I. Concurrence and Preference

7/27/2019 I. Concurrence and Preference

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MAGDALENA C. DE BARRETO, ET AL. --- versus --- JOSE G. VILLANUEVA, ET AL

On May 10, 1948, Rosario Cruzado, obtained from the defunct Rehabilitation Finance Corporation(hereinafter referred to as the RFC a loan in the amount of P11,000.00. To secure payment thereof, shemortgaged the land. As she failed to pay certain installments on the loan, the mortgage was foreclosedand the RFC acquired the property for P11,000.00, subject to her rights as mortgagor to re-purchase thesame. On July 26, 1951, upon her application, the land was sold back to her conditionally for the amountof P14,269.03, payable in seven years.

About two years thereafter Rosario Cruzado, as guardian of her minor children in Special Proceedingswas authorized by the court, to sell with the previous consent of the RFC the land in question togetherwith the improvements thereon for a sum not less than P19,000. Pursuant to such authority and with theconsent of the RFC, she sold to Pura L. Villanueva for P19,000.00. Having paid in advance the sum ofP500.00, Pura L. Villanueva, the vendee, in consideration of the aforesaid sale, executed in favor of thevendor Rosario Cruzado a promissory note dated March 9, 1953, undertaking to pay the balance ofP17,500.00 in monthly installments. On April 22, 1953, she made an additional payment of P5,500.00 onthe promissory note. She was, subsequently, able to secure in her name Transfer Certificate of Title No.32526 covering the house and lot above referred to, and on July 10, 1953, she mortgaged the saidproperty to Magdalena C. Barretto as security for a loan the amount of P30,000.00.

As said Pura L. Villanueva had failed to pay the remaining installments on the unpaid balance ofP12,000.00 her promissory note for the sale of the property in question, a complaint for the recovery of the

same from her and her husband was filed on September 21, 1963 by Rosario Cruzado. Pending trial ofthe case, a lien was constituted upon the property in the nature of a levy in attachment in favor of theCruzados said lien being annotated at the back of Transfer Certificate of Title. After trial, decision wasrendered ordering Pura Villanueva and her husband, jointly and severally, to pay Rosario Cruzado thesum of P12,000.00, with legal interest thereon from the date of the filing of the complaint until fully paidplus 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 ofmortgage, 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 theVillanuevas 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 thefinality of this decision, the Barrettos filed a motion for the issuance of a writ of execution which wasgranted 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, thesaid 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 TitleNo. 32526 of the Registry of Deeds of Manila, decreeing that should the realty in question be sold atpublic auction in the foreclosure proceedings, the Cruzados shall be credited with their pro-rata share inthe proceeds thereof, "pursuant to the provision of articles 2248 and 2249 of the new Civil Code in relationto Article 2242, paragraph 2 of the same Code." The Barrettos filed a motion for reconsideration onSeptember 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, theBarrettos 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 anddirecting the Register of Deeds of the City of Manila to issue to the Barrettos the corresponding certificateof title, subject, however, to the order of August 18, 1958 concerning,. the vendor's lien. On the samedate, the motion of the Barettos seeking reconsideration of the order of the court giving due course to thesaid 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 . awardingthe amount of P12,000.00 in favor of Rosario Cruzado and her minor children . cannot constitute a basisfor 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 torecover the remaining obligation of promissor Pura Villanueva on the note, the fact remains that RosarioP. Cruzado as guardian of her minor children, was an unpaid vendor., of the realty in question, and thepromissory note, was, precisely, for the unpaid balance of the price of the property bought by, said PuraVillanueva.

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

(2) For the unpaid price of real property sold, upon the immovable sold; and(5) Mortgage credits recorded in the Registry of Property."


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

Application of the above-quoted provisions to the case at bar would mean that the herein appellee RosarioCruzado as an unpaid vendor of the property in question has the right to share pro-rata with the appellantsthe 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 thisargument. Note must be taken of the fact that article 2242 of the new Civil Code enumerating thepreferred claims, mortgages and liens on immovables, specifically requires that . unlike the unpaid price ofreal property sold . mortgage credits, in order to be given preference, should be recorded in the Registryof Property. If the legislative intent was to impose the same requirement in the case of the vendor's lien, orthe unpaid price of real property sold, the lawmakers could have easily inserted the same qualificationwhich now modifies the mortgage credits. The law, however, does not make any distinction betweenregistered and unregistered vendor's lien, which only goes to show that any lien of that kind enjoys thepreferred credit status.

Appellants also argue that to give the unrecorded vendor's lien the same standing as the registeredmortgage credit would be to nullify the principle in land registration system that prior unrecorded interestscannot 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 lienholders 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 incidentsattached by law to unregistered land. Nothing contained in this Act shall in any way be construed torelieve 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 anydescription established by law on land and the buildings thereon, or the interest of the owners of such landor buildings, or to change the laws of descent, or the rights of partition between co-owners, joint tenantsand other co-tenants or the right to take the same by eminent domain, or to relieve such land from liabilityto be appropriated in any lawful manner for the payment of debts, or to change or affect in any other wayany other rights or liabilities created by law and applicable to unregistered land, except as otherwise

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

As to the point made that the articles of the Civil Code on concurrence and preference of credits areapplicable only to the insolvent debtor, suffice it to say that nothing in the law shows any such limitation. Ifwe 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 governthem, and it would render purposeless the special laws an insolvency.

