Case Summary (G.R. No. 120098)
Factual Background
• November 26, 1975: PBCom advances ₱3,000,000 to EVERTEX secured by a “Real and Chattel Mortgage” over factory land (TCT No. 372097), buildings, improvements and enumerated machinery (Annex A).
• April 23, 1979: PBCom grants an additional ₱3,356,000, secured by a pure chattel mortgage over machinery similar to those in the 1975 mortgage.
• Post-1979: EVERTEX acquires additional machines and equipment.
Insolvency Proceedings and Extrajudicial Foreclosure
• November 19, 1982: EVERTEX files for insolvency (SP Proc. No. LP-3091-P); November 24, 1982: Court declares insolvency and seizes all assets, including mortgaged collateral.
• December 1, 1982: PBCom initiates extrajudicial foreclosure under Act 3135 and Act 1506.
• December 15 and 23, 1982: Two sheriff’s auctions are held; PBCom is highest bidder and certificates of sale are issued.
• March 7, 1984: PBCom consolidates ownership of the lot and all factory properties.
Lease and Sale to Tsai
• November 1986: PBCom leases the factory premises (including machinery) to Tsai for ₱50,000/month.
• May 3, 1988: PBCom sells the entire factory “lock, stock and barrel” to Tsai for ₱9,000,000, purportedly including disputed machinery.
Trial Court Proceedings
• March 16, 1989: EVERTEX (through Villaluz) files for annulment of sale, reconveyance, and damages, alleging that foreclosure and sale violated the Insolvency Law and that certain 1981-acquired machines were not covered by the mortgages or notices of sale.
• RTC Decision:
- Annuls sale of contested machines and orders return to EVERTEX.
- Awards actual damages (₱5,200,000 for use and possession from November 1986 to February 1991, plus ₱100,000/month thereafter with legal interest).
- Awards attorney’s fees (₱50,000) and exemplary damages (₱200,000).
- Dismisses counterclaim and allocates costs.
Court of Appeals Decision
• August 31, 1994: Affirms RTC except:
– Deletes exemplary damages award.
– Reduces actual damages to ₱20,000/month from November 1986 until restoration of machines.
• Denies motions for reconsideration (April 28, 1995).
Issues on Review
Tsai (G.R. 120098) contends that the 1981 machines:
I. Were improperly treated as chattels rather than immovables under the 1975/1979 mortgages;
II. Were erroneously excluded from foreclosure despite after-acquired-property clauses;
III. Were buyers in bad faith;
IV. Lacked basis for actual damages, attorney’s fees, exemplary damages;
V. Prescription and laches defenses were mishandled.
PBCom (G.R. 120109) argues that:
I. Disputed machines were realty intended by contract and real-estate mortgage;
II. Having held and maintained machines in good faith, it should not be compelled to reconvey or pay damages (unjust enrichment).
Applicable Law
• 1987 Constitution (decision post-1990)
• Act 3135 (Sale under special power in real-estate mortgages)
• Act 1506 (Chattel Mortgage Law), Sec. 7 (mortgage covers only listed property, excludes after-acquired substitutions)
• Civil Code Art. 415(3) & (5) (classification of immovables)
• Rule 45, Revised Rules of Court (certiorari limited to errors of law)
• Civil Code Art. 2216 (exemplary damages discretionary)
Nature of the Disputed Machines
• Both RTC and CA found that the parties intended all machinery to be treated as chattels, not immovables.
• The 1975 “Real and Chattel Mortgage” form, supplemented by typed “machineries and equipment” in Schedule A, and the separate 1979 chattel mortgage inventory, demonstrate this intent.
• Under Act 1506, Sec. 7, after-acquired machinery (1981 acquisitions) was not covered by the originals; their inclusion in the foreclosure was void, and PBCom acquired no title.
Good Faith Purchase and Torrens Title
• Tsai had actual notice of EVERTEX’s claim (letter dated February 27, 1987) yet bought in May 1988; she is not a purchaser in good faith.
• Torrens-title indefeasibility does not extend to chattels located on mortgaged land.
Prescripti
Case Syllabus (G.R. No. 120098)
Procedural History
- Consolidation of G.R. No. 120098 (Tsai) and G.R. No. 120109 (PBCom), both challenging the Court of Appeals’ decision in CA-G.R. CV No. 32986 and its denial of motions for reconsideration.
- Underlying Civil Case No. 89-48265 was decided by the Regional Trial Court (RTC) of Manila, Branch 7.
- Both petitions invoke Rule 45 of the Revised Rules of Court, asserting errors of law in the appellate ruling.
Facts of Loan and Mortgages
- On November 26, 1975, Ever Textile Mills, Inc. (EVERTEX) obtained a ₱3,000,000 loan from Philippine Bank of Communications (PBCom), secured by a Real and Chattel Mortgage over Lot under TCT No. 372097 (factory site) and enumerated machinery.
- Annex A listed machinery and equipment: 48 Vayrow knitting machines (Hong Kong), 16 Vayrow sets (Taiwan), 2 circular knitting machines (West Germany), and 4 winding machines.
- Schedule “A” reiterated TCT No. 372097, all present and future buildings, the same machinery list, replacements and additions.
- On April 23, 1979, PBCom extended a second loan of ₱3,356,000, secured by a Chattel Mortgage covering a similar inventory of machinery.
Insolvency and Extrajudicial Foreclosure
- On November 19, 1982, EVERTEX filed insolvency proceedings (SP Proc. No. LP-3091-P); CFI declared insolvency on November 24, 1982, placing all assets under court custody.
- PBCom invoked Act 3135 (real estate foreclosure) and Act 1506 (chattel mortgage foreclosure).
- Notices of Sheriff’s Sale issued December 1, 1982; public auctions on December 15 and 23, 1982; PBCom was highest bidder on both occasions, receiving Certificates of Sale.
Subsequent Transactions
- March 7, 1984: PBCom consolidated ownership of the mortgaged real and personal properties.
- November 1986: PBCom leased the entire factory premises (including machinery) to Ruby L. Tsai for ₱50,000 per month.
- May 3, 1988: PBCom sold factory, lock, stock and barrel—including the contested machinery—to Tsai for ₱9,000,000.
RTC Complaint and Judgment
- March 16, 1989: EVERTEX sued for annulment of sale, reconveyance and damages, alleging that 1981-acquired machinery (14 interlock circular knitting machines, jet drying equipment, dryer, raisin and heatset equipment valued at ₱4,000,000) were not covered by the original mortgages nor by the Sheriff’s sale.
- RTC held the lease and sale of those machines irregular and illegal, annulled the sale as to those items and ordered:
- Reconveyance of the disputed personal properties to EVERTEX (through its assignee) within ten days of finality.
- Payment of ₱5,200,000 actual damages (rent