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

Dy versus Court of Appeals

The Case

This is a petition for review on certiorari brought by Perfecto Dy against the Court of Appeals, Gelac Trading Incorporated, and Antonio Gonzales. The petitioner asks the Supreme Court to reverse the appellate court's ruling that his purchase of a farm tractor from his brother Wilfredo Dy was not validly consummated, and to restore the trial court's judgment in his favor. The case matters because it fixes, in one clean holding, when ownership of a movable passes to the buyer by constructive delivery, and it settles that a chattel mortgagor may validly sell the mortgaged property — so that the property is no longer the debtor's when a creditor later levies on it.

Procedural History

Perfecto Dy filed an action to recover the tractor against Gelac Trading before the Regional Trial Court of Cebu City. On April 8, 1988, the trial court rendered judgment for the petitioner, pronouncing him the owner of the tractor, directing Gelac Trading and Antonio Gonzales to return it, and ordering them to pay expenses for hiring a tractor, moral damages, exemplary damages, and costs.

On appeal, the Court of Appeals reversed the trial court and dismissed the complaint, with costs against the petitioner. The appellate court held that the tractor still belonged to Wilfredo Dy when the sheriff seized and levied on it under an alias writ of execution in the collection case. The petitioner then came to the Supreme Court by petition for review on certiorari.

Facts

Perfecto Dy and Wilfredo Dy are brothers. Sometime in 1979, Wilfredo purchased a truck and a farm tractor through financing extended by Libra Finance and Investment Corporation, and both vehicles were mortgaged to Libra as security for the loan. Perfecto wanted to buy the tractor from his brother, so on August 20, 1979, he wrote Libra asking that he be allowed to purchase the tractor from Wilfredo and assume the latter's mortgage debt. Libra, through its manager, approved the request in a letter dated August 27, 1979. Thus, on September 4, 1979, Wilfredo executed a deed of absolute sale in favor of Perfecto over the tractor.

At that time the tractor was in the possession of Libra Finance because Wilfredo had failed to pay the amortizations. Although Perfecto offered full payment to Libra for the tractor, immediate release could not be effected because Wilfredo had financed not only the tractor but also a truck, and Libra insisted on full payment for both. Perfecto convinced his sister, Carol Dy-Seno, to purchase the truck so that both could be paid. On November 22, 1979, a Philippine National Bank check for 22,000 pesos was issued to Libra, settling Wilfredo's indebtedness in full. Because payment was by an out-of-town check, Libra insisted that it be cleared first before releasing the vehicles.

Meanwhile, a collection case to recover 12,269 pesos and 80 centavos was pending in another court in Cebu. On the strength of an alias writ of execution issued on December 27, 1979, the provincial sheriff seized and levied on the tractor, which was then in Libra's premises in Carmen, Cebu. The tractor was sold at public auction, where Gelac Trading was the lone bidder, and Gelac later sold it to its stockholder, Antonio Gonzales. Only when the check cleared on January 17, 1980 did Perfecto learn that Gelac had already taken custody of the tractor. He then filed the action to recover it.

Issues

• Whether or not the Court of Appeals erred in not affirming the trial court's finding that ownership of the farm tractor had already passed to the petitioner when the sheriff levied on it under the alias writ of execution in favor of Gelac Trading.
• Whether or not the Court of Appeals engaged in mere conjecture and surmise in holding that the sale of the tractor to the petitioner was made in fraud of Wilfredo Dy's creditors, there being no evidence of such fraud.
• Whether or not the Court of Appeals erred in not sustaining the trial court's finding that Gelac Trading's sale of the tractor to Antonio Gonzales, made after both knew of the filing of the case, violated the human relations provisions of the Civil Code and made them liable for moral and exemplary damages.

Applicable Provisions

Article 1496 of the Civil Code provides:

Article 1496. 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.

This fixes the moment ownership passes — upon delivery, actual or constructive — which is the whole question in the case.

Article 1498 of the Civil Code provides:

Article 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.

This makes the execution of the deed of absolute sale itself the constructive delivery of the tractor.

Article 1499 of the Civil Code 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.

This supplies constructive delivery where the tractor could not then be physically handed over because it was in Libra's possession.

Article 2088 of the Civil Code is invoked by the Court for the rule that the mortgagee cannot become the owner of the mortgaged property; the property continues to belong to the mortgagor.

Ruling

On the first issue, the Court ruled for the petitioner. The chattel mortgagor remains the owner and may alienate the property; the absence of the mortgagee's written consent affects not the validity of the sale but only the mortgagor's penal liability and the binding effect of the sale on the mortgagee. Here Libra's consent was in fact obtained. The Court then applied Article 1496 with Articles 1498 and 1499. Actual delivery could not be made, but there was constructive delivery upon the execution of the public instrument and upon the consent of the parties when the thing sold cannot be immediately transferred to the vendee. The Court rejected the argument that the sale depended on the clearing of the check: the check was intended to extinguish the mortgage obligation so the tractor could be released, not to pay the purchase price, and the transaction between the brothers is distinct from the transaction between Libra and the petitioner. The sale was therefore consummated on September 4, 1979, and the tractor was no longer Wilfredo's when levied upon in December 1979. The Court held that only properties unquestionably owned by the judgment debtor may be levied upon, and that the absence of a third party claim did not bar the petitioner from filing the replevin action.

On the second issue, the Court ruled for the petitioner. It gave great respect and weight to the trial court's findings and found no sufficient evidence that the sale was in fraud of creditors. Relationship alone does not give rise to a presumption of fraud, and fraud cannot be presumed; it must be established by clear and convincing evidence.

On the third issue, the Court agreed with the trial court that Gelac Trading's actuations violated the human relations provisions. Gelac knew of the transfer when it received summons in the replevin case, yet it still sold the tractor to its stockholder afterward.

Doctrine

A chattel mortgagor remains the owner of the mortgaged property and may validly sell it; the lack of the mortgagee's written consent does not invalidate the sale but only exposes the mortgagor to penal liability and binds the sale to the mortgagee under the mortgage. Ownership of the thing sold passes to the vendee from the moment of delivery in any of the ways in Articles 1497 to 1501 of the Civil Code. Under Article 1498, the execution of a public instrument of sale is equivalent to delivery of the thing, and under Article 1499, delivery of a movable may be made by the mere consent of the parties where the thing cannot be transferred to the vendee at the time of sale. A mortgagee does not become the owner of the mortgaged property; it continues to belong to the mortgagor. Only properties unquestionably owned by the judgment debtor may be levied upon in execution. Fraud is never presumed and must be proved by clear and convincing evidence; relationship alone is not a badge of fraud.

Disposition

The petition was granted; the decision of the Court of Appeals was set aside and the decision of the Regional Trial Court was reinstated, so the petitioner won and recovered the tractor with the damages awarded below.

Remember This

The one line to memorize: the sale of a mortgaged chattel is valid even without the mortgagee's written consent, and ownership passes by constructive delivery upon the execution of the public instrument. Examiners use this case to test constructive delivery of movables under Articles 1498 and 1499, the rights of a chattel mortgagor, and the rule that only property owned by the judgment debtor may be levied upon.