cases on concurrence and preference of credits

8/11/2019 Cases on Concurrence and Preference of Credits

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of Title No. 32526. After trial, decision was rendered ordering Pura Villanueva and her

husband, jointly and severally, to pay Rosario Cruzado the sum of P12,000.00, with legal

interest thereon from the date of the filing of the complaint until fully paid plus the sum of

P1,500.00 as attorney's fees.

Pura Villanueva having, likewise, failed to pay her indebtedness of P30,000.00 to Magdalena C.Barretto, the latter, jointly with her husband, instituted against the Villanueva spouses an action

for foreclosure of mortgage, impleading Rosario Cruzado and her children as parties

defendants. On November 11, 1956, decision was rendered in the case absolving the Cruzados

from the complaint and sentencing the Villanuevas to pay the Barrettos, jointly and severally,

the sum of P30,000.00, with interest thereon at the rate of 12% per annum from January 11, 1954

plus the sum of P4,000.00 as attorney's fees. Upon the finality of this decision, the Barrettos filed

a motion for the issuance of a writ of execution which was granted by the lower court on July

31, 1958. On August 14, 1958, the Cruzados filed their "Vendor's Lien" in the amount of

P12,000.00, plus legal interest, over the real property subject of the foreclosure suit, the said

amount representing the unpaid balance of the purchase price of the said property. Giving duecourse to the line, the court on August 18, 1958 ordered the same annotated in Transfer

Certificate of Title No. 32526 of the Registry of Deeds of Manila, decreeing that should the realty

in question be sold at public auction in the foreclosure proceedings, the Cruzados shall be

credited with their pro-rata share in the proceeds thereof, "pursuant to the provision of articles

2248 and 2249 of the new Civil Code in relation to Article 2242, paragraph 2 of the same Code."

The Barrettos filed a motion for reconsideration on September 12, 1958, but on that same date,

the sheriff of Manila, acting in pursuance of the order of the court granting the writ of

execution, sold at public auction the property in question. As highest bidder, the Barrettos

themselves acquired the properties for the sum of P49,000.00.

On October 4, 1958, 'the Court of First Instance issued an order confirming the aforesaid sale

and directing the Register of Deeds of the City of Manila to issue to the Barrettos the

corresponding certificate of title, subject, however, to the order of August 18, 1958 concerning,.

the vendor's lien. On the same date, the motion of the Barettos seeking reconsideration of the

order of the court giving due course to the said vendor's lien was denied. From this last order,

the Barretto spouses interposed the present appeal.

The appeal is devoid of merit.

In claiming that the decision of the Court, of First Instance of Manila in Civil Case No. 20075 .

awarding the amount of P12,000.00 in favor of Rosario Cruzado and her minor children . cannotconstitute a basis for the vendor's lien filed by the appellee Rosario Cruzado, appellants allege

that the action in said civil case was merely to recover the balance of a promissory note. But

while, apparently, the action was to recover the remaining obligation of promissor Pura

Villanueva on the note, the fact remains that Rosario P. Cruzado as guardian of her minor

children, was an unpaid vendor., of the realty in question, and the promissory note, was,

precisely, for the unpaid balance of the price of the property bought by, said Pura Villanueva.


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Article 2242 of the new Civil, Code enumerates the claims, mortgage and liens that constitute an

encumbrance on specific immovable property, and among them are: .

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

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

Article 2249 of the same Code provides that "if there are two or more credits with respect to thesame specific real property or real rights, they shall be satisfied pro-rata after the payment of the

taxes and assessment upon the immovable property or real rights.

Application of the above-quoted provisions to the case at bar would mean that the herein

appellee Rosario Cruzado as an unpaid vendor of the property in question has the right to share

pro-rata with the appellants the proceeds of the foreclosure sale.

The appellants, however, argue that inasmuch as the unpaid vendor's lien in this case was not

registered, it should not prejudice the said appellants' registered rights over the property. There

is nothing to this argument. Note must be taken of the fact that article 2242 of the new CivilCode enumerating the preferred claims, mortgages and liens on immovables, specifically

requires that . unlike the unpaid price of real property sold . mortgage credits, in order to be

given preference, should be recorded in the Registry of Property. If the legislative intent was to

impose the same requirement in the case of the vendor's lien, or the unpaid price of real

property sold, the lawmakers could have easily inserted the same qualification which now

modifies the mortgage credits. The law, however, does not make any distinction between

registered and unregistered vendor's lien, which only goes to show that any lien of that kind

enjoys the preferred credit status.

Appellants also argue that to give the unrecorded vendor's lien the same standing as the

registered mortgage credit would be to nullify the principle in land registration system that

prior unrecorded interests cannot prejudice persons who subsequently acquire interests over

the same property. The Land Registration Act itself, however, respects without reserve or

qualification the paramount rights of lien holders on real property. Thus, section 70 of that Act

provides that .

Registered land, and ownership therein shall in all respects be subject to the same burdens and

incidents attached by law to unregistered land. Nothing contained in this Act shall in any way

be construed to relieve registered land or the owners thereof from any rights incident to the

relation of husband and wife, or from liability to attachment on mesne process or levy, on

execution, or from liability to any lien of any description established by law on land and the buildingsthereon,or the interest of the owners of such land or buildings, or to change the laws of descent,

or the rights of partition between co-owners, joint tenants and other co-tenants or the right to

take the same by eminent domain, or to relieve such land from liability to be appropriated in

any lawful manner for the payment of debts, or to change or affect in any other way any other

rights or liabilities created by law and applicable to unregistered land, except as otherwise

expressly provided in this Act or in the amendments thereof, (Emphasis supplied)


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As to the point made that the articles of the Civil Code on concurrence and preference of credits

are applicable only to the insolvent debtor, suffice it to say that nothing in the law shows any

such limitation. If we are to interpret this portion of the Code as intended only for insolvency

cases, then other creditor-debtor relationships where there are concurrence of credits would be

left without any rules to govern them, and it would render purposeless the special laws an

insolvency.

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

Bengzon, Padilla, Bautista Angelo, Labrador, Paredes and Dizon, JJ., concur.

Concepcion, Reyes, J.B.L. and Barrera, JJ.,concur in the result.

RESOLUTION ON MOTION TO RECONSIDER

December 29, 1962

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

Appellants, spouses Barretto, have filed a motion vigorously urging, for reason to be discussed

in the course of this resolution, that our decision of 28 January 1961 be reconsidered and set

aside, and a new one entered declaring that their right as mortgagees remain superior to the

unrecorded claim of herein appellee for the balance of the purchase price of her rights, title, and

interests in the mortgaged property.

It will be recalled that, with Court authority, Rosario Cruzado sold all her right, title, and

interest and that of her children in the house and lot herein involved to Pura I. Villanueva for

P19,000.00. The purchaser paid Pl,500 in advance, and executed a promissory note for the

balance of P17,506.00. However, the buyer could only pay P5,500 On account of the note, for

which reason the vendor obtained judgment for the unpaid balance. In the meantime, the buyerVillanueva was able to secure a clean certificate of title (No. 32626), and mortgaged the property

to appellant Magdalena C. Barretto, married to Jose C. Barretto, to secure a loan of P30,000.03,

said mortgage having been duly recorded.

Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the

mortgage in her favor, obtained judgment, and upon its becoming final asked for execution on

31 July 1958. On 14 August 1958, Cruzado filed a motion for recognition for her "vendor's lien"

in the amount of Pl2,000.00, plus legal interest, invoking Articles 2242, 2243, and 2249 of the

new Civil Code. After hearing, the court below ordered the "lien" annotated on the back of

Certificate of Title No. 32526, with the proviso that in case of sale under the foreclosure decreethe vendor's lien and the mortgage credit of appellant Barretto should be paid pro ratafrom the

proceeds. Our original decision affirmed this order of the Court of First Instance of Manila.

Appellants insist that:

(1) The vendor's lien, under Articles 2242 and 2243 of the new, Civil Code of the Philippines,

can only become effective in the event of insolvency of the vendee, which has not been proved

to exist in the instant case; and .


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(2) That the appellee Cruzado is not a true vendor of the foreclosed property. We have given

protracted and mature consideration to the facts and law of this case, and have reached the

conclusion that our original decision must be reconsidered and set aside, for the following

reasons:

A. The previous decision failed to take fully into account the radical changes introduced by theCivil Code of the Philippines into the system of priorities among creditors ordained by the Civil

Code of 1889.

Pursuant to the former Code, conflicts among creditors entitled to preference as to specific real

property under Article 1923 were to be resolved according to an order of priorities established

by Article 1927, whereby one class of creditors could exclude the creditors of lower order until

the claims of the former were fully satisfied out of the proceeds of the sale of the real property

subject of the preference, and could even exhaust proceeds if necessary.

Under the system of the Civil Code of the Philippines however, only taxes enjoy a similarabsolute preference. All the remaining thirteen classes of preferred creditors under Article 2242

enjoy no priority among themselves, but must be paidpro-ratai.e., in proportion to the amount

of the respective credits. Thus, Article 2249 provides:

If there are two or more credits with respect to the same specific real property or real rights,

they, shall be satisfiedpro-rataafter the payment of the taxes and assessments upon the

immovable property or real rights."

But in order to make this prorating fully effective, the preferred creditors enumerated in Nos. 2

to 14 of Article 2242 (or such of their, as have credits outstanding) must necessarily be

convened, and the import of their claims ascertained. It is thus apparent that the full,

application (of Articles 2249 and 2242 demands that there must be first some proceedings where

the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency, the

settlement of decedents estate under Rule 87 of the Rules of Court, or other liquidation

proceedings of similar import.

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

The claims or credits enumerated in the two preceding articles" shall be considered as

mortgages or pledges of real or personal property, or liens within the purview of legal

provisions governing insolvency . . . (Emphasis supplied),

And the rule is further clarified in he Report of the Code Commission, as follows:The question as to whether the Civil Code and the insolvency Law can be harmonized is settled

by this Article (2243). The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are

to be enforced in accordance with the Insolvency Law." (Emphasis supplied) .

Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a

foreclosure sale (as in the case now before us) is not the proceeding contemplated by law for the


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enforcement of preferences under Article 2242, unless the claimant were enforcing a credit for

taxes that enjoy absolute priority. If none of the claims is for taxes, a dispute between two

creditors will not enable the Court to ascertain thepro-rata dividend corresponding to each,

because the rights of the other creditors likewise" enjoying preference under Article 2242 can

not be ascertained. Wherefore, the order of the Court of First Instance of Manila now appealed

from, decreeing that the proceeds of the foreclosure sale be apportioned only between appellantand appellee, is incorrect, and must be reversed.

In the absence of insolvency proceedings (or other equivalent general liquidation of the debtor's

estate), the conflict between the parties now before us must be decided pursuant to the well

established principle concerning registered lands; that a purchaser in good faith and for value

(as the appellant concededly is) takes registered property free from liens and encumbrances

other than statutory liens and those recorded in the certificate of title. There being no insolvency

or liquidation, the claim of the appellee, as unpaid vendor, did not require the character and

rank of a statutory lien co-equal to the mortgagee's recorded encumbrance, and must remain

subordinate to the latter.

We are understandably loathed (absent a clear precept of law so commanding) to adopt a rule

that would undermine the faith and credit to be accorded to registered Torrens titles and nullify

the beneficient objectives sought to be obtained by the Land Registration Act. No argument is

needed to stress that if a person dealing with registered land were to be held to take it in every

instance subject to all the fourteen preferred claims enumerate in Article 2242 of the new Civil

Code, even if the existence and import thereof can not be ascertained from the records, all

confidence in Torrens titles would be destroyed, and credit transactions on the faith of such

titles would be hampered, if not prevented, with incalculable results. Loans on real estate

security would become aleatory and risky transactions, for no, prospective lender could

accurately estimate the hidden liens on the property offered as security, unless he indulged in

complicated, tedious investigations, . The logical result might well be a contraction of credit

unforeseeable proportions that could lead to economic disaster.

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

creditors to cause their claims to be recorded in the books of the Register of deeds should they

desire to protect their rights even outside of insolvency or liquidation proceedings.

B. The close study of the facts disclosed by the records lasts strong doubt on the proposition that

appellees Cruzados should be regarded as unpaid vendors of the property( land, buildings, and

improvements ) involved in the case at bar so as to be entitled to preference under Article 2242.The record on appeal, specially the final decision of the Court of First Instance of Manila in the

suit of the ,Cruzados against Villanueva, clearly establishes that after her husband's death, and

with due court authority, Rosario Cruzado, for herself and as administratrix of her husband's

state, mortgaged the property to the Rehabilitation Finance Corporation (RFC) to secure

payment of a loan of P11,000, installments, but that the debtor failed to pay some of the

installments; wherefore the RFC, on 24 August 1949, foreclosed the mortgage, and acquired the


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property, subject to the debtor's right to redeem or repurchase the said property; and that on 25

September 1950, the RFC consolidated its ownership, and the certificate of title of the Cruzados

was cancelled and a new certificate issued in the name of the RFC.

While on 26 July 1951 the RFC did execute a deed selling back the property to the erstwhile

mortgagors and former owners Cruzados in installments, subject to the condition (amongothers) that the title to the property and its improvements "shall remain in the name of

Corporation (RFC) until after said purchase price, advances and interests shall have been fully

paid", as of 27 September 1952, Cruzado had only paid a total of P1,360, and had defaulted on

six monthly amortizations; for which reason the RFC rescinded the sale, and forfeited the

payments made, in accordance with the terms of the contract of 26 July 1951.

It was only on 10 March 1953 that the Cruzados sold to Pura L. Villanueva all "their rights, title,

interest and dominion on and over" the property, lot, house, and improvements for P19,000.00,

the buyer undertaking to assume payment of the obligation to the RFC, and by resolution of 30

April 1953, the RFC approved "the transfer of the rights and interest of Rosario P. Cruzado andher children in their property herein above-described in favor of Pura L. Villanueva"; and on 7

May 1953 the RFC executed a deed of absolute sale of the property to said party, who had fully

paid the price of P14,269.03. Thereupon, the spouses Villanueva obtained a new Transfer

Certificate of Title No. 32526 in their name.

On 10 July 1953, the Villanuevas mortgaged the property to the spouses Barretto, appellants

herein.

It is clear from the facts above-stated that ownership of the property had passed to the

Rehabilitation Finance Corporation since 1950, when it consolidated its purchase at the

foreclosure sale and obtained a certificate of title in its corporate name. The subsequent contract

of resale in favor of the Cruzados did not revest ownership in them, since they failed to comply

with its terms and conditions, and the contract itself provided that the title should remain in the

name of the RFC until the price was fully paid.

