Accordingly, it still had the authority or jurisdiction to issue the July 30, 1998 Order canceling the Notice of Lis Pendens. On the other hand, the November 4, 1998 Order that set aside the July 30, 1998 Order and reinstated that Notice should be considered without force and effect, because it was issued by the trial court after it had already lost jurisdiction.

In any case, even if we were to adopt petitioner’s theory that both the July 30, 1998 and the November 4, 1998 Orders were void for having been issued without jurisdiction, the annotation is still improper for lack of factual and legal bases.

As discussed previously, erroneously misplaced is the reliance of petitioner on the premise that its money claim is an action for the enforcement of a contractor’s lien. Verily, the annotation of the Notice of Lis Pendens on the subject property titles should not have been made in the first place. The Complaint filed before the Makati RTC -- for the collection of a sum of money and for damages -- did not provide sufficient legal basis for such annotation.

Finally, petitioner vehemently insists that the trial court had no jurisdiction to cancel the Notice. Yet, the former filed before the CA an appeal, docketed as CA-GR CV No. 65647,[21]questioning the RTC’s dismissal

of the Complaint for lack of jurisdiction. Moreover, it must be remembered that it was petitioner which had initially invoked the jurisdiction of the trial court when the former sought a judgment for the recovery of money and damages against respondent. Yet again, it was also petitioner which assailed that same jurisdiction for issuing an order unfavorable to the former’s cause. Indeed, parties cannot invoke the jurisdiction of a court to secure affirmative relief, then repudiate or question that same jurisdiction after obtaining or failing to obtain such relief.[22]

WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED. Costs against petitioner.

SO ORDERED.

DEVELOPMENT BANK v. CA


Manila

FIRST DIVISION

G.R. No. 126200 August 16, 2001

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs.HONORABLE COURT OF APPEALS and REMINGTON INDUSTRIAL SALES CORPORATION, respondents.

KAPUNAN, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, seeking a review of the Decision of the Court of Appeals dated October 6, 1995 and the Resolution of the same court dated August 29, 1996.

The facts are as follows:

Marinduque Mining-Industrial Corporation (Marinduque Mining), a corporation engaged in the manufacture of pure and refined nickel, nickel and cobalt in mixed sulfides; copper ore/concentrates, cement and pyrite conc., obtained from the Philippine National Bank (PNB) various loan accommodations. To secure the





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loans, Marinduque Mining executed on October 9, 1978 a Deed of Real Estate Mortgage and Chattel Mortgage in favor of PNB. The mortgage covered all of Marinduque Mining's real properties, located at Surigao del Norte, Sipalay, Negros Occidental, and at Antipolo, Rizal, including the improvements thereon. As of November 20, 1980, the loans extended by PNB amounted to P4 Billion, exclusive of interest and charges.1

On July 13, 1981, Marinduque Mining executed in favor of PNB and the Development Bank of the Philippines (DBP) a second Mortgage Trust Agreement. In said agreement, Marinduque Mining mortgaged to PNB and DBP all its real properties located at Surigao del Norte, Sipalay, Negros Occidental, and Antipolo, Rizal, including the improvements thereon. The mortgage also covered all of Marinduque Mining's chattels, as well as assets of whatever kind, nature and description which Marinduque Mining may subsequently acquire in substitution or replenishment or in addition to the properties covered by the previous Deed of Real and Chattel Mortgage dated October 7, 1978. Apparently, Marinduque Mining had also obtained loans totaling P2 Billion from DBP, exclusive of interest and charges.2

On April 27, 1984, Marinduque Mining executed in favor of PNB and DBP an Amendment to Mortgage Trust Agreement by virtue of which Marinduque Mining mortgaged in favor of PNB and DBP all other real and personal properties and other real rights subsequently acquired by Marinduque Mining.3

For failure of Marinduque Mining to settle its loan obligations, PNB and DBP instituted sometime on July and August 1984 extrajudicial foreclosure proceedings over the mortgaged properties.

The events following the foreclosure are narrated by DBP in its petition, as follows:

In the ensuing public auction sale conducted on August 31, 1984, PNB and DBP emerged and were declared the highest bidders over the foreclosed real properties, buildings, mining claims, leasehold rights together with the improvements thereon as well as machineries [sic] and equipments [sic] of MMIC located at Nonoc Nickel Refinery Plant at Surigao del Norte for a bid price of P14,238,048,150.00 [and] [o]ver the foreclosed chattels of MMIC located at Nonoc Refinery Plant at Surigao del Norte, PNB and DBP as highest bidders, bidded for P170,577,610.00 (Exhs. "5" to "5-A", "6", "7" to "7-AA-" PNB/DBP). For the foreclosed real properties together with all the

buildings, major machineries & equipment and other improvements of MMIC located at Antipolo, Rizal, likewise held on August 31, 1984, were sold to PNB and DBP as highest bidders in the sum of P1,107,167,950.00 (Exhs. "10" to "10-X"-PNB/ DBP).

At the auction sale conducted on September 7, 1984[,] over the foreclosed real properties, buildings, & machineries/equipment of MMIC located at Sipalay, Negros Occidental were sold to PNB and DBP, as highest bidders, in the amount of P2,383,534,000.00 and P543,040.000.00 respectively (Exhs. "8" to "8-BB", "9" to "90-GGGGGG"-PNB/DBP).

Finally, at the public auction sale conducted on September 18, 1984 on the foreclosed personal properties of MMIC, the same were sold to PNB and DBP as the highest bidder in the sum of P678,772,000.00 (Exhs. "11" and "12-QQQQQ"-PNB).

PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984, purposely, in order to ensure the continued operation of the Nickel refinery plant and to prevent the deterioration of the assets foreclosed, assigned and transferred to Nonoc Mining and Industrial Corporation all their rights, interest and participation over the foreclosed properties of MMIC located at Nonoc Island, Surigao del Norte for an initial consideration of P14,361,000,000.00 (Exh. "13"-PNB).

Likewise, thru [sic] a Deed of Transfer dated June 6, 1984, PNB and DBP assigned and transferred in favor of Maricalum Mining Corp. all its rights, interest and participation over the foreclosed properties of MMIC at Sipalay, Negros Occidental for an initial consideration of P325,800,000.00 (Exh. "14"-PNB/DBP).

