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G.R. No. 120098 October 2, 2001

RUBY L. TSAI, petitioner,vs.HON. COURT OF APPEALS, EVER TEXTILE MILLS, INC.and MAMERTO R VILLALUZ, respondents.

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

[G.R. No. 120109. October 2, 2001.]

PHILIPPINE BANK OF COMMUNICATIONS, petitioner,vs.HON. COURT OF APPEALS, EVER TEXTILE MILLS andMAMERTO R VILLALUZ, respondents.

QUISUMBING, J.:

These consolidated cases assail the decision1 of the Court ofAppeals in CA-G.R. CV No. 32986, affirming the decision2 ofthe Regional Trial Court of Manila, Branch 7, in Civil Case No.89-48265. Also assailed is respondent court's resolutiondenying petitioners' motion for reconsideration.

On November 26, 1975, respondent Ever Textile Mills, Inc.(EVERTEX) obtained a three million peso (P3,000,000.00)

loan from petitioner Philippine Bank of Communications(PBCom). As security for the loan, EVERTEX executed infavor of PBCom, a deed of Real and Chattel Mortgage overthe lot under TCT No. 372097, where its factory stands, andthe chattels located therein as enumerated in a scheduleattached to the mortgage contract. The pertinent portions ofthe Real and Chattel Mortgage are quoted below:

MORTGAGE

(REAL AND CHATTEL)

xxx xxx xxx

The MORTGAGOR(S) hereby transfer(s) andconvey(s), by way of First Mortgage, to theMORTGAGEE, . . . certain parcel(s) of land, togetherwith all the buildings and improvements now existing orwhich may hereafter exist thereon, situated in . . .

"Annex A"

(Real and Chattel Mortgage executed by Ever TextileMills in favor of PBCommunications continued)

LIST OF MACHINERIES & EQUIPMENT

A. Forty Eight (48) units of Vayrow Knitting Machines-Tompkins made in Hongkong:

Serial Numbers Size of Machines

xxx xxx xxx

B. Sixteen (16) sets of Vayrow Knitting Machines madein Taiwan.

xxx xxx xxx

C. Two (2) Circular Knitting Machines made in WestGermany.

xxx xxx xxx

D. Four (4) Winding Machines.

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xxx xxx xxx

SCHEDULE "A"

I. TCT # 372097 - RIZAL

xxx xxx xxx

II. Any and all buildings and improvements nowexisting or hereafter to exist on the above-mentionedlot.

III. MACHINERIES & EQUIPMENT situated, locatedand/or installed on the above-mentioned lot located at .. .

(a) Forty eight sets (48) Vayrow Knitting Machines . . .

(b) Sixteen sets (16) Vayrow Knitting Machines . . .

(c) Two (2) Circular Knitting Machines . . .

(d) Two (2) Winding Machines . . .

(e) Two (2) Winding Machines . . .

IV. Any and all replacements, substitutions, additions,increases and accretions to above properties.

xxx xxx xxx3

On April 23, 1979, PBCom granted a second loan ofP3,356,000.00 to EVERTEX. The loan was secured by aChattel Mortgage over personal properties enumerated in a list

attached thereto. These listed properties were similar to thoselisted in Annex A of the first mortgage deed.

After April 23, 1979, the date of the execution of the secondmortgage mentioned above, EVERTEX purchased variousmachines and equipments.

On November 19, 1982, due to business reverses, EVERTEXfiled insolvency proceedings docketed as SP Proc. No. LP-3091-P before the defunct Court of First Instance of PasayCity, Branch XXVIII. The CFI issued an order on November24, 1982 declaring the corporation insolvent. All its assetswere taken into the custody of the Insolvency Court, includingthe collateral, real and personal, securing the two mortgagesas abovementioned.

In the meantime, upon EVERTEX's failure to meet itsobligation to PBCom, the latter commenced extrajudicialforeclosure proceedings against EVERTEX under Act 3135,otherwise known as "An Act to Regulate the Sale of Propertyunder Special Powers Inserted in or Annexed to Real EstateMortgages" and Act 1506 or "The Chattel Mortgage Law". ANotice of Sheriff's Sale was issued on December 1, 1982.

On December 15, 1982, the first public auction was heldwhere petitioner PBCom emerged as the highest bidder and a

Certificate of Sale was issued in its favor on the same date.On December 23, 1982, another public auction was held andagain, PBCom was the highest bidder. The sheriff issued aCertificate of Sale on the same day.

On March 7, 1984, PBCom consolidated its ownership overthe lot and all the properties in it. In November 1986, it leasedthe entire factory premises to petitioner Ruby L. Tsai forP50,000.00 a month. On May 3, 1988, PBCom sold the

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factory, lock, stock and barrel to Tsai for P9,000,000.00,including the contested machineries.

On March 16, 1989, EVERTEX filed a complaint for annulmentof sale, reconveyance, and damages with the Regional TrialCourt against PBCom, alleging inter alia that the extrajudicialforeclosure of subject mortgage was in violation of theInsolvency Law. EVERTEX claimed that no rights having beentransmitted to PBCom over the assets of insolvent EVERTEX,therefore Tsai acquired no rights over such assets sold to her,and should reconvey the assets.

Further, EVERTEX averred that PBCom, without any legal orfactual basis, appropriated the contested properties, whichwere not included in the Real and Chattel Mortgage ofNovember 26, 1975 nor in the Chattel Mortgage of April 23,1979, and neither were those properties included in the Noticeof Sheriff's Sale dated December 1, 1982 and Certificate ofSale . . . dated December 15, 1982.

The disputed properties, which were valued at P4,000,000.00,are: 14 Interlock Circular Knitting Machines, 1 Jet DryingEquipment, 1 Dryer Equipment, 1 Raisin Equipment and 1Heatset Equipment.

The RTC found that the lease and sale of said personal

properties were irregular and illegal because they were notduly foreclosed nor sold at the December 15, 1982 auctionsale since these were not included in the schedules attachedto the mortgage contracts. The trial court decreed:

WHEREFORE, judgment is hereby rendered in favor ofplaintiff corporation and against the defendants:

1. Ordering the annulment of the sale executed bydefendant Philippine Bank of Communications in favor

of defendant Ruby L. Tsai on May 3, 1988 insofar as itaffects the personal properties listed in par. 9 of thecomplaint, and their return to the plaintiff corporationthrough its assignee, plaintiff Mamerto R. Villaluz, fordisposition by the Insolvency Court, to be done within

ten (10) days from finality of this decision;

2. Ordering the defendants to pay jointly and severallythe plaintiff corporation the sum of P5,200,000.00 ascompensation for the use and possession of theproperties in question from November 1986 toFebruary 1991 and P100,000.00 every monththereafter, with interest thereon at the legal rate perannum until full payment;

3. Ordering the defendants to pay jointly and severallythe plaintiff corporation the sum of P50,000.00 as andfor attorney's fees and expenses of litigation;

4. Ordering the defendants to pay jointly and severallythe plaintiff corporation the sum of P200,000.00 by wayof exemplary damages;

5. Ordering the dismissal of the counterclaim of thedefendants; and

6. Ordering the defendants to proportionately pay thecosts of suit.

SO ORDERED.4

Dissatisfied, both PBCom and Tsai appealed to the Court ofAppeals, which issued its decision dated August 31, 1994, thedispositive portion of which reads:

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WHEREFORE, except for the deletion therefrom of the award;for exemplary damages, and reduction of the actual damages,from P100,000.00 to P20,000.00 per month, from November1986 until subject personal properties are restored toappellees, the judgment appealed from is hereby AFFIRMED,

in all other respects. No pronouncement as to costs.5

Motion for reconsideration of the above decision having beendenied in the resolution of April 28, 1995, PBCom and Tsaifiled their separate petitions for review with this Court.

In G.R No. 120098, petitioner Tsai ascribed the followingerrors to the respondent court:

I

THE HONORABLE COURT OF APPEALS (SECONDDIVISION) ERRED IN EFFECT MAKING ACONTRACT FOR THE PARTIES BY TREATING THE1981 ACQUIRED MACHINERIES AS CHATTELSINSTEAD OF REAL PROPERTIES WITHIN THEIREARLIER 1975 DEED OF REAL AND CHATTELMORTGAGE OR 1979 DEED OF CHATTELMORTGAGE.

II

THE HONORABLE COURT OF APPEALS (SECONDDIVISION) ERRED IN HOLDING THAT THEDISPUTED 1981 MACHINERIES ARE NOT REALPROPERTIES DEEMED PART OF THE MORTGAGE DESPITE THE CLEAR IMPORT OF THEEVIDENCE AND APPLICABLE RULINGS OF THESUPREME COURT.

III

THE HONORABLE COURT OF APPEALS (SECONDDIVISION) ERRED IN DEEMING PETITIONER APURCHASER IN BAD FAITH.

IV

THE HONORABLE COURT OF APPEALS (SECONDDIVISION) ERRED IN ASSESSING PETITIONERACTUAL DAMAGES, ATTORNEY'S FEES ANDEXPENSES OF LITIGATION FOR WANT OFVALID FACTUAL AND LEGAL BASIS.

V

THE HONORABLE COURT OF APPEALS (SECOND

DIVISION) ERRED IN HOLDING AGAINSTPETITIONER'S ARGUMENTS ON PRESCRIPTIONAND LACHES.6

In G.R. No. 120098, PBCom raised the following issues:

I.

