EN BANC

[G.R. No. L-10132. July 18, 1957.]

LA TONDEÑA, INC., plaintiff-appellant, vs. ALTO SURETY &

INSURANCE CO., INC., ET AL., defendants-appellees.

Manuel V. San Jose and Arturo B. Christi for appellant.

Sinai C. Hamada and Guillermo F. de Guzman for appellees.

SYLLABUS

1. MORTGAGE; DISCHARGE OF MORTGAGE LIEN; LIEN SUBSISTS AS

LONG AS FORECLOSURE JUDGMENT IS NOT SATISFIED. — Where the
mortgage has not been waived, actually or constructively, the mortgage hen
could not be deemed released merely because the execution levy was
discharged without the credit being satisfied. The theory that the judgment
lien merged or absorbed (and thereby extinguished) the mortgage lien
ignores the fact that the judgment lien depends upon the levy but that of the
mortgage is based upon its registration; and that the very purpose of the
mortgage lien is precisely to assure that a judgment for the amount of the
debt will remain collectible and will be satisfied from the proceeds of the
mortgaged property; hence, the purpose of the mortgage lien would be
defeated unless it is allowed to stand as long as the foreclosure judgment is
in force and is not satisfied. Until then the mortgage can not become functus
officio .
2. ID.; NOVATION; EXTENSION OF TIME TO PAY OBLIGATION IS NOT
NOVATION; WHEN OBLIGATION IS EXTINGUISHED BY NOVATION. — The act
of giving a debtor more time to pay on obligation is not a novation that will
extinguish the original debt. In order to extinguish or discharge an obligation
by novation the intent of the parties to do so (animus novandi) must be
either expressed or else clearly apparent from the incompatibility "on all
points" of the old and the new obligations (Article 1204, Civil Code of 1889;
Article 1292, new Civil Code). In the case at bar, the subsequent agreement
of the parties did not contain provisions incompatible with the obligation of
the judgment, as the parties clearly recognized that the judgment of
foreclosure continued to be in force, because the arrangement was that if
the judgment debtor did not pay until the time granted him, the creditor
would ask for the execution of the judgment.
3. ID.; SUBROGATION OF RIGHTS BY PAYING MORTGAGE DEBT;
PREFERENCE OF CREDITORS. — As the subrogation in favor of the surety
company (by virtue of its payment of the first mortgage) did not yet exist
when said company obtained an attachment of the mortgaged properties, its
CD Technologies Asia, Inc. © 2021 cdasiaonline.com
 rights cannot be held superior to the lien of the second mortgagee. The
latter was entitled to seize and sell the security under its foreclosure
judgment, altho subject to the first mortgage. The refusal of the surety
company to surrender the mortgaged property being wrongful, it is liable for
damages.

DECISION

REYES, J.B.L., J : p

This appeal involves a question of priority between creditors that the

Court of First Instance of Manila resolved in favor of the appellee Alto Surety
and Insurance Co., Inc.