On February 27, 1987, PNB and DBP, pursuant to Proclamation No. 50 as amended, again assigned, transferred and conveyed to the National Government thru [sic] the Asset Privatization Trust (APT) all its existing rights and interest over the assets of MMIC, earlier assigned to Nonoc Mining and Industrial Corporation, Maricalum Mining Corporation and Island Cement Corporation (Exh. "15" & "15-A" PNB/DBP).4

In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining purchased and caused to be delivered construction materials and other merchandise from Remington Industrial Sales Corporation (Remington) worth P921,755.95. The purchases remained unpaid as of August 1, 1984 when Remington filed a complaint for a sum of money and damages against Marinduque Mining for the value of the unpaid construction materials and other

http://www.lawphil.net/judjuris/juri2001/aug2001/gr_126200_2001.html#fnt4





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merchandise purchased by Marinduque Mining, as well as interest, attorney's fees and the costs of suit.

On September 7, 1984, Remington's original complaint was amended to include PNB and DBP as co-defendants in view of the foreclosure by the latter of the real and chattel mortgages on the real and personal properties, chattels, mining claims, machinery, equipment and other assets of Marinduque Mining.5

On September 13, 1984, Remington filed a second amended complaint to include as additional defendant, the Nonoc Mining and Industrial Corporation (Nonoc Mining). Nonoc Mining is the assignee of all real and personal properties, chattels, machinery, equipment and all other assets of Marinduque Mining at its Nonoc Nickel Factory in Surigao del Norte.6

On March 26, 1986, Remington filed a third amended complaint including the Maricalum Mining Corporation (Maricalum Mining) and Island Cement Corporation (Island Cement) as co-defendants. Remington asserted that Marinduque Mining, PNB, DBP, Nonoc Mining, Maricalum Mining and Island Cement must be treated in law as one and the same entity by disregarding the veil of corporate fiction since:

1. Co-defendants NMIC, Maricalum and Island Cement which are newly created entities are practically owned wholly by defendants PNB and DBP, and managed by their officers, aside from the fact that the aforesaid co-defendants NMIC, Maricalum and Island Cement were organized in such a hurry and in such suspicious circumstances by co-defendants PNB and DBP after the supposed extrajudicial foreclosure of MMIC's assets as to make their supposed projects assets, machineries and equipment which were originally owned by co-defendant MMIC beyond the reach of creditors of the latter.

2. The personnel, key officers and rank-and-file workers and employees of co-defendants NMIC, Maricalum and Island Cement creations of co-defendants PNB and DBP were the personnel of co-defendant MMIC such that . . . practically there has only been a change of name for all legal purpose and intents

3. The places of business not to mention the mining claims and project premises of co-defendants NMIC, Maricalum and Island Cement likewise used to be the places of business, mining claims and project premises of co-defendant MMIC as to make the aforesaid co-defendants NMIC, Maricalum and Island

Cement mere adjuncts and subsidiaries of co-defendants PNB and DBP, and subject to their control and management.

On top of everything, co-defendants PNB, DBP NMIC, Maricalum and Island Cement being all corporations created by the government in the pursuit of business ventures should not be allowed to ignore, x x x or obliterate with impunity nay illegally, the financial obligations of x x x MMIC whose operations co-defendants PNB and DBP had highly financed before the alleged extrajudicial foreclosure of defendant MMIC's assets, machineries and equipment to the extent that major policies of co-defendant MMIC were being decided upon by co-defendants PNB and DBP as major financiers who were represented in its board of directors forming part of the majority thereof which through the alleged extrajudicial foreclosure culminated in a complete take-over by co-defendants PNB and DBP bringing about the organization of their co-defendants NMIC, Maricalum and Island Cement to which were transferred all the assets, machineries and pieces of equipment of co-defendant MMIC used in its nickel mining project in Surigao del Norte, copper mining operation in Sipalay, Negros Occidental and cement factory in Antipolo, Rizal to the prejudice of creditors of co-defendant MMIC such as plaintiff Remington Industrial Sales Corporation whose stockholders, officers and rank-and-file workers in the legitimate pursuit of its business activities, invested considerable time, sweat and private money to supply, among others, co-defendant MMIC with some of its vital needs for its operation, which co-defendant MMIC during the time of the transactions material to this case became x x x co-defendants PNB and DBP's instrumentality, business conduit, alter ego, agency (sic), subsidiary or auxiliary corporation, by virtue of which it becomes doubly necessary to disregard the corporation fiction that co-defendants PNB, DBP, MMIC, NMIC, Maricalum and Island Cement, six (6) distinct and separate entities, when in fact and in law, they should be treated as one and the same at least as far as plaintiff's transactions with co-defendant MMIC are concerned, so as not to defeat public convenience, justify wrong, subvert justice, protect fraud or confuse legitimate issues involving creditors such as plaintiff, a fact which all defendants were as (sic) still are aware of during all the time material to the transactions subject of this case.7

On April 3, 1989, Remington filed a motion for leave to file a fourth amended complaint impleading the Asset Privatization Trust (APT) as co-defendant. Said fourth amended complaint was admitted by the lower court in its Order dated April 29, 1989.





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On April 10, 1990, the Regional Trial Court (RTC) rendered a decision in favor of Remington, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the defendants Marinduque Mining & Industrial Corporation, Philippine National Bank, Development Bank of the Philippines, Nonoc Mining and Industrial Corporation, Maricalum Mining Corporation, Island Cement Corporation and Asset Privatization Trust to pay, jointly and severally, the sum of P920,755.95, representing the principal obligation, including the stipulated interest as of June 22, 1984, plus ten percent (10%) surcharge per annum by way of penalty, until the amount is fully paid; the sum equivalent to 10% of the amount due as and for attorney's fees; and to pay the costs.8

Upon appeal by PNB, DBP, Nonoc Mining, Maricalum Mining, Island Cement and APT, the Court of Appeals, in its Decision dated October 6, 1995, affirmed the decision of the RTC. Petitioner filed a Motion for Reconsideration, which was denied in the Resolution dated August 29, 1996.

Hence, this petition, DBP maintaining that Remington has no cause of action against it or PNB, nor against their transferees, Nonoc Mining, Island Cement, Maricalum Mining, and the APT.

On the other hand, private respondent Remington submits that the transfer of the properties was made in fraud of creditors. The presence of fraud, according to Remington, warrants the piercing of the corporate veil such that Marinduque Mining and its transferees could be considered as one and the same corporation. The transferees, therefore, are also liable for the value of Marinduque Mining's purchases.

In Yutivo Sons Hardware vs. Court of Tax Appeals,9 cited by the Court of Appeals in its decision,10 this Court declared:

It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. However, when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons or in case of two corporations, merge them into one". (Koppel [Phils.], Inc., vs. Yatco, 71 Phil. 496, citing 1 Fletcher Encyclopedia of Corporation, Permanent Ed., pp. 135-136; U.S. vs.

Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per Sanborn, J.). x x x.