DID THE COURT OF APPEALS VALIDLY DECREE THEMACHINERIES LISTED UNDER PARAGRAPH 9 OF THECOMPLAINT BELOW AS PERSONAL PROPERTY OUTSIDE

OF THE 1975 DEED OF REAL ESTATE MORTGAGE ANDEXCLUDED THEM FROM THE REAL PROPERTYEXTRAJUDICIALLY FORECLOSED BY PBCOM DESPITETHE PROVISION IN THE 1975 DEED THAT ALL AFTER-ACQUIRED PROPERTIES DURING THE LIFETIME OF THEMORTGAGE SHALL FORM PART THEREOF, AND DESPITETHE UNDISPUTED FACT THAT SAID MACHINERIES AREBIG AND HEAVY, BOLTED OR CEMENTED ON THE REALPROPERTY MORTGAGED BY EVER TEXTILE MILLS TO

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PBCOM, AND WERE ASSESSED FOR REAL ESTATE TAXPURPOSES?

II

CAN PBCOM, WHO TOOK POSSESSION OF THEMACHINERIES IN QUESTION IN GOOD FAITH, EXTENDEDCREDIT FACILITIES TO EVER TEXTILE MILLS WHICH ASOF 1982 TOTALLED P9,547,095.28, WHO HAD SPENT FORMAINTENANCE AND SECURITY ON THE DISPUTEDMACHINERIES AND HAD TO PAY ALL THE BACK TAXESOF EVER TEXTILE MILLS BE LEGALLY COMPELLED TORETURN TO EVER THE SAID MACHINERIES OR IN LIEUTHEREOF BE ASSESSED DAMAGES. IS THAT SITUATIONTANTAMOUNT TO A CASE OF UNJUST ENRICHMENT?7

The principal issue, in our view, is whether or not the inclusionof the questioned properties in the foreclosed properties isproper. The secondary issue is whether or not the sale ofthese properties to petitioner Ruby Tsai is valid.

For her part, Tsai avers that the Court of Appeals in effectmade a contract for the parties by treating the 1981 acquiredunits of machinery as chattels instead of real properties withintheir earlier 1975 deed of Real and Chattel Mortgage or 1979deed of Chattel Mortgage.8 Additionally, Tsai argues that

respondent court erred in holding that the disputed 1981machineries are not real properties.9 Finally, she contends thatthe Court of Appeals erred in holding against petitioner'sarguments on prescription and laches10 and in assessingpetitioner actual damages, attorney's fees and expenses oflitigation, for want of valid factual and legal basis.11

Essentially, PBCom contends that respondent court erred inaffirming the lower court's judgment decreeing that the piecesof machinery in dispute were not duly foreclosed and could not

be legally leased nor sold to Ruby Tsai. It further argued thatthe Court of Appeals' pronouncement that the pieces ofmachinery in question were personal properties have nofactual and legal basis. Finally, it asserts that the Court ofAppeals erred in assessing damages and attorney's fees

against PBCom.

In opposition, private respondents argue that the controvertedunits of machinery are not "real properties" but chattels, and,therefore, they were not part of the foreclosed real properties,rendering the lease and the subsequent sale thereof to Tsai anullity.12

Considering the assigned errors and the arguments of theparties, we find the petitions devoid of merit and ought to bedenied.

Well settled is the rule that the jurisdiction of the SupremeCourt in a petition for review on certiorari under Rule 45 of theRevised Rules of Court is limited to reviewing only errors oflaw, not of fact, unless the factual findings complained of aredevoid of support by the evidence on record or the assailedjudgment is based on misapprehension of facts.13 This rule isapplied more stringently when the findings of fact of the RTC isaffirmed by the Court of Appeals.14

The following are the facts as found by the RTC and affirmedby the Court of Appeals that are decisive of the issues: (1) the"controverted machineries" are not covered by, or included in,either of the two mortgages, the Real Estate and ChattelMortgage, and the pure Chattel Mortgage; (2) the saidmachineries were not included in the list of propertiesappended to the Notice of Sale, and neither were theyincluded in the Sheriff's Notice of Sale of the foreclosedproperties.15

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Petitioners contend that the nature of the disputedmachineries, i.e., that they were heavy, bolted or cemented onthe real property mortgaged by EVERTEX to PBCom, makethem ipso facto immovable under Article 415 (3) and (5) of theNew Civil Code. This assertion, however, does not settle the

issue. Mere nuts and bolts do not foreclose the controversy.We have to look at the parties' intent.

While it is true that the controverted properties appear to beimmobile, a perusal of the contract of Real and ChattelMortgage executed by the parties herein gives us a contraryindication. In the case at bar, both the trial and the appellatecourts reached the same finding that the true intention ofPBCOM and the owner, EVERTEX, is to treat machinery andequipment as chattels. The pertinent portion of respondentappellate court's ruling is quoted below:

As stressed upon by appellees, appellant bank treatedthe machineries as chattels; never as real properties.Indeed, the 1975 mortgage contract, which wasactually real and chattel mortgage, militates againstappellants' posture. It should be noted that the printedform used by appellant bank was mainly for real estatemortgages. But reflective of the true intention ofappellant PBCOM and appellee EVERTEX was thetyping in capital letters, immediately following theprinted caption of mortgage, of the phrase "real andchattel." So also, the "machineries and equipment" inthe printed form of the bank had to be inserted in theblank space of the printed contract and connected withthe word "building" by typewritten slash marks. Now,then, if the machineries in question were contemplatedto be included in the real estate mortgage, there wouldhave been no necessity to ink a chattel mortgagespecifically mentioning as part III of Schedule A alisting of the machineries covered thereby. It would

have sufficed to list them as immovables in the Deed ofReal Estate Mortgage of the land and building involved.

As regards the 1979 contract, the intention of theparties is clear and beyond question. It refers solely to

chattels. The inventory list of the mortgaged propertiesis an itemization of sixty-three (63) individuallydescribed machineries while the schedule listed onlymachines and 2,996,880.50 worth of finished cottonfabrics and natural cotton fabrics.16

In the absence of any showing that this conclusion is baseless,erroneous or uncorroborated by the evidence on record, wefind no compelling reason to depart therefrom.

Too, assuming arguendo that the properties in question areimmovable by nature, nothing detracts the parties from treatingit as chattels to secure an obligation under the principle ofestoppel. As far back as Navarro v. Pineda, 9 SCRA 631(1963), an immovable may be considered a personal propertyif there is a stipulation as when it is used as security in thepayment of an obligation where a chattel mortgage is executedover it, as in the case at bar.

In the instant case, the parties herein: (1) executed a contractstyled as "Real Estate Mortgage and Chattel Mortgage,"

instead of just "Real Estate Mortgage" if indeed their intentionis to treat all properties included therein as immovable, and (2)attached to the said contract a separate "LIST OFMACHINERIES & EQUIPMENT". These facts, taken together,evince the conclusion that the parties' intention is to treatthese units of machinery as chattels. A fortiori, the contestedafter-acquired properties, which are of the same description asthe units enumerated under the title "LIST OF MACHINERIES& EQUIPMENT," must also be treated as chattels.

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Accordingly, we find no reversible error in the respondentappellate court's ruling that inasmuch as the subjectmortgages were intended by the parties to involve chattels,insofar as equipment and machinery were concerned, theChattel Mortgage Law applies, which provides in Section 7

thereof that: "a chattel mortgage shall be deemed to coveronly the property described therein and not like or substitutedproperty thereafter acquired by the mortgagor and placed inthe same depository as the property originally mortgaged,anything in the mortgage to the contrary notwithstanding."

And, since the disputed machineries were acquired in 1981and could not have been involved in the 1975 or 1979 chattelmortgages, it was consequently an error on the part of theSheriff to include subject machineries with the propertiesenumerated in said chattel mortgages.

As the auction sale of the subject properties to PBCom is void,no valid title passed in its favor. Consequently, the sale thereofto Tsai is also a nullity under the elementary principle ofnemodat quod non habet, one cannot give what one does nothave.17

Petitioner Tsai also argued that assuming that PBCom's titleover the contested properties is a nullity, she is nevertheless apurchaser in good faith and for value who now has a betterright than EVERTEX.

To the contrary, however, are the factual findings andconclusions of the trial court that she is not a purchaser ingood faith. Well-settled is the rule that the person who assertsthe status of a purchaser in good faith and for value has theburden of proving such assertion.18 Petitioner Tsai failed todischarge this burden persuasively.

Moreover, a purchaser in good faith and for value is one whobuys the property of anotherwithout notice that some otherperson has a right to or interest in such propertyand pays afull and fair price for the same, at the time of purchase, orbefore he has notice of the claims or interest of some other

person in the property.19 Records reveal, however, that whenTsai purchased the controverted properties, she knew ofrespondent's claim thereon. As borne out by the records, shereceived the letter of respondent's counsel, apprising her ofrespondent's claim, dated February 27, 1987.20 She repliedthereto on March 9, 1987.21 Despite her knowledge ofrespondent's claim, she proceeded to buy the contested unitsof machinery on May 3, 1988. Thus, the RTC did not err infinding that she was not a purchaser in good faith.

Petitioner Tsai's defense of indefeasibility of Torrens Title of

the lot where the disputed properties are located is equallyunavailing. This defense refers to sale of lands and not to saleof properties situated therein. Likewise, the mere fact that thelot where the factory and the disputed properties stand is inPBCom's name does not automatically make PBCom theowner of everything found therein, especially in view ofEVERTEX's letter to Tsai enunciating its claim.