Therefore, when after defaulting in their payments due under the resale contract with the RFC

the appellants Cruzados sold to Villanueva "their rights, title, interest and dominion" to the

property, they merely assigned whatever rights or claims they might still have thereto; the

ownership of the property rested with the RFC. The sale from Cruzado to Villanueva, therefore,

was not so much a sale of the land and its improvements as it was a quit-claim deed in favor of

Villanueva. In law, the operative sale was that from the RFC to the latter, and it was the RFC

that should be regarded as the true vendor of the property. At the most, the Cruzadostransferred to Villanueva an option to acquire the property, but not the property itself, and their

credit, therefore, can not legally constitute a vendor's lien on the corpus of that property that

should stand on an equal footing with the mortgaged credit held by appellant Barretto.

In view of the foregoing, the previous decision of this Court, promulgated on 28 January 1961, is

hereby reconsidered and set aside, and a new one entered reversing the judgment appealed


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from and declaring the appellants Barretto entitled to full satisfaction of their mortgaged credit

out of the proceeds of the foreclosure sale in the hands of the Sheriff of the City of Manila. No

costs.

Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Regala and Makalintal, JJ.,concur.

Bengzon, Labrador and Dizon, JJ.,took no part.


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FIRST DIVISION

G.R. No. 126200 August 16, 2001

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

vs.

HONORABLE COURT OF APPEALS and REMINGTON INDUSTRIAL SALES

CORPORATION,respondents.KAPUNAN,J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court,

seeking a review of the Decision of the Court of Appeals dated October 6, 1995 and the

Resolution of the same court dated August 29, 1996.

The facts are as follows:

Marinduque Mining-Industrial Corporation (Marinduque Mining), a corporation engaged in

the manufacture of pure and refined nickel, nickel and cobalt in mixed sulfides; copper

ore/concentrates, cement and pyrite conc., obtained from the Philippine National Bank (PNB)

various loan accommodations. To secure the loans, Marinduque Mining executed on October 9,1978 a Deed of Real Estate Mortgage and Chattel Mortgage in favor of PNB. The mortgage

covered all of Marinduque Mining's real properties, located at Surigao del Norte, Sipalay,

Negros Occidental, and at Antipolo, Rizal, including the improvements thereon. As of

November 20, 1980, the loans extended by PNB amounted to P4 Billion, exclusive of interest

and charges.1

On July 13, 1981, Marinduque Mining executed in favor of PNB and the Development Bank of

the Philippines (DBP) a second Mortgage Trust Agreement. In said agreement, Marinduque

Mining mortgaged to PNB and DBP all its real properties located at Surigao del Norte, Sipalay,

Negros Occidental, and Antipolo, Rizal, including the improvements thereon. The mortgage

also covered all of Marinduque Mining's chattels, as well as assets of whatever kind, nature and

description which Marinduque Mining may subsequently acquire in substitution or

replenishment or in addition to the properties covered by the previous Deed of Real and Chattel

Mortgage dated October 7, 1978. Apparently, Marinduque Mining had also obtained loans

totaling P2 Billion from DBP, exclusive of interest and charges.2

On April 27, 1984, Marinduque Mining executed in favor of PNB and DBP an Amendment to

Mortgage Trust Agreement by virtue of which Marinduque Mining mortgaged in favor of PNB

and DBP all other real and personal properties and other real rights subsequently acquired by

Marinduque Mining.3

For failure of Marinduque Mining to settle its loan obligations, PNB and DBP instituted

sometime on July and August 1984 extrajudicial foreclosure proceedings over the mortgaged

properties.

The events following the foreclosure are narrated by DBP in its petition, as follows:
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In the ensuing public auction sale conducted onAugust 31, 1984, PNB and DBP emerged and

were declared the highest bidders over the foreclosed real properties, buildings, mining claims,

leasehold rights together with the improvements thereon as well as machineries [sic] and

equipments [sic] of MMIC located at Nonoc Nickel Refinery Plant at Surigao del Norte for a bid

price of P14,238,048,150.00 [and] [o]ver the foreclosed chattels of MMIC located at Nonoc

Refinery Plant at Surigao del Norte, PNB and DBP as highest bidders, bidded forP170,577,610.00 (Exhs. "5" to "5-A", "6", "7" to "7-AA-" PNB/DBP). For the foreclosed real

properties together with all the buildings, major machineries & equipment and other

improvements of MMIC located at Antipolo, Rizal, likewise held on August 31, 1984, were sold

to PNB and DBP as highest bidders in the sum of P1,107,167,950.00 (Exhs. "10" to "10-X"-PNB/

DBP).

At the auction sale conducted on September 7, 1984[,] over the foreclosed real properties,

buildings, & machineries/equipment of MMIC located at Sipalay, Negros Occidental were sold

to PNB and DBP, as highest bidders, in the amount of P2,383,534,000.00 and P543,040.000.00

respectively (Exhs. "8" to "8-BB", "9" to "90-GGGGGG"-PNB/DBP).

Finally, at the public auction sale conducted on September 18, 1984 on the foreclosed personal

properties of MMIC, the same were sold to PNB and DBP as the highest bidder in the sum of

P678,772,000.00 (Exhs. "11" and "12-QQQQQ"-PNB).

PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984, purposely, in order to

ensure the continued operation of the Nickel refinery plant and to prevent the deterioration of

the assets foreclosed, assigned and transferred to Nonoc Mining and Industrial Corporation all

their rights, interest and participation over the foreclosed properties of MMIC located at Nonoc

Island, Surigao del Norte for an initial consideration of P14,361,000,000.00 (Exh. "13"-PNB).

Likewise, thru [sic] a Deed of Transfer dated June 6, 1984, PNB and DBP assigned andtransferred in favor of Maricalum Mining Corp. all its rights, interest and participation over the

foreclosed properties of MMIC at Sipalay, Negros Occidental for an initial consideration of

P325,800,000.00 (Exh. "14"-PNB/DBP).

On February 27, 1987, PNB and DBP, pursuant to Proclamation No. 50 as amended, again

assigned, transferred and conveyed to the National Government thru [sic] the Asset

Privatization Trust (APT) all its existing rights and interest over the assets of MMIC, earlier

assigned to Nonoc Mining and Industrial Corporation, Maricalum Mining Corporation and

Island Cement Corporation (Exh. "15" & "15-A" PNB/DBP).4

In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining purchased and

caused to be delivered construction materials and other merchandise from Remington

Industrial Sales Corporation (Remington) worth P921,755.95. The purchases remained unpaid

as of August 1, 1984 when Remington filed a complaint for a sum of money and damages

against Marinduque Mining for the value of the unpaid construction materials and other

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

of suit.
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On September 7, 1984, Remington's original complaint was amended to include PNB and DBP

as co-defendants in view of the foreclosure by the latter of the real and chattel mortgages on the

real and personal properties, chattels, mining claims, machinery, equipment and other assets of

Marinduque Mining.5

On September 13, 1984, Remington filed a second amended complaint to include as additionaldefendant, the Nonoc Mining and Industrial Corporation (Nonoc Mining). Nonoc Mining is the

assignee of all real and personal properties, chattels, machinery, equipment and all other assets

of Marinduque Mining at its Nonoc Nickel Factory in Surigao del Norte.6

On March 26, 1986, Remington filed a third amended complaint including the Maricalum

Mining Corporation (Maricalum Mining) and Island Cement Corporation (Island Cement) as

co-defendants. Remington asserted that Marinduque Mining, PNB, DBP, Nonoc Mining,

Maricalum Mining and Island Cement must be treated in law as one and the same entity by

disregarding the veil of corporate fiction since:

1. Co-defendants NMIC, Maricalum and Island Cement which are newly created entities arepractically owned wholly by defendants PNB and DBP, and managed by their officers, aside

from the fact that the aforesaid co-defendants NMIC, Maricalum and Island Cement were

organized in such a hurry and in such suspicious circumstances by co-defendants PNB and DBP

after the supposed extrajudicial foreclosure of MMIC's assets as to make their supposed projects

assets, machineries and equipment which were originally owned by co-defendant MMIC

beyond the reach of creditors of the latter.