In accordance with the foregoing rule, this Court has disregarded the separate personality of the corporation where the corporate entity was used to escape liability to third parties.11 In this case, however, we do not find any fraud on the part of Marinduque Mining and its transferees to warrant the piercing of the corporate veil.

It bears stressing that PNB and DBP are mandated to foreclose on the mortgage when the past due account had incurred arrearages of more than 20% of the total outstanding obligation. Section 1 of Presidential Decree No. 385 (The Law on Mandatory Foreclosure) provides:

It shall be mandatory for government financial institutions, after the lapse of sixty (60) days from the issuance of this decree, to foreclose the collateral and/or securities for any loan, credit accommodation, and/or guarantees granted by them whenever the arrearages on such account, including accrued interest and other charges, amount to at least twenty percent (20%) of the total outstanding obligations, including interest and other charges, as appearing in the books of account and/or related records of the financial institution concerned. This shall be without prejudice to the exercise by the government financial institution of such rights and/or remedies available to them under their respective contracts with their debtors, including the right to foreclose on loans, credits, accommodations and/or guarantees on which the arrearages are less than twenty (20%) percent.

Thus, PNB and DBP did not only have a right, but the duty under said law, to foreclose upon the subject properties. The banks had no choice but to obey the statutory command.

The import of this mandate was lost on the Court of Appeals, which reasoned that under Article 19 of the Civil Code, "Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith." The appellate court, however, did not point to any fact evidencing bad faith on the part of the Marinduque Mining and its transferees. Indeed, it skirted the issue entirely by holding that the question of actual fraudulent intent on the part of the interlocking directors of DBP and Marinduque Mining was irrelevant because:






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As aptly stated by the appellee in its brief, "x x x where the corporations have directors and officers in common, there may be circumstances under which their interest as officers in one company may disqualify them in equity from representing both corporations in transactions between the two. Thus, where one corporation was 'insolvent and indebted to another, it has been held that the directors of the creditor corporation were disqualified, by reason of self-interest, from acting as directors of the debtor corporation in the authorization of a mortgage or deed of trust to the former to secure such indebtedness x x x" (page 105 of the Appellee's Brief). In the same manner that "x x x when the corporation is insolvent, its directors who are its creditors can not secure to themselves any advantage or preference over other creditors. They can not thus take advantage of their fiduciary relation and deal directly with themselves, to the injury of others in equal right. If they do, equity will set aside the transaction at the suit of creditors of the corporation or their representatives, without reference to the question of any actual fraudulent intent on the part of the directors, for the right of the creditors does not depend upon fraud in fact, but upon the violation of the fiduciary relation to the directors." x x x (page 106 of the Appellee's Brief)

We also concede that "x x x directors of insolvent corporation, who are creditors of the company, can not secure to themselves any preference or advantage over other creditors in the payment of their claims. It is not good morals or good law. The governing body of officers thereof are charged with the duty of conducting its affairs strictly in the interest of its existing creditors, and it would be a breach of such trust for them to undertake to give any one of its members any advantage over any other creditors in securing the payment of his debts in preference to all others. When validity of these mortgages, to secure debts upon which the directors were indorsers, was questioned by other creditors of the corporation, they should have been classed as instruments rendered void by the legal principle which prevents directors of an insolvent corporation from giving themselves a preference over outside creditors. x x x" (page 106-107 of the Appellee's Brief.)12

The Court of Appeals made reference to two principles in corporation law. The first pertains to transactions between corporations with interlocking directors resulting in the prejudice to one of the corporations. This rule does not apply in this case, however, since the corporation allegedly prejudiced (Remington) is a third party, not one of the corporations with interlocking directors (Marinduque Mining and DBP).

The second principle invoked by respondent court involves "directors x x x who are creditors" which is also inapplicable herein. Here, the creditor of Marinduque Mining is DBP, not the directors of Marinduque Mining.

Neither do we discern any bad faith on the part of DBP by its creation of Nonoc Mining, Maricalum and Island Cement. As Remington itself concedes, DBP is not authorized by its charter to engage in the mining business.13The creation of the three corporations was necessary to manage and operate the assets acquired in the foreclosure sale lest they deteriorate from non-use and lose their value. In the absence of any entity willing to purchase these assets from the bank, what else would it do with these properties in the meantime? Sound business practice required that they be utilized for the purposes for which they were intended.

Remington also asserted in its third amended complaint that the use of Nonoc Mining, Maricalum and Island Cement of the premises of Marinduque Mining and the hiring of the latter's officers and personnel also constitute badges of bad faith.

Assuming that the premises of Marinduque Mining were not among those acquired by DBP in the foreclosure sale, convenience and practicality dictated that the corporations so created occupy the premises where these assets were found instead of relocating them. No doubt, many of these assets are heavy equipment and it may have been impossible to move them. The same reasons of convenience and practicality, not to mention efficiency, justified the hiring by Nonoc Mining, Maricalum and Island Cement of Marinduque Mining's personnel to manage and operate the properties and to maintain the continuity of the mining operations.

To reiterate, the doctrine of piercing the veil of corporate fiction applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime.14 To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed.15 In this case, the Court finds that Remington failed to discharge its burden of proving bad faith on the part of Marinduque Mining and its transferees in the mortgage and foreclosure of the subject properties to justify the piercing of the corporate veil.

The Court of Appeals also held that there exists in Remington's favor a "lien" on the unpaid purchases of Marinduque Mining, and as transferee of these






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purchases, DBP should be held liable for the value thereof.

In the absence of liquidation proceedings, however, the claim of Remington cannot be enforced against DBP. Article 2241 of the Civil Code provides:

ARTICLE 2241. With reference to specific movable property of the debtor, the following claims or liens shall be preferred:

xxx xxx xxx

(3) Claims for the unpaid price of movables sold, on said movables, so long as they are in the possession of the debtor, up to the value of the same; and if the movable has been resold by the debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost by the immobilization of the thing by destination, provided it has not lost its form, substance and identity, neither is the right lost by the sale of the thing together with other property for a lump sum, when the price thereof can be determined proportionally;

(4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value thereof;

xxx xxx xxx

In Barretto vs. Villanueva,16 the Court had occasion to construe Article 2242, governing claims or liens over specific immovable property. The facts that gave rise to the case were summarized by this Court in its resolution as follows:

x x x 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. 32626), and mortgaged the property to appellant Magdalena C. Barretto, married to Jose C. Baretto, 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.

In its decision upholding the order of the lower court, the Court ratiocinated thus:

Article 2242 of the new Civil Code enumerates the claims, mortgages and liens that constitute an encumbrance on specific immovable property, and among them are:

"(2) For the unpaid price of real property sold, upon the immovable sold"; and

"(5) Mortgage credits recorded in the Registry of Property."

