Full Case - Credits (Finals) PDF

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FULL CASE

1.

G.R. No. 178407, March 18, 2015

METROPOLITAN BANK AND TRUST COMPANY, Petitioner , v. S.F. NAGUIAT

ENTERPRISES, INC.,Respondent .

D E C I S I O N

This case calls for the determination of whether the approval and consent of the insolvency court is required

under Act No. 1956, otherwise known as the Insolvency Law, before a secured creditor like petitioner

Metropolitan Bank and Trust Company can proceed with the extrajudicial foreclosure of the mortgaged

property.

This is a Petition for Review1 under Rule 45, seeking to reverse and set aside the November 15, 2006

Decision2

and June 14, 2007 Resolution3

of the Court of Appeals (Sixth Division) in CA-G.R. SP No. 94968. Thequestioned Decision and Resolution dismissed Metropolitan Bank and Trust Company's Petition for Certiorari

and Mandamus4 and denied its subsequent Motion for Reconsideration and Clarification.5

Sometime in April 1997, Spouses Rommel Naguiat and Celestina Naguiat and S.F. Naguiat Enterprises, Inc. (S.F.

Naguiat) executed a real estate mortgage6 in favor of Metropolitan Bank and Trust Company (Metrobank) to

secure certain credit accommodations obtained from the latter amounting to P17 million. The mortgage was

constituted over the following properties:

(1) TCT No. 586767 - a parcel of land in the Barrio of Pulung Bulu, Angeles, Pampanga, with an area of 489

square meters; and

(2) TCT No. 310523 - a parcel of land in Marikina, Rizal, with an area of 1,200.10 square meters.8

On March 3, 2005, S.F. Naguiat represented by Celestina T. Naguiat, Eugene T. Naguiat, and Anna N. Africa

obtained a loan9 from Metrobank in the amount of P1,575,000.00. The loan was likewise secured by the 1997

real estate mortgage by virtue of the Agreement on Existing Mortgage(s)10executed between the parties on

March 15, 2004.

On July 7, 2005, S.F. Naguiat filed a Petition for Voluntary Insolvency with Application for the Appointment of a

Receiver11

pursuant to Act No. 1956, as amended,12

before the Regional Trial Court of Angeles City and which

was raffled to Branch 56.13 Among the assets declared in the Petition was the property covered by TCT No.58676 (one of the properties mortgaged to Metrobank).

14

Presiding Judge Irin Zenaida S. Buan (Judge Buan) issued the Order15 dated July 12, 2005, declaring S.F. Naguiat

insolvent; directing the Deputy Sheriff to take possession of all the properties of S.F. Naguiat until the

appointment of a receiver/assignee; and forbidding payment of any debts due, delivery of properties, and

transfer of any of its properties.

Pending the appointment of a receiver, Judge Buan directed the creditors, including Metrobank, to file their

respective Comments on the Petition.16

In lieu of a Comment, Metrobank filed a Manifestation and

Motion

17

informing the court of Metrobank's decision to withdraw from the insolvency proceedings because itintended to extrajudicially foreclose the mortgaged property to satisfy its claim against S.F. Naguiat.

18

Subsequently, S.F. Naguiat defaulted in paying its loan.19

On November 8, 2005, Metrobank instituted an

extrajudicial foreclosure proceeding against the mortgaged property covered by TCT No. 5867620and sold the

property at a public auction held on December 9, 2005 to Phoenix Global Energy, Inc., the highest

bidder.21 Afterwards, Sheriff Claude B. Balasbas prepared the Certificate of Sale22 and submitted it for

approval to Clerk of Court Vicente S. Fernandez, Jr. and Executive Judge Bernardita Gabitan-Erum (Executive

Judge Gabitan-Erum). However, Executive Judge Gabitan-Erum issued theOrder23dated December 15,

2005 denying her approval of the Certificate of Sale in view of the July 12, 2005 Order issued by the insolvency


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court. Metrobank's subsequent Motion for Reconsideration was also denied in the Order24dated April 24,

2006.

Aggrieved by both Orders of Executive Judge Gabitan-Erum, Metrobank filed a Petition25

for certiorari and

mandamus before the Court of Appeals on June 22, 2006. S.F. Naguiat filed its Manifestation26

stating that it

was not interposing any objection to the Petition and requested that the issues raised in the Petition be

resolved without objection and argument on its part.27

On November 15, 2006, the Court of Appeals rendered its Decision dismissing the Petition on the basis of

Metrobank's failure to "obtain the permission of the insolvency court to extrajudicially foreclose the

mortgaged property."28 The Court of Appeals declared that "a suspension of the foreclosure proceedings is in

order, until an assignee [or receiver,] is elected or appointed [by the insolvency court] so as to afford the

insolvent debtor proper representation in the foreclosure [proceedings]."29

Metrobank filed a Motion for Reconsideration and Clarification, which was denied by the Court of Appeals in

its Resolution dated June 14, 2007.30

The Court of Appeals held that leave of court must be obtained from the

insolvency court whether the foreclosure suit was instituted judicially or extrajudicially so as to afford the

insolvent estate's proper representation (through the assignee) in such action31 and "to avoid the dissipation

of the insolvent debtor's assets in possession of the insolvency court without the latter's knowledge."32

Hence, the present Petition for Review was filed. Petitioner contends that the Court of Appeals decided

questions of substance in a way not in accord with law and with the applicable decisions of this court:

A.

By ruling that there must be a motion for leave of court to be filed and granted by the insolvency court, before

the petitioner, as a secured creditor of an insolvent, can extrajudicially foreclose the mortgaged property,

which is tantamount to a judicial legislation.

B.

By ruling that the Honorable Executive Judge Bernardita Gabitan-Erum did not abuse her discretion in refusing

to perform her ministerial duty of approving the subject certificate of sale, despite the fact that the petitioner

and the designated sheriff complied with all the requirements mandated by Act No. 3135, as amended,

circulars, administrative matters and memorandums issued by the Honorable Supreme Court.

C.

By ruling that the action of the Honorable Executive Judge Bernardita Gabitan-Erum is proper in denying the

approval of the Certificate of Sale on the grounds that the issuance of the Order dated 12 July 2005 declaringrespondent insolvent and the pendency of the insolvency proceeding forbid the petitioner, as a secured

creditor, to foreclose the subject mortgaged property.33 (Emphasis supplied )

On October 20, 2007, S.F. Naguiat filed a Manifestation34

stating that it interposed no objection to the Petition

and submitted the issues raised therein without any argument.

On November 28, 2007, the court resolved "to give due course to the petition [and] to decide the case

according to the pleadings already filed[.]"35

The issues for resolution are:

First, whether the Court of Appeals erred in ruling that prior leave of the insolvency court is necessary before a

secured creditor, like petitioner Metropolitan Bank and Trust Company, can extrajudicially foreclose the

mortgaged property.

Second, whether the Court of Appeals erred in ruling that Executive Judge Gabitan-Erum did not abuse her

discretion in refusing to approve the Certificate of Sale.