2. The personnel, key officers and rank-and-file workers and employees of co-defendants

NMIC, Maricalum and Island Cement creations of co-defendants PNB and DBP were the

personnel of co-defendant MMIC such that . . . practically there has only been a change of name

for all legal purpose and intents

3. The places of business not to mention the mining claims and project premises of co-

defendants NMIC, Maricalum and Island Cement likewise used to be the places of business,

mining claims and project premises of co-defendant MMIC as to make the aforesaid co-

defendants NMIC, Maricalum and Island Cement mere adjuncts and subsidiaries of co-

defendants PNB and DBP, and subject to their control and management.

On top of everything, co-defendants PNB, DBP NMIC, Maricalum and Island Cement being all

corporations created by the government in the pursuit of business ventures should not be

allowed to ignore, x x x or obliterate with impunity nay illegally, the financial obligations of x x

x MMIC whose operations co-defendants PNB and DBP had highly financed before the alleged

extrajudicial foreclosure of defendant MMIC's assets, machineries and equipment to the extent

that major policies of co-defendant MMIC were being decided upon by co-defendants PNB and

DBP as major financiers who were represented in its board of directors forming part of the

majority thereof which through the alleged extrajudicial foreclosure culminated in a complete

take-over by co-defendants PNB and DBP bringing about the organization of their co-

defendants NMIC, Maricalum and Island Cement to which were transferred all the assets,
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machineries and pieces of equipment of co-defendant MMIC used in its nickel mining project in

Surigao del Norte, copper mining operation in Sipalay, Negros Occidental and cement factory

in Antipolo, Rizal to the prejudice of creditors of co-defendant MMIC such as plaintiff

Remington Industrial Sales Corporation whose stockholders, officers and rank-and-file workers

in the legitimate pursuit of its business activities, invested considerable time, sweat and private

money to supply, among others, co-defendant MMIC with some of its vital needs for itsoperation, which co-defendant MMIC during the time of the transactions material to this case

became x x x co-defendants PNB and DBP's instrumentality, business conduit, alter ego, agency

(sic), subsidiary or auxiliary corporation, by virtue of which it becomes doubly necessary to

disregard the corporation fiction that co-defendants PNB, DBP, MMIC, NMIC, Maricalum and

Island Cement, six (6) distinct and separate entities, when in fact and in law, they should be

treated as one and the same at least as far as plaintiff's transactions with co-defendant MMIC

are concerned, so as not to defeat public convenience, justify wrong, subvert justice, protect

fraud or confuse legitimate issues involving creditors such as plaintiff, a fact which all

defendants were as (sic) still are aware of during all the time material to the transactions subject

of this case.7

On April 3, 1989, Remington filed a motion for leave to file a fourth amended complaint

impleading the Asset Privatization Trust (APT) as co-defendant. Said fourth amended

complaint was admitted by the lower court in its Order dated April 29, 1989.

On April 10, 1990, the Regional Trial Court (RTC) rendered a decision in favor of Remington,

the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the defendants

Marinduque Mining & Industrial Corporation, Philippine National Bank, Development Bank of

the Philippines, Nonoc Mining and Industrial Corporation, Maricalum Mining Corporation,

Island Cement Corporation and Asset Privatization Trust to pay, jointly and severally, the sum

of P920,755.95, representing the principal obligation, including the stipulated interest as of June

22, 1984, plus ten percent (10%) surcharge per annum by way of penalty, until the amount is

fully paid; the sum equivalent to 10% of the amount due as and for attorney's fees; and to pay

the costs.8

Upon appeal by PNB, DBP, Nonoc Mining, Maricalum Mining, Island Cement and APT, the

Court of Appeals, in its Decision dated October 6, 1995, affirmed the decision of the RTC.

Petitioner filed a Motion for Reconsideration, which was denied in the Resolution dated August

29, 1996.

Hence, this petition, DBP maintaining that Remington has no cause of action against it or PNB,

nor against their transferees, Nonoc Mining, Island Cement, Maricalum Mining, and the APT.

On the other hand, private respondent Remington submits that the transfer of the properties

was made in fraud of creditors. The presence of fraud, according to Remington, warrants the

piercing of the corporate veil such that Marinduque Mining and its transferees could be


13/33


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As aptly stated by the appellee in its brief, "x x x where the corporations have directors and

officers in common, there may be circumstances under which their interest as officers in one

company may disqualify them in equity from representing both corporations in transactions

between the two. Thus, where one corporation was 'insolvent and indebted to another, it has

been held that the directors of the creditor corporation were disqualified, by reason of self-

interest, from acting as directors of the debtor corporation in the authorization of a mortgage ordeed of trust to the former to secure such indebtedness x x x" (page 105 of the Appellee's Brief).

In the same manner that "x x x when the corporation is insolvent, its directors who are its

creditors can not secure to themselves any advantage or preference over other creditors. They

can not thus take advantage of their fiduciary relation and deal directly with themselves, to the

injury of others in equal right. If they do, equity will set aside the transaction at the suit of

creditors of the corporation or their representatives, without reference to the question of any actual

fraudulent intent on the part of the directors, for the right of the creditors does not depend upon

fraud in fact, but upon the violation of the fiduciary relation to the directors." x x x (page 106 of

the Appellee's Brief)

We also concede that "x x x directors of insolvent corporation, who are creditors of the

company, can not secure to themselves any preference or advantage over other creditors in the

payment of their claims. It is not good morals or good law. The governing body of officers

thereof are charged with the duty of conducting its affairs strictly in the interest of its existing

creditors, and it would be a breach of such trust for them to undertake to give any one of its

members any advantage over any other creditors in securing the payment of his debts in

preference to all others. When validity of these mortgages, to secure debts upon which the

directors were indorsers, was questioned by other creditors of the corporation, they should

have been classed as instruments rendered void by the legal principle which prevents directors

of an insolvent corporation from giving themselves a preference over outside creditors. x x x"

(page 106-107 of the Appellee's Brief.)12

The Court of Appeals made reference to two principles in corporation law. The first pertains to

transactions between corporations with interlocking directors resulting in the prejudice to one

of the corporations. This rule does not apply in this case, however, since the corporation

allegedly prejudiced (Remington) is a third party, not one of the corporations with interlocking

directors (Marinduque Mining and DBP).

The second principle invoked by respondent court involves "directors x x x who are creditors"

which is also inapplicable herein. Here, the creditor of Marinduque Mining is DBP, not the

directors of Marinduque Mining.