Article 2249 of the same Code provides that "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 rights."

Application of the above-quoted provisions to the case at bar would mean that the herein appellee Rosario Cruzado as an unpaid vendor of the property in question has the right to share pro-rata with the appellants the proceeds of the foreclosure sale.

xxx xxx xxx

As to the point made that the articles of the Civil Code on concurrence and preference of credits are applicable only to the insolvent debtor, suffice it to say that nothing in the law shows any such limitation. If we are to interpret this portion of the Code as intended only for insolvency cases, then other creditor-debtor relationships where there are concurrence of credits would be left without any rules to govern them, and it would render purposeless the special laws on insolvency.17




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Upon motion by appellants, however, the Court reconsidered its decision. Justice J.B.L. Reyes, speaking for the Court, explained the reasons for the reversal:

A. The previous decision failed to take fully into account the radical changes introduced by the Civil Code of 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 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 proceeds if necessary.

Under the system of the Civil Code of the Philippines, 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 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 rights."

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 be first some proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency, the settlement of 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 articles shall be considered as mortgages or pledges of real or personal property, or liens within the

purview of legal provisions governing insolvency x x x (Italics 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 Insolvency Law." (Italics 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 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. [Emphasis supplied]

The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon. Lantin, Jr., etc., et al.,18 and in two cases both entitled Development Bank of the Philippines vs. NLRC.19

Although Barretto involved specific immovable property, the ruling therein should apply equally in this case where specific movable property is involved. As the extrajudicial foreclosure instituted by PNB and DBP is not the liquidation proceeding contemplated by the Civil Code, Remington cannot claim its pro rata share from DBP.

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated October 6, 1995 and its Resolution promulgated on August 29, 1996 is REVERSED and SET ASIDE. The original complaint filed in the Regional Trial Court in CV Case No. 84-25858 is hereby DISMISSED.

SO ORDERED.

DBP v. NLRC




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Manila

FIRST DIVISION

G.R. No. 108031 March 1, 1995

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs.NATIONAL LABOR RELATIONS COMMISSION and LEONOR A ANG, respondents.

BELLOSILLO, J.:

Is declaration of bankruptcy or judicial liquidation required before the worker's preference may be invoked under Art. 110 of the Labor Code?

On 21 March 1977 private respondent Leonor A. Ang started employment as Executive Secretary with Tropical Philippines Wood Industries, Inc. (TPWII), a corporation engaged in the manufacture and sale of veneer, plywood and sawdust panel boards. In 1982 she was promoted to the position of Personnel Officer.

In September 1983 petitioner Development Bank of the Philippines, as mortgagee of TPWII, foreclosed its plant facilities and equipment. Nevertheless TPWII continued its business operations interrupted only by brief shutdowns for the purpose of servicing its plant facilities and equipment. In January 1986 petitioner took possession of the foreclosed properties. From then on the company ceased its operations. As a consequence private respondent was on 15 April 1986 verbally terminated from the service.

On 14 December 1987 aggrieved by the termination of her employment, private respondent filed with the Labor Arbiter a complaint for separation pay, 13th month pay, vacation and sick leave pay, salaries and allowances against TPWII, its General Manager, and petitioner.

After hearing the Labor Arbiter found TPWII primarily liable to private respondent but only for her separation pay and vacation and sick leave pay because her claims for unpaid wages and 13th month pay were later paid after the complaint was filed. 1 The General

Manager was absolved of any liability. But with respect to petitioner, it was held subsidiarily liable in the event the company failed to satisfy the judgment. The Labor Arbiter rationalized that the right of an employee to be paid benefits due him from the properties of his employer is superior to the right of the latter's mortgage, citing this Court's resolution in PNB v. Delta Motor Workers Union. 2

On 16 November 1992 public respondent National Labor Relations Commission affirmed the ruling of the Labor Arbiter. 3

The issue now before us is whether public respondent committed grave abuse of discretion in holding that Art. 110 of the Labor Code, as amended, which refers to worker preference in case of bankruptcy or liquidation of an employer's business is applicable to the present case notwithstanding the absence of any formal declaration of bankruptcy or judicial liquidation of TPWII.

Petitioner argues that the decision of public respondent runs counter to the consistent rulings of this Court in a long line of cases emphasizing that the application of Art. 110 of the Labor Code is contingent upon the institution of bankruptcy or judicial liquidation proceedings against the employer.

We hold that public respondent gravely abused its discretion in affirming the decision of the Labor Arbiter. Art. 110 should not be treated apart from other laws but applied in conjunction with the pertinent provisions of the Civil Code and the Insolvency Law to the extent that piece-meal distribution of the assets of the debtor is avoided. Art. 110, then prevailing, provides:

Art. 110. Worker preference in case of bankruptcy. — In the event of bankruptcy or liquidation of an employer's business, his workers shall enjoy first preference as regards wages due them for services rendered during the period prior to the bankruptcy or liquidation, any provision to the contrary notwithstanding. Unpaid wages shall be paid in full before other creditors may establish any claim to a share in the assets of the employer.

Complementing Art. 110, Sec. 10, Rule VIII, Book III, of the Revised Rules and Regulations Implementing the Labor Code provides:

Sec. 10. Payment of wages in case of bankruptcy. — Unpaid wages earned by the employees before the declaration of bankruptcy or judicial liquidation of the


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employer's business shall be given first preference and shall be paid in full before other creditors may establish any claim to a share in the assets of the employer.

We interpreted this provision in Development Bank of the Philippines v. Santos 4 to mean that —

. . . a declaration of bankruptcy or a judicial liquidation must be present before the worker's preference may be enforced. Thus, Article 110 of the Labor Code and its implementing rule cannot be invoked by the respondents in this case absent a formal declaration of bankruptcy or a liquidation order . . . . (Emphasis supplied).

The rationale is that to hold Art. 110 to be applicable also to extrajudicial proceedings would be putting the worker in a better position than the State which could only assert its own prior preference in case of a judicial proceeding. 5 Art. 110, which was amended by R.A. 6715 effective 21 March 1989, now reads:

Art. 110. Worker preference in case of bankruptcy. — In the event of bankruptcy or liquidation of an employer's business, his workers shall enjoy first preference as regards their unpaid wages and other monetary claims, any provision of law to the contrary notwithstanding. Such unpaid wages and monetary claims shall be paid in full before the claims of the Government and other creditors may be paid.

