G.R. No. 169211, March 6, 2013 Star Two(SPV-AMC), Inc., PetitionersvsPaper City Corporation of the Philippines, Respondent.Facts:From 1990-1991, Paper City applied for and was grantedfour (4) loans and credit accomodations by Rizal Commercial BankingCorporation (RCBC), now substituted byStar Two(SPV-AMC), Inc. Theloans were secured by four (4) Deeds of Continuing ChattelMortgages on Paper City's machineries andequipment.However, RCBC eventually executed a unilateralCancellation of Deed ofContining Chattel Mortgage.In 1992, RCBC, as the trustee bank, together withMetrobank and Union Bank, entered intoa Mortgage Trust Indenture,which will be known hereinafter as MTI, with Paper City. In the saidMTI, Paper City acquired additional loans secured by five (5) Deeds of Real Estate Mortgage, plus real and personal properties in anannex to the MTI, which covered the machineries and equipment ofPaper City.The MTI was later on amended and supplemented three(3) times, wherein the loan was increased and included the samemortgages with an additional building and other improvements inthe plant site.Paper City was able to comply woth the loans butonly until1997 due to an econmic crisis. And because of the default in thepayment, RCBC filed a petition for extra-judicial foreclosure againstthe real estate executed by Paper City including all theimprovements. As highest bidders, the three banks were issued a Certificate of Sale. Paper City filed a complaint aleging that the salewas null and void due to lack ofprior notice.During the pendency of the complaint, Paper City filed with the trial court a motion to remove machinery out of the foreclosed land and building, saying that the same were not included in the foreclosure of the real estate mortgage. The trial court deniedthe motion, ruling that the machineries and equipment were included. In Paper City's Motion for Reconsideration, the trial courtgranted the same and justified the reversal by finding that themachineries and equipment are chattels by agreement thru the fourDeeds of Continuing Chattel Mortgages; and that the deed ofcancellation executed by RCBC of said mortgagewas not validbecause it was one unilaterally. RCBC's own Motion forReconsiderationwas denied. The case was elevated to the CA on appeal. RCBC alleged:1.ThatPaperCitygaveitsconsenttoconsiderthedisputedmachineries and equipment as real properties when they signed theMTI's and all its amendments;2.Thatthemachineriesandequipmentarethesameasinthe MTI's, hence treated by agreement of the parties as real properties.In its comment, Paper City argued:1.Theydidnotconsenttoconsiderthedisputedmachineryies and equipment as realproperty;2.Thatthedisputedmachineriesandequipmentremainedwithin the purview of theexisting chattel mortgages.The CA affirmed the orders of the trial court because it relied on the plain language of the MTI's. Hence, the petition.Issue:Whether or not the subject machineries and equipment wereconsidered real properties and should therefore be included in theextra-judicial foreclosure which in turnwere sold to thebanks.Held:The SC said that repeatedly in the MTI's, the parties stipulated that the properties mortgaged by Paper City toRCBC are various parcels of landincluding buildings and existing improvements thereon as well asthe machineries and equipment.The Court reiterated the rule that in contracts (in this case the MTI's), if the language used is clear as day and readily understandable by an ordinary reader, there is no need forconstruction. The case at bar is covered by the rule. The plain language and literal interpretation of the MTI's must be applied. The petitioner, other creditor banks, and Paper City intended from the very first indenture that the machineries andequipment in the annex in the MTI's areincluded.The Court also said that it was error for the CA to hold that the machineries and equipment in the MTI's are personal property,for in factthe MTI's did not describe thesame as personal property. And finally, the realestate mortgage over the machineries and equipment is even in full accord with the classification of such properties by the Civil Code as immoveable property. Thus:Art. 415. Thefollowing are immovable property:Land, buildings, roads and constructions of all kinfs adhered to thesoil;xxxx5. Machinery, receptacles, instruments or implements intended bythe owner of the tenement for an industry or works wich may becarried on in a building or on a piece of land, and which tenddirectly to meet the needs of thesaid industry or worksgarcia vs villar gr-158891The mortgagee's purchase of the subject property did not violate the prohibition on pactum commissorium. The power of attorney provision above did not provide that the ownership over the subject property would automatically pass to the mortgagee upon the mortgagor's failure to pay the loan on time. What it granted was the mere appointment of the mortgagee as attorney-in-fact, with authority to sell or otherwise dispose of the subject property, and to apply the proceeds to the payment of the loan. This provision is customary in mortgage contracts, and is in conformity with Article 2087 of the Civil Code, - G.R. No. 158891