Finally, petitioners' defense of prescription and laches is lessthan convincing. We find no cogent reason to disturb theconsistent findings of both courts below that the case for thereconveyance of the disputed properties was filed within thereglementary period. Here, in our view, the doctrine of lachesdoes not apply. Note that upon petitioners' adamant refusal toheed EVERTEX's claim, respondent company immediatelyfiled an action to recover possession and ownership of thedisputed properties. There is no evidence showing any failureor neglect on its part, for an unreasonable and unexplainedlength of time, to do that which, by exercising due diligence,could or should have been done earlier. The doctrine of stale

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demands would apply only where by reason of the lapse oftime, it would be inequitable to allow a party to enforce hislegal rights. Moreover, except for very strong reasons, thisCourt is not disposed to apply the doctrine of laches toprejudice or defeat the rights of an owner.22

As to the award of damages, the contested damages are theactual compensation, representing rentals for the contestedunits of machinery, the exemplary damages, and attorney'sfees.

As regards said actual compensation, the RTC awardedP100,000.00 corresponding to the unpaid rentals of thecontested properties based on the testimony of John Chua,who testified that the P100,000.00 was based on the acceptedpractice in banking and finance, business and investments thatthe rental price must take into account the cost of money usedto buy them. The Court of Appeals did not give full credence toChua's projection and reduced the award to P20,000.00.

Basic is the rule that to recover actual damages, the amount ofloss must not only be capable of proof but must actually beproven with reasonable degree of certainty, premised uponcompetent proof or best evidence obtainable of the actualamount thereof.23 However, the allegations of respondentcompany as to the amount of unrealized rentals due them asactual damages remain mere assertions unsupported bydocuments and other competent evidence. In determiningactual damages, the court cannot rely on mere assertions,speculations, conjectures or guesswork but must depend oncompetent proof and on the best evidence obtainableregarding the actual amount of loss.24 However, we are notprepared to disregard the following dispositions of therespondent appellate court:

. . . In the award of actual damages under scrutiny,there is nothing on record warranting the said award ofP5,200,000.00, representing monthly rental income ofP100,000.00 from November 1986 to February 1991,and the additional award of P100,000.00 per month

thereafter.

As pointed out by appellants, the testimonial evidence,consisting of the testimonies of Jonh (sic) Chua andMamerto Villaluz, is shy of what is necessary tosubstantiate the actual damages allegedly sustained byappellees, by way of unrealized rental income ofsubject machineries and equipments.

The testimony of John Cua (sic) is nothing but anopinion or projection based on what is claimed to be apractice in business and industry. But such a testimonycannot serve as the sole basis for assessing the actualdamages complained of. What is more, there is noshowing that had appellant Tsai not taken possessionof the machineries and equipments in question,somebody was willing and ready to rent the same forP100,000.00 a month.

xxx xxx xxx

Then, too, even assuming arguendo that the saidmachineries and equipments could have generated arental income of P30,000.00 a month, as projected bywitness Mamerto Villaluz, the same would have been agross income. Therefrom should be deducted orremoved, expenses for maintenance and repairs . . .Therefore, in the determination of the actual damagesor unrealized rental income sued upon, there is a goodbasis to calculate that at least four months in a year,the machineries in dispute would have been idle due to

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absence of a lessee or while being repaired. In the lightof the foregoing rationalization and computation, Webelieve that a net unrealized rental income ofP20,000.00 a month, since November 1986, is morerealistic and fair.25

As to exemplary damages, the RTC awarded P200,000.00 toEVERTEX which the Court of Appeals deleted. But accordingto the CA, there was no clear showing that petitioners actedmalevolently, wantonly and oppressively. The evidence,however, shows otherwise.It is a requisite to award exemplarydamages that the wrongful act must be accompanied by badfaith,26 and the guilty acted in a wanton, fraudulent, oppressive,reckless or malevolent manner.27 As previously stressed,petitioner Tsai's act of purchasing the controverted propertiesdespite her knowledge of EVERTEX's claim was oppressive

and subjected the already insolvent respondent to grossdisadvantage. Petitioner PBCom also received the sameletters of Atty. Villaluz, responding thereto on March 24,1987.28 Thus, PBCom's act of taking all the properties found inthe factory of the financially handicapped respondent,including those properties not covered by or included in themortgages, is equally oppressive and tainted with bad faith.Thus, we are in agreement with the RTC that an award ofexemplary damages is proper.

The amount of P200,000.00 for exemplary damages is,however, excessive. Article 2216 of the Civil Code providesthat no proof of pecuniary loss is necessary for theadjudication of exemplary damages, their assessment beingleft to the discretion of the court in accordance with thecircumstances of each case.29 While the imposition ofexemplary damages is justified in this case, equity calls for itsreduction. In Inhelder Corporation v. Court of Appeals, G.R.No. L-52358, 122 SCRA 576, 585, (May 30, 1983), we laiddown the rule that judicial discretion granted to the courts in

the assessment of damages must always be exercised withbalanced restraint and measured objectivity. Thus, here theaward of exemplary damages by way of example for the publicgood should be reduced to P100,000.00.

By the same token, attorney's fees and other expenses oflitigation may be recovered when exemplary damages areawarded.30 In our view, RTC's award of P50,000.00 asattorney's fees and expenses of litigation is reasonable, giventhe circumstances in these cases.

WHEREFORE, the petitions are DENIED. The assaileddecision and resolution of the Court of Appeals in CA-G.R. CVNo. 32986 are AFFIRMED WITH MODIFICATIONS.Petitioners Philippine Bank of Communications and Ruby L.Tsai are hereby ordered to pay jointly and severally EverTextile Mills, Inc. the following: (1) P20,000.00 per month, ascompensation for the use and possession of the properties inquestion from November 198631 until subject personalproperties are restored to respondent corporation; (2)P100,000.00 by way of exemplary damages, and (3)P50,000.00 as attorney's fees and litigation expenses. Costsagainst petitioners.

SO ORDERED.

[G.R. No. 137705. August 22, 2000]

SERGS PRODUCTS, INC., andSERGIO T.GOQUIOLAY,petitioners,vs. PCI

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LEASING AND FINANCE,INC., respondent.

D E C I S I O N

PANGANIBAN, J.:

After agreeing to a contract stipulating that areal or immovable property be considered aspersonal or movable, a party is estopped fromsubsequently claiming otherwise. Hence, suchproperty is a proper subject of a writ of replevinobtained by the other contracting party.

The Case

Before us is a Petition for Review onCertiorari assailing the January 6, 1999Decision[1] of the Court of Appeals (CA) [2] in CA-GR SP No. 47332 and its February 26, 1999Resolution[3] denying reconsideration. Thedecretal portion of the CA Decision reads asfollows:

WHEREFORE, premises considered, theassailed Order dated February 18, 1998 andResolution dated March 31, 1998 in Civil Case No.Q-98-33500 are hereby AFFIRMED. The writ ofpreliminary injunction issued on June 15, 1998 ishereby LIFTED.[4]

In its February 18, 1998 Order,[5] the RegionalTrial Court (RTC) of Quezon City (Branch 218)[6] issued a Writ of Seizure. [7] The March 18, 1998Resolution[8] denied petitioners Motion for Special

Protective Order, praying that the deputy sheriffbe enjoined from seizing immobilized or otherreal properties in (petitioners) factory in Cainta,Rizal and to return to their original placewhatever immobilized machineries orequipments he may have removed.[9]

The Facts

The undisputed facts are summarized by theCourt of Appeals as follows: [10]

On February 13, 1998, respondent PCI Leasingand Finance, Inc. (PCI Leasing for short) filedwith the RTC-QC a complaint for [a] sum of money(Annex E), with an application for a writ ofreplevin docketed as Civil Case No. Q-98-33500.

On March 6, 1998, upon an ex-parte applicationof PCI Leasing, respondent judge issued a writ ofreplevin (Annex B) directing its sheriff to seizeand deliver the machineries and equipment to PCILeasing after 5 days and upon the payment of thenecessary expenses.

10
http://sc.judiciary.gov.ph/jurisprudence/2000/aug2000/137705.htm#_ftn1http://sc.judiciary.gov.ph/jurisprudence/2000/aug2000/137705.htm#_ftn2http://sc.judiciary.gov.ph/jurisprudence/2000/aug2000/137705.htm#_ftn3http://sc.judiciary.gov.ph/jurisprudence/2000/aug2000/137705.htm#_ftn4http://sc.judiciary.gov.ph/jurisprudence/2000/aug2000/137705.htm#_ftn5http://sc.judiciary.gov.ph/jurisprudence/2000/aug2000/137705.htm#_ftn6http://sc.judiciary.gov.ph/jurisprudence/2000/aug2000/137705.htm#_ftn7http://sc.judiciary.gov.ph/jurisprudence/2000/aug2000/137705.htm#_ftn8http://sc.judiciary.gov.ph/jurisprudence/2000/aug2000/137705.htm#_ftn9http://sc.judiciary.gov.ph/jurisprudence/2000/aug2000/137705.htm#_ftn10http://sc.judiciary.gov.ph/jurisprudence/2000/aug2000/137705.htm#_ftn2http://sc.judiciary.gov.ph/jurisprudence/2000/aug2000/137705.htm#_ftn3http://sc.judiciary.gov.ph/jurisprudence/2000/aug2000/137705.htm#_ftn4http://sc.judiciary.gov.ph/jurisprudence/2000/aug2000/137705.htm#_ftn5http://sc.judiciary.gov.ph/jurisprudence/2000/aug2000/137705.htm#_ftn6http://sc.judiciary.gov.ph/jurisprudence/2000/aug2000/137705.htm#_ftn7http://sc.judiciary.gov.ph/jurisprudence/2000/aug2000/137705.htm#_ftn8http://sc.judiciary.gov.ph/jurisprudence/2000/aug2000/137705.htm#_ftn9http://sc.judiciary.gov.ph/jurisprudence/2000/aug2000/137705.htm#_ftn10http://sc.judiciary.gov.ph/jurisprudence/2000/aug2000/137705.htm#_ftn1


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On March 24, 1998, in implementation of saidwrit, the sheriff proceeded to petitioners factory,seized one machinery with [the] word that he[would] return for the other machineries.