Obviously, the amendment expanded the concept of "worker preference" to cover not only unpaid wages but also other monetary claims to which even claims of the Government must be deemed subordinate. The Rules and Regulations Implementing R.A. 6715, approved 24 May 1989, also amended the corresponding implementing rule, and now reads:

Sec. 10. Payment of wages and other monetary claims in case of bankruptcy. — In case of bankruptcy or liquidation of the employer's business, the unpaid wages and other monetary claims of the employees shall be given first preference and shall be paid in full before the claims of government and other creditors may be paid.

Although the terms "declaration" (of bankruptcy) or "judicial" (liquidation) have been notably eliminated, still inDevelopment Bank of the Philippines v. NLRC, 6 this Court did not alter its original position that the right to preference given to workers under Art. 110 cannot exist in any effective way prior to the time

of its presentation in distribution proceedings. In effect, we reiterated our previous interpretation in Development Bank of the Philippines v. Santos where we said:

It (worker preference) will find application when, in proceedings such as insolvency, such unpaid wages shall be paid in full before the "claims of the Government and other creditors" may be paid. But, for an orderly settlement of a debtor's assets, all creditors must be convened, their claims ascertained and inventoried, and thereafter the preferences determined. In the course of judicial proceedings which have for their object the subjection of the property of the debtor to the payment of his debts or other lawful obligations. Thereby, an orderly determination of preference of creditors' claims is assured (Philippine Savings Bank vs. Lantin, No. L-33929, September 2, 1983, 124 SCRA 476); the adjudication made will be binding on all parties-in-interest since those proceedings are proceedings in rem; and the legal scheme of classification, concurrence and preference of credits in the Civil Code, the Insolvency Law, and the Labor Code is preserved in harmony. 7

In ruling, as we did, in Development Bank of the Philippines v. Santos, we took into account the following pronouncements:

In the event of insolvency, a principal objective should be to effect an equitable distribution of the insolvents property among his creditors. To accomplish this there must first be some proceeding where notice to all of the insolvent's creditors may be given and where the claims of preferred creditors may be bindingly adjudicated. (De Barreto v. Villanueva, No. L-14938, December 29, 1962, 6 SCRA 928). The rationale therefore has been expressed in the recent case of DBP v. Secretary of Labor (G.R. No. 79351, 28 November 1989), which we quote:

A preference of credit bestows upon the preferred creditor an advantage of having his credit satisfied first ahead of other claims which may be established against the debtor. Logically, it becomes material only when the properties and assets of the debtors are insufficient to pay his debts in full; for if the debtor is amply able to pay his various creditors in full, how can the necessity exist to determine which of his creditors shall be paid first or whether they shall be paid out of the proceeds of the sale (of) the debtor's specific property. Indubitably, the preferential right of credit attains significance only after the properties of the debtor have been inventoried and liquidated, and the claims held by his various creditors have been


33

established (Kuenzle & Sheriff (Ltd.) v. Villanueva, 41 Phil. 611 [1916]; Barretto v. Villanueva, G.R. No. 14938, 29 December 1962, 6 SCRA 928; Philippine Savings Bank v. Lantin, G.R. No. 33929, 2 September 1983, 124 SCRA 476).

In the present case, there is as yet no declaration of bankruptcy nor judicial liquidation of TPWII. Hence, it would be premature to enforce the worker's preference.

The additional ratiocination of public respondent that "under Article 110 of the Labor Code complainant enjoys a preference of credit over the properties of TPWII being held in possession by DBP," is a dismal misconception of the nature of preference of credit, a subject matter which we have already discussed in clear and simple terms and even distinguished from a lien in Development Bank of the Philippines v. NLRC 8 —

. . . A preference applies only to claims which do not attach to specific properties. A lien creates a charge on a particular property. The right of first preference as regards unpaid wages recognized by Article 110 does not constitute a lien on the property of the insolvent debtor in favor of workers. It is but a preference of credit in their favor, a preference in application. It is a method adopted to determine and specify the order in which credits should be paid in the final distribution of the proceeds of the insolvent's assets. It is a right to a first preference in the discharge of the funds of the judgment debtor . . . In the words of Republic v. Peralta, supra: Article 110 of the Labor Code does not purport to create a lien in favor of workers or employees for unpaid wages either upon all of the properties or upon any particular property owned by their employer. Claims for unpaid wages do not therefore fall at all within the category of specially preferred claims established under Articles 2241 and 2242 of the Civil Code, except to the extent that such claims for unpaid wages are already covered by Article 2241, number 6: "claims for laborers: wages, on the goods manufactured or the work done;" or by Article 2242, number 3, "claims of laborers and other workers engaged in the construction reconstruction or repair of buildings, canals and other works, upon said buildings, canals and other works . . . . To the extent that claims for unpaid wages fall outside the scope of Article 2241, number 6, and 22421 number 3, they would come within the ambit of the category of ordinary preferred credits under Article 2244.

The DBP anchors its claim on a mortgage credit. A mortgage directly and immediately subjects the

property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted (Article 2176, Civil Code). It creates a real right which is enforceable against the whole world. It is a lien on an identified immovable property, which a preference is not. A recorded mortgage credit is a special preferred credit under Article 2242 (5) of the Civil Code on classification of credits. The preference given by Article 1l0, when not falling within Article 2241 (6) and Article 2242 (3), of the Civil Code and not attached to any specific property, is all ordinary preferred credit although its impact is to move it from second priority to first priority in the order of preference established by Article 2244 of the Civil Code.

The present controversy could have been easily settled by public respondent had it referred to ample jurisprudence which already provides the solution. Stare decisions et non quiet movere. Once a case is decided by this Court as the final arbiter of any justifiable controversy one way, then another case involving exactly the same point at issue should be decided in the same manner. Public respondent had no choice on the matter. It could not have ruled any other way. This Court having spoken in a string of cases against public respondent, its duty is simply to obey judicial precedents. 9 Any further disregard, if not defiance, of our rulings will be considered a ground to hold public respondent in contempt.

WHEREFORE, the petition is GRANTED. The decision of public respondent National Labor Relations Commission affirming the decision of the Labor Arbiter insofar as it held petitioner Development Bank of the Philippines liable for the monetary claims of private respondent Leonor A. Ang is SET ASIDE. The temporary restraining order we issued on 8 February 1993 10 enjoining the execution of the decision of public respondent against petitioner is made PERMANENT.

SO ORDERED.

REPUBLIC v. PERALTA


Manila


34

EN BANC

G.R. No. L-56568 May 20, 1987

REPUBLIC OF THE PHILIPPINES, represented by the Bureau of Customs and the Bureau of Internal Revenue, petitioner, vs.HONORABLE E.L. PERALTA, PRESIDING JUDGE OF THE COURT OF FIRST INSTANCE OF MANILA, BRANCH XVII, QUALITY TABACCO CORPORATION, FRANCISCO, FEDERACION OBRERO DE LA INDUSTRIA TABAQUERA Y OTROS TRABAJADORES DE FILIPINAS (FOITAF) USTC EMPLOYEES ASSOCIATION WORKERS UNION-PTGWO, respondents.