Prohibition on pactum commissorium

Garcia claims that the stipulation appointing Villar, the mortgagee, as the mortgagors attorney-in-fact, to sell the property in case of default in the payment of the loan, is in violation of the prohibition onpactum commissorium, as stated under Article 2088 of the Civil Code,viz:

Art. 2088.The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them.Any stipulation to the contrary is null and void.

The power of attorney provision in the Deed of Real Estate Mortgage reads:

5.Power of Attorney of MORTGAGEE. Effective upon the breach of any condition of this Mortgage, and in addition to the remedies herein stipulated, the MORTGAGEE is likewise appointed attorney-in-fact of the MORTGAGOR with full power and authority to take actual possession of the mortgaged properties, to sell, lease any of the mortgaged properties, to collect rents, to execute deeds of sale, lease, or agreement that may be deemed convenient, to make repairs or improvements on the mortgaged properties and to pay the same, and perform any other act which the MORTGAGEE may deem convenient for the proper administration of the mortgaged properties.The payment of any expenses advanced by the MORTGAGEE in connection with the purpose indicated herein is also secured by this Mortgage.Any amount received from the sale, disposal or administration abovementioned maybe applied by assessments and other incidental expenses and obligations and to the payment of original indebtedness including interest and penalties thereon.The power herein granted shall not be revoked during the life of this Mortgage and all acts which may be executed by the MORTGAGEE by virtue of said power are hereby ratified.[38]

The following are the elements ofpactum commissorium:

(1) There should be a property mortgaged by way of security for the payment of the principal obligation; and

(2) There should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.[39]

Villars purchase of the subject property did not violate the prohibition onpactum commissorium.The power of attorney provision above did not provide that the ownership over the subject property would automatically pass to Villar upon Galass failure to pay the loan on time.What it granted was the mere appointment of Villar as attorney-in-fact, with authority to sell or otherwise dispose of the subject property, and to apply the proceeds to the payment of the loan.[40]This provision is customary in mortgage contracts, and is in conformity with Article 2087 of the Civil Code, which reads:

Art. 2087.It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor.

Galass decision to eventually sell the subject property to Villar for an additionalP1,500,000.00 was well within the scope of her rights as the owner of the subject property.The subject property was transferred to Villar by virtue of another and separate contract, which is the Deed of Sale.Garcia never alleged that the transfer of the subject property to Villar was automatic upon Galass failure to discharge her debt, or that the sale was simulated to cover up such automatic transfer.x x x."Mortgage; pactum commissorium. The following are the elements ofpactum commissorium:(1) There should be a property mortgaged by way of security for the payment of the principal obligation; and(2) There should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.Villars purchase of the subject property did not violate the prohibition onpactum commissorium. The power of attorney provision above did not provide that the ownership over the subject property would automatically pass to Villar upon Galass failure to pay the loan on time. What it granted was the mere appointment of Villar as attorney-in-fact, with authority to sell or otherwise dispose of the subject property, and to apply the proceeds to the payment of the loan. This provision is customary in mortgage contracts, and is in conformity with Article 2087 of the Civil Code.Galass decision to eventually sell the subject property to Villar for an additionalP1,500,000.00 was well within the scope of her rights as the owner of the subject property. The subject property was transferred to Villar by virtue of another and separate contract, which is the Deed of Sale. Garcia never alleged that the transfer of the subject property to Villar was automatic upon Galass failure to discharge her debt, or that the sale was simulated to cover up such automatic transfer.Pablo P. Garcia vs. Yolanda Valdez Villar;G.R. No. 158891, June 27, 2012.