It appears that on April 21, 1949, one Primitivo P. Ferrer executed in

favor of La Tondeña, Inc., a second chattel mortgage upon certain properties
described in the complaint, to guarantee payment of certain amounts. Some
of these properties were already subject to a first mortgage in favor of one
Pedro Ruiz. All mortgages were duly registered.
On August 18, 1949, Pedro Ruiz sought foreclosure of the first
mortgage in his favor, alleging default by the mortgagor Ferrer; and in view
of the latter's refusal to surrender the properties mortgaged, Ruiz started
action in court (Case No. 10880 of the Court of First Instance of Pangasinan)
and asked for their replevin. However, Ferrer secured their release by means
of a redelivery bond for P20,000, guaranteed by the Alto Surety and
Insurance Co. The case having been tried, the court rendered judgment on
December 1, 1950, sentencing Ferrer to pay Ruiz P6,590.00 plus interest
and attorneys' fees. As Ferrer defaulted, the Alto Surety paid for him on June
19, 1952.
While this first case was still pending, La Tondeña, Inc. instituted court
proceedings against Ferrer on November 15, 1949 (No. 9658 of the Court of
First Instance of Manila to foreclose its second mortgage and to recover
various other sums; and on June 7, 1950, judgment was rendered sentencing
Ferrer to pay P7,122.49 plus interest and costs on account of the mortgage
debt, with a decree for its foreclosure if not paid within ninety days. Ferrer
was also sentenced to pay P6,608.00 on the other cause of action. In view of
the foreclosure decree the Provincial Sheriff of Pangasinan levied on the
mortgaged properties and advertised them for sale. The sale was postponed
from time to time, until on December 13,1950, upon request of Ferrer and to
save him the custody fees, plaintiff directed the sheriff to release the
properties from levy, on condition that Ferrer would satisfy the judgment by
March 31, 1951, and should he fail to do so, La Tondeña would be at liberty
to proceed with the foreclosure.
On March 13, 1951, the Alto Surety filed complaints (Civil Cases Nos.
241 and 242 of the Court of First Instance of Baguio) against Ferrer to
recover bond premiums and indemnities paid for his account, and secured
CD Technologies Asia, Inc. © 2021 cdasiaonline.com
 writs of preliminary attachment. Then on April 23, 1951 the Provincial
Sheriff, at the behest of Alto Surety, attached the very properties mortgaged
by Ferrer to La Tondeña, Inc., and which had been the subject of the writ of
execution released as heretofore narrated.
Ferrer not having paid his debt to La Tondeña at the end of March
1951, as stipulated, the mortgagee obtained an alias writ of execution of the
judgment in its favor on May 26. Put as the properties had been in the
meantime attached by Alto Surety, and Alto Surety refused to lift its
attachment, the foreclosure sale could not proceed. La Tondeña then filed
with the Sheriff a third party claim to the property; the Alto Surety in turn
issued an indemnity bond in favor of the Sheriff, guaranteed by the
Associated Insurance Company, to maintain its levy; and on May 19, 1952,
the goods were sold at auction at the instance of Alto Surety and purchased
by the same for P3,507.50.
Thereupon La Tondeña, Inc. filed the present complaint for damages
against Alto Surety, the Associated Insurance Co., and the Provincial Sheriff
of Pangasinan. After due trial, the Court of First Instance dismissed the
complaint on the ground that (1) the release of the levy originally made by
the Sheriff in the foreclosure proceedings of La Tondeña's mortgage,
extinguished its lien on the goods, and deprived it of preference; (2) that the
judgment of foreclosure was novated and extinguished by extension of time
and release of execution levy granted by La Tondeña to Ferrer; and (3) that
since Alto Surety had paid off the claims of the first mortgagee, Pedro Ruiz,
the surety company became subrogated to the rights of the first mortgagee,
and therefore Alto Surety's rights became superior to those of the second
mortgagee La Tondeña, Inc. The latter appealed the judgment to this Court
on points of law exclusively.
1. As to the alleged extinction of the lien of La Tondeña because of its
release of the execution levy, the court below appears to have missed the
fact that La Tondeña held a mortgage lien, independent of that arising from
the levy. It is true that if the creditor, instead of foreclosing the mortgage,
files an ordinary action against the mortgagor, the creditor is deemed to
have abandoned the mortgage (Bachrach Motor Co. vs. Icarañgal, 68 Phil.
287; Manila Trading and Supply Co. vs. Co Kim, 71 Phil. 448 and cases cited).
But that is not the case now, for La Tondeña here precisely sued for the
foreclosure of the mortgage in its favor, and can not have intended to
abandon its mortgage.
It is apparent that, not having been waived actually or constructively,
the mortgage lien held by La Tondeña could not be deemed released merely
because the execution levy was discharged without the credit being
satisfied. Had La Tondeña not secured a writ of execution on its foreclosure
judgment, undeniably the attachment levied at the behest of Alto Surety
would have been subordinate to the registered mortgage in favor of La
Tondeña and would not supersede it. We see no reason why Alto Surety
should be in a better position when an execution levy is made and later
lifted than in the case where no such levy at all is had.
The theory that the judgment lien merged or absorbed (and thereby
CD Technologies Asia, Inc. © 2021 cdasiaonline.com
 extinguished) the mortgage lien ignores the fact that the judgment lien
depends upon the levy but that of the mortgage is based upon its
registration; and that the very purpose of the mortgage lien is precisely to
assure that a judgment for the amount of the debt will remain collectible and
will be satisfied from the proceeds of the mortgaged property; hence, the
purpose of the mortgage lien would be defeated unless it is allowed to stand
as long as the foreclosure judgment is in force and is not satisfied. Until then
it can not be contended as appellees do, that the mortgage has become
functus officio. Wherefore, as stated in American Jurisprudence, Vol. 37, p.
79, section 596, —
"Altho there is some conflict on the question, the weight of
authority favors the doctrine that a decree of foreclosure does not
merge the lien of the mortgage until it has been consummated by sale
and satisfaction. The decree does not, it has been said, destroy the lien
of the mortgage but, rather, judicially determines the amount thereof."
2. The ruling of the court below, that the act of La Tondeña, Inc. in
dissolving the execution levy and giving its debtor until March 31, 1951,
wherein to pay, constitutes a novation that extinguished the original
judgment, is contrary to the rulings of this Court in Zapanta vs. De Rotaeche,
21 Phil. 154 and Inchausti vs. Yulo, 34 Phil. 978. In both cases, this Court
ruled that in order to extinguish or discharge an obligation by novation the
intent of the parties to do so (animus novandi) must be either expressed or
else clearly apparent from the incompatibility "on all points" of the old and
the new obligations (Art. 1204, Civil Code of 1889; Article 1292, new Civil
Code); and that the act of giving a debtor more time to pay an obligation is
not a novation that will extinguish the original debt. As in the De Rotaeche
case, the subsequent arrangement between La Tondeña and the judgment
debtor Ferrer clearly recognized that the judgment of foreclosure continued
to be in force, because the arrangement was that if Ferrer did not pay until
March 31st, 1951, La Tondeña, Inc. would ask for the execution of the
judgment.