Oscar A. Pascua for assignee F. Candelaria.

Teofilo C. Villarico for respondent Federation.

Pedro A. Lopez for respondent USTC.

FELICIANO, J.:

The Republic of the Philippines seeks the review on certiorari of the Order dated 17 November 1980 of the Court of First Instance of Manila in its Civil Case No. 108395 entitled "In the Matter of Voluntary Insolvency of Quality Tobacco Corporation, Quality Tobacco Corporation, Petitioner," and of the Order dated 19 January 1981 of the same court denying the motion for reconsideration of the earlier Order filed by the Bureau of Internal Revenue and the Bureau of Customs for the Republic.

In the voluntary insolvency proceedings commenced in May 1977 by private respondent Quality Tobacco Corporation (the "Insolvent"), the following claims of creditors were filed:

(i) P2,806,729.92, by the USTC Association of Employees and workers Union-PTGWO USTC as separation pay for their members. This amount plus an additional sum of P280,672.99 as attorney's fees had been awarded by the National Labor Relations Commission in NLRC Case No. RB-IV-9775-77. 1

(ii) P53,805.05 by the Federacion de la Industria Tabaquera y Otros Trabajadores de Filipinas ("FOITAF), as separation pay for their members, an

amount similarly awarded by the NLRC in the same NLRC Case.

(iii) P1,085,188.22 by the Bureau of Internal Revenue for tobacco inspection fees covering the period 1 October 1967 to 28 February 1973;

(iv) P276,161.00 by the Bureau of Customs for customs duties and taxes payable on various importations by the Insolvent. These obligations appear to be secured by surety bonds. 2 Some of these imported items are apparently still in customs custody so far as the record before this Court goes.

In its questioned Order of 17 November 1980, the trial court held that the above-enumerated claims of USTC and FOITAF (hereafter collectively referred to as the "Unions") for separation pay of their respective members embodied in final awards of the National Labor Relations Commission were to be preferred over the claims of the Bureau of Customs and the Bureau of Internal Revenue. The trial court, in so ruling, relied primarily upon Article 110 of the Labor Code which reads thus:

Article 110. Worker preference in case of bankruptcy — In the event of bankruptcy or liquidation of an employer's business, his workers shall enjoy first preference as regards wages due them for services rendered during the period prior to the bankruptcy or liquidation, any provision of law to the contrary notwithstanding. Union paid wages shall be paid in full before other creditors may establish any claim to a share in the assets of the employer.

The Solicitor General, in seeking the reversal of the questioned Orders, argues that Article 110 of the Labor Code is not applicable as it speaks of "wages," a term which he asserts does not include the separation pay claimed by the Unions. "Separation pay," the Solicitor General contends,

is given to a laborer for a separation from employment computed on the basis of the number of years the laborer was employed by the employer; it is a form of penalty or damage against the employer in favor of the employee for the latter's dismissal or separation from service. 3

Article 97 (f) of the Labor Code defines "wages" in the following terms:

Wage' paid to any employee shall mean the remuneration or earnings, however designated,


35

capable of being expressed in terms of money, whether fixed or ascertained on a time, task, piece, or commission basis, or other method of calculating the same, which is payable by an employer to an employee under a written or unwritten contract of employment for work done or to be done, or for services rendered or to be rendered, and includes the fair and reasonable value, as determined by the Secretary of Labor, of board, lodging, or other facilities customarily furnished by the employer to the employee. 'Fair and reasonable value' shall not include any profit to the employer or to any person affiliated with the employer.(emphasis supplied)

We are unable to subscribe to the view urged by the Solicitor General. We note, in this connection, that inPhilippine Commercial and Industrial Bank (PCIB) us. National Mines and Allied Workers Union, 4 the Solicitor General took a different view and there urged that the term "wages" under Article 110 of the Labor Code may be regarded as embracing within its scope severance pay or termination or separation pay. In PCIB, this Court agreed with the position advanced by the Solicitor General. 5 We see no reason for overturning this particular position. We continue to believe that, for the specific purposes of Article 110 and in the context of insolvency termination or separation pay is reasonably regarded as forming part of the remuneration or other money benefits accruing to employees or workers by reason of their having previously rendered services to their employer; as such, they fall within the scope of "remuneration or earnings — for services rendered or to be rendered — ." Liability for separation pay might indeed have the effect of a penalty, so far as the employer is concerned. So far as concerns the employees, however, separation pay is additional remuneration to which they become entitled because, having previously rendered services, they are separated from the employer's service. The relationship between separation pay and services rendered is underscored by the fact that separation pay is measured by the amount (i.e., length) of the services rendered. This construction is sustained both by the specific terms of Article 110 and by the major purposes and basic policy embodied in the Labor Code. 6 It is also the construction that is suggested by Article 4 of the Labor Code which directs that doubts — assuming that any substantial rather than merely frivolous doubts remain-in the interpretation of the provisions of the labor Code and its implementing rules and regulations shall be "resolved in favor of labor."

The resolution of the issue of priority among the several claims filed in the insolvency proceedings

instituted by the Insolvent cannot, however, rest on a reading of Article 110 of the labor Code alone.

Article 110 of the Labor Code, in determining the reach of its terms, cannot be viewed in isolation. Rather, Article 110 must be read in relation to the provisions of the Civil Code concerning the classification, concurrence and preference of credits, which provisions find particular application in insolvency proceedings where the claims of all creditors, preferred or non-preferred, may be adjudicated in a binding manner. 7 It is thus important to begin by outlining the scheme constituted by the provisions of the Civil Code on this subject.

Those provisions may be seen to classify credits against a particular insolvent into three general categories, namely:

(a) special preferred credits listed in Articles 2241 and 2242,

(b) ordinary preferred credits listed in Article 2244; and

(c) common credits under Article 2245.