Neither do we discern any bad faith on the part of DBP by its creation of Nonoc Mining,

Maricalum and Island Cement. As Remington itself concedes, DBP is not authorized by its

charter to engage in the mining business.13The creation of the three corporations was necessary

to manage and operate the assets acquired in the foreclosure sale lest they deteriorate from non-

use and lose their value. In the absence of any entity willing to purchase these assets from the


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bank, what else would it do with these properties in the meantime? Sound business practice

required that they be utilized for the purposes for which they were intended.

Remington also asserted in its third amended complaint that the use of Nonoc Mining,

Maricalum and Island Cement of the premises of Marinduque Mining and the hiring of the

latter's officers and personnel also constitute badges of bad faith.

Assuming that the premises of Marinduque Mining were not among those acquired by DBP in

the foreclosure sale, convenience and practicality dictated that the corporations so created

occupy the premises where these assets were found instead of relocating them. No doubt, many

of these assets are heavy equipment and it may have been impossible to move them. The same

reasons of convenience and practicality, not to mention efficiency, justified the hiring by Nonoc

Mining, Maricalum and Island Cement of Marinduque Mining's personnel to manage and

operate the properties and to maintain the continuity of the mining operations.

To reiterate, the doctrine of piercing the veil of corporate fiction applies only when such

corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defendcrime.14To disregard the separate juridical personality of a corporation, the wrongdoing must

be clearly and convincingly established. It cannot be presumed.15In this case, the Court finds

that Remington failed to discharge its burden of proving bad faith on the part of Marinduque

Mining and its transferees in the mortgage and foreclosure of the subject properties to justify

the piercing of the corporate veil.

The Court of Appeals also held that there exists in Remington's favor a "lien" on the unpaid

purchases of Marinduque Mining, and as transferee of these purchases, DBP should be held

liable for the value thereof.

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

ARTICLE 2241. With reference to specific movable property of the debtor, the following claims

or liens shall be preferred:

xxx xxx xxx

(3) Claims for the unpaid price of movables sold, on said movables, so long as they are in the

possession of the debtor, up to the value of the same; and if the movable has been resold by the

debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost by

the immobilization of the thing by destination, provided it has not lost its form, substance andidentity, neither is the right lost by the sale of the thing together with other property for a lump

sum, when the price thereof can be determined proportionally;

(4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the

creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up

to the value thereof;


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xxx xxx xxx

In Barretto vs. Villanueva,16the Court had occasion to construe Article 2242, governing claims or

liens over specific immovable property. The facts that gave rise to the case were summarized by

this Court in its resolution as follows:

x x x Rosario Cruzado sold all her right, title, and interest and that of her children in the house

and lot herein involved to Pura L. Villanueva for P19,000.00. The purchaser paid P1,500 in

advance, and executed a promissory note for the balance of P17,500.00. However, the buyer

could only pay P5,500 on account of the note, for which reason the vendor obtained judgment

for the unpaid balance. In the meantime, the buyer Villanueva was able to secure a clean

certificate of title (No. 32626), and mortgaged the property to appellant Magdalena C. Barretto,

married to Jose C. Baretto, to secure a loan of P30,000.03, said mortgage having been duly

recorded.

Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the

mortgage in her favor, obtained judgment, and upon its becoming final asked for execution on31 July 1958. On 14 August 1958, Cruzado filed a motion for recognition for her "vendor's lien"

in the amount of P12,000.00, plus legal interest, invoking Articles 2242, 2243, and 2249 of the

new Civil Code. After hearing, the court below ordered the "lien" annotated on the back of

Certificate of Title No. 32526, with the proviso that in case of sale under the foreclosure decree

the vendor's lien and the mortgage credit of appellant Barretto should be paidpro ratafrom the

proceeds. Our original decision affirmed this order of the Court of First Instance of Manila.

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

Article 2242 of the new Civil Code enumerates the claims, mortgages and liens that constitute

an encumbrance on specific immovable property, and among them are:

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

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

Article 2249 of the same Code provides that "if there are two or more credits with respect to the

same specific real property or real rights, they shall be satisfied pro-rata, after the payment of

the taxes and assessments upon the immovable property or real rights."

Application of the above-quoted provisions to the case at bar would mean that the herein

appellee Rosario Cruzado as an unpaid vendor of the property in question has the right to

sharepro-ratawith the appellants the proceeds of the foreclosure sale.

xxx xxx xxx

As to the point made that the articles of the Civil Code on concurrence and preference of credits

are applicable only to the insolvent debtor, suffice it to say that nothing in the law shows any

such limitation. If we are to interpret this portion of the Code as intended only for insolvency

cases, then other creditor-debtor relationships where there are concurrence of credits would be


17/33

left without any rules to govern them, and it would render purposeless the special laws on

insolvency.17

Upon motion by appellants, however, the Court reconsidered its decision. Justice J.B.L. Reyes,

speaking for the Court, explained the reasons for the reversal:

A. The previous decision failed to take fully into account the radical changes introduced by the

Civil Code of the Philippines into the system of priorities among creditors ordained by the Civil

Code of 1889.

Pursuant to the former Code, conflicts among creditors entitled to preference as to specific real

property under Article 1923 were to be resolved according to an order of priorities established

by Article 1927, whereby one class of creditors could exclude the creditors of lower order until

the claims of the former were fully satisfied out of the proceeds of the sale of the real property

subject of the preference, and could even exhaust proceeds if necessary.

Under the system of the Civil Code of the Philippines, however, only taxes enjoy a similar

absolute preference. All the remaining thirteen classes of preferred creditors under Article 2242

enjoy no priority among themselves, but must be paidpro rata, i.e., in proportion to the amount

of the respective credits. Thus, Article 2249 provides:

"If there are two or more credits with respect to the same specific real property or real rights,

they shall be satisfied pro rata, after the payment of the taxes and assessments upon the

immovable property or real rights."

But in order to make this prorating fully effective, the preferred creditors enumerated in Nos. 2

to 14 of Article 2242 (or such of them as have credits outstanding) must necessarily be

convened, and the import of their claims ascertained. It is thus apparent that the full application of

Articles 2249 and 2242 demands that there must be first some proceeding where the claims of all the

preferred creditors may be bindingly adjudicated, such as insolvency, the settlement of decedent's estate

under Rule 87 of the Rules of Court, or other liquidation proceedings of similar import.

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

"The claims or credits enumerated in the two preceding articles shall be considered as

mortgages or pledges of real or personal property, or liens within the purview of legal provisions

governing insolvencyx x x (Italics supplied).

And the rule is further clarified in the Report of the Code Commission, as follows

"The question as to whether the Civil Code and the Insolvency Law can be harmonized is

settled by this Article (2243). The preferences named in Articles 2261 and 2262 (now 2241 and

2242) are to be enforced in accordance with the Insolvency Law." (Italics supplied)

Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosure

sale (as in the case now before us) is not the proceeding contemplated by law for the enforcement of

preferences under Article 2242, unless the claimant were enforcing a credit for taxes that enjoy absolute


18/33


19/33


20/33

amount of P1,150,000 and, in addition, to provide cash equity of P767,305.99 to be remitted

directly to petitioners.