On March 25, 1998, petitioners filed a motion forspecial protective order (Annex C), invoking thepower of the court to control the conduct of itsofficers and amend and control its processes,praying for a directive for the sheriff to deferenforcement of the writ of replevin.

This motion was opposed by PCI Leasing (Annex

F), on the ground that the properties [were] stillpersonal and therefore still subject to seizure and awrit of replevin.

In their Reply, petitioners asserted that theproperties sought to be seized [were] immovableas defined in Article 415 of the Civil Code, theparties agreement to the contrarynotwithstanding. They argued that to give effect to

the agreement would be prejudicial to innocentthird parties. They further stated that PCI Leasing[was] estopped from treating these machineries aspersonal because the contracts in which thealleged agreement [were] embodied [were] totallysham and farcical.

On April 6, 1998, the sheriff again sought toenforce the writ of seizure and take possession ofthe remaining properties. He was able to take twomore, but was prevented by the workers from

taking the rest.

On April 7, 1998, they went to [the CA] via anoriginal action for certiorari.

Ruling of the Court of Appeals

Citing the Agreement of the parties, the

appellate court held that the subject machineswere personal property, and that they had onlybeen leased, not owned, by petitioners. It alsoruled that the words of the contract are clear andleave no doubt upon the true intention of thecontracting parties. Observing that PetitionerGoquiolay was an experienced businessmanwho was not unfamiliar with the ways of thetrade, it ruled that he should have realized theimport of the document he signed. The CA

further held:

Furthermore, to accord merit to this petition wouldbe to preempt the trial court in ruling upon the casebelow, since the merits of the whole matter are laiddown before us via a petition whose sole purposeis to inquire upon the existence of a grave abuse ofdiscretion on the part of the [RTC] in issuing the

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assailed Order and Resolution. The issues raisedherein are proper subjects of a full-blown trial,necessitating presentation of evidence by bothparties. The contract is being enforced by one,

and [its] validity is attacked by the other a matterx x x which respondent court is in the best positionto determine.

Hence, this Petition.[11]

The Issues

In their Memorandum, petitioners submit thefollowing issues for our consideration:

A. Whether or not the machineries purchasedand imported by SERGS became real property byvirtue of immobilization.

B. Whether or not the contract between the partiesis a loan or a lease.[12]

In the main, the Court will resolve whetherthe said machines are personal, not immovable,property which may be a proper subject of a writof replevin. As a preliminary matter, the Courtwill also address briefly the procedural pointsraised by respondent.

The Courts Ruling

The Petition is not meritorious.

Preliminary Matter:Procedural Questions

Respondent contends that the Petition failedto indicate expressly whether it was being filedunder Rule 45 or Rule 65 of the Rules ofCourt. It further alleges that the Petitionerroneously impleaded Judge Hilario Laqui asrespondent.

There is no question that the presentrecourse is under Rule 45. This conclusion findssupport in the very title of the Petition, which isPetition for Review on Certiorari. [13]

While Judge Laqui should not have beenimpleaded as a respondent, [14] substantial justicerequires that such lapse by itself should notwarrant the dismissal of the present Petition. Inthis light, the Court deems it proper to

remove, motu proprio, the name of Judge Laquifrom the caption of the present case.

Main Issue: Nature of the Subject Machinery

Petitioners contend that the subjectmachines used in their factory were not proper

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subjects of the Writ issued by the RTC, becausethey were in fact real property. Serious policyconsiderations, they argue, militate against acontrary characterization.

Rule 60 of the Rules of Court provides thatwrits of replevin are issued for the recovery ofpersonal property only.[15] Section 3 thereof reads:

SEC. 3. Order. -- Upon the filing of such affidavitand approval of the bond, the court shall issue anorder and the corresponding writ of replevindescribing the personal property alleged to bewrongfully detained and requiring the sheriff

forthwith to take such property into his custody.

On the other hand, Article 415 of the CivilCode enumerates immovable or real property asfollows:

ART. 415. The following are immovable property:

x x x....................................x x x....................................x xx

(5) Machinery, receptacles, instruments orimplements intended by the owner of the tenementfor an industry or works which may be carried on ina building or on a piece of land, and which tenddirectly to meet the needs of the said industry orworks;

x x x....................................x x x....................................x xx

In the present case, the machines that werethe subjects of the Writ of Seizure were placed

by petitioners in the factory built on their ownland. Indisputably, they were essential andprincipal elements of their chocolate-makingindustry. Hence, although each of them wasmovable or personal property on its own, all ofthem have become immobilized by destinationbecause they are essential and principalelements in the industry.[16] In that sense,petitioners are correct in arguing that the saidmachines are real, not personal, property

pursuant to Article 415 (5) of the Civil Code. [17]

Be that as it may, we disagree with thesubmission of the petitioners that the saidmachines are not proper subjects of the Writ ofSeizure.

The Court has held that contracting partiesmay validly stipulate that a real property beconsidered as personal.[18] After agreeing to suchstipulation, they are consequently estopped from

claiming otherwise. Under the principle ofestoppel, a party to a contract is ordinarilyprecluded from denying the truth of any materialfact found therein.

Hence, in Tumalad v. Vicencio,[19] the Courtupheld the intention of the parties to treata house as a personal property because it had

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been made the subject of a chattelmortgage. The Court ruled:

x x x. Although there is no specific statement

referring to the subject house as personal property,yet by ceding, selling or transferring a property byway of chattel mortgage defendants-appellantscould only have meant to convey the house aschattel, or at least, intended to treat the same assuch, so that they should not now be allowed tomake an inconsistent stand by claiming otherwise.

Applying Tumalad, the Court in MakatiLeasing and Finance Corp. v. Wearever TextileMills[20] also held that the machinery used in afactory and essential to the industry, as in thepresent case, was a proper subject of a writ ofreplevin because it was treated as personalproperty in a contract. Pertinent portions of theCourts ruling are reproduced hereunder:

x x x. If a house of strong materials, like whatwas involved in the above Tumalad case, may be

considered as personal property for purposes ofexecuting a chattel mortgage thereon as long asthe parties to the contract so agree and noinnocent third party will be prejudiced thereby,there is absolutely no reason why a machinery,which is movable in its nature and becomesimmobilized only by destination or purpose, maynot be likewise treated as such. This is really

because one who has so agreed is estopped fromdenying the existence of the chattel mortgage.

In the present case, the Lease Agreement

clearly provides that the machines in questionare to be considered as personalproperty. Specifically, Section 12.1 of theAgreement reads as follows:[21]

12.1 The PROPERTY is, and shall at all times beand remain, personal property notwithstanding thatthe PROPERTY or any part thereof may now be,or hereafter become, in any manner affixed orattached to or embedded in, or permanentlyresting upon, real property or any building thereon,or attached in any manner to what is permanent.

Clearly then, petitioners are estopped fromdenying the characterization of the subjectmachines as personal property. Under thecircumstances, they are proper subjects of theWrit of Seizure.

It should be stressed, however, that our

holding -- that the machines should be deemedpersonal property pursuant to the LeaseAgreement is good only insofar as thecontracting parties are concerned.[22] Hence, whilethe parties are bound by the Agreement, thirdpersons acting in good faith are not affected byits stipulation characterizing the subjectmachinery as personal.[23] In any event, there is

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no showing that any specific third party would beadversely affected.

Validity of the Lease Agreement

In their Memorandum, petitioners contendthat the Agreement is a loan and not a lease.[24] Submitting documents supposedly showingthat they own the subject machines, petitionersalso argue in their Petition that the Agreementsuffers from intrinsic ambiguity which places inserious doubt the intention of the parties and thevalidity of the lease agreement itself. [25] In their

Reply to respondents Comment, they furtherallege that the Agreement is invalid. [26]

These arguments are unconvincing. Thevalidity and the nature of the contract are the lismota of the civil action pending before theRTC. A resolution of these questions, therefore,is effectively a resolution of the merits of thecase. Hence, they should be threshed out in thetrial, not in the proceedings involving the

issuance of the Writ of Seizure.Indeed, in La Tondea Distillers v. CA,[27] the

Court explained that the policy under Rule 60was that questions involving title to the subjectproperty questions which petitioners are nowraising -- should be determined in the trial. Inthat case, the Court noted that the remedy ofdefendants under Rule 60 was either to post acounter-bond or to question the sufficiency of the

plaintiffs bond. They were not allowed, however,to invoke the title to the subject property. TheCourt ruled:

In other words, the law does not allow thedefendant to file a motion to dissolve or dischargethe writ of seizure (or delivery) on ground ofinsufficiency of the complaint or of the groundsrelied upon therefor, as in proceedings onpreliminary attachment or injunction, and therebyput at issue the matter of the title or right ofpossession over the specific chattel beingreplevied, the policy apparently being that said

matter should be ventilated and determined only atthe trial on the merits.[28]

Besides, these questions require adetermination of facts and a presentation ofevidence, both of which have no place in apetition for certiorari in the CA under Rule 65 orin a petition for review in this Court under Rule45.[29]

Reliance on the Lease Agreement

It should be pointed out that the Court in thiscase may rely on the Lease Agreement,for nothing on record shows that it has beennullified or annulled. In fact, petitioners assailedit first only in the RTC proceedings, which had

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ironically been instituted byrespondent. Accordingly, it must be presumedvalid and binding as the law between the parties.