Sps. Yap vs. Sps. Dy, et al. (GR No. 171868July 27, 2011)DRBI vs. Sps. Dy, et al. (GR No. 171991)Facts:Sps. Tirambulo are the registered owners of several parcels of land in Negros Oriental (Lots 1,3,4,5,6,8 and846). In 1976, they executed a Real Estate Mortgage over Lots 1,4,5,6 and 8 in favor of Rural Bank ofDumaguete, Inc. (Now Dumaguete Rural Bank, Inc.DRBI) to secure a P105,000 loan. Later, they obtained asecond loan for P28,000 and also executed a Real Estate Mortgage over Lots 3 and 846 in favor of the samebank.Subsequently, the Tirambulos sold all the mortgaged properties to Sps. Dy and Sps. Maxinos without theconsent of DRBI. Upon default of the Tirambulos to pay their loans to DRBI, the latter extrajudicially foreclosedthe first mortgage and sold Lots 1,4,5,6 and 8 at public auction, wherein the DRBI was proclaimed the highestbidder and bought said lots for P216,040.93. TheCertificate of Salestates thatthe sale is subject to therights of redemption of the mortgagor(s) or any other persons authorized by law to do so, within aperiodofone(1)yearfromregistrationhereof.However, the Certificate of Sale was not registered untilalmost a year later, or onJune 24, 1983.Days after the registration, the DRBI sold Lots 1,3and 6 to Sps. Yap under a Deed of Sale with Agreement toMortgage.NOTE: Lot 3 was not among the foreclosed properties bought by DRBI at public auction.InAugust 1983(within theredemption period), theSps. YapfiledaMotion for Writ of Possessionalleging thathave acquired all the rights and interests of DRBI over the foreclosed and the immediate possession of thesame because the 1-yr redemption period had lapsed without any redemption being made. Upon motion of theYaps, it was ordered withdrawn for unknown reason. However, 3 days later, the Yaps again filed the saidmotion, which was granted by the trial court, consequently, a Writ ofPossession over Lots 1,3and 6 was issuedin favor of the Yaps.Before the expiration of the redemption period, the Dys and Maxinos attempted to redeem Lots 1, 3 and 6 forP40,000 but DRBI and Yaps refused, contending that the redemption should be for the full amount of thewinning bid of P216,040.93 plus interest for allthe foreclosed properties. Thus, the Dys and the Maxinos went tothe office of the sheriff and paid P50,625.29 (40,000 principal + 10,625.29 interests and sheriffs commission) toeffect the redemption. A Certificate of Redemption was issued for Lots 1 and 6 only stating thatLot 3 is notincluded in the foreclosure proceedings.Atty. Diputado (Clerk of Court and Provincial Sheriff) duly notifiedthe Yaps of the said redemption and the non-inclusion of Lot 3 among the foreclosed properties.However, in aletter to Atty. Diputado from the Yaps, they refused to take delivery of the redemption price arguing thatone of the characteristics of a mortgage is its indivisibility and that one cannot redeem only some of thelots foreclosed because all the parcels were sold for a single price at the auction sale.The Dys and the Maxinos filed a complaint for accounting, injunction, declaration of nullity (for Lot 3) ofthe Deed of Sale with Agreement to Mortgage, and damagesagainst the Yaps and DRBI. Thereafter, theDys and the Maxinos consigned to the trial court an additional sum of P83,850.50 + sheriffs commission fee ofP419.25 representing the remaining balance of the purchase price that theYaps still owed DRBI by virtue ofthesale to them by the DRBI ofLots 1, 3 and 6.Meanwhile, the Yaps told DRBI that no redemption has been made by the Tirambulos or their successors-in-interest and requested DRBI to consolidate its title over the foreclosed properties by requesting the ProvincialSheriff to execute the final deed of sale in favor of the bank so that the latter can transfer the titles of the twoforeclosed properties to them. On the same date, they wrote the Maxinos that they were formally turning overthe possession of Lot 3 to the Maxinos, and informed them that they intended to consolidate ownership over Lots 1 and 6 since there was no redemption as contemplated by law. Included in the letter was a liquidation ofthe copra proceeds harvested for Lots 1, 