PERFECTO DY, JR., PETITIONER, VS. COURT OF APPEALS, GELAC TRADING INC., AND ANTONIO V. GONZALES, RESPONDENTS.

This is a petition for review on certiorari seeking the reversal
of the March 23, 1990 decision
of the Court of Appeals which ruled that the petitioner’s purchase of a farm
tractor was not validly consummated and ordered a complaint for its recovery
dismissed.

The facts as established by the records are as follows:

The petitioner, Perfecto Dy and Wilfredo Dy are brothers.  Sometime in 1979, Wilfredo
Dy purchased a truck and a farm tractor through
financing extended by Libra Finance and Investment Corporation (Libra).  Both truck and tractor were mortgaged to Libra
as security for the loan.

The petitioner wanted to buy the tractor from his brother so on
August 20, 1979, he wrote a letter to Libra requesting that he be allowed to
purchase from Wilfredo Dy
the said tractor and assume the mortgage debt of the latter.

In a letter dated August 27, 1979, Libra thru its manager, Cipriano Ares approved the petitioner’s request.

Thus, on September 4, 1979, Wilfredo Dy executed a deed of absolute sale in favor of the
petitioner over the tractor in question.

At this time, the subject tractor was in the possession of Libra
Finance due to Wilfredo Dy’s
failure to pay the amortizations.

Despite the offer of full payment by the petitioner to Libra for
the tractor, the immediate release could not be effected
because Wilfredo Dy had
obtained financing not only for said tractor but also for a truck and Libra
insisted on full payment for both.

The petitioner was able to convince his sister, Carol Dy-Seno, to purchase the truck so that full payment could
be made for both.  On November 22, 1979,
a PNB check was issued in the amount of
P22,000.00 in favor of Libra, thus settling in full
the indebtedness of Wilfredo Dy
with the financing firm.  Payment having
been effected through an out-of-town check, Libra insisted that it be cleared
first before Libra could release the chattels in question.

Meanwhile, Civil Case No. R-16646
entitled “Gelac Trading, Inc. v. Wilfredo Dy“, a collection
case to recover the sum of P12,269.80 was pending in
another court in Cebu.

On the strength of
an alias writ of execution issued on December 27, 1979, the provincial sheriff
was able to seize and levy on the tractor which was in the premises of Libra in
Carmen, Cebu. 
The tractor was subsequently sold at public auction where Gelac Trading was the lone bidder.  Later, Gelac sold
the tractor to one
of its stockholders, Antonio Gonzales.

It was only when the check was cleared on January 17, 1980 that
the petitioner learned about GELAC having already taken custody of the subject
tractor.  Consequently, the petitioner
filed an action to recover the subject tractor against GELAC Trading with the
Regional Trial Court of Cebu City.

On April 8, 1988, the RTC rendered judgment in favor of the
petitioner.  The dispositive portion of the decision reads as
follows:

“WHEREFORE, judgment is hereby rendered in favor of the
plaintiff and against the defendant, pronouncing that the plaintiff is the
owner of the tractor, subject matter of this case, and directing the defendants
Gelac Trading Corporation and Antonio Gonzales to
return the same to the plaintiff herein; directing the defendants jointly and
severally to pay to the plaintiff the amount of P1,541.00 as expenses for hiring a tractor; P50,000 for moral
damages; P50,000 for exemplary damages;
and to pay the cost.” (Rollo, pp. 35-36)

On appeal, the Court of Appeals reversed the decision of the RTC
and dismissed the complaint with costs against the petitioner.  The Court of Appeals held that the tractor in
question still belonged to Wilfredo Dy When it was seized and levied
by the sheriff by virtue of the alias writ of execution issued in Civil Case
No. R-16646.

The petitioner now comes to the Court raising the following
questions:

A.

“WHETHER OR NOT THE HONORABLE COURT OF APPEALS MIS-APPREHENDED
THE FACTS AND ERRED IN NOT AFFIRMING THE TRIAL COURT’S FINDING THAT OWNERSHIP
OF THE FARM TRACTOR HAD ALREADY PASSED TO HEREIN PETITIONER WHEN SAID TRACTOR WAS LEVIED ON BY THE SHERIFF PURSUANT TO AN
ALIAS WRIT OF EXECUTION ISSUED IN ANOTHER CASE IN FAVOR OF RESPONDENT GELAC
TRADING INC.”

B.