Makati Leasing and Finance Corporation [30] is

also instructive on this point. In that case, theDeed of Chattel Mortgage, which characterizedthe subject machinery as personal property, wasalso assailed because respondent had allegedlybeen required to sign a printed form of chattelmortgage which was in a blank form at the timeof signing. The Court rejected the argument andrelied on the Deed, ruling as follows:

x x x. Moreover, even granting that the charge is

true, such fact alone does not render a contractvoid ab initio, but can only be a ground forrendering said contract voidable, or annullablepursuant to Article 1390 of the new Civil Code, bya proper action in court. There is nothing onrecord to show that the mortgage has beenannulled. Neither is it disclosed that steps weretaken to nullify the same. x x x

Alleged Injustice Committed on the Part ofPetitioners

Petitioners contend that if the Court allowsthese machineries to be seized, then its workerswould be out of work and thrown into the

streets.[31] They also allege that the seizure wouldnullify all efforts to rehabilitate the corporation.

Petitioners arguments do not preclude theimplementation of the Writ. As earlier discussed,

law and jurisprudence support itspropriety. Verily, the above-mentionedconsequences, if they come true, should not beblamed on this Court, but on the petitioners forfailing to avail themselves of the remedy underSection 5 of Rule 60, which allows the filing of acounter-bond. The provision states:

SEC. 5. Return of property. -- If the adverseparty objects to the sufficiency of the applicants

bond, or of the surety or sureties thereon, hecannot immediately require the return of theproperty, but if he does not so object, he may, atany time before the delivery of the property to theapplicant, require the return thereof, by filing withthe court where the action is pending a bondexecuted to the applicant, in double the value ofthe property as stated in the applicants affidavit forthe delivery thereof to the applicant, if such

delivery be adjudged, and for the payment of suchsum to him as may be recovered against theadverse party, and by serving a copy bond on theapplicant.

WHEREFORE, the Petition is DENIED andthe assailed Decision of the Court ofAppealsAFFIRMED. Costs against petitioners.

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SO ORDERED.

G.R. No. L-50008 August 31, 1987

PRUDENTIAL BANK, petitioner,vs.HONORABLE DOMINGO D. PANIS, Presiding Judge ofBranch III, Court of First Instance of Zambales andOlongapo City; FERNANDO MAGCALE & TEODULABALUYUT-MAGCALE, respondents.

PARAS, J.:

This is a petition for review on certiorari of the November 13,1978 Decision * of the then Court of First Instance of Zambalesand Olongapo City in Civil Case No. 2443-0 entitled "SpousesFernando A. Magcale and Teodula Baluyut-Magcale vs. Hon.Ramon Y. Pardo and Prudential Bank" declaring that thedeeds of real estate mortgage executed by respondentspouses in favor of petitioner bank are null and void.

The undisputed facts of this case by stipulation of the parties

are as follows:

... on November 19, 1971, plaintiffs-spousesFernando A. Magcale and Teodula BaluyutMagcale secured a loan in the sum ofP70,000.00 from the defendant PrudentialBank. To secure payment of this loan, plaintiffsexecuted in favor of defendant on the aforesaid

date a deed of Real Estate Mortgage over thefollowing described properties:

l. A 2-STOREY, SEMI-CONCRETE, residentialbuilding with warehouse spaces containing a

total floor area of 263 sq. meters, more or less,generally constructed of mixed hard wood andconcrete materials, under a roofing of cor. g. i.sheets; declared and assessed in the name ofFERNANDO MAGCALE under Tax DeclarationNo. 21109, issued by the Assessor of OlongapoCity with an assessed value of P35,290.00.This building is the only improvement of the lot.

2. THE PROPERTY hereby conveyed by wayof MORTGAGE includes the right of occupancy

on the lot where the above property is erected,and more particularly described and bounded,as follows:

A first class residential landIdentffied as Lot No. 720, (Ts-308, Olongapo TownsiteSubdivision) Ardoin Street, EastBajac-Bajac, Olongapo City,containing an area of 465 sq. m.more or less, declared andassessed in the name ofFERNANDO MAGCALE underTax Duration No. 19595 issuedby the Assessor of OlongapoCity with an assessed value ofP1,860.00; bounded on the

NORTH: By No. 6, Ardoin StreetSOUTH: By No. 2, Ardoin Street

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EAST: By 37 Canda Street, andWEST: By Ardoin Street.All corners of the lot marked by conc. cylindricalmonuments of the Bureau of Lands as visible limits.( Exhibit "A, " also Exhibit "1" for defendant).

Apart from the stipulations in the printed portion of theaforestated deed of mortgage, there appears a ridertyped at the bottom of the reverse side of thedocument under the lists of the properties mortgagedwhich reads, as follows:AND IT IS FURTHER AGREED that in the event theSales Patent on the lot applied for by the Mortgagorsas herein stated is released or issued by the Bureau ofLands, the Mortgagors hereby authorize the Registerof Deeds to hold the Registration of same until thisMortgage is cancelled, or to annotate this

encumbrance on the Title upon authority from theSecretary of Agriculture and Natural Resources, whichtitle with annotation, shall be released in favor of theherein Mortgage.

From the aforequoted stipulation,it is obvious that the mortgagee(defendant Prudential Bank) wasat the outset aware of the factthat the mortgagors (plaintiffs)have already filed aMiscellaneous Sales Applicationover the lot, possessory rightsover which, were mortgaged toit.

Exhibit "A" (Real EstateMortgage) was registered underthe Provisions of Act 3344 withthe Registry of Deeds of

Zambales on November 23,1971.

On May 2, 1973, plaintiffssecured an additional loan from

defendant Prudential Bank in thesum of P20,000.00. To securepayment of this additional loan,plaintiffs executed in favor of thesaid defendant another deed ofReal Estate Mortgage over thesame properties previouslymortgaged in Exhibit "A." (Exhibit"B;" also Exhibit "2" fordefendant). This second deed ofReal Estate Mortgage was

likewise registered with theRegistry of Deeds, this time inOlongapo City, on May 2,1973.

On April 24, 1973, the Secretary of Agricultureissued Miscellaneous Sales Patent No. 4776over the parcel of land, possessory rights overwhich were mortgaged to defendant PrudentialBank, in favor of plaintiffs. On the basis of theaforesaid Patent, and upon its transcription inthe Registration Book of the Province of

Zambales, Original Certificate of Title No. P-2554 was issued in the name of PlaintiffFernando Magcale, by the Ex-Oficio Register ofDeeds of Zambales, on May 15, 1972.

For failure of plaintiffs to pay their obligation todefendant Bank after it became due, and uponapplication of said defendant, the deeds of RealEstate Mortgage (Exhibits "A" and "B") were

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extrajudicially foreclosed. Consequent to theforeclosure was the sale of the propertiestherein mortgaged to defendant as the highestbidder in a public auction sale conducted by thedefendant City Sheriff on April 12, 1978 (Exhibit

"E"). The auction sale aforesaid was helddespite written request from plaintiffs throughcounsel dated March 29, 1978, for thedefendant City Sheriff to desist from going withthe scheduled public auction sale (Exhibit "D")."(Decision, Civil Case No. 2443-0, Rollo, pp. 29-31).

Respondent Court, in a Decision dated November 3, 1978declared the deeds of Real Estate Mortgage as null and void(Ibid., p. 35).

On December 14, 1978, petitioner filed a Motion forReconsideration (Ibid., pp. 41-53), opposed by privaterespondents on January 5, 1979 (Ibid., pp. 54-62), and in anOrder dated January 10, 1979 (Ibid., p. 63), the Motion forReconsideration was denied for lack of merit. Hence, theinstant petition (Ibid., pp. 5-28).

The first Division of this Court, in a Resolution dated March 9,1979, resolved to require the respondents to comment (Ibid.,p. 65), which order was complied with the Resolution datedMay 18,1979, (Ibid., p. 100), petitioner filed its Reply on June2,1979 (Ibid., pp. 101-112).

Thereafter, in the Resolution dated June 13, 1979, the petitionwas given due course and the parties were required to submitsimultaneously their respective memoranda. (Ibid., p. 114).

On July 18, 1979, petitioner filed its Memorandum (Ibid., pp.116-144), while private respondents filed their Memorandumon August 1, 1979 (Ibid., pp. 146-155).

In a Resolution dated August 10, 1979, this case was

considered submitted for decision (Ibid., P. 158).

In its Memorandum, petitioner raised the following issues:

1. WHETHER OR NOT THE DEEDS OF REAL ESTATEMORTGAGE ARE VALID; AND

2. WHETHER OR NOT THE SUPERVENING ISSUANCE INFAVOR OF PRIVATE RESPONDENTS OFMISCELLANEOUS SALES PATENT NO. 4776 ON APRIL 24,1972 UNDER ACT NO. 730 AND THE COVERING ORIGINALCERTIFICATE OF TITLE NO. P-2554 ON MAY 15,1972HAVE THE EFFECT OF INVALIDATING THE DEEDS OFREAL ESTATE MORTGAGE. (Memorandum for Petitioner,Rollo, p. 122).