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

----------------------------- RESOLUTION ON MOTION TO RECONSIDER December 29, 1962-----------------------------

Appellants, spouses Barretto, have filed a motion vigorously urging, for reason to be discussed in thecourse of this resolution, that our decision of 28 January 1961 be reconsidered and set aside, and a newone entered declaring that their right as mortgagees remain superior to the unrecorded claim of hereinappellee 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 ofher children in the house and lot herein involved to Pura I. Villanueva for P19,000.00. The purchaser paidPl,500 in advance, and executed a promissory note for the balance of P17,506.00. However, the buyercould only pay P5,500 On account of the note, for which reason the vendor obtained judgment for theunpaid 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. Barretto, tosecure 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 inher 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 courtbelow ordered the "lien" annotated on the back of Certificate of Title No. 32526, with the proviso that incase of sale under the foreclosure decree the vendor's lien and the mortgage credit of appellant Barrettoshould be paid pro rata from the proceeds. Our original decision affirmed this order of the Court of FirstInstance of Manila.

Appellants insist that:


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

(2) That the appellee Cruzado is not a true vendor of the foreclosed property. We have given protractedand mature consideration to the facts and law of this case, and have reached the conclusion that ouroriginal decision must be reconsidered and set aside, for the following reasons:

A. The previous decision failed to take fully into account the radical changes introduced by the Civil Codeof 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 propertyunder 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 formerwere fully satisfied out of the proceeds of the sale of the real property subject of the preference, and couldeven exhaust proceeds if necessary.

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

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

satisfied pro-rata after the payment of the taxes and assessments upon the immovable property or realrights."

But in order to make this prorating fully effective, the preferred creditors enumerated in Nos. 2 to 14 ofArticle 2242 (or such of their, as have credits outstanding) must necessarily be convened, and the importof their claims ascertained. It is thus apparent that the full, application (of Articles 2249 and 2242 demandsthat there must be first some proceedings where the claims of all the preferred creditors may be bindinglyadjudicated, 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 thisArticle (2243). The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to be enforcedin accordance with the Insolvency Law." (Emphasis supplied) .

Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosuresale (as in the case now before us) is not the proceeding contemplated by law for the enforcement ofpreferences under Article 2242, unless the claimant were enforcing a credit for taxes that enjoy absolutepriority. If none of the claims is for taxes, a dispute between two creditors will not enable the Court toascertain thepro-ratadividend 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 FirstInstance of Manila now appealed from, decreeing that the proceeds of the foreclosure sale be apportionedonly between appellant and appellee, is incorrect, and must be reversed.

In the absence of insolvency proceedings (or other equivalent general liquidation of the debtor's estate),the conflict between the parties now before us must be decided pursuant to the well established principleconcerning 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 recordedin the certificate of title. There being no insolvency or liquidation, the claim of the appellee, as unpaidvendor, did not require the character and rank of a statutory lien co-equal to the mortgagee's recordedencumbrance, and must remain subordinate to the latter.

We are understandably loathed (absent a clear precept of law so commanding) to adopt a rule that wouldundermine the faith and credit to be accorded to registered Torrens titles and nullify the beneficientobjectives sought to be obtained by the Land Registration Act. No argument is needed to stress that if aperson dealing with registered land were to be held to take it in every instance subject to all the fourteenpreferred claims enumerate in Article 2242 of the new Civil Code, even if the existence and import thereofcan not be ascertained from the records, all confidence in Torrens titles would be destroyed, and credittransactions 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 lendercould accurately estimate the hidden liens on the property offered as security, unless he indulged incomplicated, tedious investigations, . The logical result might well be a contraction of credit unforeseeableproportions that could lead to economic disaster.


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Upon the other hand, it does not appear excessively burdensome to require the privileged creditors tocause their claims to be recorded in the books of the Register of deeds should they desire to protect theirrights even outside of insolvency or liquidation proceedings.

B. The close study of the facts disclosed by the records lasts strong doubt on the proposition thatappellees Cruzados should be regarded as unpaid vendors of the property( land, buildings, andimprovements ) involved in the case at bar so as to be entitled to preference under Article 2242. Therecord 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 theproperty 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 August1949, foreclosed the mortgage, and acquired the property, subject to the debtor's right to redeem orrepurchase the said property; and that on 25 September 1950, the RFC consolidated its ownership, andthe 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 mortgagorsand former owners Cruzados in installments, subject to the condition (among others) that the title to theproperty and its improvements "shall remain in the name of Corporation (RFC) until after said purchaseprice, advances and interests shall have been fully paid", as of 27 September 1952, Cruzado had onlypaid 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 26July 1951.

It was only on 10 March 1953 that the Cruzados sold to Pura L. Villanueva all "their rights, title, interestand dominion on and over" the property, lot, house, and improvements for P19,000.00, the buyerundertaking to assume payment of the obligation to the RFC, and by resolution of 30 April 1953, the RFCapproved "the transfer of the rights and interest of Rosario P. Cruzado and her children in their propertyherein above-described in favor of Pura L. Villanueva"; and on 7 May 1953 the RFC executed a deed ofabsolute sale of the property to said party, who had fully paid the price of P14,269.03. Thereupon, thespouses 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 RehabilitationFinance Corporation since 1950, when it consolidated its purchase at the foreclosure sale and obtained acertificate of title in its corporate name. The subsequent contract of resale in favor of the Cruzados did notrevest ownership in them, since they failed to comply with its terms and conditions, and the contract itselfprovided 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 theappellants Cruzados sold to Villanueva "their rights, title, interest and dominion" to the property, theymerely assigned whatever rights or claims they might still have thereto; the ownership of the propertyrested with the RFC. The sale from Cruzado to Villanueva, therefore, was not so much a sale of the landand its improvements as it was a quit-claim deed in favor of Villanueva. In law, the operative sale was thatfrom the RFC to the latter, and it was the RFC that should be regarded as the true vendor of the property.

At the most, the Cruzados transferred to Villanueva an option to acquire the property, but not the propertyitself, and their credit, therefore, can not legally constitute a vendor's lien on the corpus of that propertythat 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 herebyreconsidered and set aside, and a new one entered reversing the judgment appealed from and declaringthe appellants Barretto entitled to full satisfaction of their mortgaged credit out of the proceeds of theforeclosure sale in the hands of the Sheriff of the City of Manila. No costs.