Petitioner argues that nowhere in Act No. 1956 does it require that a secured creditor must first obtain leave


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or permission from the insolvency court before said creditor can foreclose on the mortgaged property.36 It

adds that this procedural requirement applies only to civil suits, and not when the secured creditor opts to

exercise the right to foreclose extrajudicially the mortgaged property under Act No. 3135, as amended,

because extrajudicial foreclosure is not a civil suit.37

Thus, the Court of Appeals allegedly imposed a new

condition that was tantamount to unauthorized judicial legislation when it required petitioner to file a Motion

for Leave of the insolvency court.38

Said condition, petitioner argues, defeated and rendered inutile its right or

prerogative under Act No. 1956 to independently initiate extrajudicial foreclosure of the mortgaged

property.39

Nonetheless, petitioner contends that the filing of its Manifestation before the insolvency court served as

sufficient notice of its intention and, in effect, asked the court's permission to foreclose the mortgaged

property.40

Petitioner further contends that "the powers and responsibilities of an Executive Judge in extrajudicial

foreclosure proceedings, in line with Administrative Order No. 6, is merely to supervise the conduct of the

extra-judicial foreclosure of the property"41

and to oversee that the procedural requirements are faithfully

complied with;42 and when "the Clerk of Court and Sheriff concerned complied with their designated duties

and responsibilities under the [administrative] directives and under Act No. 3135, as amended, and the

corresponding filing and legal fees were duly paid, it becomes a ministerial duty on the part of the executive judge to approve the certificate of sale."43 Thus, Executive Judge Gabitan-Erum allegedly exceeded her

authority by "exercising judicial discretion in issuing her Orders dated December 15, 2006 and April 24, 2006 . .

. despite the fact that Sheriff Balasbas complied with all the notices requirements under Act No. 3135, [as]

amended, . . . and the petitioner and the highest bidder paid all the requisite filing and legal fees[.]"44

Furthermore, citing Chartered Bank v. C.A. Imperial and National Bank,45

petitioner submits that the order of

insolvency affected only unsecured creditors and not secured creditors, like petitioner, which did not

surrender its right over the mortgaged property.46

Hence, it contends that the Court of Appeals seriously erred

in holding as proper Executive Judge Gabitan-Erum's disapproval of the Certificate of Sale on account of the

Order of insolvency issued by the insolvency court.

47

Finally, petitioner points out that contrary to the Court of Appeals' ruling, "there is nothing more to suspend

because the extrajudicial foreclosure of the mortgaged property was already a fait accompli as the public

auction sale was conducted on December 9, 2005 and all the requisite legal fees were paid and a Certificate of

Sale was already prepared."48 "The only remaining thing to do [was] for the . . . Executive Judge to sign the

Certificate of Sale, which she . . . refused to do."49

The Petition has no merit.

I

A look at the historical background of the laws governing insolvency in this country will be helpful in resolving

the questions presented before us.

The first insolvency law, Act No. 1956, was enacted on May 20, 1909. It was derived from the Insolvency Act of

California (1895), with a few provisions taken from the United States Bankruptcy Act of 1898.50 Act No. 1956

was entitled "An Act Providing for the Suspension of Payments, the Relief of Insolvent Debtors, the Protection

of Creditors, and the Punishment of Fraudulent Debtors." The remedies under the law were through a

suspension of payment51 (for a debtor who was solvent but illiquid) or a discharge from debts and liabilities

through the voluntary

52

or involuntary

53

insolvency proceedings (for a debtor who was insolvent).

The objective of suspension of payments is the deferment of the payment of debts until such time as the

debtor, which possesses sufficient property to cover all its debts, is able to convert such assets into cash or

otherwise acquires the cash necessary to pay its debts. On the other hand, the objective in insolvency

proceedings is "to effect an equitable distribution of the bankrupt's properties among his creditors and to

benefit the debtor by discharging54 him from his liabilities and enabling him to start afresh with the property

set apart for him as exempt."55

Act No. 1956 was meant to be a complete law on insolvency,56 and debts were to be liquidated in accordance


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with the order of priority set forth under Chapter VI, Sections 48 to 50 on "Classification and Preference of

Creditors"; and Sections 29 and 59 with respect to mortgage or pledge of real or personal property, or lien

thereon. Jurisdiction over suspension of payments and insolvency was vested in the Courts of First Instance

(now the Regional Trial Courts).57

The Civil Code58

(effective August 30, 1950) established a system of concurrence and preference of credits,

which finds particular application in insolvency proceedings.59Philippine Savings Bank v. Hon. Lantin60 explains

this scheme:

Concurrence of credits occurs when the same specific property of the debtor or all of his property is subjected

to the claims of several creditors. The concurrence of credits raises no questions of consequence where the

value of the property or the value of all assets of the debtor is sufficient to pay in full all the creditors.

However, it becomes material when said assets are insufficient for then some creditors of necessity will not be

paid or some creditors will not obtain the full satisfaction of their claims. In this situation, the question of

preference will then arise, that is to say who of the creditors will be paid ahead of the others. (Caguioa,

Comments and Cases on Civil Law, 1970 ed., Vol. VI, p. 472.)61

The credits are classified into three general categories, namely, "(a) special preferred credits listed in Articles

224162

and 2242,63

(b) ordinary preferred credits listed in Article 2244[,]64

and (c) common credits under Article2245."

65

The special preferred credits enumerated in Articles 2241 (with respect to movable property) and 2242 (with

respect to immovable property) are considered as mortgages or pledges of real or personal property, or liens

within the purview of Act No. 1956.66 These credits, which enjoy preference with respect to a specific movable

or immovable property, exclude all others to the extent of the value of the property.67 If there are two or

more liens on the same specific property, the lienholders divide the value of the property involved pro rata,

after the taxes on the same property are fully paid.68

"Credits which are specially preferred because they constitute liens (tax or non-tax) in turn, take precedence

over ordinary preferred credits so far as concerns the property to which the liens have attached. The specially

preferred credits must be discharged first out of the proceeds of the property to which they relate, before

ordinary preferred creditors may lay claim to any part of such proceeds."69

"In contrast with Articles 2241 and 2242, Article 2244 creates no liens on determinate property which follow

such property. What Article 2244 creates are simply rights in favor of certain creditors to have the cash and

other assets of the insolvent applied in a certain sequence or order of priority."70

It was held that concurrence and preference of credits can only be ascertained in the context of a general

liquidation proceeding that is in rem, such as an insolvency proceeding, where properties of the debtor are

inventoried and liquidated and the claims of all the creditors may be bindingly adjudicated.71 The applicationof this order of priorities established under the Civil Code in insolvency proceedings assures that priority of

claims are respected and credits belonging to the same class are equitably treated.

Conformably, it is the policy of Act No. 1956 to place all the assets and liabilities of the insolvent debtor

completely within the jurisdiction and control of the insolvency court without the intervention of any other

court in the insolvent debtor's concerns or in the administration of the estate.72 It was considered to be of

prime importance that the insolvency proceedings follow their course as speedily as possible in order that a

discharge, if the insolvent debtor is entitled to it, should be decreed without unreasonable delay. "Proceedings

of [this] nature cannot proceed properly or with due dispatch unless they are controlled absolutely by the

court having charge thereof."