“WHETHER OR NOT THE HONORABLE COURT OF APPEALS EMBARKED ON
MERE CONJECTURE AND SURMISE IN HOLDING THAT THE SALE OF THE AFORESAID TRACTOR
TO PETITIONER WAS DONE IN FRAUD OF WILFREDO DY’S CREDITORS, THERE BEING NO
EVIDENCE OF SUCH FRAUD AS FOUND BY THE TRIAL COURT,”

C.

‘”WHETHER OR NOT THE HONORABLE COURT OF APPEALS
MIS-APPREHENDED THE FACTS AND ERRED IN NOT SUSTAINING THE FINDING OF THE TRIAL
COURT THAT THE SALE OF THE TRACTOR BY RESPONDENT GELAC TRADING TO ITS
CO-RESPONDENT ANTONIO V. GONZALES ON AUGUST 2, 1980 – AT WHICH TIME BOTH
RESPONDENTS ALREADY KNEW OF THE FILING OF THE INSTANT CASE – WAS VIOLATIVE OF
THE HUMAN RELATIONS PROVISIONS OF THE CIVIL CODE AND RENDERED THEM LIABLE FOR
THE MORAL AND EXEMPLARY DAMAGES SLAPPED AGAINST THEM BY THE TRIAL COURT.”
(Rollo, p. 13)

The respondents claim that at the time of the execution of the
deed of sale, no constructive delivery was effected
since the consummation of the sale depended upon the clearance and encashment
of the check which was issued in payment of the subject tractor.

In the case of Servicewide Specialists
Inc. v. Intermediate Appellate Court, (174 SCRA 80 [1989]), we stated that:

xxx                xxx                   xxx

“The rule is settled that the chattel mortgagor continues to be
the owner of the property, and therefore, has the power to alienate the same;
however, he is obliged under pain of penal liability, to secure the written
consent of the mortgagee.  (Francisco, Vicente, Jr., Revised Rules of Court in the
Philippines, (1972), Volume IV-B Part I, p. 525).  Thus, the instruments of mortgage are
binding, while they subsist, not only upon the parties executing them but also
upon those who later, by purchase or otherwise, acquire the properties referred
to therein.

“The absence of the written consent of the mortgagee to the
sale of the mortgaged property in favor of a third person, therefore, affects
not the validity of the sale but only the penal liability of the mortgagor
under the Revised Penal Code and the binding effect of such sale on the
mortgagee under the Deed of Chattel
Mortgage.”

xxx                xxx                   xxx

The mortgagor who gave the property as security under a chattel
mortgage did not part with he ownership over the
same.  He had the right to sell it
although he was under the obligation to secure the written consent of
the mortgagee or he lays himself open to criminal prosecution under the
provision of Article 319 par. 2 of the Revised Penal Code.  And even if no consent was obtained from the mortgagee, the validity of the sale
would still not be affected.

Thus, we see no reason why Wilfredo Dy, as the chattel mortgagor can not sell the subject
tractor.  There is no dispute that the
consent of Libra Finance was obtained in the instant case.  In a letter dated August 27, 1979, Libra allowed
the petitioner to purchase the
tractor and assume the mortgage debt of his brother.  The sale between the brothers was therefore
valid and binding as between them and to the mortgagee, as well.

Article 1496 of the Civil Code states that the ownership of the
thing sold is acquired by the vendee from the moment it is delivered to him in
any of the ways specified in Articles 1497 to 1501 or in any other manner
signifying an agreement that the possession is transferred from the vendor to
the vendee.  We agree with the petitioner
that Articles 1498 and 1499 are applicable in the case at bar.

Article 1498 states:

“Art. 1498. 
When the sale is made through a public instrument, the execution
thereof shall be equivalent to the delivery of the thing which is the object of
the contract, if
from the deed the contrary does not appear or cannot clearly be inferred.”

xxx                xxx                   xxx

Article 1499 provides:

“Article 1499.  The delivery of movable property may likewise
be made by the mere consent or agreement of the contracting parties, if the
thing sold cannot be transferred to the possession of the vendee at the time of
the sale, or if the latter already had it in his possession for any other
reason.  (1463a)”

In the instant case, actual delivery of the subject tractor could
not be made.  However, there was
constructive delivery already upon the execution of the public instrument
pursuant to Article 1498 and upon the consent or agreement of the parties when
the thing sold cannot be immediately transferred to the possession of the
vendee.  (Art. 1499)

The respondent court avers that the vendor must first have
control and possession of the thing before he could transfer ownership by
constructive delivery.  Here, it was
Libra Finance which was in possession of the subject tractor due to Wilfredo’s failure to pay the amortization as a preliminary
step to foreclosure.  As mortgagee, he
has the right of foreclosure upon default by the mortgagor in the performance
of the conditions mentioned in the contract of mortgage.  The law implies that the mortgagee is
entitled to possess the mortgaged property because possession is necessary in
order to enable him to have the property sold.