J.L. BERNARDO CONSTRUCTION, SANTIAGO R. SUGAY, EDWIN A. SUGAY and FERNANDO S. A.ERANA,-- versus -- COURT OF APPEALS and MAYOR JOSE L. SALONGA

This petition forcertiorariunder Rule 65 seeks to annul and set aside the following:1. Decision dated February 6, 1992 issued by the Eleventh Division of the Court of Appeals in CA-G.R.No. 26336 which nullified the order of the Regional Trial Court of Cabanatuan City in Civil Case No. 1016-

AF granting plaintiffs (petitioners herein) a writ of attachment and a contractors lien upon the San AntonioPublic Market; and

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

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


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

It is claimed by petitioners Santiago R. Sugay, Edwin A. Sugay, Fernando S.A. Erana and J.L. BernardoConstruction, a single proprietorship owned by Juanito L. Bernardo, that they entered into a business

venture for the purpose of participating in the bidding for the public market. It was agreed by petitionersthat Santiago Sugay would take the lead role and be responsible for the preparation and submission ofthe bid documents, financing the entire project, providing and utilizing his own equipment, providing thenecessary labor, supplies and materials and making the necessary representations and doing the liaisonwork with the concerned government agencies.

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

It is claimed by petitioners that under this Construction Agreement, the Municipality agreed to assume the

expenses for the demolition, clearing and site filling of the construction site in the amount of P1,150,000and, 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 Municipalityrefused to pay the same, despite repeated demands and notwithstanding that the public market was morethan ninety-eight percent (98%) complete as of July 20, 1991. Furthermore, petitioners maintain thatSalonga induced them to advance the expenses for the demolition, clearing and site filling work by makingrepresentations 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, withthe 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 asum of money, with prayer for preliminary attachment and enforcement of contractors lien against theMunicipality of San Antonio, Nueva Ecija and Salonga, in his personal and official capacity as municipalmayor. After defendants filed their answer, the Regional Trial Court held hearings on the ancillaryremedies prayed for by plaintiffs.[2]

On September 5, 1991, the Regional Trial Court issued the writ of preliminary attachment prayed for byplaintiffs. It also granted J.L. Bernardo Construction the right to maintain possession of the public marketand 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 prayedfor by the plaintiffs to be well-taken and the same is hereby GRANTED. Conformably thereto, let a writ ofpreliminary attachment be issued upon the filing by the plaintiffs of a bond in the amount of P2,653,576.84

to answer for costs and damages which the defendants may suffer should the Court finally adjudged (sic)that the plaintiffs are not entitled to the said attachment, and thereafter, the Deputy Sheriff of this court ishereby ordered to attach the properties of the defendants JOSE LAPUZ SALONGA and theMUNICIPALITY OF SAN ANTONIO, NUEVA ECIJA which are not exempt from execution.

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

SO ORDERED.The trial court gave credence to plaintiffs claims that defendants were guilty of fraud in incurring theircontractual obligations as evidenced by the complaint and the affidavits of plaintiffs Santiago Sugay andErana. The court ruled that defendants acts of "obtaining property, credit or services by falserepresentations as to material facts made by the defendant to the plaintiff with intent to deceive constitutesfraud warranting attachment" and that " a debt is considered fradulently contracted if at the time ofcontracting it, the debtor entertained an intention not to pay."

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

The trial court made short shrift of defendants argument that the case was not instituted in the name ofthe real parties-in-interest. It explained that the plaintiff in the cause of action for money claims for unpaid

cash equity and demolition and site filling expenses is J.L. Bernardo Construction, while the plaintiffs inthe claim for damages for violation of their rights under the Civil Code provisions on human relations areplaintiffs Santiago Sugay, Edwin Sugay and Erana. [3]

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

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

On October 21, 1991, during the pendency of his motion, respondent Salonga filed with the Court of

Appeals a petition forcertiorariunder Rule 65 with prayer for a writ of preliminary injunction and temporaryrestraining order which case was docketed as CA-G.R. SP No. 26336. [4] Petitioners opposed the petition,claming that respondent had in fact a plain, speedy and adequate remedy as evidenced by the filing of amotion to approve counter-bond with the trial court.[5]

On February 6, 1992, the Court of Appeals reversed the trial courts decision and ruled in favor ofSalonga. The dispositive portion of its decision states

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 andfor the enforcement of a contractors lien, is hereby NULLIFIED and SET ASIDE; the writ of attachmentissued pursuant thereto and the proceedings conducted by the Sheriffs assigned to implement the sameare, as a consequence, also hereby NULLIFIED and SET ASIDE;

2. The respondent judges ORDER dated October 11, 1991 further enforcing the contractors lien andapproving 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) andfor 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 Bernardoand the Municipality of San Antonio, and since there is no sworn statement by Juanito Bernardo allegingthat he had been deceived or misled by Mayor Salonga or the Municipality of San Antonio, it is apparentthat 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 attachmentshould be struck down for having been improvidently and irregularly issued.

The filing of a motion for the approval of counter-bond by defendants did not, according to the Court ofAppeals, render the petition forcertioraripremature. The appellate court held that such motion could notcure the defect in the issuance of the writ of attachment and that, moreover, the defendants motion wasfiled 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 applicationonly in the context of insolvency proceedings, as expressly stated in Article 2243. Even if it is concededthat plaintiffs are entitled to retain possession of the market under its contractors lien, the appellate courtheld that the same right cannot be expanded to include the right to use the building. Therefore, the trialcourts grant of authority to plaintiffs to operate the San Antonio Public Market amounts to a grave abuseof discretion.