This petition is impressed with merit.

The pivotal issue in this case is whether or not a valid realestate mortgage can be constituted on the building erected onthe land belonging to another.

The answer is in the affirmative.

In the enumeration of properties under Article 415 of the CivilCode of the Philippines, this Court ruled that, "it is obvious thatthe inclusion of "building" separate and distinct from the land,in said provision of law can only mean that a building is byitself an immovable property." (Lopez vs. Orosa, Jr., et al., L-10817-18, Feb. 28, 1958; Associated Inc. and Surety Co., Inc.vs. Iya, et al., L-10837-38, May 30,1958).

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Thus, while it is true that a mortgage of land necessarilyincludes, in the absence of stipulation of the improvementsthereon, buildings, still a building by itself may be mortgagedapart from the land on which it has been built. Such amortgage would be still a real estate mortgage for the building

would still be considered immovable property even if dealt withseparately and apart from the land (Leung Yee vs. StrongMachinery Co., 37 Phil. 644). In the same manner, this Courthas also established that possessory rights over saidproperties before title is vested on the grantee, may be validlytransferred or conveyed as in a deed of mortgage (Vda. deBautista vs. Marcos, 3 SCRA 438 [1961]).

Coming back to the case at bar, the records show, asaforestated that the original mortgage deed on the 2-storeysemi-concrete residential building with warehouse and on the

right of occupancy on the lot where the building was erected,was executed on November 19, 1971 and registered under theprovisions of Act 3344 with the Register of Deeds of Zambaleson November 23, 1971. Miscellaneous Sales Patent No. 4776on the land was issued on April 24, 1972, on the basis ofwhich OCT No. 2554 was issued in the name of privaterespondent Fernando Magcale on May 15, 1972. It is thereforewithout question that the original mortgage was executedbefore the issuance of the final patent and before thegovernment was divested of its title to the land, an event whichtakes effect only on the issuance of the sales patent and its

subsequent registration in the Office of the Register of Deeds(Visayan Realty Inc. vs. Meer, 96 Phil. 515; Director of Landsvs. De Leon, 110 Phil. 28; Director of Lands vs. Jurado, L-14702, May 23, 1961; Pena "Law on Natural Resources", p.49). Under the foregoing considerations, it is evident that themortgage executed by private respondent on his own buildingwhich was erected on the land belonging to the government isto all intents and purposes a valid mortgage.

As to restrictions expressly mentioned on the face ofrespondents' OCT No. P-2554, it will be noted that Sections121, 122 and 124 of the Public Land Act, refer to land alreadyacquired under the Public Land Act, or any improvementthereon and therefore have no application to the assailed

mortgage in the case at bar which was executed before sucheventuality. Likewise, Section 2 of Republic Act No. 730, alsoa restriction appearing on the face of private respondent's titlehas likewise no application in the instant case, despite itsreference to encumbrance or alienation before the patent isissued because it refers specifically to encumbrance oralienation on the land itself and does not mention anythingregarding the improvements existing thereon.

But it is a different matter, as regards the second mortgageexecuted over the same properties on May 2, 1973 for an

additional loan of P20,000.00 which was registered with theRegistry of Deeds of Olongapo City on the same date.Relative thereto, it is evident that such mortgage executedafter the issuance of the sales patent and of the OriginalCertificate of Title, falls squarely under the prohibitions statedin Sections 121, 122 and 124 of the Public Land Act andSection 2 of Republic Act 730, and is therefore null and void.

Petitioner points out that private respondents, after physicallypossessing the title for five years, voluntarily surrendered thesame to the bank in 1977 in order that the mortgaged may be

annotated, without requiring the bank to get the prior approvalof the Ministry of Natural Resources beforehand, therebyimplicitly authorizing Prudential Bank to cause the annotationof said mortgage on their title.

However, the Court, in recently ruling on violations of Section124 which refers to Sections 118, 120, 122 and 123 ofCommonwealth Act 141, has held:

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... Nonetheless, we apply our earlier rulingsbecause we believe that as inpari delicto maynot be invoked to defeat the policy of the Stateneither may the doctrine of estoppel give avalidating effect to a void contract. Indeed, it is

generally considered that as between parties toa contract, validity cannot be given to it byestoppel if it is prohibited by law or is againstpublic policy (19 Am. Jur. 802). It is not withinthe competence of any citizen to barter awaywhat public policy by law was to preserve(Gonzalo Puyat & Sons, Inc. vs. De los Amasand Alino supra). ... (Arsenal vs. IAC, 143SCRA 54 [1986]).

This pronouncement covers only the previous transaction

already alluded to and does not pass upon any new contractbetween the parties (Ibid), as in the case at bar. It should notpreclude new contracts that may be entered into betweenpetitioner bank and private respondents that are in accordancewith the requirements of the law. After all, private respondentsthemselves declare that they are not denying the legitimacy oftheir debts and appear to be open to new negotiations underthe law (Comment; Rollo, pp. 95-96). Any new transaction,however, would be subject to whatever steps the Governmentmay take for the reversion of the land in its favor.

PREMISES CONSIDERED, the decision of the Court of FirstInstance of Zambales & Olongapo City is hereby MODIFIED,declaring that the Deed of Real Estate Mortgage forP70,000.00 is valid but ruling that the Deed of Real EstateMortgage for an additional loan of P20,000.00 is null and void,without prejudice to any appropriate action the Governmentmay take against private respondents.

SO ORDERED.

G.R. No. L-58469 May 16, 1983

MAKATI LEASING and FINANCE CORPORATION,petitioner,vs.

WEAREVER TEXTILE MILLS, INC., and HONORABLECOURT OF APPEALS, respondents.

Loreto C. Baduan for petitioner.

Ramon D. Bagatsing & Assoc. (collaborating counsel) forpetitioner.

Jose V. Mancella for respondent.

DE CASTRO, J.:

Petition for review on certiorari of the decision of the Court ofAppeals (now Intermediate Appellate Court) promulgated onAugust 27, 1981 in CA-G.R. No. SP-12731, setting asidecertain Orders later specified herein, of Judge Ricardo J.Francisco, as Presiding Judge of the Court of First instance ofRizal Branch VI, issued in Civil Case No. 36040, as wen as theresolution dated September 22, 1981 of the said appellate

court, denying petitioner's motion for reconsideration.

It appears that in order to obtain financial accommodationsfrom herein petitioner Makati Leasing and FinanceCorporation, the private respondent Wearever Textile Mills,Inc., discounted and assigned several receivables with theformer under a Receivable Purchase Agreement. To securethe collection of the receivables assigned, private respondentexecuted a Chattel Mortgage over certain raw materials

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inventory as well as a machinery described as an Artos AeroDryer Stentering Range.

Upon private respondent's default, petitioner filed a petition forextrajudicial foreclosure of the properties mortgage to it.

However, the Deputy Sheriff assigned to implement theforeclosure failed to gain entry into private respondent'spremises and was not able to effect the seizure of theaforedescribed machinery. Petitioner thereafter filed acomplaint for judicial foreclosure with the Court of FirstInstance of Rizal, Branch VI, docketed as Civil Case No.36040, the case before the lower court.

Acting on petitioner's application for replevin, the lower courtissued a writ of seizure, the enforcement of which washowever subsequently restrained upon private respondent's

filing of a motion for reconsideration. After several incidents,the lower court finally issued on February 11, 1981, an orderlifting the restraining order for the enforcement of the writ ofseizure and an order to break open the premises of privaterespondent to enforce said writ. The lower court reaffirmed itsstand upon private respondent's filing of a further motion forreconsideration.

On July 13, 1981, the sheriff enforcing the seizure order,repaired to the premises of private respondent and removedthe main drive motor of the subject machinery.

The Court of Appeals, in certiorari and prohibition proceedingssubsequently filed by herein private respondent, set aside theOrders of the lower court and ordered the return of the drivemotor seized by the sheriff pursuant to said Orders, after rulingthat the machinery in suit cannot be the subject of replevin,much less of a chattel mortgage, because it is a real propertypursuant to Article 415 of the new Civil Code, the same beingattached to the ground by means of bolts and the only way to

remove it from respondent's plant would be to drill out ordestroy the concrete floor, the reason why all that the sheriffcould do to enfore the writ was to take the main drive motor ofsaid machinery. The appellate court rejected petitioner'sargument that private respondent is estopped from claiming

that the machine is real property by constituting a chattelmortgage thereon.

A motion for reconsideration of this decision of the Court ofAppeals having been denied, petitioner has brought the caseto this Court for review by writ of certiorari. It is contended byprivate respondent, however, that the instant petition wasrendered moot and academic by petitioner's act of returningthe subject motor drive of respondent's machinery after theCourt of Appeals' decision was promulgated.

The contention of private respondent is without merit. Whenpetitioner returned the subject motor drive, it made itselfunequivocably clear that said action was without prejudice to amotion for reconsideration of the Court of Appeals decision, asshown by the receipt duly signed by respondent'srepresentative. 1 Considering that petitioner has reserved itsright to question the propriety of the Court of Appeals'decision, the contention of private respondent that this petitionhas been mooted by such return may not be sustained.

The next and the more crucial question to be resolved in this

Petition is whether the machinery in suit is real or personalproperty from the point of view of the parties, with petitionerarguing that it is a personality, while the respondent claimingthe contrary, and was sustained by the appellate court, whichaccordingly held that the chattel mortgage constituted thereonis null and void, as contended by said respondent.