73

In 1981, Presidential Decree No. 1758 amended Presidential Decree No. 902-A, the Securities and Exchange

Commission charter. Under its terms,74

jurisdiction regarding corporations that sought suspension of

payments process was taken away from the regular courts and given to the Securities and Exchange

Commission.75 In addition, an alternative to suspension of payments — rehabilitation — was introduced. It

enables a corporation whose assets are not sufficient to cover its liabilities to apply to the Securities and

Exchange Commission for the appointment of a rehabilitation receiver and/or management committee76 and

then to develop a rehabilitation plan with a view to rejuvenating a financially distressed corporation. However,

the procedure to avail of the remedy was not spelled out until 20 years later when the Securities and


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Exchange Commission finally adopted the Rules of Procedure on Corporate Recovery on January 4, 2000.

Shortly thereafter, with the passage of Republic Act No. 8799 or The Securities Regulation Code on July 19,

2000, jurisdiction over corporation rehabilitation cases was reverted to the Regional Trial Courts designated as

commercial courts or rehabilitation courts.77

This legal development was implemented by the Interim Rules of

Procedure on Corporate Rehabilitation (made effective in December 2000), which was later replaced by A.M.

00-8-10-SC or the Rules of Procedure on Corporate Rehabilitation of 2008.

Act No. 1956 continued to remain in force and effect until its express repeal on July 18, 2010 when Republic

Act No. 10142,78 otherwise known as the Financial Rehabilitation and Insolvency Act of 2010, took effect.

Republic Act No. 10142 now provides for court proceedings in the rehabilitation or liquidation of debtors, both

juridical and natural persons, in a "timely, fair, transparent, effective and efficient"79 manner. The purpose of

insolvency proceedings is "to encourage debtors . . . and their creditors to collectively and realistically resolve

and adjust competing claims and property rights"80while "maintaining] certainty and predictability in

commercial affairs, preserving] and maximizing] the value of the assets of these debtors, recognizing] creditor

rights and respecting] priority of claims, and ensuring] equitable treatment of creditors who are similarly

situated."81 It has also been provided that whenever rehabilitation is no longer feasible, "it is in the interest of

the State to facilitate a speedy and orderly liquidation of [the] debtors' assets and the settlement of their

obligations."82

Unlike Act No. 1956, Republic Act No. 10142 provides a broad definition of the term, "insolvent":

SEC. 4. Definition of Terms. - As used in this Act, the term:

. . . .

(p) Insolvent shall refer to the financial condition of a debtor that is generally unable to pay its or his liabilities

as they fall due in the ordinary course of business or has liabilities that are greater than its or his assets.

Republic Act No. 10142 also expressly categorizes different forms of debt relief available to a corporate debtor

in financial distress. These are out-of-court restructuring agreements;83

pre-negotiated rehabilitation;84

court-

supervised rehabilitation;85

and liquidation (voluntary and involuntary).86

An insolvent individual debtor can

avail of suspension of payments,87

or liquidation.88

During liquidation proceedings, a secured creditor may waive its security or lien, prove its claim, and share in

the distribution of the assets of the debtor, in which case it will be admitted as an unsecured creditor; or

maintain its rights under the security or lien,89 in which case:

1. [T]he value of the property may be fixed in a manner agreed upon by the creditor and the liquidator.

When the value of the property is less than the claim . . . the [creditor] will be admitted ... as a creditorfor the balance. If its value exceeds the claim . . . the liquidator may convey the property to the

creditor and waive the debtor's right of redemption upon receiving the excess from the creditor;

2. [T]he liquidator may sell the property and satisfy the secured creditor's entire claim from the proceedsof the sale; or

3. [T]he secured creditor may enforce the lien or foreclose on the property pursuant to applicable laws.90

A secured creditor, however, is subject to the temporary stay of foreclosure proceedings for a period of 180

days,91 upon the issuance by the court of the Liquidation Order.92

Republic Act No. 10142 was to govern all petitions filed after it had taken effect, and all further proceedings in

pending insolvency, suspension of payments, and rehabilitation cases, except when its application "would not

be feasible or would work injustice, in which event the procedures set forth in prior laws and regulations shall

apply ."93

The relevant proceedings in this case took place prior to Republic Act No. 10142; hence, the issue will be

resolved according to the provisions of Act No. 1956.


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II

Act No. 1956 impliedly requires a secured creditor to ask the permission of the insolvent court before said

creditor can foreclose the mortgaged property.

When read together, the following provisions of Act No. 1956 reveal the necessity for leave of the insolvency

court:

(A) Under Section 14, "[a]n insolvent debtor, owing debts exceeding in amount the sum of one thousand

pesos, may apply to be discharged from his debts and liabilities by petition to the Court of First Instance

of the province or city in which he has resided for six months next preceding the filing of such petition. In

his petition, he shall set forth his place of residence, the period of his residence therein immediately

prior to filing said petition, his inability to pay all his debts in full, his willingness to surrender all his

property, estate, and effects not exempt from execution for the benefit of his creditors, and an

application to be adjudged an insolvent. He shall annex to his petition a schedule and inventory in the

orm hereinafter provided. The filing of such petition shall be an act of insolvency."

(B) Under Section 16, "[the] inventory must contain, besides the creditors, an accurate description of all the

real and personal property, estate, and effects of the [insolvent], including his homestead, if any,

together with a statement of the value of each item of said property, estate, and effects and its location,and a statement of the incumbrances thereon. All property exempt by law from execution shall be set

out in said inventory with a statement of its valuation, location, and the incumbrances thereon, if any.

The inventory shall contain an outline of the facts giving rises [sic], or which might give rise, to a right of

action in favor of the insolvent debtor."

(C) Under Section 18, upon receipt of the petition, the court shall issue an order declaring the petitioner

insolvent, and directing the sheriff to take possession of and safely keep, until the appointment of a

receiver or assignee, all the debtor's real and personal property, except those exempt by law from

execution. The order also forbids the transfer of any property by the debtor.

(D) Under Section 32, once an assignee is elected and qualified, the clerk of court shall assign and convey to

the assignee all the real and personal property of the debtor, not exempt from execution, and

such assignment shall relate back to the commencement of the insolvency proceedings, and by operation

n of law, shall vest the tide to all such property in the assignee.

With the declaration of insolvency of the debtor, insolvency courts "obtain full and complete jurisdiction over

all property of the insolvent and of all claims by and against [it.]"94

It follows that the insolvency court has

exclusive jurisdiction to deal with the property of the insolvent.95Consequently, after the mortgagor-debtor

has been declared insolvent and the insolvency court has acquired control of his estate, a mortgagee may not,

without the permission of the insolvency court, institute proceedings to enforce its lien. In so doing, it would

interfere with the insolvency court's possession and orderly administration of the insolvent's properties.96

It is true that under Section 59 of Act No. 1956, the creditor is given the option to participate in the insolvencyproceedings by proving the balance of his debt, after deducting the value of the mortgaged property as agreed

upon with the receiver or determined by the court or by a sale of the property as directed by the court; or

proving his whole debt, after releasing his claim to the receiver/sheriff before the election of an assignee, or to

the assignee. However, Section 59 of Act No. 1956 proceeds to state that when "the property is not sold or

released, and delivered up, or its value fixed, the creditor [is] not allowed to prove any part of his debt," but

the assignee shall deliver to the creditor the mortgaged property. Hence, explicitly under Section 59 and as a

necessary consequence flowing from the exclusive jurisdiction of the insolvency court over the estate of the

insolvent, the mortgaged property must first be formally delivered by the court or the assignee (if one has

already been elected) before a mortgagee-creditor can initiate proceedings for foreclosure.97

Here, the foreclosure and sale of the mortgaged property of the debtor, without leave of court, contravene

the provisions of Act No. 1956 and violate the Order dated July 12, 2005 of the insolvency court which

declared S.F. Naguiat insolvent and forbidden from making any transfer of any of its properties to any person.