Turning first to special preferred credits under Articles 2241 and 2242, it should be noted at once that these credits constitute liens or encumbrances on the specific movable or immovable property to which they relate. Article 2243 makes clear that these credits "shall be considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency." It should be emphasized in this connection that "duties, taxes and fees due [on specific movable property of the insolvent] to the State or any subdivision thereof" (Article 2241 [1]) and "taxes due upon the [insolvent's] land or building (2242 [1])"stand first in preference in respect of the particular movable or immovable property to which the tax liens have attached. Article 2243 is quite explicit: "[T]axes mentioned in number 1, Article 2241 and number 1, Article 2242 shall first be satisfied. " The claims listed in numbers 2 to 13 in Article 2241 and in numbers 2 to 10 in Articles 2242, all come after taxes in order of precedence; such claims enjoy their privileged character as liens and may be paid only to the extent that taxes have been paid from the proceeds of the specific property involved (or from any other sources) and only in respect of the remaining balance of such proceeds. What is more, these other (non-tax) credits, although constituting liens attaching to particular property, are not preferred one over another inter se. Provided tax liens shall have been satisfied, non-tax liens or


36

special preferred credits which subsist in respect of specific movable or immovable property are to be treated on an equal basis and to be satisfied concurrently and proportionately. 8 Put succintly, Articles 2241 and 2242 jointly with Articles 2246 to 2249 establish a two-tier order of preference. The first tier includes only taxes, duties and fees due on specific movable or immovable property. All other special preferred credits stand on the same second tier to be satisfied, pari passu and pro rata, out of any residual value of the specific property to which such other credits relate.

Credits which are specially preferred because they constitute liens (tax or non-tax) in turn, take precedence over ordinary preferred credits so far as concerns the property to which the liens have attached. The specially preferred credits must be discharged first out of the proceeds of the property to which they relate, before ordinary preferred creditors may lay claim to any part of such proceeds. 9

If the value of the specific property involved is greater than the sum total of the tax liens and other specially preferred credits, the residual value will form part of the "free property" of the insolvent — i.e., property not impressed with liens by operation of Articles 2241 and 2242. If, on the other hand, the value of the specific movable or immovable is less than the aggregate of the tax liens and other specially preferred credits, the unsatisfied balance of the tax liens and other such credits are to the treated as ordinary credits under Article 2244 and to be paid in the order of preference there set up. 10

In contrast with Articles 2241 and 2242, Article 2244 creates no liens on determinate property which follow such property. What Article 2244 creates are simply rights in favor of certain creditors to have the cash and other assets of the insolvent applied in a certain sequence or order of priority. 11

Only in respect of the insolvent's "free property" is an order of priority established by Article 2244. In this sequence, certain taxes and assessments also figure but these do not have the same kind of overriding preference that Articles 2241 No. 1 and 2242 No. I create for taxes which constituted liens on the taxpayer's property. Under Article 2244,

(a) taxes and assessments due to the national government, excluding those which result in tax liens under Articles 2241 No. 1 and 2242 No. 1 but including the balance thereof not satisfied out of

the movable or immovable property to which such liens attached, are ninth in priority;

(b) taxes and assessments due any province, excluding those impressed as tax liens under Articles 2241 No. 1 and 2242 No. 1, but including the balance thereof not satisfied out of the movable or immovable property to which such liens attached, are tenth in priority; and

(c) taxes and assessments due any city or municipality, excluding those impressed as tax liens under Articles 2241 No. I and 2242 No. 2 but including the balance thereof not satisfied out of the movable or immovable property to which such liens attached, are eleventh in priority.

It is within the framework of the foregoing rules of the Civil Code that the question of the relative priority of the claims of the Bureau of Customs and the Bureau of Internal Revenue, on the one hand, and of the claims of the Unions for separation pay of their members, on the other hand, is to be resolved. A related vital issue is what impact Article 110 of the labor Code has had on those provisions of the Civil Code.

A. Claim of the Bureau of Customs for Unpaid Customs Duties and Taxes-

Under Section 1204 of the Tariff and Customs Code, 12 the liability of an importer

for duties, taxes and fees and other charges attaching on importation constitute a personal debt due from the importer to the government which can be discharged only by payment in full of all duties, taxes, fees and other charges legally accruing It also constitutes a lien upon the articles imported which may be enforced while such articles are in the custody or subject to the control of the government. (emphasis supplied)

Clearly, the claim of the Bureau of Customs for unpaid customs duties and taxes enjoys the status of a specially preferred credit under Article 2241, No. 1, of the Civil Code. only in respect of the articles importation of which by the Insolvent resulted in the assessment of the unpaid taxes and duties, and which are still in the custody or subject to the control of the Bureau of Customs. The goods imported on one occasion are not subject to a lien for customs duties and taxes assessed upon other importations though also effected by the Insolvent. Customs duties and taxes which remain unsatisfied after levy upon the imported articles on which such duties and taxes are


37

due, would have to be paid out of the Insolvent's "free property" in accordance with the order of preference embodied in Article 2244 of the Civil Code. Such unsatisfied customs duties and taxes would fall within Article 2244, No. 9, of the Civil Code and hence would be ninth in priority.

B. Claims of the Bureau of Internal Revenue for Tabacco Inspection Fees —

Under Section 315 of the National Internal Revenue Code ("old Tax Code"), 13 later reenacted in Identical terms as Section 301 of the Tax Code of 1977, 14 an unpaid "internal revenue tax," together with related interest, penalties and costs, constitutes a lien in favor of the Government from the time an assessment therefor is made and until paid, "upon all property and rights to property belonging to the taxpayer."

Tobacco inspection fees are specifically mentioned as one of the miscellaneous taxes imposed under the National Internal Revenue Code, specifically Title VIII, Chapter IX of the old Tax Code and little VIII, Chapter VII of the Tax Code of 1977. 15 Tobacco inspection fees are collected both for purposes of regulation and control and for purposes of revenue generation: half of the said fees accrues to the Tobacco Inspection Fund created by Section 12 of Act No. 2613, as amended by Act No. 3179, while the other half accrues to the Cultural Center of the Philippines. Tobacco inspection fees, in other words, are imposed both as a regulatory measure and as a revenue-raising measure. In Commissioner of Internal Revenue us. Guerrero, et al 16 this Court held, through Mr. Chief Justice Concepcion, that the term "tax" is used in Section 315 of the old Tax Code:

not in the limited sense [of burdens imposed upon persons and/or properties, by way of contributions to the support of the Government, in consideration of general benefits derived from its operation], but, in a broad sense, encompassing all government revenues collectible by the Commissioner of Internal Revenue under said Code, whether involving taxes, in the strict technical sense thereof, or not. x x x As used in Title IX of said Code, the term 'tax' includes 'any national internal revenue tax, fee or charge imposed by the Code. 17

It follows that the claim of the Bureau of Internal Revenue for unpaid tobacco inspection fees constitutes a claim for unpaid internal revenue taxes 18 which gives rise to a tax lien upon all the properties and assets, movable and immovable, of the Insolvent as taxpayer. Clearly, under Articles 2241 No.