Petitioners allege that, although the whole amount of the cash equity became due, the

Municipality refused to pay the same, despite repeated demands and notwithstanding that the

public market was more than ninety-eight percent (98%) complete as of July 20, 1991.Furthermore, petitioners maintain that Salonga induced them to advance the expenses for the

demolition, clearing and site filling work by making representations that the Municipality had

the financial capability to reimburse them later on. However, petitioners claim that they have

not been reimbursed for their expenses.[1]

On July 31, 1991, J.L. Bernardo Construction, Santiago Sugay, Edwin Sugay and Fernando

Erana, with the latter three bringing the case in their own personal capacities and also in

representation of J.L. Bernardo Construction, filed a complaint for breach of contract, specific

performance, and collection of a sum of money, with prayer for preliminary attachment and

enforcement of contractors lien against the Municipality of San Antonio, Nueva Ecija and

Salonga, in his personal and official capacity as municipal mayor. After defendants filed theiranswer, the Regional Trial Court held hearings on the ancillary remedies prayed for by

plaintiffs.[2]

On September 5, 1991, the Regional Trial Court issued the writ of preliminary attachment

prayed for by plaintiffs. It also granted J.L. Bernardo Construction the right to maintain

possession of the public market and to operate the same. The dispositive portion of the decision

provides:

IN VIEW OF THE FOREGOING DISQUISITION, the Court finds the auxiliary reliefs of

attachment prayed for by the plaintiffs to be well-taken and the same is hereby GRANTED.

Conformably thereto, let a writ of preliminary attachment be issued upon the filing by theplaintiffs of a bond in the amount of P2,653,576.84 to answer for costs and damages which the

defendants may suffer should the Court finally adjudged (sic) that the plaintiffs are not entitled

to the said attachment, and thereafter, the Deputy Sheriff of this court is hereby ordered to

attach the properties of the defendants JOSE LAPUZ SALONGA and the MUNICIPALITY OF

SAN ANTONIO, NUEVA ECIJA which are not exempt from execution.

CORROLARILY, the Court grants the plaintiffs J.L. BERNARDO CONSTRUCTION,

represented by SANTIAGO R. SUGAY, EDWIN A. SUGAY and FERNANDO S.A. ERANA, the

authority to hold on to the possession of the public market in question and to open and operate

the same based on fair and reasonable guidelines and other mechanics of operation to besubmitted by plaintiffs within fifteen (15) days from their receipt of this Order which shall be

subject to Courts approval and to deposit the income they may derive therefrom to the

Provincial Treasurer of Nueva Ecija after deducting the necessary expenses for the operation

and management of said market, subject to further orders from this Court.

SO ORDERED.
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The trial court gave credence to plaintiffs claims that defendants were guilty of fraud in

incurring their contractual obligations as evidenced by the complaint and the affidavits of

plaintiffs Santiago Sugay and Erana. The court ruled that defendants acts of "


22/33

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

1. The respondent judges ORDER dated September 5, 1991 for the issuance of a writ of

attachment and for the enforcement of a contractors lien, is hereby NULLIFIED and SET

ASIDE; the writ of attachment issued pursuant thereto and the proceedings conducted by the

Sheriffs assigned to implement the same are, as a consequence, also hereby NULLIFIED andSET ASIDE;

2. The respondent judges ORDER dated October 11, 1991 further enforcing the contractors lien

and approving the guidelines for the operation of the San Antonio Public Market is also

NULLIFIED and SET ASIDE.

Petitioners prayers for the dismissal of Civil Case No. 1016 (now pending before respondent

judge) and for his deletion from said case as defendant in his private capacity are, however,

DENIED.

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

SO ORDERED.

The appellate court reasoned that since the Construction Agreement was only between Juanito

Bernardo and the Municipality of San Antonio, and since there is no sworn statement by Juanito

Bernardo alleging that he had been deceived or misled by Mayor Salonga or the Municipality of

San Antonio, it is apparent that the applicant has not proven that the defendants are guilty of

inceptive fraud in contracting the debt or incurring the obligation, pursuant to Rule 57 of the

Rules of Court, and therefore, the writ of attachment should be struck down for having been

improvidently and irregularly issued.

The filing of a motion for the approval of counter-bond by defendants did not, according to theCourt of Appeals, render the petition for certioraripremature. The appellate court held that such

motion could not cure the defect in the issuance of the writ of attachment and that, moreover,

the defendants motion was filed by them "without prejudice to the petition for certiorari."

As to the contractors lien, the appellate court ruled that Articles 2242 of the Civil Code finds

application only in the context of insolvency proceedings, as expressly stated in Article 2243.

Even if it is conceded that plaintiffs are entitled to retain possession of the market under its

contractors lien, the appellate court held that thesame right cannot be expanded to include the

right to use the building. Therefore, the trial courts grant of authority to plaintiffs to operate the

San Antonio Public Market amounts to a grave abuse of discretion.

With regard to the allegations of defendants that plaintiffs are not the proper parties, the Court

of Appeals ruled that such issue should be assigned as an error by defendants later on should

the outcome of the case be adverse to the latter.[6]

Petitioners are now before this Court assailing the appellate courts decision. In their petition,

they make the following assignment of errors:
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1. THE DECISION IS CONTRARY TO LAW IN THAT THE COURT OF APPEALS

OVERLOOKED AND/OR DISREGARDED THE FUNDAMENTAL REQUIREMENT AND

ESTABLISHED SUPREME COURT DECISIONS IN ACTIONS FOR CERTIORARI

CONSIDERING THAT THE FILING OF THE PETITION BY RESPONDENT SALONGA WITH

THE COURT OF APPEALS IS OBVIOUSLY PREMATURE AND IMPROPER SINCE THERE

ADMITTEDLY EXISTS A PLAIN, SPEEDY AND ADEQUATE REMEDY AVAILABLE TORESPONDENT SALONGA WHICH IS HIS UNRESOLVED "MOTION TO APPROVE

COUNTERBOND" PENDING WITH THE TRIAL COURT.

2. IN COMPLETE DISREGARD OF ESTABLISHED JURISPRUDENCE, THE COURT OF

APPEALS HAS SKIRTED AND/OR FAILED TO CONSIDER/DISREGARDED THE EQUALLY

CRUCIAL ISSUE THAT THE QUESTIONED ORDERS ARE CLEARLY AND ADMITTEDLY

INTERLOCUTORY IN NATURE AND THEREFORE THEY CANNOT BE THE PROPER

SUBJECT OF AN ACTION FOR CERTIORARI; PROOF THAT THE ORDERS ASSAILED BY

RESPONDENT SALONGA ARE INTERLOCUTORY IN CHARACTER IS THE DISPOSITIVE

PORTION OF THE DECISION WHEN THE COURT OF APPEALS SAID "THE RESPONDENT

JUDGE MAY NOW PROCEED TO HEARING OF SAID CIVIL CASE NO. 1016 ON THE

MERITS"; PETITION FILED BY RESPONDENT SALONGA WITH THE COURT OF APPEALS

SHOULD HAVE BEEN DISMISSED OUTRIGHTLY AS SOUGHT BY HEREIN PETITIONERS

IN THEIR VARIOUS UNACTED PLEADINGS.

3. THE DECISION IS BASED ON FINDINGS OF FACTS AND CONCLUSIONS WHICH ARE

NOT ONLY GROSSLY ERRONEOUS BUT ARE SQUARELY CONTRADICTED BY THE

EVIDENCE ON RECORD.