While it is true that Wilfredo Dy was not in actual possession and control of the subject
tractor, his right of ownership was not divested from him upon his
default.  Neither could it be said that
Libra was the owner of the subject tractor because the mortgagee can not become
the owner of or convert and appropriate to himself the
property mortgaged.  (Article 2088, Civil
Code) Said property continues to belong to the mortgagor.  The only remedy given to the mortgagee is to
have said property sold at public auction and the proceeds of the sale applied
to the payment of the obligation secured by the mortgagee.  (See Martinez v. PNB, 93 Phil. 765, 767
[1953]) There is no showing that Libra Finance has already foreclosed the
mortgage and that it was the new owner of the subject tractor.  Undeniably, Libra gave its consent to the sale of the subject
tractor to the petitioner.  It was aware
of the transfer of rights to the petitioner.

Where a third person purchases the mortgaged property, he
automatically steps into the shoes of the original mortgagor.  (See Industrial Finance
Corp. v. Apostol, 177 SCRA 521 [1989]).  His right of ownership shall be subject to
the mortgage of the thing sold to him. 
In the case at bar, the petitioner was fully aware of the existing
mortgage of the subject tractor to Libra. 
In fact, when he was obtaining Libra’s consent to the sale, he
volunteered to assume the remaining balance of the mortgage debt of Wilfredo Dy which Libra
undeniably agreed to.

The payment of the check was actually intended to extinguish the
mortgage obligation so that the tractor could be released to the
petitioner.  It was never intended nor
could it be considered as payment of the purchase price because the
relationship between Libra and the petitioner is not one of sale but still a
mortgage.  The clearing or encashment of
the check which produced the effect of payment determined the full payment of
the money obligation and the release of the chattel mortgage.  It was not determinative of the consummation
of the sale.  The transaction between the
brothers is distinct and apart from
the transaction between Libra and the petitioner.  The contention, therefore, that the
consummation of the sale depended upon the encashment of the check is
untenable.

The sale of the subject tractor was consummated upon the
execution of the public instrument on September 4, 1979.  At this time constructive delivery was
already effected. 
Hence, the subject tractor was no longer owned by Wilfredo
Dy when it was levied upon by the sheriff in
December, 1979.  Well settled is the rule
that only properties unquestionably owned by the judgment debtor and which are
not exempt by law from execution should be levied upon or sought to be levied
upon.  For the power of the court in the execution of its judgment
extends only over properties belonging to the judgment debtor.  (Consolidated Bank and Trust Corp. v. Court
of Appeals, G.R. No. 78771, January 23, 1991).

The respondents further claim that at that time the sheriff
levied on the tractor and took legal custody thereof no one ever protested or
filed a third party claim.

It is inconsequential whether a third party claim has been filed
or not by the petitioner during the time the sheriff levied on the subject
tractor.  A person other than the
judgment debtor who claims ownership or right over levied properties is not
precluded, however, from taking other legal remedies to prosecute his
claim.  (Consolidated Bank and Trust
Corp. v. Court of Appeals, supra) This is precisely what the petitioner
did when he filed the action for replevin with the
RTC.

Anent the second and third issues raised,
the Court accords great respect and weight to the findings of fact of the trial
court.  There is no sufficient evidence
to show that the sale of the tractor was in fraud of Wilfredo
and creditors.  While it is true that Wilfredo and Perfecto are brothers, this fact alone does
not give rise to the presumption that the sale was fraudulent.  Relationship is not a badge of fraud (Goquiolay v. Sycip, 9 SCRA 663
[1963]).  Moreover, fraud can not be
presumed; it must be established by clear convincing evidence.

We agree with the trial court’s findings that the actuations of
GELAC Trading were indeed violative of the provisions
on human relations.  As found by the
trial court, GELAC knew very well of the transfer of the property to the
petitioners on July 14, 1980 when
it received summons based on the complaint for replevin
filed with the RTC by the petitioner. 
Notwithstanding said summons, it continued to sell the subject tractor
to one of its stockholders on August 2, 1980.

WHEREFORE, the petition is hereby GRANTED.  The decision of the Court of Appeals
promulgated on March 23, 1990 is SET ASIDE and the decision of the Regional
Trial Court dated April 8, 1988 is REINSTATED.

SO ORDERED.

Fernan, C.J., (Chairman), Feliciano, and Bidin, JJ., concur.

Davide, Jr., J., no part, used to be counsel for petitioner.