Petitioner would insist that "respondent was given the opportunity to be represented in the public auction

sale conducted on December 9, 2005"98 because it received a copy of the Notice of the Sheriffs Sale on

November 11, 2005;"99 and the Notice of Auction Sale was published in a newspaper of general

circulation.100 However, respondent allegedly opted not to participate by not attending the public auction

sale.101


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Such was to be expected because when the foreclosure proceeding was initiated, respondent was already

declared insolvent. Indeed, upon the adjudication of insolvency, the insolvent ceased to exist and was in effect

judicially declared dead as of the filing of the insolvency petition and by the nature of things had no further

interest in the property covered by the mortgage.102

Under Section 32 of Act No. 1956, title to the insolvent's

estate relates back to the filing of the insolvency petition upon the election of the assignee who shall

thereafter act on behalf of all the creditors. Under Section 36, the assignee has the power to redeem all valid

mortgages or sell property subject to mortgage. Thus, the extrajudicial foreclosure of the mortgaged property

initiated by petitioner without leave of insolvency court would effectively exclude the assignee's right to

participate in the public auction sale of the property and to redeem the foreclosed property103 to the

prejudice of all the other creditors of the insolvent.

Petitioner filed its Manifestation and Motion before the insolvency court on September 7, 2005,104praying that

it would no longer file the Comment required as it opted to exercise its right to extrajudicially foreclose the

property mortgaged and that it "be allowed to temporarily withdraw its active participation in the . . .

proceeding pending the outcome of the extra-judicial foreclosure proceeding of the mortgaged property."105

Petitioner should have waited for the insolvency court to act on its Manifestation and Motion before

foreclosing the mortgaged property and its lien (assuming valid) would not be impaired or its claim in any way jeopardized by any reasonable delay. There are mechanisms within Act No. 1956 such as Section 59 that

ensure that the interests of the secured creditor are adequately protected. Parenthetically, mortgage liens are

retained in insolvency proceedings. What is merely suspended until court approval is obtained is the creditor's

enforcement of such preference.

On the other hand, to give the secured creditor a free hand in foreclosing its collateral upon the initiation of

insolvency proceedings may frustrate the basic objectives of Act No. 1956 of maximizing the value of the

estate of the insolvent or obtaining the highest return possible from its sale for the benefit of all the creditors

(both secured and unsecured).

III

Executive Judge Gabitan-Erum did not unlawfully neglect to perform her duty when she refused to approve

and sign the Certificate of Sale, as would warrant the issuance of a writ of mandamus against her.

An executive judge has the administrative duty in extrajudicial foreclosure proceedings to ensure that all the

conditions of Act No. 3135 have been complied with before approving the sale at public auction of any

mortgaged property.106

"Certain requisites must be established before a creditor can proceed to an extrajudicial foreclosure, namely:

first, there must have been the failure to pay the loan obtained from the mortgagee-creditor; second, the loanobligation must be secured by a real estate mortgage; and third, the mortgagee-creditor has the right to

foreclose the real estate mortgage either judicially or extrajudicially."107

Furthermore, Act No. 3135 outlines the notice and publication requirements and the procedure for the

extrajudicial foreclosure which constitute a condition sine qua non for its validity. Specifically, Sections 2, 3,

and 4 of the law prescribe the formalities of the extrajudicial foreclosure proceeding:

SEC. 2. Said sale cannot be made legally outside of the province in which the property sold is situated; and in

case the place within said province in which the sale is to be made is the subject of stipulation, such sale shall

be made in said place or in the municipal building of the municipality in which the property or part thereof is

situated.

SEC. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public

places of the municipality or city where the property is situated, and if such property is worth more than four

hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a

newspaper of general circulation in the municipality or city.

SEC. 4. The sale shall be made at public auction, between the hours of nine in the morning and four in the

afternoon; and shall be under the direction of the sheriff of the province, the justice or auxiliary justice of the


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peace of the municipality in which such sale has to be made, or a notary public of said municipality, who shall

be entitled to collect a fee of five pesos for each day of actual work performed, in addition to his expenses.

''Mandamus will not issue to enforce a right which is in substantial dispute or to which a substantial doubt

exists."108

There was a valid reason for Executive Judge Gabitan-Erum to doubt the propriety of the foreclosure sale. Her

verification with the records of the Clerk of Court showed that a Petition for Insolvency had been filed and had

already been acted upon by the insolvency court prior to the application for extrajudicial foreclosure of the

mortgaged properties. Among the inventoried unpaid debts and properties attached to the Petition for

Insolvency was the loan secured by the real estate mortgage subject of the application for extrajudicial

foreclosure sale.109 With the pendency of the insolvency case, substantial doubt exists to justify the refusal by

Executive Judge Gabitan-Erum to approve the Certificate of Sale as the extrajudicial foreclosure sale without

leave of the insolvency court may contravene the policy and purpose of Act No. 1956.110

Act No. 3135 is silent with respect to mortgaged properties that are in custodia legis, such as the property in

this case, which was placed under the control and supervision of the insolvency court. This court has declared

that "[a] court which has control of such property, exercises exclusive jurisdiction over the same, retains all

incidents relative to the conduct of such property. No court, except one having supervisory control or superior jurisdiction in the premises, has a right to interfere with and change that possession."111 The extrajudicial

foreclosure and sale of the mortgaged property of the debtor would clearly constitute an interference with

the insolvency court's possession of the property.

Furthermore, Executive Judge Gabitan-Erum noticed that the President of the highest bidder in the public

auction sale may be related to the owners of S.F. Naguiat Enterprises, Inc. The President of the highest bidder,

Phoenix Global Energy, Inc., was a certain Eugene T. Naguiat.112

"Among the incorporators of S.F. Naguiat

Enterprises, Inc. [the insolvent corporation] [were] Sergio F. Naguiat, Maningning T. Naguiat, Antolin M. Tiglao,

Nero F. Naguiat and Antolin T. Naguiat. Later[,] its capital was increased and the listed subscribers [were]

Celestina T. Naguiat, Rommel T. Naguiat, Antolin T. Naguiat, Sergio T. Naguiat, Jr., Alexander T. Naguiat,Coumelo T. Naguiat, Fely Ann Breggs and Teresita Celine Quemer."113

Under the foregoing circumstances, the refusal of Executive Judge Gabitan-Erum to approve the Certificate of

Sale was in accord with her duty to act with prudence, caution, and attention in the performance of her

functions.

