Title
La Tondena, Inc. vs. Alto Surety and Insurance Co., Inc.
Case
G.R. No. L-10132
Decision Date
Jul 18, 1957
Primitivo Ferrer defaulted on two chattel mortgages; La Tondena and Alto Surety disputed lien priority. Court ruled La Tondena's mortgage lien remained valid, Alto Surety's attachment illegal.
mortgage lien
foreclosure judgment
extension of time
A

Case Summary (G.R. No. 121683)

Parties, Property, and Origin of Liens

The record showed that on April 21, 1949, Primitivo P. Ferrer executed in favor of La Tondena, Inc. a second chattel mortgage over properties described in the complaint to secure payment of certain amounts. Some of these properties were already encumbered by a first mortgage in favor of Pedro Ruiz. The decision stressed that all mortgages were duly registered, which fixed their enforceability and lien character against third parties.

Pedro Ruiz’s Foreclosure and Ferrer’s Redelivery Through Surety

On August 18, 1949, Pedro Ruiz moved to foreclose the first mortgage, alleging Ferrer’s default. Ruiz also initiated court proceedings, including a case in the Court of First Instance of Pangasinan seeking replevin of the mortgaged properties due to Ferrer’s refusal to surrender them. Ferrer obtained release of the properties by furnishing a redelivery bond for P20,000, which was guaranteed by Alto Surety and Insurance Co., Inc. After trial, the Pangasinan court rendered judgment on December 1, 1950, ordering Ferrer to pay Ruiz P6,590.00 plus interest and attorneys’ fees. Ferrer eventually defaulted. Alto Surety paid Ruiz on June 19, 1952, thereby satisfying the first mortgagee’s claim.

La Tondena’s Second Mortgage Foreclosure and Sheriffs’ Levy

While Ruiz’s case was ongoing, La Tondena, Inc. filed its own foreclosure action against Ferrer on November 15, 1949, in the Court of First Instance of Manila, as case number No. 9658, seeking foreclosure of its second mortgage and recovery of various sums. On June 7, 1950, judgment was rendered ordering Ferrer to pay P7,122.49 plus interest and costs on account of the mortgage debt, with a decree for foreclosure if not paid within ninety days. Ferrer was likewise sentenced to pay P6,608.00 for the additional cause of action.

Because of the foreclosure decree, the Provincial Sheriff of Pangasinan levied on the mortgaged properties and advertised them for sale. The sale was repeatedly postponed. On December 13, 1950, upon request of Ferrer and to save custody fees, La Tondena directed the sheriff to release the properties from levy, but only on condition that Ferrer would satisfy the judgment by March 31, 1951. If he failed, La Tondena would proceed with foreclosure.

Alto Surety’s Attachments and the Interference With Foreclosure

On March 13, 1951, while the March 31, 1951 payment condition was still outstanding, Alto Surety filed complaints (civil cases Nos. 241 and 242) in the Court of First Instance of Baguio against Ferrer to recover bond premiums and indemnities it had paid for Ferrer’s account. Alto Surety also obtained writs of preliminary attachment.

On April 23, 1951, the Provincial Sheriff, at Alto Surety’s behest, attached the very properties previously mortgaged to La Tondena and which had been released from the earlier levy in the foreclosure proceedings pursuant to the December 13, 1950 arrangement. When Ferrer failed to pay by the end of March 1951, La Tondena secured an alias writ of execution on May 26. However, foreclosure sale could not proceed because the properties had meanwhile been attached by Alto Surety, and Alto Surety refused to lift its attachment.

Third-Party Claim, Indemnity Bond, and Sale at Alto Surety’s Instance

La Tondena responded by filing a third-party claim to the attached properties. Alto Surety then issued an indemnity bond in favor of the sheriff, guaranteed by Associated Insurance Company, to maintain its levy. On May 19, 1952, the goods were sold at auction at Alto Surety’s instance, and Alto Surety purchased the goods for P3,507.50.

Thereafter, La Tondena filed the present complaint for damages against Alto Surety, Associated Insurance Company, and the Provincial Sheriff of Pangasinan, imputing wrongful interference with its rights as second mortgagee.

Proceedings in the Court of First Instance and the Appeal

After trial, the Court of First Instance dismissed La Tondena’s complaint on three main grounds: first, that La Tondena’s release of the execution levy extinguished its lien and deprived it of preference; second, that the judgment of foreclosure was novated and extinguished by the extension of time and release of execution levy granted by La Tondena to Ferrer; and third, that because Alto Surety had paid off Pedro Ruiz’s first mortgage, Alto Surety became subrogated to Ruiz’s rights, thereby giving Alto Surety a priority superior to La Tondena’s second mortgage.