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

Petitioners are now before this Court assailing the appellate courts decision. In their petition, they makethe following assignment of errors:

1. THE DECISION IS CONTRARY TO LAW IN THAT THE COURT OF APPEALS OVERLOOKEDAND/OR DISREGARDED THE FUNDAMENTAL REQUIREMENT AND ESTABLISHED SUPREMECOURT DECISIONS IN ACTIONS FOR CERTIORARI CONSIDERING THAT THE FILING OF THE
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PETITION BY RESPONDENT SALONGA WITH THE COURT OF APPEALS IS OBVIOUSLYPREMATURE AND IMPROPER SINCE THERE ADMITTEDLY EXISTS A PLAIN, SPEEDY AND

ADEQUATE REMEDY AVAILABLE TO RESPONDENT SALONGA WHICH IS HIS UNRESOLVED"MOTION TO APPROVE COUNTERBOND" PENDING WITH THE TRIAL COURT.

2. IN COMPLETE DISREGARD OF ESTABLISHED JURISPRUDENCE, THE COURT OF APPEALS HASSKIRTED AND/OR FAILED TO CONSIDER/DISREGARDED THE EQUALLY CRUCIAL ISSUE THATTHE QUESTIONED ORDERS ARE CLEARLY AND ADMITTEDLY INTERLOCUTORY IN NATURE ANDTHEREFORE THEY CANNOT BE THE PROPER SUBJECT OF AN ACTION FOR CERTIORARI;

PROOF THAT THE ORDERS ASSAILED BY RESPONDENT SALONGA ARE INTERLOCUTORY INCHARACTER IS THE DISPOSITIVE PORTION OF THE DECISION WHEN THE COURT OF APPEALSSAID "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 PETITIONERSIN THEIR VARIOUS UNACTED PLEADINGS.

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

4. THE COURT OF APPEALS HAS CLEARLY MISAPPRECIATED, MISREAD AND DISREGARDEDHEREIN 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 CONCLUSIONSAND FINDINGS ON THE ISSUE OF "REAL PARTY IN INTEREST" IN COMPLETE DISREGARD OFTHE POWERS AND AUTHORITY GRANTED BY JUANITO L. BERNARDO CONSTRUCTION TOHEREIN PETITIONERS.

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

7. THE COURT OF APPEALS WENT BEYOND THE ISSUES OF THE CERTIORARI CASE AND ITSFINDINGS AND CONCLUSIONS ON ISSUES NOT RELATED TO THE CASE FOR CERTIORARI ARECONTRARY TO THE PLEADINGS AND DO NOT CONFORM TO THE EVIDENCE ON RECORD.

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

AND FINDINGS OF FACT OF THE TRIAL COURT ARE ENTITLED TO GREAT WEIGHT ON APPEALAND SHOULD NOT BE DISTURBED SINCE THERE IS NO STRONG AND COGENT REASONWHATSOVER TO OVERCOME THE WELL-WRITTEN AND DETAILED AND ESTABLISHED FACTUALFINDINGS OF THE TRIAL COURT.

9. PETITIONERS HAVE STRONG REASONS TO BELIEVE THAT THE DECISION OF THE COURT OFAPPEALS WAS ISSUED WITH SERIOUS INJUSTICE AND AGAINST THE TENETS OF FAIR PLAYSINCE THE DECISION HAD BEEN KNOWN TO AS IT WAS OPENLY AND PUBLICLY ANNOUNCEDBY 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 byrespondents herein assailing the trial courts interlocutory orders granting the writ of attachment and thecontractors lien?

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

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

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

As a general rule, an interlocutory order is not appealable until after the rendition of the judgment on themerits 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) whenthe 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 affordadequate and expeditious relief.[11]
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We hold that the petition forcertiorarifiled by Salonga and the Municipality with the Court of Appealsquestioning the writ of attachment issued by the trial court should not have been given due course for theystill 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 thewrit of attachment. Moreover, they could also have filed a motion to discharge the attachment for havingbeen improperly or irregularly issued or enforced, or that the bond is insufficient, or that the attachment isexcessive.[12] With such remedies still available to the Municipality and Salonga, the filing of a petitionforcertiorariwith the Court of Appeals insofar as it questions the order of attachment was clearly

premature.However, with regards to the contractors lien, we uphold the appellate courts ruling reversing the trialcourts grant of a contractors lien in favor of petitioners.

Articles 2241 and 2242 of the Civil Code enumerates certain credits which enjoy preference with respectto specific personal or real property of the debtor. Specifically, the contractors lien claimed by petitionersis granted under the third paragraph of Article 2242 which provides that the claims of contractors engagedin the construction, reconstruction or repair of buildings or other works shall be preferred with respect tothe 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 samespecific property of the debtor is subjected to the claims of several creditors and the value of suchproperty of the debtor is insufficient to pay in full all the creditors. In such a situation, the question of

preference will arise, that is, there will be a need to determine which of the creditors will be paid ahead ofthe others.[14] Fundamental tenets of due process will dictate that this statutory lien should then only beenforced in the context of some kind of a proceeding where the claims of all the preferred creditors maybe bindingly adjudicated, such as insolvency proceedings.[15]

This is made explicit by Article 2243 which states that the claims and liens enumerated in articles 2241and 2242 shall be considered as mortgages or pledges of real or personal property, or liens within thepurview of legal provisions governing insolvency.[16]

The action filed by petitioners in the trial court does not partake of the nature of an insolvency proceeding.It is basically for specific performance and damages.[17] Thus, even if it is finally adjudicated thatpetitioners 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 isno way of determining whether or not there exist other preferred creditors with claims over the SanAntonio Public Market. The records do not contain any allegation that petitioners are the only creditorswith respect to such property. The fact that no third party claims have been filed in the trial court will notbar other creditors from subsequently bringing actions and claiming that they also have preferred liensagainst the property involved.[18]