WHEREFORE, the Petition is DENIED, and the Court of Appeals' Decision dated November 15, 2006 and

Resolution dated June 14, 2007 are AFFIRMED.

SO ORDERED.


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2.

RIZAL COMMERCIAL BANKING

CORPORATION, Petitioner ,

- versus -

ROYAL CARGO CORPORATION, Respondent .

G.R. No. 179756

Present:

YNARES-SANTIAGO, *

CARPIO MORALES,

**

Acting Chairperson, PERALTA,

***

DEL CASTILLO, andABAD, JJ .

Promulgated:October 2, 2009

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

D E C I S I O N

CARPIO MORALES, J.:

Terrymanila, Inc.[1] (Terrymanila) filed a petition for voluntary insolvency with the Regional Trial Court

(RTC) of Bataan on February 13, 1991.[2] One of its creditors was Rizal Commercial Banking Corporation

(petitioner) with which it had an obligation of P3 Million that was secured by a chattel mortgage executed

on February 16, 1989.The chattel mortgage was duly recorded in the notarial register of Amado Castano, a

notary public for and in the Province of Bataan.[3]

Royal Cargo Corporation (respondent), another creditor of Terrymanila, filed an action before the RTC

of Manila for collection of sum of money and preliminarily attached some of Terrymanilas personal

properties on March 5, 1991 to secure the satisfaction of a judgment award of P296,662.16, exclusive of

interests and attorneys fees.[4]

On April 12, 1991, the Bataan RTC declared Terrymanila insolvent.

On June 11, 1991,[5]

the Manila RTC, by Decision of even date, rendered judgment in the collection case

in favor of respondent.

In the meantime, petitioner sought in the insolvency proceedings at the Bataan RTC permission to

extrajudicially foreclose the chattel mortgage which was granted by Order of February 3, 1992.[6]

It appears

that respondent, together with its employees union, moved to have this Order reconsidered but the motion

was denied by Order of March 20, 1992 Order.[7]

The provincial sheriff of Bataan thereupon scheduled on June 16, 1992 the public auction sale of the

mortgaged personal properties at the Municipal Building of Mariveles, Bataan. At the auction sale, petitioner,

the sole bidder of the properties, purchased them for P1.5 Million. Eventually, petitioner sold the properties

to Domingo Bondoc and Victoriano See.[8]

Respondent later filed on July 30, 1992 a petition before the RTC of Manila, docketed as Civil Case No.

92-62106, against the Provincial Sheriff of the RTC Bataan and petitioner, for annulment of the auction

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sale (annulment of sale case). Apart from questioning the inclusion in the auction sale[9]

of some of the

properties which it had attached, respondent questioned the failure to duly notify it of the sale at least 10

days before the sale, citing Section 14 of Act No. 1508 or the Chattel Mortgage Law which reads:

Sec. 14. The mortgagee, his executor, administrator or assign, may, after thirty days, from the time of

condition broken, cause the mortgaged property, or any part thereof, to be sold at public auction by a public

officer at a public place in the municipality where the mortgagor resides, or where the property is situated,provided at least ten days notice of the time, place, and purpose of such sale has been posted at two or more

public places in such municipality, and the mortgagee, his executor, administrator or assignee shall notify the

mortgagor or person holding under him and the persons holding subsequent mortgages of the time and

place of sale, either by notice in writing directed to him or left at his abode, if within the municipality, or

sent by mail if he does not reside in such municipality, at least ten days previous to the date. (Emphasis and

underscoring supplied),

it claiming that its counsel received a notice only on the day of the sale.[10]

Petitioner, alleging that the annulment of sale case filed by respondent stated no cause of action, filed

on December 3, 1992 a Motion to Dismiss[11] which was, however, denied by Branch 16 of the Manila RTC.[12]

Petitioner appealed the denial of the Motion to Dismiss via certiorari to the Court of Appeals, docketed

as CA-G.R. SP No. 31125. The appellate court dismissed the petition, by Decision of February 21, 1994, it

holding that respondents petition for annulment prima facie states a sufficient cause of action and that the

[trial court] in denying [herein petitioner RCBCs] motion to dismiss, had acted advisedly and well within its

powers and authority.[13]

Petitioner thereupon filed before the Manila RTC its Answer Ex Abundante Cautelam[14] in the

annulment of sale case in which it lodged a Compulsory Counterclaim by seeking P1 Million for moral

damages, P500,000 for exemplary damages, and P250,000 for attorneys fees. It thereafter elevated the case

to this Court via petition for review oncertiorari , docketed as G.R. 115662. This Court by minute Resolution

of November 7, 1994,

[15]

denied the petition for failure to show that a reversible error was committed by theappellate court.[16]

Trial on the merits of the annulment of sale case thereupon ensued. By Decision[17]

of October 15,

1997, Branch 16 of the Manila RTC rendered judgment in favor of respondent, disposing as follows:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:

1. ORDERING . . . RCBC to pay plaintiff [heein respondent Royal Cargo] the amount of P296,662.16 and P8,000.00 as

reasonable attorneys fees.

2. No pronouncement as to costs.

3. DISMISSING the petition as to respondents Provincial Sheriff of Balanga, Bataan RTC;

SO ORDERED.

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Both parties appealed to the Court of Appeals which, by Decision[18]

of April 17, 2007, denied herein

petitioners appeal and partly granted herein respondents by increasing to P50,000 the attorneys fees awarded

to it and additionally awarding it exemplary damages and imposing interest on the principal amount payable

to it. Thus it disposed:

WHEREFORE, the foregoing considered, the appeal instituted by appellant RCBC is hereby DENIED for

lack of merit while the appeal of appellant Royal Cargo is PARTLY GRANTED in that the amount of attorneys

fees awarded by the RTC is increased to P50,000.00.

In addition, RCBC is ordered to pay Royal Cargo the amount of P100,000.00 as exemplary

damages. The principal amount of P296,662.18 [sic] to be paid by RCBC to Royal Cargo shall likewise earn 12%

interest per annum from the time the petition was filed in the court a quo until fully paid. The rest of the

decision is AFFIRMED.

SO ORDERED. (Emphasis and underscoring supplied)

In partly granting respondents appeal from the Decision of Br. 16 of RTC Manila, the appellate court

ratiocinated that respondent had a right to be timely informed of the foreclosure sale.