La Tondena appealed to the Supreme Court on points of law exclusively, challenging these determinations of lien priority and the legal effect of the release and extension arrangements.

The Parties’ Core Positions on Priority

La Tondena maintained that its mortgage lien derived from registration and remained enforceable and preferred despite the sheriff’s release of the earlier execution levy conditioned on Ferrer’s compliance. It likewise argued that the time extension and release of levy did not novate or extinguish the foreclosure judgment. Finally, it contended that Alto Surety’s payment of the first mortgage could not retroactively defeat La Tondena’s lien and priority as of the time Alto Surety levied its attachments.

Alto Surety and Associated Insurance Company, as appellees, defended the trial court’s reasoning. They insisted that the release of the levy had extinguished La Tondena’s lien; that the foreclosure judgment had been effectively extinguished by novation through the extension arrangement; and that Alto Surety’s subsequent payment of the first mortgage carried subrogation that improved Alto Surety’s priority over the second mortgage.

Legal Basis and Reasoning: No Extinction of the Registered Mortgage Lien

On the first assigned ground, the Supreme Court held that the trial court had misapprehended the legal nature of the rights involved. The Court emphasized that La Tondena’s position was anchored on its mortgage lien, which was independent of any lien arising from the levy. The Court acknowledged that where a creditor files an ordinary action instead of foreclosing, the creditor is deemed to have abandoned the mortgage under Bachrach Motor Co. vs. Icarangal, 68 Phil. 287, and Manila Trading and Supply Co. vs. Co Kim, 71 Phil. 448, among others. But that doctrine did not apply because La Tondena had precisely filed and pursued foreclosure of its mortgage. Thus, the Court concluded that La Tondena could not have waived its mortgage lien merely because the sheriff’s execution levy was discharged without satisfaction of the judgment.

The Court reasoned that the attachment later levied by Alto Surety would have been subordinate to La Tondena’s registered mortgage if La Tondena had not even taken execution. It saw no legal basis to afford Alto Surety a better position when an execution levy had been made and later lifted. The Court rejected the idea that a judgment lien merged into or absorbed the mortgage lien. It explained that the judgment lien depends on the levy, while the mortgage lien depends on registration, and that the mortgage’s purpose is to ensure that the debt judgment remains collectible from the mortgaged property. It therefore held that the mortgage lien could not be treated as functus officio until the foreclosure judgment was consummated by sale and satisfaction.

In support of its view, the Court cited American jurisprudence quoted in the decision: that “a decree of foreclosure does not merge the lien of the mortgage until it has been consummated by sale and satisfaction,” and that the decree does not destroy the mortgage lien but judicially determines its amount.

Legal Basis and Reasoning: No Novation by Extension of Time

On the second ground, the Court held that the trial court’s novation conclusion was contrary to prevailing jurisprudence. The Court relied on Zapanta vs. De Rotaeche, 21 Phil. 154, and Inchausti vs. Yulo, 34 Phil. 978, which required intent to novate (animus novandi) to be either expressed or clearly apparent from incompatibility “on all points” between the old and new obligations (as reflected in the decision’s quoted references to Art. 1204 of the Civil Code of 1889 and Art. 1292 of the new Civil Code).

The Supreme Court found that the later arrangement between La Tondena and Ferrer recognized that the foreclosure judgment continued to be in force. The agreement was that if Ferrer did not pay by March 31, 1951, La Tondena would proceed with execution. The Court applied the reasoning reflected in Zapanta vs. De Rotaeche: the contract did not extinguish the obligations in the judgment but instead provided a method and more time for satisfaction, delaying only the right to execution, and leaving the original obligations subsisting until fully complied with.

The Court also added a statutory consistency point. It held that extension of time does not constitute extinctive novation because the law treated extension as a special ground for discharge of guaranty in Article 1851 of the old Code (reflected as Article 2079 in the decision’s quotation), even though the general provisions on guaranty discharge (as referenced by the decision to Article 1847, now Article 2076) already list grounds that would naturally include novation. This statutory structure would be unnecessary if extension of time were itself a novation.

Legal Basis and Reasoning: Subrogation Could Not Defeat the Second Mortgage as of Attachment Time

On the third argument, the Supreme Court ruled against appellees on the timing and conditions of subrogation. It held that legal subrogation occurs upon payment of the first mortgage: under Civil Code of 1889, Article 1210, and the new Civil Code’s Article 1302, Alto Surety could not claim subrogation superior to La Tondena’s lien until it actually paid the first mortgage. The decision found that Alto Surety did not begin paying Pedro Ruiz’s mortgage until March 1952, and it completed payment only on June 19, 1952, while Alto Surety’s attachment on the relevant properties occurred i

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