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A similar, if not Identical issue was raised in Tumalad v.Vicencio, 41 SCRA 143 where this Court, speaking throughJustice J.B.L. Reyes, ruled:

Although there is no specific statement referring

to the subject house as personal property, yetby ceding, selling or transferring a property byway of chattel mortgage defendants-appellantscould only have meant to convey the house aschattel, or at least, intended to treat the sameas such, so that they should not now be allowedto make an inconsistent stand by claimingotherwise. Moreover, the subject house stoodon a rented lot to which defendants-appellantsmerely had a temporary right as lessee, andalthough this can not in itself alone determine

the status of the property, it does so whencombined with other factors to sustain theinterpretation that the parties, particularly themortgagors, intended to treat the house aspersonality. Finally, unlike in the Iya cases,Lopez vs. Orosa, Jr. & Plaza Theatre, Inc. &Leung Yee vs. F.L. Strong Machinery &Williamson, wherein third persons assailed thevalidity of the chattel mortgage, it is thedefendants-appellants themselves, as debtors-mortgagors, who are attacking the validity of the

chattel mortgage in this case. The doctrine ofestoppel therefore applies to the hereindefendants-appellants, having treated thesubject house as personality.

Examining the records of the instant case, We find no logicaljustification to exclude the rule out, as the appellate court did,the present case from the application of the abovequotedpronouncement. If a house of strong materials, like what was

involved in the above Tumalad case, may be considered aspersonal property for purposes of executing a chattelmortgage thereon as long as the parties to the contract soagree and no innocent third party will be prejudiced thereby,there is absolutely no reason why a machinery, which is

movable in its nature and becomes immobilized only bydestination or purpose, may not be likewise treated as such.This is really because one who has so agreed is estoppedfrom denying the existence of the chattel mortgage.

In rejecting petitioner's assertion on the applicability of theTumalad doctrine, the Court of Appeals lays stress on the factthat the house involved therein was built on a land that did notbelong to the owner of such house. But the law makes nodistinction with respect to the ownership of the land on whichthe house is built and We should not lay down distinctions not

contemplated by law.

It must be pointed out that the characterization of the subjectmachinery as chattel by the private respondent is indicative ofintention and impresses upon the property the characterdetermined by the parties. As stated in Standard Oil Co. ofNew York v. Jaramillo, 44 Phil. 630, it is undeniable that theparties to a contract may by agreement treat as personalproperty that which by nature would be real property, as longas no interest of third parties would be prejudiced thereby.

Private respondent contends that estoppel cannot applyagainst it because it had never represented nor agreed thatthe machinery in suit be considered as personal property butwas merely required and dictated on by herein petitioner tosign a printed form of chattel mortgage which was in a blankform at the time of signing. This contention lackspersuasiveness. As aptly pointed out by petitioner and notdenied by the respondent, the status of the subject machineryas movable or immovable was never placed in issue before

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the lower court and the Court of Appeals except in asupplemental memorandum in support of the petition filed inthe appellate court. Moreover, even granting that the charge istrue, such fact alone does not render a contract void ab initio,but can only be a ground for rendering said contract voidable,

or annullable pursuant to Article 1390 of the new Civil Code,by a proper action in court. There is nothing on record to showthat the mortgage has been annulled. Neither is it disclosedthat steps were taken to nullify the same. On the other hand,as pointed out by petitioner and again not refuted byrespondent, the latter has indubitably benefited from saidcontract. Equity dictates that one should not benefit at theexpense of another. Private respondent could not nowtherefore, be allowed to impugn the efficacy of the chattelmortgage after it has benefited therefrom,

From what has been said above, the error of the appellatecourt in ruling that the questioned machinery is real, notpersonal property, becomes very apparent. Moreover, thecase ofMachinery and Engineering Supplies, Inc. v. CA, 96Phil. 70, heavily relied upon by said court is not applicable tothe case at bar, the nature of the machinery and equipmentinvolved therein as real properties never having been disputednor in issue, and they were not the subject of a ChattelMortgage. Undoubtedly, the Tumalad case bears more nearlyperfect parity with the instant case to be the more controllingjurisprudential authority.

WHEREFORE, the questioned decision and resolution of theCourt of Appeals are hereby reversed and set aside, and theOrders of the lower court are hereby reinstated, with costsagainst the private respondent.

SO ORDERED.

G.R. No. L-40411 August 7, 1935

DAVAO SAW MILL CO., INC., plaintiff-appellant,vs.APRONIANO G. CASTILLO and DAVAO LIGHT & POWERCO., INC., defendants-appellees.

Arsenio Suazo and Jose L. Palma Gil and Pablo Lorenzo andDelfin Joven for appellant.J.W. Ferrier for appellees.

MALCOLM, J.:

The issue in this case, as announced in the opening sentenceof the decision in the trial court and as set forth by counsel forthe parties on appeal, involves the determination of the natureof the properties described in the complaint. The trial judgefound that those properties were personal in nature, and as a

consequence absolved the defendants from the complaint,with costs against the plaintiff.

The Davao Saw Mill Co., Inc., is the holder of a lumberconcession from the Government of the Philippine Islands. Ithas operated a sawmill in the sitio of Maa, barrio of Tigatu,municipality of Davao, Province of Davao. However, the landupon which the business was conducted belonged to anotherperson. On the land the sawmill company erected a buildingwhich housed the machinery used by it. Some of theimplements thus used were clearly personal property, theconflict concerning machines which were placed and mountedon foundations of cement. In the contract of lease between thesawmill company and the owner of the land there appearedthe following provision:

That on the expiration of the period agreed upon, allthe improvements and buildings introduced anderected by the party of the second part shall pass tothe exclusive ownership of the party of the first part

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without any obligation on its part to pay any amount forsaid improvements and buildings; also, in the event theparty of the second part should leave or abandon theland leased before the time herein stipulated, theimprovements and buildings shall likewise pass to the

ownership of the party of the first part as though thetime agreed upon had expired: Provided, however,That the machineries and accessories are not includedin the improvements which will pass to the party of thefirst part on the expiration or abandonment of the landleased.

In another action, wherein the Davao Light & Power Co., Inc.,was the plaintiff and the Davao, Saw, Mill Co., Inc., was thedefendant, a judgment was rendered in favor of the plaintiff inthat action against the defendant in that action; a writ of

execution issued thereon, and the properties now in questionwere levied upon as personalty by the sheriff. No third partyclaim was filed for such properties at the time of the salesthereof as is borne out by the record made by the plaintiffherein. Indeed the bidder, which was the plaintiff in that action,and the defendant herein having consummated the sale,proceeded to take possession of the machinery and otherproperties described in the corresponding certificates of saleexecuted in its favor by the sheriff of Davao.

As connecting up with the facts, it should further be explained

that the Davao Saw Mill Co., Inc., has on a number ofoccasions treated the machinery as personal property byexecuting chattel mortgages in favor of third persons. One ofsuch persons is the appellee by assignment from the originalmortgages.

Article 334, paragraphs 1 and 5, of the Civil Code, is in point.According to the Code, real property consists of

1. Land, buildings, roads and constructions of all kindsadhering to the soil;

x x x x x x x x x

5. Machinery, liquid containers, instruments orimplements intended by the owner of any building orland for use in connection with any industry or tradebeing carried on therein and which are expresslyadapted to meet the requirements of such trade ofindustry.

Appellant emphasizes the first paragraph, and appellees thelast mentioned paragraph. We entertain no doubt that the trialjudge and appellees are right in their appreciation of the legaldoctrines flowing from the facts.

In the first place, it must again be pointed out that theappellant should have registered its protest before or at thetime of the sale of this property. It must further be pointed outthat while not conclusive, the characterization of the propertyas chattels by the appellant is indicative of intention andimpresses upon the property the character determined by theparties. In this connection the decision of this court in the caseof Standard Oil Co. of New York vs. Jaramillo ( [1923], 44Phil., 630), whetherobiter dicta or not, furnishes the key tosuch a situation.

It is, however not necessary to spend overly must time in theresolution of this appeal on side issues. It is machinery whichis involved; moreover, machinery not intended by the owner ofany building or land for use in connection therewith, butintended by a lessee for use in a building erected on the landby the latter to be returned to the lessee on the expiration orabandonment of the lease.