RCBCs citations [sic] of numerous rulings on the matter more than supports the fact that as mortgagee,

it had preferential right over the chattels subject of the foreclosure sale. This however is not at issue in this

case. What is being contested is the right of Royal Cargo to be timely informed of the foreclosure sale as it too

had interests over the mortgagee Terrymanila, Inc.s assets. We note that this matter had already been

passed upon by this Court on February 21, 1994 in CA-G.R. SP No. 31125 as well as by the Supreme Court on

November 7, 1994 in G.R. No. [1]15662. RCBC, by arguing about its preferential right as mortgagee in the

instant appeal merely reiterates what had already been considered and ruled upon in earlier proceedings.

x x x x

Moreover, Section 14 of the Chattel Mortgage Law pertaining to the procedure in the foreclosure of

chattel mortgages provides, to wit:

x x x x

The above-quoted provision clearly requires that the mortgagee should notify in writing the mortgagoror person holding under him of the time and place of the sale by personal delivery of the notice. Thus, RCBCs

failure to comply with this requirement warranted a ruling against it by the RTC. (Italics in the original;

emphasis partly in the original; underscoring supplied)

Its motion for reconsideration having been denied by the appellate court,[19]

petitioner lodged the

present petition for review which raises the following issues:

I

WHETHER OR NOT RESPONDENT SHOULD HAVE BEEN GIVEN A TEN(10)-DAY PRIOR NOTICE OF THE JUNE 16,

1992 FORECLOSURE SALE

II

WHETHER OR NOT THE TRIAL COURT AND THE COURT OF APPEALS GRAVELY ERRED IN DECLARING

PETITIONER GUILTY OF CONSTRUCTIVE FRAUD IN FAILING TO PROVIDE RESPONDENT A TEN (10)-DAY PRIOR

NOTICE OF THE FORECLOSURE SALE.

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III

WHETHER OR NOT THE PETITIONER WAS CORRECTLY HELD LIABLE TO PAY RESPONDENT P296,662.[16] PLUS

INTEREST THEREON, EXEMPLARY DAMAGES ANDATTORNEYS FEES.

IV

WHETHER OR NOT PETITIONER IS ENTITLED TO AN AWARD OF ATTORNEYS FEES.[20] (Underscoring supplied)

Petitioner faults the appellate court in applying res judicata by holding that respondents entitlement to

notice of the auction sale had already been settled in its Decision inCA G.R. SP No. 31125 and in this

Courts Decision in G.R. No. 115662. For, so it contends, the decisions in these cases dealt

on interlocutory issues, viz: the issue of whether respondents petition for annulment of the sale stated a cause

of action, and the issue of whether petitioners motion to dismiss was properly denied.[21]

Arguing against respondents position that it was entitled to notice of the auction sale, petitioner cites

the Chattel Mortgage Law which enumerates who are entitled to be notified under Section 14 thereof. It

posits that [h]ad the law intended to include in said Section an attaching creditor or a judgment creditor [like

herein respondent], it could have so specifically stated therein, since in the preceding section, Section 13, it

already mentioned that a subsequent attaching creditor may redeem.[22]

Petitioner goes on to fault the appellate court in echoing its ruling in CA-G.R. SP No. 31125 that

Sections 13[23]

and 14 of the Chattel Mortgage Law should be read in tandem since the right given to the

attaching creditor under Section 13 would not serve its purpose if we were to exclude the subsequent

attaching creditor from those who under Section 14 need to be notified of the foreclosure sale ten days before

it is held.[24]

Petitioner likewise posits that Section 13 permits a subsequent attaching creditor to redeem the

mortgage only before the holding of the auction sale, drawing attention toParay v. Rodriguez[25]

which

instructs that no right of redemption exists over personal property as the Chattel Mortgage Law is silent

thereon.[26]

Even assuming arguendo, petitioner contends, that there exists an obligation to furnish respondent a

notice of the auction sale 10 days prior thereto, respondents judgment award of P296,662.16 with interest

thereon at the legal rate from the date of filing of the [c]omplaint and P10,000.00 as reasonable attorneys fees

is very much less than the P1.5 [m]illion bid of petitioner[27]

As for the issue of constructive fraud-basis of the award of damages to respondent, petitioner

maintains that both the trial and appellate courts erred in concluding that it (petitioner) was the one which

sent the notice of sheriffs sale to, which was received on the day of the sale by, the counsel for respondent

for, so it contends, it had absolutely no participation in the preparation and sending of such notice.[28]

In its Comment,[29] respondent reiterates that the respective decisions of the appellate court and this

Court in CA G.R. SP No. 31125 and G.R. No. 115662 are conclusivebetween the parties, hence, the right of

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[respondent] to a [ten-day] notice has a binding effect and must be adopted in any other controversy between

the same parties in which the very same question is raised.[30]

And respondent maintains that the obligation to notify the mortgagor or person holding under him and

the persons holding subsequent mortgages falls upon petitioner as the mortgagee.

The petition is MERITORIOUS.

The respective decisions of the appellate court in CA G.R. SP No. 31125 and this Court in G.R. No.

115662 did not conclusively settle the issue on the need to give a 10-day notice to respondent of the holding

of the public auction sale of the chattels.

The elements of res judicata are: (1) the judgment sought to bar the new action must be final; (2) the

decision must have been rendered by a court having jurisdiction over the subject matter and the parties; (3)

the disposition of the case must be a judgment on the merits; and (4) there must be as between the first and

second action, identity of parties, subject matter, and causes of action.[31]

Res judicata has two concepts: (1) bar by prior judgment as enunciated in Rule 39, Section 47 (b) of the

Rules of Civil Procedure; and (2) conclusiveness of judgment in Rule 39, Section 47 (c).[32]

There is bar by prior judgment when, as between the first case where the judgment was rendered, and

the second case that is sought to be barred, there is identity of parties, subject matter, and causes of action.

Where there is identity of parties and subject matter in the first and second cases, but no identity of causes of

action, there isconclusiveness of judgment.[33] The first judgment is conclusive only as to those

matters actually and directly controverted and determined , not as to matters merely involved therein.

The Court of Appeals, in CA G.R. SP No. 31125

, resolved only the interlocutory issue of whether the trial

courts Order of April 12, 1993 denying petitioners motion to dismiss respondents petition for annulment was

attended by grave abuse of discretion. The appellate court did not rule on the merits of the petition as to

establish a controlling legal rule which has to be subsequently followed by the parties in the same case. It

merely held that respondents petition in the trial court stated a sufficient cause of action. Its determination of

respondents entitlement to notice of the public auction sale was at best prima facie. Thus, the appellate court

held:

In view of the above, We are of the considered view that the private respondents petition in the

court a quo prima facie states a sufficient cause of action and that the public respondent in denying the

petitioners motion to dismiss, had acted advisedly and well within its powers and authority. We, therefore,

find no cause to annul the challenged order issued by the respondent court in Civil Case No. 92-

62106. (Underscoring in the original; emphasis and italics supplied)[34]

An order denying a motion to dismiss is merely interlocutory and cannot give rise to res judicata,

hence, it is subject to amendments until the rendition of the final judgment.[35]

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On respondents contention that petitioner, as mortgagee, had the duty to notify it of the public

auction sale, the Court finds the same immaterial to the case.

Section 13 of the Chattel Mortgage Law allows the would-be redemptioner thereunder to redeem the

mortgaged property only before its sale. Consider the following pronouncement in Paray : [36]

[T]here is no law in our statute books which vests the right of redemption over personal property. Act

No. 1508, or the Chattel Mortgage Law, ostensibly could have served as the vehicle for any legislative intent to

bestow a right of redemption over personal property, since that law governs the extrajudicial sale of

mortgaged personal property, but the statute is definitely silent on the point. And Section 39 of the 1997

Rules of Civil Procedure, extensively relied upon by the Court of Appeals, starkly utters that the right of

redemption applies to real properties, not personal properties, sold on execution. (Emphasis, italics and

underscoring supplied)

Unmistakably, the redemption cited in Section 13 partakes of an equity of redemption, which is the

right of the mortgagor to redeem the mortgaged property after his default in the performance of the

conditions of the mortgage but before the sale of the property[37] to clear it from the encumbrance of the

mortgage.[38] It is not the same asright of redemption which is the right of the mortgagor to redeem the

mortgaged property after registration of the foreclosure sale,[39] and even after confirmation of the sale.[40]

While respondent had attached some of Terrymanilas assets to secure the satisfaction ofa P296,662.16 judgment rendered in another case, what it effectively attached wasTerrymanilas equity of

redemption. That respondents claim is much lower than the P1.5 million actual bid of petitioner at the auction

sale does not defeat respondents equity of redemption. Top Rate International Services, Inc. v.