4. THE COURT OF APPEALS HAS CLEARLY MISAPPRECIATED, MISREAD AND

DISREGARDED HEREIN PETITIONERS CAUSES OF ACTION AGAINST RESPONDENT

SALONGA AND HIS CO-RESPONDENT MUNICIPALITY OF SAN ANTONIO, NUEVA

ECIJA.

5. THE COURT OF APPEALS HAS MADE ERRONEOUS AND CONTRADICTORY

CONCLUSIONS AND FINDINGS ON THE ISSUE OF "REAL PARTY IN INTEREST" IN

COMPLETE DISREGARD OF THE POWERS AND AUTHORITY GRANTED BY JUANITO L.

BERNARDO CONSTRUCTION TO HEREIN PETITIONERS.

6. THE COURT OF APPEALS HAS SKIRTED THE IMPORTANT ISSUE OF "AGENCY

COUPLED WITH AN INTEREST."

7. THE COURT OF APPEALS WENT BEYOND THE ISSUES OF THE CERTIORARI CASE

AND ITS FINDINGS AND CONCLUSIONS ON ISSUES NOT RELATED TO THE CASE FOR

CERTIORARI ARE CONTRARY TO THE PLEADINGS AND DO NOT CONFORM TO THE

EVIDENCE ON RECORD.

8. THE COURT OF APPEALS HAS LIKEWISE DISREGARDED THE PRECEPT THAT

CONCLUSIONS AND FINDINGS OF FACT OF THE TRIAL COURT ARE ENTITLED TO


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GREAT WEIGHT ON APPEAL AND SHOULD NOT BE DISTURBED SINCE THERE IS NO

STRONG AND COGENT REASON WHATSOVER TO OVERCOME THE WELL-WRITTEN

AND DETAILED AND ESTABLISHED FACTUAL FINDINGS OF THE TRIAL COURT.

9. PETITIONERS HAVE STRONG REASONS TO BELIEVE THAT THE DECISION OF THE

COURT OF APPEALS WAS ISSUED WITH SERIOUS INJUSTICE AND AGAINST THETENETS OF FAIR PLAY SINCE THE DECISION HAD BEEN KNOWN TO AS IT WAS

OPENLY AND PUBLICLY ANNOUNCED BY RESPONDENT SALONGA LONG BEFORE IT

WAS "PROMULGATED" BY THE COURT OF APPEALS.

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

1. Whether or not the Court of Appeals correctly assumed jurisdiction over the petition for

certiorari filed by respondents herein assailing the trial courts interlocutory orders granting the

writ of attachment and the contractors lien?

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

A petition for certiorari may be filed in case a tribunal, board or officer exercising judicial or

quasi-judicial functions has acted without or in excess of jurisdiction, or with grave abuse of

discretion amounting to lack or excess of jurisdiction, and there is no appeal, or any plain,

speedy, and adequate remedy in the ordinary course of law.[7]

The office of a writ of certiorari is restricted to truly extraordinary cases wherein the act of the

lower court or quasi-judicial body is wholly void.[8]We held in a recent case that certiorarimay

be issued "only where it is clearly shown that there is a patent and gross abuse of discretion as

to amount to an evasion of positive duty or to virtual refusal to perform a duty enjoined by law,

or to act at all in contemplation of law, as where the power is exercised in an arbitrary and

despotic manner by reason of passion or personal hostility."[9]

As a general rule, an interlocutory order is not appealable until after the rendition of the

judgment on the merits for a contrary rule would delay the administration of justice and unduly

burden the courts.[10]However, we have held that certiorariis an appropriate remedy to assail an

interlocutory order (1) when the tribunal issued such order without or in excess of jurisdiction

or with grave abuse of discretion and (2) when the assailed interlocutory order is patently

erroneous and the remedy of appeal would not afford adequate and expeditious relief .[11]

We hold that the petition for certiorari filed by Salonga and the Municipality with the Court of

Appeals questioning the writ of attachment issued by the trial court should not have been givendue course for they still had recourse to a plain, speedy and adequate remedy - the filing of a

motion to fix the counter-bond, which they in fact filed with the trial court, the grant of which

would effectively prevent the issuance of the writ of attachment. Moreover, they could also

have filed a motion to discharge the attachment for having been improperly or irregularly

issued or enforced, or that the bond is insufficient, or that the attachment is excessive.[12]With

such remedies still available to the Municipality and Salonga, the filing of a petition
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for certiorari with the Court of Appeals insofar as it questions the order of attachment was

clearly premature.

However, with regards to the contractors lien, weuphold the appellate courts ruling reversing

the trial courts grant of a contractors lien in favor of petitioners.

Articles 2241 and 2242 of the Civil Code enumerates certain credits which enjoy preference with

respect to specific personal or real property of the debtor. Specifically, the contractors lien

claimed by petitioners is granted under the third paragraph of Article 2242 which provides that

the claims of contractors engaged in the construction, reconstruction or repair of buildings or

other works shall be preferred with respect to the specific building or other immovable

property constructed.[13]

However, Article 2242 only finds application when there is a concurrence of credits, i.e. when

the same specific property of the debtor is subjected to the claims of several creditors and the

value of such property of the debtor is insufficient to pay in full all the creditors. In such a

situation, the question of preference will arise, that is, there will be a need to determine which ofthe creditors will be paid ahead of the others.[14]Fundamental tenets of due process will dictate

that this statutory lien should then only be enforced in the context of some kind of a proceeding

where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency

proceedings.[15]

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

articles 2241 and 2242 shall be considered as mortgages or pledges of real or personal property,

or liens within the purview of legal provisions governing insolvency.[16]

The action filed by petitioners in the trial court does not partake of the nature of an insolvency

proceeding. It is basically for specific performance and damages.[17]Thus, even if it is finallyadjudicated that petitioners herein actually stand in the position of unpaid contractors and are

entitled to invoke the contractors lien granted under Article 2242, such lien cannot be enforced

in the present action for there is no way of determining whether or not there exist other

preferred creditors with claims over the San Antonio Public Market. The records do not contain

any allegation that petitioners are the only creditors with respect to such property. The fact that

no third party claims have been filed in the trial court will not bar other creditors from

subsequently bringing actions and claiming that they also have preferred liens against the

property involved.[18]

Our decision herein is consistent with our ruling in Philippine Savings Bank v. Lantin,[19]wherein

we also disallowed the contractor from enforcing his lien pursuant to Article 2242 of the Civil

Code in an action filed by him for the collection of unpaid construction costs.

It not having been alleged in their pleadings that they have any rights as a mortgagee under the

contracts, petitioners may only obtain possession and use of the public market by means of a

preliminary attachment upon such property, in the event that they obtain a favorable judgment

in the trial court. Under our rules of procedure, a writ of attachment over registered real
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property is enforced by the sheriff by filing with the registry of deeds a copy of the order of

attachment, together with a description of the property attached, and a notice that it is attached,

and by leaving a copy of such order, description, and notice with the occupant of the property,

if any.[20]If judgment be recovered by the attaching party and execution issue thereon, the

sheriff may cause the judgment to be satisfied by selling so much of the property as may be

necessary to satisfy the judgment.[21]Only in the event that petitioners are able to purchase theproperty will they then acquire possession and use of the same.

Clearly, the trial courts order of September 5, 1991 granting possession and use of the public

market to petitioners does not adhere to the procedure for attachment laid out in the Rules of

Court. In issuing such an order, the trial court gravely abused its discretion and the appellate

courts nullification of the same should be sustained.