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A similar question arose in Puerto Rico, and on appeal beingtaken to the United States Supreme Court, it was held thatmachinery which is movable in its nature only becomesimmobilized when placed in a plant by the owner of theproperty or plant, but not when so placed by a tenant, a

usufructuary, or any person having only a temporary right,unless such person acted as the agent of the owner. In theopinion written by Chief Justice White, whose knowledge ofthe Civil Law is well known, it was in part said:

To determine this question involves fixing the natureand character of the property from the point of view ofthe rights of Valdes and its nature and character fromthe point of view of Nevers & Callaghan as a judgmentcreditor of the Altagracia Company and the rightsderived by them from the execution levied on the

machinery placed by the corporation in the plant.Following the Code Napoleon, the Porto Rican Codetreats as immovable (real) property, not only land andbuildings, but also attributes immovability in somecases to property of a movable nature, that is, personalproperty, because of the destination to which it isapplied. "Things," says section 334 of the Porto RicanCode, "may be immovable either by their own nature orby their destination or the object to which they areapplicable." Numerous illustrations are given in the fifthsubdivision of section 335, which is as follows:

"Machinery, vessels, instruments or implementsintended by the owner of the tenements for theindustrial or works that they may carry on in anybuilding or upon any land and which tend directly tomeet the needs of the said industry or works." (Seealso Code Nap., articles 516, 518 et seq. to andinclusive of article 534, recapitulating the things which,though in themselves movable, may be immobilized.)So far as the subject-matter with which we are dealing

machinery placed in the plant it is plain, bothunder the provisions of the Porto Rican Law and of theCode Napoleon, that machinery which is movable in itsnature only becomes immobilized when placed in aplant by the owner of the property or plant. Such result

would not be accomplished, therefore, by the placing ofmachinery in a plant by a tenant or a usufructuary orany person having only a temporary right.(Demolombe, Tit. 9, No. 203; Aubry et Rau, Tit. 2, p.12, Section 164; Laurent, Tit. 5, No. 447; and decisionsquoted in Fuzier-Herman ed. Code Napoleon underarticles 522 et seq.) The distinction rests, as pointedout by Demolombe, upon the fact that one only havinga temporary right to the possession or enjoyment ofproperty is not presumed by the law to have appliedmovable property belonging to him so as to deprive

him of it by causing it by an act of immobilization tobecome the property of another. It follows thatabstractly speaking the machinery put by the AltagraciaCompany in the plant belonging to Sanchez did notlose its character of movable property and becomeimmovable by destination. But in the concreteimmobilization took place because of the expressprovisions of the lease under which the Altagracia held,since the lease in substance required the putting in ofimproved machinery, deprived the tenant of any right tocharge against the lessor the cost such machinery, and

it was expressly stipulated that the machinery so put inshould become a part of the plant belonging to theowner without compensation to the lessee. Under suchconditions the tenant in putting in the machinery wasacting but as the agent of the owner in compliance withthe obligations resting upon him, and theimmobilization of the machinery which resulted arose inlegal effect from the act of the owner in giving bycontract a permanent destination to the machinery.

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x x x x x x x x x

The machinery levied upon by Nevers & Callaghan,that is, that which was placed in the plant by theAltagracia Company, being, as regards Nevers &

Callaghan, movable property, it follows that they hadthe right to levy on it under the execution upon thejudgment in their favor, and the exercise of that rightdid not in a legal sense conflict with the claim ofValdes, since as to him the property was a part of therealty which, as the result of his obligations under thelease, he could not, for the purpose of collecting hisdebt, proceed separately against. (Valdes vs. CentralAltagracia [192], 225 U.S., 58.)

Finding no reversible error in the record, the judgment

appealed from will be affirmed, the costs of this instance to bepaid by the appellant.

G.R. No. L-30173 September 30, 1971GAVINO A. TUMALAD and GENEROSA R. TUMALAD,

plaintiffs-appellees,vs.

ALBERTA VICENCIO and EMILIANO SIMEON, defendants-appellants.

Castillo & Suck for plaintiffs-appellees.Jose Q. Calingo for defendants-appellants.

REYES, J.B.L., J.:Case certified to this Court by the Court of Appeals (CA-G.R. No.27824-R) for the reason that only questions of law are involved.This case was originally commenced by defendants-appellantsin the municipal court of Manila in Civil Case No. 43073, forejectment. Having lost therein, defendants-appellants appealedto the court a quo (Civil Case No. 30993) which also rendered adecision against them, the dispositive portion of which follows:

WHEREFORE, the court hereby renders judgment in favor of theplaintiffs and against the defendants, ordering the latter to payjointly and severally the former a monthly rent of P200.00 onthe house, subject-matter of this action, from March 27, 1956,to January 14, 1967, with interest at the legal rate from April18, 1956, the filing of the complaint, until fully paid, plus

attorney's fees in the sum of P300.00 and to pay the costs.

It appears on the records that on 1 September 1955defendants-appellants executed a chattel mortgage in favor ofplaintiffs-appellees over their house of strong materials locatedat No. 550 Int. 3, Quezon Boulevard, Quiapo, Manila, over LotNos. 6-B and 7-B, Block No. 2554, which were being rentedfrom Madrigal & Company, Inc. The mortgage was registered inthe Registry of Deeds of Manila on 2 September 1955. Theherein mortgage was executed to guarantee a loan ofP4,800.00 received from plaintiffs-appellees, payable withinone year at 12% per annum. The mode of payment wasP150.00 monthly, starting September, 1955, up to July 1956,and the lump sum of P3,150 was payable on or before August,1956. It was also agreed that default in the payment of any ofthe amortizations, would cause the remaining unpaid balanceto becomeimmediately due and Payable and

the Chattel Mortgage will be enforceable in accordance with theprovisions of Special Act No. 3135, and for this purpose, theSheriff of the City of Manila or any of his deputies is herebyempowered and authorized to sell all the Mortgagor's propertyafter the necessary publication in order to settle the financialdebts of P4,800.00, plus 12% yearly interest, and attorney's

fees...2

When defendants-appellants defaulted in paying, the mortgagewas extrajudicially foreclosed, and on 27 March 1956, thehouse was sold at public auction pursuant to the said contract.As highest bidder, plaintiffs-appellees were issued thecorresponding certificate of sale. 3Thereafter, on 18 April 1956,plaintiffs-appellant commenced Civil Case No. 43073 in themunicipal court of Manila, praying, among other things, thatthe house be vacated and its possession surrendered to them,

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and for defendants-appellants to pay rent of P200.00 monthlyfrom 27 March 1956 up to the time the possession issurrendered. 4On 21 September 1956, the municipal courtrendered its decision

... ordering the defendants to vacate the premises described in

the complaint; ordering further to pay monthly the amount ofP200.00 from March 27, 1956, until such (time that) thepremises is (sic) completely vacated; plus attorney's fees ofP100.00 and the costs of the suit. 5

Defendants-appellants, in their answers in both the municipalcourt and court a quo impugned the legality of the chattelmortgage, claiming that they are still the owners of the house;but they waived the right to introduce evidence, oral ordocumentary. Instead, they relied on their memoranda insupport of their motion to dismiss, predicated mainly on thegrounds that: (a) the municipal court did not have jurisdictionto try and decide the case because (1) the issue involved, isownership, and (2) there was no allegation of prior possession;and (b) failure to prove prior demand pursuant to Section 2,Rule 72, of the Rules of Court. 6

During the pendency of the appeal to the Court of FirstInstance, defendants-appellants failed to deposit the rent forNovember, 1956 within the first 10 days of December, 1956 asordered in the decision of the municipal court. As a result, thecourt granted plaintiffs-appellees' motion for execution, and itwas actually issued on 24 January 1957. However, thejudgment regarding the surrender of possession to plaintiffs-

appellees could not be executed because the subject househad been already demolished on 14 January 1957 pursuant tothe order of the court in a separate civil case (No. 25816) forejectment against the present defendants for non-payment ofrentals on the land on which the house was constructed.

The motion of plaintiffs for dismissal of the appeal, execution ofthe supersedeas bond and withdrawal of deposited rentals wasdenied for the reason that the liability therefor was disclaimedand was still being litigated, and under Section 8, Rule 72,

rentals deposited had to be held until final disposition of theappeal. 7

On 7 October 1957, the appellate court of First Instancerendered its decision, the dispositive portion of which is quotedearlier. The said decision was appealed by defendants to the

Court of Appeals which, in turn, certified the appeal to thisCourt. Plaintiffs-appellees failed to file a brief and this appealwas submitted for decision without it.

Defendants-appellants submitted numerous assignments oferror which can be condensed into two questions, namely: .

(a) Whether the municipal court from which the case originatedhad jurisdiction to adjudicate the same;

(b) Whether the defendants are, under the law, legally bound topay rentals to the plaintiffs during the period of one (1) yearprovided by law for the redemption of the extrajudicially

foreclosed house.

We will consider these questions seriatim.(a) Defendants-appellants mortgagors question the jurisdictionof the municipal court from which the case originated, andconsequently, the appellate jurisdiction of the Court of FirstInstance a quo, on the theory that the chattel mortgage is voidab initio; whence it would follow that the extrajudicialforeclosure, and necessarily the consequent auction sale, arealso void. Thus, the ownership of the house still remained withdefendants-appellants who are entitled to possession and notplaintiffs-appellees. Therefore, it is argued by defendants-appellants, the issue of ownership will have to be adjudicatedfirst in order to determine possession. lt is contended furtherthat ownership being in issue, it is the Court of First Instancewhich has jurisdiction and not the municipal court.

Defendants-appellants predicate their theory of nullity of thechattel mortgage on two grounds, which are: (a) that, theirsignatures on the chattel mortgage were obtained throughfraud, deceit, or trickery; and (b) that the subject matter of themortgage is a house of strong materials, and, being an

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immovable, it can only be the subject of a real estate mortgageand not a chattel mortgage.On the charge of fraud, deceit or trickery, the Court of FirstInstance found defendants-appellants' contentions as notsupported by evidence and accordingly dismissed the charge, 8confirming the earlier finding of the municipal court that "the

defense of ownership as well as the allegations of fraud anddeceit ... are mere allegations." 9

It has been held in Supia and Batiaco vs. Quintero and Ayala 10that "the answer is a mere statement of the facts which theparty filing it expects to prove, but it is not evidence; 11 andfurther, that when the question to be determined is one of title,the Court is given the authority to proceed with the hearing ofthe cause until this fact is clearly established. In the case ofSyvs. Dalman, 12 wherein the defendant was also a successfulbidder in an auction sale, it was likewise held by this Court thatin detainer cases the aim of

cases property 1

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