IAC [41]

enlightens:

It is, therefore, error on the part of the petitioner to say that since private respondents lien is only a

total of P343,227.40, they cannot be entitled to the equity of redemption because the exercise of such right

would require the payment of an amount which cannot be less than P40,000,000.00.

When herein private respondents prayed for the attachment of the properties to secure their

respective claims against Consolidated Mines, Inc., the properties had already been mortgaged to the

consortium of twelve banks to secure an obligation of US$62,062,720.66. Thus, like subsequent mortgagees,

the respondents liens on such properties became inferior to that of banks, which claims in the event of

foreclosure proceedings, must first be satisfied. The appellate court, therefore, was correct in holding that in

reality, what was attached by the respondents was merely Consolidated Mines . . . equity of redemption. x x

x x

x x x x

We, therefore, hold that the appellate court did not commit any error in ruling that there was no over-

levy on the disputed properties. What was actually attached by respondents was Consolidated Mines right or

equity of redemption, an incorporeal and intangible right, the value of which can neither be quantified nor

equated with the actual value of the properties upon which it may be exercised.[42] (Emphasis, italics and

underscoring supplied)

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Having thus attached Terrymanilas equity of redemption, respondent had to be informed of the date of

sale of the mortgaged assets for it to exercise such equity of redemption over some of those foreclosed

properties, as provided for in Section 13.

Recall, however, that respondent filed a motion to reconsider the February 3, 1992 Order of the RTC

Bataan-insolvency court which granted leave to petitioner to foreclose the chattel mortgage, which motion

was denied. Notably, respondent failed to allege this incident in his annulment of sale case before the RTC of

Manila.

Thus, even prior to receiving, through counsel, a mailed notice of the auction sale on the date of the

auction sale itself on June 16, 1992, respondent was already put on notice of the impending foreclosure sale of

the mortgaged chattels. It could thus have expediently exercised its equity of redemption, at the earliest when

it received the insolvency courts Order of March 20, 1992 denying its Motion for Reconsideration of the

February 3, 1992 Order.

Despite its window of opportunity to exercise its equity of redemption, however, respondent chose to

be technically shrewd about its chances, preferring instead to seek annulment of the auction sale, which was

the result of the foreclosure of the mortgage, permission to conduct which it had early on opposed before the

insolvency court. Its negligence or omission to exercise its equity of redemption within a reasonable time, or

even on the day of the auction sale, warrants a presumption that it had either abandoned it or opted not to

assert it.[43] Equitable considerations thus sway against it.

It is also not lost on the Court that as early as April 12, 1991, Terrymanila had been judicially declared

insolvent. Respondents recourse was thus to demand the satisfaction of its judgment award before the

insolvency court as its judgment award is a preferred credit under Article 2244 [44] of the Civil Code. To now

allow respondent have its way in annulling the auction sale and at the same time let it proceed with its claims

before the insolvency court would neither rhyme with reason nor with justice.

Parenthetically, respondent has not shown that it was prejudiced by the auction sale since theinsolvency court already determined that even if the mortgaged properties were foreclosed, there were still

sufficient, unencumbered assets of Terrymanila to cover the obligations owing to other creditors, including

that of respondents.[45]

In any event, even if respondent would have participated in the auction sale and matched petitioners

bid, the superiority of petitioners lien over the mortgaged assets would preclude respondent from recovering

the chattels.

It has long been settled by this Court that the right of those who acquire said properties should notand can not be superior to that of the creditor who has in his favor an instrument of mortgage executed

with the formalities of the law, in good faith, and without the least indication of fraud. x x x. In purchasing it,

with full knowledge that such circumstances existed, it should be presumed that he did so, very much willing

to respect the lien existing thereon, since he should not have expected that with the purchase, he would

acquire a better right than that which the vendor then had. (Emphasis and underscoring supplied)[46]

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It bears noting that the chattel mortgage in favor of petitioner was registered more than two

years before the issuance of a writ of attachment over some of Terrymanilas chattels in favor of respondent.

This is significant in determining who between petitioner and respondent should be given preference over the

subject properties. Since the registration of a chattel mortgage is an effective and binding notice to other

creditors of its existence and creates a real right or lien that follows the property wherever it may be ,[47] the

right of respondent, as an attaching creditor or as purchaser, had it purchased the mortgaged chattel at the

auction sale, is subordinate to the lien of the mortgagee who has in his favor a valid chattel mortgage.[48]

Contrary then to the appellate courts ruling, petitioner is not liable for constructive fraud for

proceeding with the auction sale. Nor for subsequently selling the chattel. For foreclosure suits may be

initiated even during insolvency proceedings, as long as leave must first be obtained from the insolvency

court[49] as what petitioner did.

The appellate courts award of exemplary damages and attorneys fees for respondent, given petitioners

good faith, is thus not warranted.

As for petitioners prayer for attorneys fees in its Compulsory Counterclaim, the same is in order, the

dismissal of respondents Complaint nowithstanding.[50] Perkin Elmer Singapore v. Dakila

Trading ,[51]

citing Pinga v. Heirs of German Santiago ,[52]

enlightens:

It bears to emphasize that petitioners counterclaim against respondent is for damages and attorneys feesarising from the unfounded suit. While respondents Complaint against petitioner is already dismissed,

petitioner may have very well incurred damages and litigation expenses such as attorneys fees since it

was forced to engage legal representation in the Philippines to protect its rights and to assert lack of

jurisdiction of the courts over its person by virtue of the improper service of summons upon it. Hence, the

cause of action of petitioners counterclaim is not eliminated by the mere dismissal of respondents

complaint.[53] (Underscoring supplied)

To the Court, the amount of P250,000 prayed for by petitioner in its Counterclaim is just and equitable, given

the nature and extent of legal services employed in controverting respondents unfounded claim.

WHEREFORE, the petition for review is GRANTED. The challenged Decision and Resolution of the Court

of Appeals are REVERSED and SET ASIDE. Civil Case No. 92-62106 lodged before the Regional Trial Court of

Manila, Branch 16, is DISMISSED for lack of merit.

Respondent, Royal Cargo Corporation, is ORDERED to pay petitioner, Rizal Commercial Banking

Corporation, P250,000 as and for attorneys fees.

No costs.

SO ORDERED.

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3.

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

REPUBLIC OF THE PHILIPPINES, represented by the Bureau of Customs and the Bureau ofInternal Revenue,petitioner,vs.