3and 6.Later,the Yaps filed a case for consolidation of ownership, annulment of certificate of redemption, anddamagesagainst the Dys,the Maxinos, the Provincial Sheriff and DRBI.Both cases were tried jointly. The Yaps, through counsel, filed a motion to withdraw from the provincial sheriffthe redemption money amounting to P50,373.42, which was granted by the court after presentation of the SPAexecuted by Francisco Yap in favor ofhis brother, Valiente Yap to receive the redemption money.The trial court rendered judgment in favor of the Yaps, dismissing the compliant of Dy and Maxino spouses aswell as the counterclaim of the bank and the Yaps for lack of factual and legal basis, while the Yaps case wasgranted, declaring them as the exclusive owners of Lot 1 and 6, for failureof the Dys andthe Maxinos to redeemthe properties within 1 year from the auction sale; and directing the provincial sheriff to execute the Final Deedof Sale in favor ofthe bank, and the latter to transfer the subject properties to the Yaps.Upon motion of the DRBI, the trial court amended the aforesaid decision declaring as null and void theCertificate of Redemption, the Deed of Sale made by Tirambulo and Estorco in favor of theDys and the Maxinoscovering all the 7 parcels ofland in question; and declaring the Yaps asthe exclusive owners of Lot 1 and 6,forfailure of the Dys and the Maxinos to redeem the properties within 1 year fromthe auction sale.Aggrieved by the above ruling, the Dys and theMaxinos elevated the case to CA, which reversed the amendeddecision of the trial court, holding that the sale with respect to Lot 3 was null and void; the redemption made bythe Dys and the Maxinos as valid; ordering the Yaps to deliver possession and ownership to the Dys andMaxinos and to tender and deliver the corresponding amount of income out of the 3 parcels until finality ofjudgment; and for DRBI to pay damages to the Dys and the Maxinos. Further, the CAalso ruled that there is nonecessity in discussing the validity of the redemption.It found that the bank was in bad faith and thereforecannot insist on the protection of the law regarding the need for compliance with all the requirements for a validredemption while estoppel and unjust enrichment operate against the Yaps who had already withdrawn theredemption money.On MR of the Yaps, the CA amended its decision deleting the delivery of possession and ownership to the Dysand the Maxinos, and thetendering of corresponding amount ofincome from the said parcels ofland.Hence, theconsolidated petitions assailing the appellate courts decision.Issue:Whether or not the doctrine of indivisibility of mortgage is applicable in the case at barRuling:NO.We cannot subscribe to the Yaps argument on the indivisibility of themortgage. As held in the caseofPhilippine National Bank v. De los Reyes,[44]the doctrine of indivisibility of mortgage does not apply once themortgage is extinguished by a complete foreclosure thereof as inthe instant case. The Court held:The parties were accordingly embroiled ina hermeneutic disparity ontheir aforesaid contendingpositions. Yet, the rule on the indivisibility of mortgage finds no application to the case at bar.The particular provision of theCivil Code referred to provides:Art. 2089.A pledge or mortgage is indivisible, even though the debt may bedivided among the successors in interest of the debtor or of the creditor.Therefore, the debtors heir who has paid a part of the debt cannot ask for theproportionateextinguishmentofthe pledge or mortgage aslongas the debt isnot completely satisfied.Neither can the creditors heir who received his share of the debt return thepledge or cancel the mortgage, to the prejudice of the other heirs who have notbeen paid.From these provisions is excepted the case in which, there being severalthings given in mortgage or pledge, each one of these guarantees only adeterminate portion of the credit.The debtor, in this case, shall have a right to the extinguishment of the pledgeor mortgage as the portion of the debt for which each thing is speciallyanswerable is satisfied.From the foregoing, it is apparent that what the law