Our decision herein is consistent with our ruling in Philippine Savings Bank v. Lantin,[19] wherein we alsodisallowed the contractor from enforcing his lien pursuant to Article 2242 of the Civil Code in an actionfiled 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 ofprocedure, a writ of attachment over registered real property is enforced by the sheriff by filing with theregistry 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 theoccupant of the property, if any. [20] If judgment be recovered by the attaching party and execution issuethereon, the sheriff may cause the judgment to be satisfied by selling so much of the property as may benecessary to satisfy the judgment. [21] Only in the event that petitioners are able to purchase the propertywill 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 topetitioners does not adhere to the procedure for attachment laid out in the Rules of Court. In issuing suchan 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 hereinare the real parties-in-interest. In the event that judgment is rendered against Salonga and theMunicipality, 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 itsSeptember 5, 1991 Order. Consequently, we also UPHOLD the appellate courts nullification of the trialcourts October 11, 1991 Order approving the guidelines for the operation of the San Antonio PublicMarket. However, we REVERSE the appellate courts order nullifying the writ of attachment granted by thetrial court.
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No pronouncement as to costs. SO ORDERED.

DEVELOPMENT BANK OF THE PHILIPPINES vs. COURT OF APPEALS and REMINGTONINDUSTRIAL SALES CORP

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, seeking a reviewof 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 corporationengaged in the manufacture of pure and refined nickel, nickel and cobalt in mixed sulfides; copperore/concentrates, cement and pyrite conc., obtained from the Philippine National Bank (PNB) various loanaccommodations. To secure the loans, Marinduque Mining executed on October 9, 1978 a Deed of RealEstate Mortgage and Chattel Mortgage in favor of PNB. The mortgage covered all of Marinduque Mining'sreal properties, located at Surigao del Norte, Sipalay, Negros Occidental, and at Antipolo, Rizal, includingthe 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 thePhilippines (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, NegrosOccidental, and Antipolo, Rizal, including the improvements thereon. The mortgage also covered all ofMarinduque Mining's chattels, as well as assets of whatever kind, nature and description whichMarinduque Mining may subsequently acquire in substitution or replenishment or in addition to theproperties 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 interestand charges.2

On April 27, 1984, Marinduque Mining executed in favor of PNB and DBP an Amendment to MortgageTrust Agreement by virtue of which Marinduque Mining mortgaged in favor of PNB and DBP all other realand 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 Julyand August 1984 extrajudicial foreclosure proceedings over the mortgaged properties.

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

In the ensuing public auction sale conducted on August 31, 1984, PNB and DBP emerged and weredeclared the highest bidders over the foreclosed real properties, buildings, mining claims, leasehold rightstogether with the improvements thereon as well as machineries [sic] and equipments [sic] of MMIClocated 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 andDBP as highest bidders, bidded for P170,577,610.00 (Exhs. "5" to "5-A", "6", "7" to "7-AA-" PNB/DBP).

For the foreclosed real properties together with all the buildings, major machineries & equipment andother improvements of MMIC located at Antipolo, Rizal, likewise held on August 31, 1984, were sold toPNB 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, ashighest 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 propertiesof 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 thecontinued 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 andparticipation over the foreclosed properties of MMIC located at Nonoc Island, Surigao del Norte for aninitial consideration of P14,361,000,000.00 (Exh. "13"-PNB).
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Likewise, thru [sic] a Deed of Transfer dated June 6, 1984, PNB and DBP assigned and transferred infavor of Maricalum Mining Corp. all its rights, interest and participation over the foreclosed properties ofMMIC 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 itsexisting rights and interest over the assets of MMIC, earlier assigned to Nonoc Mining and IndustrialCorporation, 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 tobe 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 Remingtonfiled a complaint for a sum of money and damages against Marinduque Mining for the value of the unpaidconstruction materials and other merchandise purchased by Marinduque Mining, as well as interest,attorney's fees and the costs of suit.

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

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

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

since:

1. Co-defendants NMIC, Maricalum and Island Cement which are newly created entities are practicallyowned wholly by defendants PNB and DBP, and managed by their officers, aside from the fact that theaforesaid co-defendants NMIC, Maricalum and Island Cement were organized in such a hurry and in suchsuspicious circumstances by co-defendants PNB and DBP after the supposed extrajudicial foreclosure ofMMIC's assets as to make their supposed projects assets, machineries and equipment which wereoriginally 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 andintents

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 projectpremises of co-defendant MMIC as to make the aforesaid co-defendants NMIC, Maricalum and IslandCement mere adjuncts and subsidiaries of co-defendants PNB and DBP, and subject to their control andmanagement.

On top of everything, co-defendants PNB, DBP NMIC, Maricalum and Island Cement being allcorporations created by the government in the pursuit of business ventures should not be allowed toignore, 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 ofdefendant MMIC's assets, machineries and equipment to the extent that major policies of co-defendantMMIC were being decided upon by co-defendants PNB and DBP as major financiers who wererepresented in its board of directors forming part of the majority thereof which through the allegedextrajudicial foreclosure culminated in a complete take-over by co-defendants PNB and DBP bringingabout the organization of their co-defendants NMIC, Maricalum and Island Cement to which weretransferred all the assets, machineries and pieces of equipment of co-defendant MMIC used in its nickelmining project in Surigao del Norte, copper mining operation in Sipalay, Negros Occidental and cementfactory in Antipolo, Rizal to the prejudice of creditors of co-defendant MMIC such as plaintiff RemingtonIndustrial Sales Corporation whose stockholders, officers and rank-and-file workers in the legitimate
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pursuit of its business activities, invested considerable time, sweat and private money to supply, amongothers, co-defendant MMIC with some of its vital needs for its operation, which co-defendant MMIC duringthe time of the transactions material to this case became x x x co-defendants PNB and DBP'sinstrumentality, business conduit, alter ego, agency (sic), subsidiary or auxiliary corporation, by virtue ofwhich 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-defendantMMIC 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 theAsset Privatization Trust (APT) as co-defendant. Said fourth amended complaint was admitted by thelower court in its Order dated April 29, 1989.

