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

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 suras; 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 81, 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 Hos. 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 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.  But 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 Tondena, 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 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,—

“Alto 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 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. Be 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 surrogated 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 be 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 en 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 P8,507  (Exhibt 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.

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 re-open 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.