Title
Union Bank of the Philippines vs. Alain Juniat, et al.
Case
G.R. No. 171569
Decision Date
Aug 1, 2011
Union Bank filed a lawsuit for a sum against Juniat and companies for unpaid debt secured by equipment. The RTC ruled in favor of Union Bank, but the Court of Appeals reversed it, granting Nonwoven entitlements. Supreme Court reversed CA's ruling, reinstating RTC's decision.
pledge
chattel mortgage
preliminary attachment
A

Case Summary (G.R. No. 171569)

Facts Leading to the RTC Action

On April 11, 1992, Juniat, acting for and in behalf of Winwood and Wingyan, executed a promissory note and, as additional security, executed a Continuing Surety Agreement in favor of Union Bank. Earlier, on March 27, 1992, Juniat executed a Chattel Mortgage over several motorized sewing machines and allied equipment to secure the export bills transaction obligations to Union Bank in the amount of P1,131,134.35.

On September 3, 1992, Union Bank filed with the RTC of Makati, Branch 57 a complaint seeking ex-parte writs of preliminary attachment and replevin against Juniat, Winwood, Wingyan, and the person in possession of the mortgaged machines and equipment. Union Bank alleged that the loan remained unpaid and that the mortgaged machines were insufficient to cover the obligation. On September 10, 1992, the RTC issued the writs, which the sheriff served upon Nonwoven because Nonwoven was in possession of the motorized sewing machines and equipment. Although Nonwoven was not impleaded as a defendant in the complaint, the RTC nonetheless caused summons to be served on it due to its possession of the properties.

On September 28, 1992, Nonwoven filed an Answer, contending that the unnotarized chattel mortgage executed in favor of Union Bank had no binding effect on Nonwoven. Nonwoven asserted that it had a better title because the machines and equipment had been assigned to it by Juniat pursuant to an agreement dated May 9, 1992. Juniat, Winwood, and Wingyan, however, were declared in default for failure to file an answer within the prescribed period.

Seizure, Sale of the Chattels, and RTC Determination

After the writs were issued, Union Bank moved on November 23, 1992 to sell the chattels seized by replevin to prevent depreciation. Before the RTC could act, Union Bank sold the attached properties on May 18, 1993 for P1,350,000.00.

Nonwoven later moved to cite Union Bank’s officers in contempt for selling the attached properties, but the RTC denied the motion on the ground that Union Bank had acted in good faith.

On May 20, 1999, the RTC of Makati (Branch 145) rendered judgment in favor of Union Bank. The RTC held that both the chattel mortgage in favor of Union Bank (dated March 27, 1992) and the Agreement dated May 9, 1992 were not binding on third persons because neither document was notarized. Nevertheless, because the Union Bank chattel mortgage was executed earlier, the RTC applied the doctrine “first in time, stronger in right” ( priuss tempore, potior jure ) and ruled that Union Bank had the better right over the machines and equipment and, correspondingly, the proceeds of the sale. The RTC awarded Union Bank the proceeds of P1,350,000.00, declared Juniat, Winwood, and Wingyan jointly and severally liable for the deficiency, imposed legal interest at 12% per annum from the date of judgment until fully paid, and awarded P50,000.00 as reasonable attorneys’ fees, plus costs.

Nonwoven moved for reconsideration, which the RTC denied in an Order dated July 14, 1999.

The CA’s Reversal and Nonwoven’s Theory on Appeal

On appeal, the CA reversed the RTC. The CA ruled that the contract between Juniat and Nonwoven was valid and binding, and that the motorized sewing machines and equipment had been ceded to Nonwoven by way of dacion en pago. Consequently, the CA held that Nonwoven was entitled to the proceeds of the sale, which it described as an amount in escrow realized from the May 18, 1993 sale. The CA’s dispositive portion directed Union Bank to pay Nonwoven P1,350,000.00, with no pronouncement on costs.

Issues Raised in the Supreme Court

Union Bank sought certiorari review and framed the issues in substance as whether the CA committed reversible error in (1) setting aside the RTC ruling that Union Bank had a better right over the seized machines and/or the sale proceeds, and (2) holding that Nonwoven had a valid claim over the subject sewing machines.

Positions of the Parties Before the Court

Union Bank insisted that it had the better title to the proceeds. It acknowledged that its chattel mortgage was not notarized, yet argued that it remained valid and, in any case, it had preference over Nonwoven’s later agreement. Union Bank further contended that Nonwoven presented no adequate evidence showing that the motorized machines and equipment were actually transferred to Nonwoven.

Nonwoven, on the other hand, relied on Article 1544 of the Civil Code on double sale, contending that, by analogy, it should be treated as the party with the better right. It asserted that its prior possession was in good faith. Nonwoven also maintained that Union Bank’s claim to the proceeds was defective because the chattel mortgage in its favor was unnotarized, unregistered, and lacked an affidavit of good faith.

Supreme Court’s Analysis: Failure to Bind Third Persons and the Nature of the Agreement

The Supreme Court held that the unnotarized chattel mortgage executed by Juniat for Winwood and Wingyan in favor of Union Bank did not bind Nonwoven as a third party, in line with the controlling effect-of-pledge rule under the Civil Code.

However, the Court clarified that Union Bank’s primary cause of action was not a direct effort to enforce the chattel mortgage as an instrument binding upon Nonwoven. Union Bank sued for a sum of money coupled with a prayer for ex-parte writs of attachment and replevin against Juniat, Winwood, Wingyan, and the person in possession of the properties. Because the RTC had issued writs of attachment and replevin, the Court reasoned that Nonwoven, as possessor and claimant against the attachment and replevin, had the burden to prove that it had a better right of possession or ownership over the attached properties. The Court found that Nonwoven failed to discharge this burden.

In assessing Nonwoven’s asserted basis, the Court examined the Agreement dated May 9, 1992, which stated that Nonwoven would receive certain sewing machines, snap machines, and boilers as guarantee for settlement of accounts, while delivery to Winwood and Wingyan would resume in the meantime. The Court applied Article 2096 of the Civil Code, which provides that a pledge does not take effect against third persons if the description of the thing pledged and the date of the pledge do not appear in a public instrument. Thus, the Court concluded that the pledge executed by Juniat in favor of Nonwoven likewise could not bind Union Bank as a third party.

The Court rejected the CA’s characterization that the machines were ceded to Nonwoven via dacion en pago, stressing that no evidence had been presented to show that the attached properties were subsequently sold or transferred to Nonwoven as payment for the obligation of Winwood and Wingyan. The Court also found nothing in the May 9, 1992 Agreement indicating that the machines, snap machines, and boilers were ceded to Nonwoven as payment for the obligations.

The Court further emphasized a fundamental distinction: there can be no transfer of ownership if the delivery of the property to the creditor is by way of security. It also invoked the presumption that, in case of doubt whether a transaction is a pledge or a dacion en pago, the law presumes a pledge, since it involves a le

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