"In the present case, the contract referred to does not expressly
extinguish the obligations existing in said judgment. Upon the contrary
it expressly recognizes the obligations existing between the parties in
said judgment and expressly provides a method by which the same
shall be extinguished, which method is, as expressly indicated in said
contract, by monthly payments. The contract, instead of containing
provisions 'absolutely incompatible' with the obligations of the
Judgment, expressly ratifies such obligations and contains provisions
for satisfying them. The said agreement simply gave the plaintiff a
method and more time for the satisfaction of said judgment. It did not
extinguish the obligations contained in the judgment, until the terms of
said contract had been fully complied with. Had the plaintiff continued
to comply with the conditions of said contract, he might have
successfully invoked its provisions against the issuance of an execution
upon the said judgment. The contract and the punctual compliance
with its terms only delayed the right of the defendant to an execution
upon the judgment. The judgment was not satisfied and the obligations
CD Technologies Asia, Inc. © 2021 cdasiaonline.com
 existing thereunder still subsisted until the terms of agreement had
been fully complied with. The plaintiff was bound to perform the
conditions mentioned in said contract punctually and fully, in default of
which the defendant was remitted to the original rights under his
judgment." (Zapanta vs. De Rotaeche, supra.).
That an extension of time does not constitute extinctive novation is
evident from the fact that extension had to be made a special ground for the
extinguishment of the contract of guaranty in Article 1851 of the old Code
(Article 2079 new Civil Code) notwithstanding that Article 1847 (now 2076)
applies or guaranty the same grounds that extinguish all other obligations,
naturally including novation. If the extension of the period for payment were
included in novation, Article 1851 (now 2079), making it a separate ground
of discharge would be unnecessary.
3. The last argument for the appellees is that, by paying off the first
mortgage of Pedro Ruiz, Alto Surety became legally subrogated to the rights
of the first mortgagee. This stand fails to take into account that such
subrogation only occurs upon payment of the first mortgage (Civil Code of
1889, Article 1210; new Civil Code, Article 1302), and that Alto Surety did
not begin paying off the first mortgage until March 1952, nor complete its
payment until June 19, 1952, while its attachment was levied one year
before, in April of 1951. The complaint upon which Alto Surety obtained the
attachment in question was not for the foreclosure of first mortgage, and in
fact, did not even allege that the first mortgage had been paid by Alto
Surety. Hence, the subrogation in its favor did not exist when the attachment
was levied, nor make the latter superior to the lien of the second mortgagee,
La Tondeña, Inc., as of the time of the attachment; nor would it justify the
refusal of the appellees to allow the foreclosure sale to proceed, or their
rejection of the third party claim filed by the second mortgagee on
September 5, 1951. As of the latter date, La Tondeña, Inc. was already
entitled to seize and sell the security (of course, subject to the first
mortgage), and the attaching creditor, Alto Surety, had only a lien
subordinate to that of its opponent. The refusal to surrender the mortgaged
property being evidently wrongful, the appellees are liable for damages.
As to the extent of such damages, there is no evidence on record other
than the third party claim of La Tondeña, asserting that the goods attached
by Alto Surety were worth not less than P7,500; the indemnity bond
subscribed by both Alto Surety and Associated Insurance and Surety Co., in
the sum of P7,500; and that the attached goods were sold at the instance of
Alto Surety, and purchased by it at P3,507 (Exhibit 14-Alto). Since the
appellant did not petition for an increase of the indemnity bond, it is
inferable that it was agreeable that the goods attached were not worth
more. Considering that La Tondeña was not entitled to the ownership of the
disputed goods, but only claimed the right to seize and sell them at public
auction subject to the first mortgage, and there being no other pertinent
evidence, we believe that there is no basis at present for assessing the the
appellant's damages. As this failure appears due to the concentration of the
parties on the main legal question of preference, equity justifies a reopening
of the case to admit evidence on the particular issue of damages.
CD Technologies Asia, Inc. © 2021 cdasiaonline.com
 In view of the foregoing, the decision appealed from is reversed, and
the attachment levied on the goods in question by the appellee Alto Surety
and Insurance Co. is declared illegal and void. The records are ordered
remanded to the court of origin with instructions to reopen the case and
receive evidence on the question of damages caused by the illegal
attachment. Costs in this instance shall be taxed against the appellees, Alto
Surety and Insurance Co. and Associated Insurance Co. So ordered.
Paras, C.J., Bengzon, Padilla, Montemayor, Bautista Angelo, Labrador,
Concepcion and Endencia, JJ., concur.

CD Technologies Asia, Inc. © 2021 cdasiaonline.com