TOP RATE INTERNATIONAL SERVICES, INC., PETITIONER, VS. INTERMEDIATE APPELLATE COURT AND RODRIGO TAN, DOING BUSINESS UNDER THE NAME AND STYLE “ASTRO AUTOMOTIVE SUPPLY”, RESPONDENTS.

Top Rate International Services versus Intermediate Appellate Court

The Case

This is a consolidated petition for review filed by Top Rate International Services, Incorporated against the Intermediate Appellate Court and Rodrigo Tan, doing business under the name and style Astro Automotive Supply, arising from two collection cases in which the plaintiff creditors caused the attachment of real properties registered in the name of Consolidated Mines, Incorporated. Top Rate, which had acquired those properties through a sale confirmed by an insolvency court, asked the Supreme Court to annul the appellate decisions that sustained the levies, arguing that the properties were worth far more than the debts being secured. The case matters because it fixes, in plain and memorable terms, the distinction between levying on property itself and levying on the judgment debtor's interest in that property — the equity of redemption — and it explains why such a levy can never be attacked as an over-levy.

Procedural History

Two separate collection suits were filed in the Court of First Instance of Manila. In the first, Rodrigo Tan sued Consolidated Mines, Incorporated and its president for the purchase price of heavy equipment, and a writ of preliminary attachment issued. In the second, Polaris Motor Supply Company sued the same defendants, and the trial court likewise ordered attachment. In both cases the trial court, after hearing, ordered the lifting of the levy on the two properties claimed by Top Rate, maintaining in the first case only the levy on a third property. The plaintiffs appealed to the Intermediate Appellate Court. The appellate court reversed the trial court in both cases and ordered the levies maintained, holding that what had been attached was not the properties themselves but only the vendor's equity of redemption. Top Rate then filed separate petitions before the Supreme Court, which, because the petitions raised identical issues, ordered their consolidation. The Supreme Court dismissed both petitions and affirmed the appellate decisions.

Facts

Consolidated Mines, Incorporated had earlier mortgaged its real and personal properties to a consortium of twelve banks under a deed executed in November 1978, registered in December 1978, to secure a very large dollar obligation. In 1981, two suppliers, Rodrigo Tan of Astro Automotive Supply and Polaris Motor Supply Company, sued the corporation and its president for unpaid purchase prices and obtained writs of preliminary attachment. The sheriff levied on the corporation's real properties and annotated the notices of levy on the transfer certificates of title, but these annotations came after the registered mortgage in favor of the consortium banks.

Meanwhile, the consortium banks foreclosed on the personal properties, which were sold to them as the highest bidder. In the insolvency proceedings involving the corporation, a sale of the two real properties to Top Rate International, as assignee of El Grande Development Corporation, was confirmed, and Top Rate thereupon filed third-party claims asking that the properties be discharged from the attachments. The trial courts initially lifted the levies, but the appellate court reversed, reasoning that the sale to Top Rate was really a sale by the mortgagor with the consent of the mortgagee banks, not an assignment of the banks' mortgage rights, and that the insolvency court had in any event dismissed the insolvency petition for lack of jurisdiction.

Top Rate then came to the Supreme Court, insisting that because the creditors' claims were only about 271,000 pesos and about 71,000 pesos while the properties were worth more than 40,000,000 pesos, the levies were an obvious over-levy that should be quashed.

Issues

• Whether or not the appellate court committed grave abuse of discretion in ruling that there was no over-levy because what was attached was not the properties themselves but only the mortgagor's equity of redemption.
• Whether or not the value of the equity of redemption may be equated with the actual value of the mortgaged properties for purposes of determining over-levy.

Applicable Provisions

Article 2088 of the Civil Code, cited by the appellate court and carried into the Supreme Court's discussion, provides:

The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.

This is the prohibition against pactum commissorium, the forbidden arrangement by which a mortgagee appropriates the mortgaged thing, and it explains why the banks could not simply sell the properties to Top Rate outside of foreclosure.

Ruling

On the first issue, the Court held that the appellate court committed no error. When the creditors prayed for attachment, the properties had already been mortgaged to the consortium of twelve banks. Like subsequent mortgagees, the creditors' liens were inferior to the banks' mortgage, which would have to be satisfied first in any foreclosure. What was actually attached, therefore, was merely the corporation's right or equity of redemption. The Court defined the terms with precision: equity of redemption is the right of the mortgagor to redeem the mortgaged property after default but before the sale or the confirmation of the sale, while the right of redemption is the right to repurchase even after confirmation of the sale, in cases of foreclosure by banks, within one year from registration of the sale. Levying on that interest required no physical taking of the property, for levying upon the property itself is distinguishable from levying on the judgment debtor's interest in it.

On the second issue, the Court rejected the argument that the levy was excessive because the properties were worth more than 40,000,000 pesos. The equity of redemption is an incorporeal and intangible right, the value of which can neither be quantified nor equated with the actual value of the properties upon which it may be exercised. It was error, therefore, to say that because the creditors' total lien was only about 343,000 pesos, they could not be entitled to the equity of redemption, since exercising that right would require payment of an amount not less than 40,000,000 pesos. There being no over-levy, the levies stood.

Doctrine

A levy on real property already mortgaged to a prior creditor reaches only the judgment debtor's equity of redemption, not the property itself, because the prior mortgage must first be satisfied. The equity of redemption is an incorporeal and intangible right whose value cannot be quantified or equated with the actual value of the property, so a levy on that interest cannot be assailed as an over-levy merely because the property is worth more than the judgment debt. And under Article 2088 of the Civil Code, a mortgagee may not appropriate or dispose of the mortgaged thing; any such stipulation is null and void as pactum commissorium.

Disposition

The petitions were dismissed for lack of merit, and the decisions of the appellate court sustaining the levies were affirmed; Top Rate lost.

Remember This

Memorize the line that what is attached in such cases is only the equity of redemption, an incorporeal right that can neither be quantified nor equated with the property's value. Examiners use this case to test the distinction between equity of redemption and right of redemption, and to test over-levy and pactum commissorium under Article 2088.