HONORABLE E.L. PERALTA, PRESIDING JUDGE OF THE COURT OF FIRST INSTANCE OFMANILA, BRANCH XVII, QUALITY TABACCO CORPORATION, FRANCISCO, FEDERACIONOBRERO DE LA INDUSTRIA TABAQUERA Y OTROS TRABAJADORES DE FILIPINAS (FOITAF)USTC EMPLOYEES ASSOCIATION WORKERS UNION-PTGWO, respondents.

The Republic of the Philippines seeks the review on certiorari of the Order dated 17 November 1980of the Court of First Instance of Manila in its Civil Case No. 108395 entitled "In the Matter of VoluntaryInsolvency of Quality Tobacco Corporation, Quality Tobacco Corporation, Petitioner," and of the

Order dated 19 January 1981 of the same court denying the motion for reconsideration of the earlierOrder filed by the Bureau of Internal Revenue and the Bureau of Customs for the Republic.

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

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

(ii) P53,805.05 by the Federacion de la Industria Tabaquera y Otros Trabajadores de Filipinas("FOITAF), as separation pay for their members, an amount similarly awarded by the NLRC in thesame NLRC Case.

(iii) P1,085,188.22 by the Bureau of Internal Revenue for tobacco inspection fees covering the period1 October 1967 to 28 February 1973;

(iv) P276,161.00 by the Bureau of Customs for customs duties and taxes payable on various

importations by the Insolvent. These obligations appear to be secured by surety bonds. 2 Some of theseimported items are apparently still in customs custody so far as the record before this Court goes.

In its questioned Order of 17 November 1980, the trial court held that the above-enumerated claimsof USTC and FOITAF (hereafter collectively referred to as the "Unions") for separation pay of theirrespective members embodied in final awards of the National Labor Relations Commission were to

be preferred over the claims of the Bureau of Customs and the Bureau of Internal Revenue. The trialcourt, in so ruling, relied primarily upon Article 110 of the Labor Code which reads thus:

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

the employer.

The Solicitor General, in seeking the reversal of the questioned Orders, argues that Article 110 of the

Labor Code is not applicable as it speaks of "wages," a term which he asserts does not includethe separation pay claimed by the Unions. "Separation pay," the Solicitor General contends,

is given to a laborer for a separation from employment computed on the basis of the number of years

the laborer was employed by the employer; it is a form of penalty or damage against the employer infavor of the employee for the latter's dismissal or separation from service . 3

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


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Wage' paid to any employee shall mean the remuneration or earnings, howeverdesignated, capable of being expressed in terms of money, whether fixed orascertained on a time, task, piece, or commission basis, or other method of calculating

the same, which is payable by an employer to an employee under a written or unwrittencontract of employment for work done or to be done, or for services rendered or to berendered, and includes the fair and reasonable value, as determined by the Secretary ofLabor, of board, lodging, or other facilities customarily furnished by the employer to theemployee. 'Fair and reasonable value' shall not include any profit to the employer or to

any person affiliated with the employer.(emphasis supplied)

We are unable to subscribe to the view urged by the Solicitor General. We note, in this connection,

that inPhilippine Commercial and Industrial Bank (PCIB) us. National Mines and Allied WorkersUnion, 4 the Solicitor General took a different view and there urged that the term "wages" under Article 110 of the LaborCode may be regarded as embracing within its scope severance pay or termination or separation pay. In PCIB, this Courtagreed with the position advanced by the Solicitor General. 5 We see no reason for overturning this particular position. Wecontinue to believe that, for the specific purposes of Article 110 and in the context of insolvency termination or separationpay is reasonably regarded as forming part of the remuneration or other money benefits accruing to employees or workersby reason of their having previously rendered services to their employer; as such, they fall within the scope of"remuneration or earnings— for services rendered or to be rendered — ." Liability for separation pay might indeed havethe effect of a penalty, so far as the employer is concerned. So far as concerns the employees, however, separation pay

is additional remuneration to which they become entitled because, having previously rendered services, they areseparated from the employer's service. The relationship between separation pay and services rendered is underscored bythe fact that separation pay is measured by the amount (i.e., length) of the services rendered. This construction issustained both by the specific terms of Article 110 and by the major purposes and basic policy embodied in the LaborCode. 6 It is also the construction that is suggested by Article 4 of the Labor Code which directs that doubts — assumingthat any substantial rather than merely frivolous doubts remain-in the interpretation of the provisions of the labor Code andits implementing rules and regulations shall be "resolved in favor of labor."

The resolution of the issue of priority among the several claims filed in the insolvency proceedingsinstituted by the Insolvent cannot, however, rest on a reading of Article 110 of the labor Code alone.

Article 110 of the Labor Code, in determining the reach of its terms, cannot be viewed in isolation.

Rather, Article 110 must be read in relation to the provisions of the Civil Code concerning theclassification, concurrence and preference of credits, which provisions find particular application ininsolvency proceedings where the claims of all creditors, preferred or non-preferred, may be

adjudicated in a binding manner. 7 It is thus important to begin by outlining the scheme constituted by theprovisions of the Civil Code on this subject.

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

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

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

(c) common credits under Article 2245.

Turning first to special preferred credits under Articles 2241 and 2242, it should be noted at once thatthese credits constitute liens or encumbrances on the specific movable or immovable property to

which they relate. Article 2243 makes clear that these credits "shall be considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governinginsolvency ." It should be emphasized in this connection that "duties, taxes and fees due [on specificmovable property of the insolvent] to the State or any subdivision thereof" (Article 2241 [1]) and"taxes due upon the [insolvent's] land or building (2242 [1])"stand first in preference in respect of theparticular movable or immovable property to which the tax liens have attached. Article 2243 is quiteexplicit: "[T]axes mentioned in number 1, Article 2241 and number 1, Article 2242 shall first besatisfied . " The claims listed in numbers 2 to 13 in Article 2241 and in numbers 2 to 10 in Articles2242, all come after taxes in order of precedence; such claims enjoy their privileged character as

liens and may be paid only to the extent that taxes have been paid from the proceeds of the specificproperty involved (or from any other sources) and only in respect of the remaining balance of suchproceeds. What is more, these other (non-tax) credits, although constituting liens attaching toparticular property, are not preferred one over another inter se. Provided tax liens shall have beensatisfied, non-tax liens or special preferred credits which subsist in respect of specific movable orimmovable property are to be treated on an equal basis and to be satisfied concurrently and


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proportionately. 8 Put succintly, Articles 2241 and 2242 jointly with Articles 2246 to 2249 establish a two-tier order ofpreference. The first tier includes only taxes, duties and fees due on specific movable or immovable property. All otherspecial preferred credits stand on the same second tier to be satisfied, pari passu and pro rata, out of any residual valueof the specific property to which such other credits relate.

Credits which are specially preferred because they constitute liens (tax or non-tax) in turn, takeprecedence over ordinary preferred credits so far as concerns the property to which the liens haveattached. The specially preferred credits must be discharged first out of the proceeds of the property

to which they relate, before ordinary preferred creditors may lay claim to any part of such proceeds.

9

If the value of the specific property involved is greater than the sum total of the tax liens and other

specially preferred credits, the residual value will form part of the "free property" of the insolv

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