1, 2242 No. 1, and 2246-2249 of the Civil Code, this tax claim must be given preference over any other claim of any other creditor, in respect of any and all properties of the Insolvent. 19

C. Claims of the Unions for Separation Pay of Their Members —

Article 110 of the Labor Code does not purport to create a lien in favor of workers or employees for unpaid wages either upon all of the properties or upon any particular property owned by their employer. Claims for unpaid wages do not therefore fall at all within the category of specially preferred claims established under Articles 2241 and 2242 of the Civil Code, except to the extent that such claims for unpaid wages are already covered by Article 2241, number 6. "claims for laborers' wages, on the goods manufactured or the work done;" or by Article 2242, number 3: "claims of laborers and other workers engaged in the construction, reconstruction or repair of buildings, canals and other works, upon said buildings, canals or other works." To the extent that claims for unpaid wages fall outside the scope of Article 2241, number 6 and 2242, number 3, they would come within the ambit of the category of ordinary preferred credits under Article 2244.

Applying Article 2241, number 6 to the instant case, the claims of the Unions for separation pay of their members constitute liens attaching to the processed leaf tobacco, cigars and cigarettes and other products produced or manufactured by the Insolvent, but not to other assets owned by the Insolvent. And even in respect of such tobacco and tobacco products produced by the Insolvent, the claims of the Unions may be given effect only after the Bureau of Internal Revenue's claim for unpaid tobacco inspection fees shall have been satisfied out of the products so manufactured by the Insolvent.

Article 2242, number 3, also creates a lien or encumbrance upon a building or other real property of the Insolvent in favor of workmen who constructed or repaired such building or other real property. Article 2242, number 3, does not however appear relevant in the instant case, since the members of the Unions to whom separation pay is due rendered services to the Insolvent not (so far as the record of this case would show) in the construction or repair of buildings or other real property, but rather, in the regular course of the manufacturing operations of the Insolvent. The Unions' claims do not therefore constitute a lien or encumbrance upon any immovable property owned by the Insolvent, but rather, as already indicated, upon


38

the Insolvent's existing inventory (if any of processed tobacco and tobacco products.

We come to the question of what impact Article 110 of the Labor Code has had upon the complete scheme of classification, concurrence and preference of credits in insolvency set out in the Civil Code. We believe and so hold that Article 110 of the Labor Code did not sweep away the overriding preference accorded under the scheme of the Civil Code to tax claims of the government or any subdivision thereof which constitute a lien upon properties of the Insolvent. It is frequently said that taxes are the very lifeblood of government. The effective collection of taxes is a task of highest importance for the sovereign. It is critical indeed for its own survival. It follows that language of a much higher degree of specificity than that exhibited in Article 110 of the Labor Code is necessary to set aside the intent and purpose of the legislator that shines through the precisely crafted provisions of the Civil Code. It cannot be assumed simpliciter that the legislative authority, by using in Article 110 the words "first preference" and "any provision of law to the contrary notwithstanding" intended to disrupt the elaborate and symmetrical structure set up in the Civil Code. Neither can it be assumed casually that Article 110 intended to subsume the sovereign itself within the term "other creditors" in stating that "unpaid wages shall be paid in full before other creditors may establish any claim to a share in the assets of employer." Insistent considerations of public policy prevent us from giving to "other creditors" a linguistically unlimited scope that would embrace the universe of creditors save only unpaid employees.

We, however, do not believe that Article 110 has had no impact at all upon the provisions of the Civil Code. Bearing in mind the overriding precedence given to taxes, duties and fees by the Civil Code and the fact that the Labor Code does not impress any lien on the property of an employer, the use of the phrase "first preference" in Article 110 indicates that what Article 110 intended to modify is the order of preference found in Article 2244, which order relates, as we have seen, to property of the Insolvent that is not burdened with the liens or encumbrances created or recognized by Articles 2241 and 2242. We have noted that Article 2244, number 2, establishes second priority for claims for wages for services rendered by employees or laborers of the Insolvent "for one year preceding the commencement of the proceedings in insolvency." Article 110 of the Labor Code establishes "first preference" for services rendered "during the period prior to the bankruptcy or liquidation, " a period not limited to the year immediately prior to the

bankruptcy or liquidation. Thus, very substantial effect may be given to the provisions of Article 110 without grievously distorting the framework established in the Civil Code by holding, as we so hold, that Article 110 of the Labor Code has modified Article 2244 of the Civil Code in two respects: (a) firstly, by removing the one year limitation found in Article 2244, number 2; and (b) secondly, by moving up claims for unpaid wages of laborers or workers of the Insolvent from second priority to first priority in the order of preference established I by Article 2244.

Accordingly, and by way of recapitulating the application of Civil Code and Labor Code provisions to the facts herein, the trial court should inventory the properties of the Insolvent so as to determine specifically: (a) whether the assets of the Insolvent before the trial court includes stocks of processed or manufactured tobacco products; and (b) whether the Bureau of Customs still has in its custody or control articles imported by the Insolvent and subject to the lien of the government for unpaid customs duties and taxes.

In respect of (a), if the Insolvent has inventories of processed or manufactured tobacco products, such inventories must be subjected firstly to the claim of the Bureau of Internal Revenue for unpaid tobacco inspection fees. The remaining value of such inventories after satisfaction of such fees (or should such inspection fees be satisfied out of other properties of the Insolvent) will be subject to a lien in favor of the Unions by virtue of Article 2241, number 6. In case, upon the other hand, the Insolvent no longer has any inventory of processed or manufactured product, then the claim of the Unions for separation pay would have to be satisfied out of the "free property" of the Insolvent under Article 2244 of the Civil Code. as modified by Article 110 of the Labor Code.

Turning to (b), should the Bureau of Customs no longer have any importations by the Insolvent still within customs custody or control, or should the importations still held by the Bureau of Customs be or have become insufficient in value for the purpose, customs duties and taxes remaining unpaid would have only ninth priority by virtue of Article 2244, number 9. In respect therefore of the Insolvent's "free property, " the claims of the Unions will enjoy first priority under Article 2244 as modified and will be paid ahead of the claims of the Bureau of Customs for any customs duties and taxes still remaining unsatisfied.


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It is understood that the claims of the Unions referred to above do not include the 10% claim for attorney's fees. Attorney's fees incurred by the Unions do not stand on the same footing as the Unions' claims for separation pay of their members.

WHEREFORE, the petition for review is granted and the Orders dated 17 November 1980 and 19 January 1981 of the trial court are modified accordingly. This case is hereby remanded to the trial court for further proceedings in insolvency compatible with the rulings set forth above. No pronouncement as to costs.

SO ORDERED.

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