G.R. No.

L-68010 May 30, 1986 latter agreed to manage the plaintiff company for a
period of three years; that under the management
FILIPINAS MARBLE CORPORATION, petitioner, agreement, the affairs of the petitioner were placed
vs. under the complete control of DBP and Bancom
THE HONORABLE INTERMEDIATE APPELLATE including the disposition and disbursement of the
COURT, THE HONORABLE CANDIDO $5,000,000 or P37,600,000 loan; that the
VILLANUEVA, Presiding Judge of Br. 144, RTC, respondents and their directors/officers
Makati, DEVELOPMENT BANK OF THE mismanaged and misspent the loan, after which
PHILIPPINES (DBP), BANCOM SYSTEMS Bancom resigned with the approval of DBP even
CONTROL, INC. (Bancom), DON FERRY, before the expiration date of the management
CASIMERO TANEDO, EUGENIO PALILEO, contract, leaving petitioner desolate and devastated;
ALVARO TORIO, JOSE T. PARDO, ROLANDO that among the acts and omissions of the
ATIENZA, SIMON A. MENDOZA, Sheriff respondents are the following. (a) failure to
NORVELL R. LIM, respondents. purchase all the necessary machinery and
equipment needed by the petitioner's project for
Vicente Millora for petitioner. which the approved loan was intended; (b) failure to
construct a processing plant; (c) abandonment of
Jesus A. Avencena and Bonifacio M. Abad for imported machinery and equipment at the pier, (d)
respondents. purchase of unsuitable lot for the processing plant at
Binan; (e) failure to develop even a square meter of
GUTIERREZ, JR., J.: the quarries in Romblon or Cebu; and (f) nearly
causing the loss of petitioner's rights over its Cebu
This petition for review seeks to annul the decision claims; and that instead of helping petitioner get
and resolution of the appellate court which upheld back on its feet, DBP completely abandoned the
the trial court's decision denying the petitioner's petitioner's project and proceeded to foreclose the
prayer to enjoin the respondent from foreclosing on properties mortgaged to it by petitioner without
its properties. previous demand or notice.