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

WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the defendants MarinduqueMining & Industrial Corporation, Philippine National Bank, Development Bank of the Philippines, NonocMining and Industrial Corporation, Maricalum Mining Corporation, Island Cement Corporation and AssetPrivatization Trust to pay, jointly and severally, the sum of P920,755.95, representing the principalobligation, including the stipulated interest as of June 22, 1984, plus ten percent (10%) surcharge perannum by way of penalty, until the amount is fully paid; the sum equivalent to 10% of the amount due asand 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 ofAppeals, in its Decision dated October 6, 1995, affirmed the decision of the RTC. Petitioner filed a Motionfor 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 infraud of creditors. The presence of fraud, according to Remington, warrants the piercing of the corporateveil such that Marinduque Mining and its transferees could be considered as one and the samecorporation. The transferees, therefore, are also liable for the value of Marinduque Mining's purchases.

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

It is an elementary and fundamental principle of corporation law that a corporation is an entity separate

and distinct from its stockholders and from other corporations to which it may be connected. However,when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defendcrime, the law will regard the corporation as an association of persons or in case of two corporations,merge them into one". (Koppel [Phils.], Inc., vs. Yatco, 71 Phil. 496, citing 1 Fletcher Encyclopedia ofCorporation, Permanent Ed., pp. 135-136; U.S. vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247,255 per Sanborn, J.). x x x.

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

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

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

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

The import of this mandate was lost on the Court of Appeals, which reasoned that under Article 19 of the

Civil Code, "Every person must, in the exercise of his rights and in the performance of his duties, act withjustice, give everyone his due, and observe honesty and good faith." The appellate court, however, did notpoint to any fact evidencing bad faith on the part of the Marinduque Mining and its transferees. Indeed, itskirted the issue entirely by holding that the question of actual fraudulent intent on the part of theinterlocking directors of DBP and Marinduque Mining was irrelevant because:

As aptly stated by the appellee in its brief, "x x x where the corporations have directors and officers incommon, there may be circumstances under which their interest as officers in one company maydisqualify 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 thecreditor corporation were disqualified, by reason of self-interest, from acting as directors of the debtorcorporation in the authorization of a mortgage or deed of trust to the former to secure such indebtedness xx 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 othercreditors. They can not thus take advantage of their fiduciary relation and deal directly with themselves, tothe injury of others in equal right. If they do, equity will set aside the transaction at the suit of creditors ofthe corporation or their representatives, without reference to the question of any actual fraudulent intenton the part of the directors, for the right of the creditors does not depend upon fraud in fact, but upon theviolation 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 notsecure to themselves any preference or advantage over other creditors in the payment of their claims. It isnot 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 trustfor them to undertake to give any one of its members any advantage over any other creditors in securingthe payment of his debts in preference to all others. When validity of these mortgages, to secure debtsupon which the directors were indorsers, was questioned by other creditors of the corporation, they shouldhave been classed as instruments rendered void by the legal principle which prevents directors of aninsolvent corporation from giving themselves a preference over outside creditors. x x x" (page 106-107 ofthe Appellee's Brief.)12

The Court of Appeals made reference to two principles in corporation law. The first pertains totransactions between corporations with interlocking directors resulting in the prejudice to one of thecorporations. 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 Miningand DBP).

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

Neither do we discern any bad faith on the part of DBP by its creation of Nonoc Mining, Maricalum andIsland Cement. As Remington itself concedes, DBP is not authorized by its charter to engage in themining business.13The creation of the three corporations was necessary to manage and operate theassets acquired in the foreclosure sale lest they deteriorate from non-use and lose their value. In theabsence of any entity willing to purchase these assets from the bank, what else would it do with these

properties in the meantime? Sound business practice required that they be utilized for the purposes forwhich they were intended.

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

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

To reiterate, the doctrine of piercing the veil of corporate fiction applies only when such corporate fiction isused to defeat public convenience, justify wrong, protect fraud or defend crime.14To disregard theseparate juridical personality of a corporation, the wrongdoing must be clearly and convincingly

established. It cannot be presumed.15

In this case, the Court finds that Remington failed to discharge itsburden of proving bad faith on the part of Marinduque Mining and its transferees in the mortgage andforeclosure 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 ofMarinduque Mining, and as transferee of these purchases, DBP should be held liable for the valuethereof.

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

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

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

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

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

x x x Rosario Cruzado sold all her right, title, and interest and that of her children in the house and lotherein involved to Pura L. Villanueva for P19,000.00. The purchaser paid P1,500 in advance, andexecuted a promissory note for the balance of P17,500.00. However, the buyer could only pay P5,500 onaccount of the note, for which reason the vendor obtained judgment for the unpaid balance. In themeantime, the buyer Villanueva was able to secure a clean certificate of title (No. 32626), and mortgagedthe 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 inher favor, obtained judgment, and upon its becoming final asked for execution on 31 July 1958. On 14

August 1958, Cruzado filed a motion for recognition for her "vendor's lien" in the amount of P12,000.00,plus legal interest, invoking Articles 2242, 2243, and 2249 of the new Civil Code. After hearing, the courtbelow ordered the "lien" annotated on the back of Certificate of Title No. 32526, with the proviso that incase of sale under the foreclosure decree the vendor's lien and the mortgage credit of appellant Barrettoshould be paidpro rata from the proceeds. Our original decision affirmed this order of the Court of FirstInstance 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 anencumbrance on specific immovable property, and among them are:

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

"(5) Mortgage credits recorded in the Registry of Property."
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Article 2249 of the same Code provides that "if there are two or more credits with respect to the samespecific real property or real rights, they shall be satisfied pro-rata, after the payment of the taxes andassessments upon the immovable property or real rights."