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

herein are the real parties-in-interest. In the event that judgment is rendered against Salonga

and the Municipality, this issue may be assigned as an error in their appeal from such

judgment.

WHEREFORE, we UPHOLD the Court of Appeals Decision dated February 6, 1992 in CA-G.R.

SP No. 26336 insofar as it nullifies the contractors lien granted by the trial court in favor of

petitioners in its September 5, 1991 Order. Consequently, we also UPHOLD the appellate

courts nullification of the trial courts October 11, 1991 Order approving the guidelines for the

operation of the San Antonio Public Market. However, we REVERSE the appellate courts order

nullifying the writ of attachment granted by the trial court.

No pronouncement as to costs.

SO ORDERED.

Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur.
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proceeds thereof in the funds of Philfinance. Petitioner learned about the unauthorized sale of

his shares only on September 10, 1996.[9] He lodged a complaint with private respondents but

the latter ignored it[10] prompting him to file, on May 6, 1997,[11] a formal complaint against

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

Meanwhile, on April 18, 1997, the SEC approved a 15% rate of recovery for Philfinancescreditors and investors.[12] On May 13, 1997, the liquidators began the process of settling the

claims against Philfinance, from its assets.[13]

On April 14, 1998, the SEC rendered judgment dismissing the petition. However, it

reconsidered this decision in a resolution dated September 24, 1999 and granted the claims of

petitioner. It held that petitioner was the owner of the CSPI shares by virtue of a confirmation

of sale (which was considered as a deed of assignment) issued to him by Philfinance. But since

the shares had already been sold and the proceeds commingled with the other assets of

Philfinance, petitioners status was converted into that of an ordinary creditor for the value of

such shares. Thus, it ordered private respondents to pay petitioner the amount of P5,062,500representing 15% of the monetary value of his CSPI shares plus interest at the legal rate from

the time of their unauthorized sale.

On October 27, 1999, the SEC issued an order clarifying its September 24, 1999

resolution. While it reiterated its earlier order to pay petitioner the amount ofP5,062,500, it

deleted the award of legal interest. It clarified that it never meant to award interest since this

would be unfair to the other claimants.

On appeal, the CA affirmed the SEC. It agreed that petitioner was indeed the owner of the CSPI

shares but the recovery of such shares had become impossible. It also declared that the

clarificatory order merely harmonized the dispositive portion with the body of the

resolution. Petitioners motion for reconsideration was denied.

Hence this petition raising the following issues:

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

Philfinance;

2) whether petitioner can recover the full value of his CSPI shares or merely 15%

thereof like all other ordinary creditors of Philfinance and

3) whether petitioner is entitled to legal interest.[14]

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

There is no dispute that petitioner was the owner of the CSPI shares. However, private

respondents, as liquidators of Philfinance, illegally withdrew said certificates of stock without

the knowledge and consent of petitioner and authority of the SEC.[15]After selling the CSPI

shares, private respondents added the proceeds of the sale to the assets of Philfinance.[16] Under
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these circumstances, did the petitioner become a creditor of Philfinance? We rule in the

affirmative.

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

Petitioner is seeking the return of his CSPI shares which, for the present, is no longerpossible, considering that the same had already been sold by the respondents, the proceeds of

which are ADMITTEDLY commingled with the assets of PHILFINANCE.

This being the case, [petitioner] is now but a claimant for the value of those shares. As a

claimant, he shall be treated as an ordinary creditor in so far as the value of those certificates is

concerned.[17]

The CA agreed with this and elaborated:

Much as we find both detestable and reprehensible the grossly abusive and illicit contrivance

employed by private respondents against petitioner, we, nevertheless, concur with public

respondent that the return of petitioners CSPI shares is well -nigh impossible, if not already an

utter impossibility, inasmuch as the certificates of stocks have already been alienated or

transferred in favor of Northeast Corporation, as early as May 27, 1996, in consequence whereof

the proceeds of the sale have been transmuted into corporate assets of Philfinance,

undercustodia legis, ready for distribution to its creditors and/or investors. Case law holds that

the assets of an institution under receivership or liquidation shall be deemed in custodia legisin

the hands of the receiver or liquidator, and shall from the moment of such receivership or

liquidation, be exempt from any order, garnishment, levy, attachment, or execution.

Concomitantly, petitioners filing of his claim over the subject CSPI shares before the SEC in the

liquidation proceedings bound him to the terms and conditions thereof. He cannot demand any

special treatment [from] the liquidator, for this flies in the face of, and will contravene, the

Supreme Court dictum that when a corporation threatened by bankruptcy is taken over by a

receiver, all the creditors shall stand on equal footing. Not one of them should be given

preference by paying one or some [of] them ahead of the others. This is precisely the philosophy

underlying the suspension of all pending claims against the corporation under

receivership. The rule of thumb is equality in equity.[18]

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

Certainly, petitioner had the right to demand the return of his CSPI shares.[19]He in fact filed a

complaint in the liquidation proceedings in the SEC to get them back but was confronted by an

impossible situation as they had already been sold. Consequently, he sought instead to recover

their monetary value.
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Petitioners CSPI shares were specific or determinate movable properties.[20]But after they were

sold, the money raised from the sale became generic[21]and were commingled with the cash and

other assets of Philfinance. Unlike shares of stock, money is a generic thing. It is designated

merely by its class or genus without any particular designation or physical segregation from all

others of the same class.[22]This means that once a certain amount is added to the cash balance,one can no longer pinpoint the specific amount included which then becomes part of a whole

mass of money.

It thus became impossible to identify the exact proceeds of the sale of the CSPI shares since they

could no longer be particularly designated nor distinctly segregated from the assets of

Philfinance. Petitioners only remedy was to file a claim on the whole mass of these assets, to

which unfortunately all of the other creditors and investors of Philfinance also had a claim.

Petitioners right of action against Philfinance was a claim properly to be litigated in the

liquidation proceedings.[23]

In Finasia Investments and Finance Corporation v. CA,[24]

we discussedthe definition of claims in the context of liquidation proceedings:

We agree with the public respondent that the word claim as used in Sec. 6(c) of P.D. 902-

A,[25]as amended, refers to debts or demands of a pecuniary nature. It means "the assertion of a

right to have money paid. It is used in special proceedings like those before [the administrative

court] on insolvency."

The word "claim" is also defined as:

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

fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or

unsecured; or right to an equitable remedy for breach of performance if such breach gives rise

to a right to payment, whether or not such right to an equitable remedy is reduced to judgment,

fixed, contingent, matured, unmatured, disputed, undisputed, secured, unsecured.[26]

Undoubtedly, petitioner had a right to the payment of the value of his shares. His demand was

of a pecuniary nature since he was claiming the monetary value of his shares. It was in this

sense (i.e.as a claimant) that he was a creditor of Philfinance.

The Civil Code provisions on concurrence and preference of credits are applicable to the

liquidation proceedings.[27] The next question is, was petitioner a preferred or ordinary creditorunder these provisions?

Petitioner argues that he was a preferred creditor because private respondents illegally

withdrew his CSPI shares from the custodian banks and sold them without his knowledge and

consent and without authority from the SEC. He quotes Article 2241 (2) of the Civil Code:
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cases on concurrence and preference of credits

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