On January 19, 1983, petitioner Filipinas Marble In essence, the petitioner in its complaint seeks the
Corporation filed an action for nullification of deeds annulment of the deeds of mortgage and deed of
and damages with prayer for a restraining order and assignment which it executed in favor of DBP in
a writ of preliminary injunction against the private order to secure the $5,000,000.00 loan because it is
respondents. In its complaint, the petitioner alleged petitioner's contention that there was no loan at all
in substance that it applied for a loan in the amount to secure since what DBP "lent" to petitioner with its
of $5,000,000.00 with respondent Development right hand, it also got back with its left hand; and that,
Bank of the Philippines (DBP) in its desire to develop there was failure of consideration with regard to the
the fun potentials of its mining claims and deposits; execution of said deeds as the loan was never
that DBP granted the loan subject, however, to sixty delivered to the petitioner. The petitioner further
onerous conditions, among which are: (a) petitioner prayed that pending the trial on the merits of the
shall have to enter into a management contract with case, the trial court immediately issue a restraining
respondent Bancom Systems Control, Inc. order and then a writ of preliminary injunction
[Bancom]; (b) DBP shall be represented by no less against the sheriffs to enjoin the latter from
than six (6) regular directors, three (3) to be proceeding with the foreclosure and sale of the
nominated by Bancom and three (3) by DBP, in petitioner's properties in Metro Manila and in
Filipinos Marble's board, one of whom shall continue Romblon.
to be the chairman of the board; (c) the key
officers/executives [the President and the officers for Respondent DBP opposed the issuance of a writ of
finance, marketing and purchasing] to be chosen by preliminary injunction stating that under Presidential
Bancom for the corporation shall be appointed only Decree No. 385, DBP's right to foreclose is
with DBP's prior approval and all these officers are mandatory as the arrearages of petitioner had
to be made directly responsible to DBP; DBP shall already amounted to P123,801,265.82 as against its
immediately designate Mr. Alvaro Torio, Assistant total obligation of P151,957,641.72; that under the
Manager of DBP's Accounting Department as DBP's same decree, no court can issue any restraining
Comptroller in the firm whose compensation shall be order or injunction against it to stop the foreclosure
borne by Filipinas Marble; and (d) the $5 Million loan since Filipinas Marble's arrearages had already
shall be secured by: 1) a final mortgage on the reached at least twenty percent of its total
following assets with a total approved value of obligations; that the alleged non-receipt of the loan
P48,630,756.00 ... ; 2) the joint and several proceeds by the petitioner could, at best, be
signatures with Filipinas Marble of Mr. Pelagio M. accepted only in a technical sense because the
Villegas, Sr., Trinidad Villegas, and Jose E. money was received by the officers of the petitioner
Montelibano and 3) assignment to DBP of the acting in such capacity and, therefore, irrespective
borrower firm's right over its mining claims; that of whoever is responsible for placing them in their
pursuant to these above- mentioned and other "take positions, their receipt of the money was receipt by
it or leave it" conditions, the petitioner entered into a the petitioner corporation and that the complaint
management contract with Bancom whereby the does not raise any substantial controversy as to the
amount due under the mortgage as the issues equipment but claims that such imported
raised therein refer to the propriety of the manner by machineries were left to the mercy of the elements
which the proceeds of the loan were expended by as they were never delivered to it.
the petitioner's management, the allegedly
precipitate manner with which DBP proceeded with xxxxxxxxx
the foreclosure, and the capacity of the DBP to be
an assignee of the mining lease rights. Apart from the foregoing, petitioner is patently not
entitled to a writ of preliminary injunction for it has
After a hearing on the preliminary injunction, the trial not demonstrated that at least 20% of its
court issued an order stating: outstanding arrearages has been paid after the
foreclosure proceedings were initiated. Nowhere in
The Court has carefully gone over the evidence the record is it shown or alleged that petitioner has
presented by both parties, and while it paid in order that it may fall within the exception
sympathizes with the plight of the plaintiff and of prescribed on Section 2, Presidential Decree No.
the pitiful condition it now has found itself, it 385.
cannot but adhere to the mandatory provisions of
P.D. 385. While the evidence so far presented by Dissatisfied with the appellate court's decision, the
the plaintiff corporation appears to be persuasive, petitioner filed this instant petition with the following
the same may be considered material and assignments of errors:
relevant to the case. Hence, despite the
impressive testimony of the plaintiff's witnesses, 1. There being 'persuasive' evidence that the $5
the Court believes that it cannot enjoin the million proceeds of the loan were not received and
defendant Development Bank of the Philippines did not benefit the petitioner per finding of the lower
from complying with the mandatory provisions of court which should not be disturbed unless there is
the said Presidential Decree. It having been grave abuse of discretion, it must follow that PD
shown that plaintiff's outstanding obligation as of 385 does not and cannot apply;
December 31, 1982 amounted to
P151,957,641.72 and with arrearages reaching 2. If there was no valid loan contract for failure of
up to 81 % against said total obligation, the Court consideration, the mortgage cannot exist or stand
finds the provisions of P.D. 385 applicable to the by itself being a mere accessory contract.
instant case. It is a settled rule that when the Additionally, the chattel mortgage has not been
statute is clear and unambiguous, there is no registered. Therefore, the same is null and void
room for interpretation, and all that it has to do is under Article 2125 of the New Civil Code; and
to apply the same.
3. PD 385 is unconstitutional as a 'class legislation',
On appeal, the Intermediate Appellate Court upheld and violative of the due process clause.
the trial court's decision and held:
With regard to the first assignment of error, the
While petitioner concedes 'that Presidential Decree petitioner maintains that since the trial court found
No. 385 applies only where it is clear that there was "persuasive evidence" that there might have been a
a loan or where the loan is not denied' (p. 14- failure of consideration on the contract of loan due
petition), it disclaims receipt of the $5 million loan to the manner in which the amount of $5 million was
nor benefits derived therefrom and bewails the spent, said court committed grave abuse of
onerous conditions imposed by DBP Resolution discretion in holding that it had no recourse but to
No. 385 dated December 7, 1977, which allegedly apply P.D. 385 because the application of this
placed the petitioner under the complete control of decree requires the existence of a valid loan which,
the private respondents DBP and Bancom however, is not present in petitioner's case. It
Systems Control Inc. (Bancom, for short). The likewise faults the appellate court for upholding the
plausibility of petitioner's statement that it did Dot applicability of the said decree.
receive the $5 million loan is more apparent than
real. At the hearing for injunction before the Sections 1 and 2 of P.D. No. 385 respectively
counsel for DBP stressed that $2,625,316.83 of the provide:
$5 million loan was earmarked to finance the
acquisition of machinery, equipment and spare Section 1. It shall be mandatory for government
parts for petitioner's Diamond gangsaw which financial institutions after the lapse of sixty (60)
machineries were actually imported by petitioner days from the issuance of this Decree, to foreclose
Filipinas Marble Corporation and arrived in the the collaterals and/or securities for any loan, credit
Philippines. Indeed, a summary of releases to accommodation, and/or guarantees granted by
petitioner covering the period June 1978 to them whenever the arrearages on such account,
October 1979 (Exh. 2, Injunction) showed including accrued interest and other charges,
disbursements amounting to millions of pesos for amount to at least twenty (20%) of the total
working capital and opening of letter of credits for outstanding obligations, including interest and
the acquisition of its machineries and equipment. other charges, as appearing in the book of
Petitioner does not dispute that releases were accounts and/or related records of the financial
made for the purchase of machineries and institution concerned. This shall be without
 prejudice to the exercise by the government Filipinas Marble misspent the proceeds of the loan
financial institution of such rights and/or remedies by taking advantage of the positions that they were
available to them under their respective contracts occupying in the corporation which resulted in the
with their debtors, including the right to foreclose latter's devastation instead of its rehabilitation. The
on loans, credits, accommodations, and/or petitioner does not question the authority under
guarantees on which the arrearages are less than which the loan was delivered but stresses that it is
twenty percent (20%). precisely this authority which enabled the DBP and
Bancom people to misspend and misappropriate the
Section 2. No restraining order, temporary or proceeds of the loan thereby defeating its very
permanent injunction shall be issued by the court purpose, that is, to develop the projects of the
against any government financial institution in any corporation. Therefore, it is as if the loan was never
action taken by such institution in compliance with delivered to it and thus, there was failure on the part
the mandatory foreclosure provided in Section 1 of the respondent DBP to deliver the consideration
hereof, whether such restraining order, temporary for which the mortgage and the assignment of deed
or permanent injunction is sought by the were executed.
borrower(s) or any third party or parties, except
after due hearing in which it is established by the We cannot, at this point, conclude that respondent
borrower, and admitted by the government DBP together with the Bancom people actually
financial institution concerned that twenty percent misappropriated and misspent the $5 million loan in
(20%) of the outstanding arrearages has been paid whole or in part although the trial court found that
after the filing of foreclosure proceedings. there is "persuasive" evidence that such acts were
committed by the respondent. This matter should
Presidential Decree No. 385 was issued primarily to rightfully be litigated below in the main action.
see to it that government financial institutions are not Pending the outcome of such litigation, P.D. 385
denied substantial cash inflows, which are cannot automatically be applied for if it is really
necessary to finance development projects all over proven that respondent DBP is responsible for the
the country, by large borrowers who, when they misappropriation of the loan, even if only in part,
become delinquent, resort to court actions in order then the foreclosure of the petitioner's properties
to prevent or delay the government's collection of under the provisions of P.D. 385 to satisfy the whole
their debts and loans. amount of the loan would be a gross mistake. It
would unduly prejudice the petitioner, its employees
The government, however, is bound by basic and their families.
principles of fairness and decency under the due
process clause of the Bill of Rights. P.D. 385 was Only after trial on the merits of the main case can
never meant to protect officials of government the true amount of the loan which was applied wisely
lending institutions who take over the management or not, for the benefit of the petitioner be determined.
of a borrower corporation, lead that corporation to Consequently, the extent of the loan where there
bankruptcy through mismanagement or was no failure of consideration and which may be
misappropriation of its funds, and who, after ruining properly satisfied by foreclosure proceedings under
it, use the mandatory provisions of the decree to P.D. 385 will have to await the presentation of
avoid the consequences of their misdeeds. evidence in a trial on the merits. As we have ruled in
the case of Central Bank of the Philippines vs. Court
The designated officers of the government financing of Appeals, (1 39 SCRA 46, 5253; 56):
institution cannot simply walk away and then state
that since the loans were obtained in the When Island Savings Bank and Sulpicio M.
corporation's name, then P.D. 385 must be Tolentino entered into an P80,000.00 loan
peremptorily applied and that there is no way the agreement on April 28, 1965, they undertook
borrower corporation can prevent the automatic reciprocal obligations, the obligation or promise of
foreclosure of the mortgage on its properties once each party is the consideration for that of the othe.
the arrearages reach twenty percent (20%) of the (Penacio vs. Ruaya, 110 SCRA 46 [1981]; ...
total obligation no matter who was responsible.
xxxxxxxxx
In the case at bar, the respondents try to impress
upon this Court that the $5,000,000.00 loan was The fact that when Sulpicio M. Tolentino executed
actually granted and released to the petitioner his real estate mortgage, no consideration was
corporation and whatever the composition of the then in existence, as there was no debt yet
management which received the loan is of no because Island Savings Bank had not made any
moment because this management was acting in release on the loan, does not make the real estate
behalf of the corporation. The respondents also mortgage void for lack of consideration. It is not
argue that since the loan was extended to the necessary that any consideration should pass at
corporation, the releases had to be made to the then the time of the execution of the contract of real
officers of that borrower corporation. mortgage (Bonnevie vs. Court of Appeals, 125
SCRA 122 [1983]. It may either be a prior or
Precisely, what the petitioner is trying to point out is subsequent matter. But when the consideration is
that the DBP and Bancom people who managed subsequent to the mortgage, the mortgage can
 take effect only when the debt secured by it is Registry of Property. If the instrument is not
created as a binding contract to pay (Parks vs. recorded, the mortgage is nevertheless binding
Sherman, Vol. 2, pp. 5-6). And, when there is between the parties.
partial failure of consideration, the mortgage
becomes unenforceable to the extent of such xxxxxxxxx
failure (Dow, et al. vs. Poore Vol. 172 N.E. p. 82,
cited in Vol. 59, 1974 ed. C.J.S. p. 138). ... The petitioner cannot invoke the above provision to
nullify the chattel mortgage it executed in favor of
Under the admitted circumstances of this petition, respondent DBP.
we, therefore, hold that until the trial on the merits of
the main case, P.D. 385 cannot be applied and thus, We find no need to pass upon the constitutional
this Court can restrain the respondents from issue raised in the third assignment of error. We
foreclosing on petitioner's properties pending such follow the rule started in Alger Electric, Inc. vs. Court
litigation. of Appeals, (135 SCRA 37, 45).