Application of the above-quoted provisions to the case at bar would mean that the herein appellee RosarioCruzado as an unpaid vendor of the property in question has the right to sharepro-rata with the appellantsthe proceeds of the foreclosure sale.

As to the point made that the articles of the Civil Code on concurrence and preference of credits areapplicable only to the insolvent debtor, suffice it to say that nothing in the law shows any such limitation. Ifwe 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 governthem, 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, speakingfor 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 Codeof 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 propertyunder 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 formerwere fully satisfied out of the proceeds of the sale of the real property subject of the preference, and couldeven exhaust proceeds if necessary.

Under the system of the Civil Code of the Philippines, however, only taxes enjoy a similar absolutepreference. All the remaining thirteen classes of preferred creditors under Article 2242 enjoy no priorityamong 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 besatisfied pro rata, after the payment of the taxes and assessments upon the immovable property or realrights."

But in order to make this prorating fully effective, the preferred creditors enumerated in Nos. 2 to 14 ofArticle 2242 (or such of them as have credits outstanding) must necessarily be convened, and the importof their claims ascertained. It is thus apparent that the full application of Articles 2249 and 2242 demandsthat there must be first some proceeding where the claims of all the preferred creditors may be bindinglyadjudicated, 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 orpledges of real or personal property, or liens within the purview of legal provisions governing insolvencyx xx (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 thisArticle (2243). The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to be enforcedin accordance with the Insolvency Law." (Italics supplied)

Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosuresale (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 absolutepriority. If none of the claims is for taxes, a dispute between two creditors will not enable the Court toascertain the pro rata dividend corresponding to each, because the rights of the other creditors likewiseenjoying preference under Article 2242 can not be ascertained. Wherefore, the order of the Court of FirstInstance of Manila now appealed from, decreeing that the proceeds of the foreclosure sale be apportionedonly between appellant and appellee, is incorrect, and must be reversed. [Emphasis supplied]
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The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon. Lantin, Jr., etc., et al.,18 and in twocases both entitled Development Bank of the Philippines vs. NLRC. Although Barretto involved specificimmovable property, the ruling therein should apply equally in this case where specific movable propertyis involved. As the extrajudicial foreclosure instituted by PNB and DBP is not the liquidation proceedingcontemplated by the Civil Code, Remington cannot claim its pro rata share from DBP.

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated October 6, 1995and its Resolution promulgated on August 29, 1996 is REVERSED and SET ASIDE. The original

complaint filed in the Regional Trial Court in CV Case No. 84-25858 is hereby DISMISSED. SOORDERED.

RUBY INDUSTRIAL CORPORATION and BENHAR INTERNATIONAL, INC. ----- versus ----COURT OF APPEALS, MIGUEL LIM, ALLIED LEASING and FINANCE CORPORATION, and THEMANAGEMENT COMMITTEE OF RUBY INDUSTRIAL CORPORATION.

Petitioners seek the reversal of the Court of Appeals Decision, 1 setting aside the Orders of the Securitiesand Exchange Commission (SEC), dated July 30, 1993 and October 15, 1993, which approved theRevised Rehabilitation Plan of Ruby Industrial Corporation (RUBY) and appointed Benhar International,Inc. (BENHAR) as member of RUBY's Management Committee.

The facts: Petitioner Ruby Industrial Corporation (RUBY) is a domestic corporation engaged in glassmanufacturing, while petitioner Benhar International, Inc. (BENHAR) is a domestic corporation engaged inimportation and sale of vehicle spare parts. BENHAR is wholly-owned by the Yu family and headed byHenry Yu who is also a director and majority stockholder of RUBY.

In 1983, RUBY suffered severe liquidity problems. Thus, on December 13, 1983, it filed a Petition forSuspension of Payments with the Securities and Exchange Commission (SEC). 2

On December 20, 1983, the SEC issued an Order3declaring RUBY under suspension of payments.Pending hearing of its petition, the SEC enjoined RUBY from disposing its property, except insofar asnecessary in its ordinary operations. It also enjoined RUBY from making payments outside of the

necessary or legitimate expenses of its business.

On August 10, 1984, the SEC Hearing Panel 4created a management committee 5for RUBY to: (1)undertake the management of RUBY; (2) take custody of and control over all existing assets and liabilitiesof RUBY; (3) evaluate RUBY's existing assets and liabilities, earnings and operations; (4) determine thebest way to salvage and protect the interest of its investors and creditors; and (5) study, review andevaluate the proposed rehabilitation plan for RUBY. 6

Subsequently, at RUBY's special stockholders meeting, its majority stockholders led by Yu KimGiangpresented the BENHAR/RUBY Rehabilitation Plan to be submitted to SEC. Under the plan,BENHAR shall lend its P60 million credit line in China Bank to RUBY, payable within ten (10) years.

Moreover, BENHAR shall purchase the credits of RUBY's creditors and mortgage RUBY's properties toobtain credit facilities for RUBY. 7Upon approval of the rehabilitation plan, BENHAR shall control andmanage RUBY'S operations. For its service, BENHAR shall receive a management fee equivalent to 7.5%of RUBY's net sales. 8

Some 40% of the stockholders opposed the BENHAR/RUBY Plan, including private respondent MIGUELLIM, a minority shareholder of RUBY. Private respondent Allied Leasing and Finance Corporation, thebiggest unsecured creditor of RUBY and chairman of the management committee, also objected to theplan as it would transfer RUBY's assets beyond the reach and to the prejudice of its unsecured creditors.Despite the oppositions, the majority stockholders still submitted the BENHAR/RUBY Plan to the SEC forapproval.