proscribes is the foreclosure of only aportion of the property or a number of the several properties mortgaged corresponding to theunpaid portion of the debt where before foreclosure proceedings partial payment was made bythe debtor on his total outstanding loan or obligation. This also means that the debtor cannotask for the release of any portion of the mortgaged property or of one or some of the severallots mortgaged unless and until the loan thus, secured has been fully paid, notwithstanding thefact that there has been a partial fulfillment of the obligation. Hence, it is provided that thedebtor who has paid a part of the debt cannot ask for the proportionate extinguishment of themortgage as long as thedebt is notcompletely satisfied.That the situation obtaining in the case at bar is not within the purview of the aforesaid rule onindivisibility is obvious since the aggregate number of the lots which comprise the collaterals forthe mortgage had already been foreclosed and sold at public auction. There is no partialpayment nor partial extinguishment of the obligation to speak of. The aforesaid doctrine, whichis actually intended for the protection of the mortgagee, specifically refers to the release of themortgage which secures the satisfaction ofthe indebtedness and naturally presupposes that themortgage is existing. Once the mortgage is extinguished by a complete foreclosurethereof, said doctrine of indivisibility ceases to apply since, with the full payment of thedebt, there is nothing more to secure.[45](Emphasis supplied.)Nothing in the law prohibits the piecemeal redemption of properties sold at one foreclosure proceeding. In fact,in several early cases decided by this Court, the right of the mortgagor or redemptioner to redeem one or someof the foreclosed properties was recognized.Clearly, the Dys and Maxinos can effect the redemption of even only two of the five properties foreclosed. Andsince they can effect a partial redemption, they are not required to paythe P216,040.93 considering that it is thepurchase price forall the five properties foreclosed.So what amount should the Dysand Maxinos pay in orderfor their redemption ofthe two properties be deemedvalid considering that when the five properties wereauctioned, they were not separately valued?Contrary to the Yaps contention, the amount paid by the Dys and Maxinos within the redemption periodfor theredemption of just two parcels of land was not only P40,000.00 but totaled to P134,223.92(P50,373.42paid on May 28, 1984 plus P83,850.50 paid on June 19, 1984).That is more than60% of the purchase pricefor the five foreclosed properties, to think the Dys and Maxinos were only redeeming two properties.Wefind that itcan be considered a sufficient amount if we were tobase the proper purchase price on theproportionof the size ofLots 1 and 6 with thetotal size of the five foreclosed properties, which had the following respectivesizes:Lot161,371squaremetersLot616,087squaremetersLot52,900squaremetersLot427,875squaremetersLot839,888squaremetersTOTAL148,121squaremetersThe two subject properties to be redeemed, Lots 1 and 6, have a total area of 77,458 square meters or roughly52% of the total area of the foreclosed properties. Even with this rough approximation, we rule that there is noreason to invalidate the redemption of the Dys and Maxinos since they tendered 60% of the totalpurchase pricefor properties constituting only 52% of the total area. However, there is a need to remand the case forcomputation of the pro-rata value of Lots 1 and 6 based on their true values at that time of redemption for thepurposes of determining if there is any deficiency or overpayment on the part ofthe Dys and Maxinos.Disposition:Petitions are DENIED. CA decision is AFFIRMED with MODIFICATION that the case beREMANDEDto trialcourt for computation of the pro-rata value of properties covered by Lot 1 and 6 at the time of redemption todetermine if there is a deficiency to besettled by or overpayment to berefunded to respondent Spouses ZosimoDy, Sr. and Natividad Chiu and Spouses Marcelino C. Maxino and Remedios Lasola with regard to theredemption money they paid