The respondents, in addition, assert that even if the We see no necessity of passing upon the
$5 million loan were not existing, the mortgage on constitutional issues raised by respondent
the properties sought to be foreclosed was made to Northern. This Court does not decide questions of
secure previous loans of the petitioner with a constitutional nature unless absolutely
respondent and therefore, the foreclosure is still necessary to a decision of a case. If there exists
justified. some other grounds of construction, we decide
the case on a non- constitutional determination.
This contention is untenable. Two of the conditions (See Burton vs. United States, 196 U.S. 283; Siler
imposed by respondent DBP for the release of the vs. Luisville & Nashville R. Co., 123 U.S. 175;
$5 million loan embodied in its letter to petitioner Berta College vs. Kentucky, 211 U.S. 45).
dated December 21, 1977 state:
WHEREFORE, IN VIEW OF THE FOREGOING, the
A. The interim loan of $289,917.32 plus interest petition is GRANTED. The orders of the
due thereon which was used for the importation of Intermediate Appellate Court dated April 17, 1984
one Savage Diamond Gangsaw shall be liquidated and July 3, 1984 are hereby ANNULLED and SET
out of the proceeds of this $5 million loan. In ASIDE. The trial court is ordered to proceed with the
addition, FMC shall also pay DBP, out of the trial on the merits of the main case. In the meantime,
proceeds of above foreign currency loan, the past the temporary restraining order issued by this Court
due amounts on obligation with DBP. on July 23, 1984 shall remain in force until the merits
of the main case are resolved.
xxxxxxxxx
SO ORDERED.
B. Conversion into preferred shares of P 2 million
of FMCs total obligations with DBP as of the date Feria (Chairman), Fernan, Alampay and Paras, JJ.,
the legal documents for this refinancing shall have concur.
been exempted or not later than 90 days from date
of advice of approval of this accommodation.

The above conditions lend credence to the

petitioner's contention that the "original loan had
been converted into 'equity shares', or preferred
shares; therefore, to all intents and purposes, the
only 'loan' which is the subject of the foreclosure
proceedings is the $5 million loan in 1978. "

As regards the second assignment of error, we

agree with the petitioner that a mortgage is a mere
accessory contract and, thus, its validity would
depend on the validity of the loan secured by it. We,
however, reject the petitioner's argument that since
the chattel mortgage involved was not registered,
the same is null and void. Article 2125 of the Civil
Code clearly provides that the non-registration of the
mortgage does not affect the immediate parties. It
states:

Art. 2125. In addition to the requisites stated in

article 2085, it is indispensable, in order that a
mortgage may be validly constituted that the
document in which it appears be recorded in the