Upon the other hand, RUBY's minority stockholders, represented by private respondent Lim, submittedtheir own rehabilitation plan (the ALTERNATIVE PLAN) to the SEC where they proposed to: (1) pay allRUBY'S creditors without securing any bank loan; (2) run and operate RUBY without chargingmanagement fees; (3) buy-out the majority shares or sell their shares to the majority stockholders; (4)rehabilitate RUBY's two plants; and (5) secure a loan at 25% interest, as against the 28% interest chargedin the loan under the BENHAR/RUBY Plan. 9

Both plans were endorsed by the SEC to RUBY's management committee for evaluation.
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On October 28, 1988, the SEC Hearing Panel approved the BENHAR/RUBY Plan. 10The minoritystockholders, thru private respondent Lim, appealed the approval to the SEC en banc. On November 15,1988, the SEC en banctemporarily enjoined the implementation of the BENHAR/RUBY Plan. OnDecember 20, 1988, after the expiration of the TRO, the SEC en bancgranted the writ of preliminaryinjunction against the enforcement of the BENHAR/RUBY Plan. 11

Thereafter, BENHAR and Henry Yu, later joined by RUBY and Yu Kim Clang, appealed to the Court ofAppeals (CA-G.R. SP No. 16798) questioning the issuance of the writ. Their appeal was denied. 12

BENHAR and company elevated the matter to this Court. In a minute Resolution, 13dated February 28,1990, we denied the petition and upheld the injunction against the implementation of the BENHAR/RUBYPlan.

However, it appears that before the SEC Hearing Panel approved the BENHAR/RUBY Plan on October28, 1988, BENHAR had already implemented part of the plan by paying off Far East Bank & TrustCompany (FEBTC), one of RUBY's secured creditors. Thus, by May 30, 1988, FEBTC had alreadyexecuted a deed of assignment of credit and mortgage rights in favor of BENHAR. Moreover, despite theSEC en banc's TRO and injunction, BENHAR still paid RUBY's other secured creditors who, in turn,assigned their credits in favor of BENHAR.

Hence, RUBY's biggest unsecured creditor, Allied Leasing and Finance Corporation, and privaterespondent Lim moved to nullify the deeds of assignment executed in favor of BENHAR and cite theparties thereto in contempt for willful violation of the December 20, 1983 SEC Order enjoining RUBY fromdisposing its properties and making payments pending the hearing of its petition for suspension ofpayments. Private respondents Lim and Allied Leasing charged that in paying off FEBTC's credits, FEBTCwas given undue preference over the other creditors of RUBY.

Acting on private respondents' motions, the SEC Hearing Panel nullified the deeds of assignmentexecuted by RUBY's creditors in favor of BENHAR and declared the parties thereto guilty of indirectcontempt. 14

Petitioners appealed to the SEC en banc. Their appeal was denied. 15It was ruled that, pending approvalof the BENHAR/RUBY plan, BENHAR had no authority to pay off FEBTC, one of RUBY's creditors. Inprematurely implementing the BENHAR/RUBY plan, BENHAR defied the SEC Order declaring RUBYunder suspension of payments and directing the management committee to preserve its assets.

Petitioners RUBY and BENHAR, joined by Henry Yu and Yu Kim Giang, appealed to the Court of Appeals(CA-G.R. SP No. 18310). On August 29,1990, the Court of Appeals affirmed the SEC ruling nullifying the deeds of assignment. 16It also declaredthat its decision is final and executory as to RUBY and Yu Kim Giang for their failure to file their pleadingswithin the reglementary period. This Court affirmed the Court of Appeals' decision in G.R. No. 96675. 17

Earlier, on May 29, 1990, after the SEC en bancenjoined the implementation of BENHAR/RUBY Plan,RUBY filed with the SEC en bancan ex-parte petition to create a new management committee and toapprove its revised rehabilitation plan (Revised BENHAR/RUBY Plan). Under the revised plan, BENHARshall receive P34.068 Million of the P60.437 Million credit facility to be extended to RUBY, asreimbursement for BENHAR's payment to some of RUBY's creditors.

The SEC en bancdirected RUBY to submit the Revised BENHAR/RUBY Plan to its creditors for commentand approval. The petition for the creation of a new management committee was remanded for furtherproceedings to the SEC Hearing Panel. The Alternative Plan of RUBY's minority stockholders was alsoforwarded to the hearing panel for evaluation.

On April 26, 1991, over ninety (90%) percent of RUBY's creditors objected to the Revised

BENHAR/RUBY Plan and the creation of a new management committee. Instead, they endorsed theminority stockholders' Alternative Plan.

At the hearing of the petition for the creation of a new management committee, three (3) members of theoriginal management committee 18 opposed the Revised BENHAR/RUBY Plan on the following grounds:

(1) the Revised BENHAR/RUBY Plan would legitimize the entry of BENHAR, a total stranger, to RUBY asBENHAR would become the biggest creditor of RUBY;


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(2) the revised plan would put RUBY's assets beyond the reach of the unsecured creditors and theminority stockholders; and,

(3) the revised plan was not approved by RUBY's stockholders in a meeting called for the purpose.

However, on September 18, 1991, despite the objections of over 90% of RUBY's creditors and three (3)members of the management committee, the SEC Hearing Panel approved the revised plan anddissolved the existing management committee. It also created a new management committee and

appointed BENHAR as one of its members.19

In addition to the powers originally conferred to themanagement committee under P.D. No. 902-A, the new management committee was tasked to overseethe implementation by the Board of Directors of the revised rehabilitation plan for RUBY.

Consequently, the original management committee, Lim, and the Allied Leasing Corporation appealed tothe SECen banc. On July 30, 1993, the SEC En Bancaffirmed the approval of the RevisedBENHAR/RUBY Plan and the creation of a new management committee. 20To avoid any group fromcontrolling the management of RUBY, the SEC appointed SEC lawyers Ruben C. Ladia and Teresita R.Siao as a

I. Concurrence and Preference

Documents

Transcript of I. Concurrence and Preference