Mambulao Lumber Company vs. Philippine National Bank

A mortgagee who forecloses a chattel mortgage at a place other than that stipulated in the mortgage contract, over the mortgagor's objection, and sells the chattels in bulk rather than article by article, is guilty of conversion and liable for the full value of the chattels at the time of the illegal sale. The Court further held that compound interest shall not be reckoned absent an express agreement or judicial demand, and that stipulated attorney's fees may be reduced by the courts when found unconscionable or unreasonable, fixed on a quantum meruit basis.

Mambulao Lumber Company, a corporation engaged in logging and sawmill operations, applied for an industrial loan with the Naga Branch of the Philippine National Bank, a government banking institution. The loan was secured by both a real estate mortgage over a parcel of land with improvements in Jose Panganiban, Camarines Norte, and a chattel mortgage over various sawmill equipment, logging and transportation equipment. The loan releases were evidenced by two promissory notes bearing six percent (6%) interest per annum. The chattel mortgage contract contained a stipulation that in case of both judicial and extra-judicial foreclosure under Act No. 1508, the petition for sale should be filed with the courts or the sheriff of the City of Manila.

Mambulao Lumber Company applied for an industrial loan of P155,000 with the Naga Branch of the Philippine National Bank on May 5, 1956, offering real estate, machinery, logging and transportation equipment as collaterals. The application was approved for P100,000 only, and the plaintiff mortgaged a parcel of land with buildings and improvements in Jose Panganiban, Camarines Norte, covered by Transfer Certificate of Title No. 381, as well as various sawmill equipment, rolling unit and other fixed assets. On August 2, 1956, the PNB released P27,500, for which the plaintiff signed a promissory note promising to pay in five equal yearly installments of P6,528.40 beginning July 31, 1957. On October 19, 1956, the PNB released another P15,500, secured by another promissory note for five equal yearly installments of P3,679.64.

The plaintiff failed to pay the amortizations, and repeated demands were made. Upon inspection, the PNB found that the plaintiff had stopped operations about the end of 1957 or early part of 1958. On September 27, 1961, the PNB requested the Provincial Sheriff of Camarines Norte to take possession of the real property and sell it at public auction under Act No. 3135, as amended, for the satisfaction of the unpaid obligation which as of September 22, 1961 amounted to P57,646.59, excluding attorney's fees. The real property was sold at public auction on November 21, 1961 to the PNB for P56,908.00, subject to the plaintiff's right of redemption.

On November 6, 1961, the PNB also requested the Provincial Sheriff to take possession of the mortgaged chattels and sell them at public auction on the same date, November 21, 1961. Deputy Provincial Sheriff Anacleto Heraldo took possession of the chattels on November 8, 1961, and issued the corresponding notice of public auction sale to be held on November 21, 1961 at the plaintiff's compound in Jose Panganiban. The plaintiff sent letters on November 19, 1961 protesting the foreclosures on the grounds that they could not be effected without a court order and that the foreclosure proceedings should be made in Manila according to the mortgage contracts. The PNB construed the letter as a request for extension and deferred the chattel sale to December 21, 1961.

In a letter dated December 14, 1961, the plaintiff sent a bank draft for P738.59 to the PNB, allegedly in full settlement of the balance of its obligation after applying the P56,908.00 proceeds of the real estate foreclosure sale. The plaintiff reiterated its request that the chattel foreclosure sale be discontinued on the grounds that the mortgaged indebtedness had been fully paid and that it could not be legally effected at a place other than the City of Manila. On December 18, 1961, the PNB's attorney acknowledged the remittance but advised that the balance was P9,161.76, to which should be added guarding expenses, explaining that the sum of P57,646.59 did not include the 10% attorney's fees and expenses of the sale. On December 21, 1961, the foreclosure sale of the mortgaged chattels was held at 10:00 a.m. and they were awarded to the PNB for P4,200, with the corresponding bill of sale issued by Deputy Provincial Sheriff Heraldo.

On May 24, 1962, several employees of the PNB arrived at the plaintiff's compound and informed Luis Salgado, Chief Security Guard, that the properties had been auctioned and bought by the PNB, which in turn sold them to Mariano Bundok. Salgado was initially reluctant to allow any property to be taken, but after the PNB employees explained he would be exposing himself to litigation, he sent a wire to the plaintiff's President. Mariano Bundok was able to take out two truckloads of equipment. On the following day, Salgado received a telegram directing him not to deliver the chattels without court order, but through the intervention of local police and PC soldiers, the trucks of Mariano Bundok were able to haul the properties originally mortgaged by the plaintiff.

• Amount of Indebtedness: Petitioner argued that its total indebtedness to the PNB as of November 21, 1961 was only P56,485.87 and not P58,213.51 as concluded by the trial court, and that the proceeds of the foreclosure sale of its real property alone, added to the P738.59 it remitted thereafter, was more than sufficient to liquidate its obligation, thereby rendering the subsequent foreclosure sale of its chattels unlawful.
• Attorney's Fees and Expenses: Petitioner argued that it was not liable to pay PNB the amount of P5,821.35 for attorney's fees and the additional sum of P298.54 as expenses of the foreclosure sale, because there was no express agreement in the real estate mortgage contract to pay attorney's fees in case of extra-judicial foreclosure, and because the PNB neither spent nor incurred any obligation to pay attorney's fees.
• Nullity of Chattel Foreclosure Sale: Petitioner argued that the subsequent foreclosure sale of its chattels was null and void, not only because it had already settled its indebtedness to the PNB at the time the sale was effected, but also because the sale was not conducted in accordance with the provisions of the Chattel Mortgage Law and the venue agreed upon by the parties in the mortgage contract.
• Liability for Value of Chattels: Petitioner argued that the PNB, having illegally sold the chattels, was liable to the plaintiff for their value.
• Damages: Petitioner argued that for the acts of the PNB in proceeding with the sale of the chattels in utter disregard of plaintiff's vigorous opposition, and in taking possession thereof after the sale through force, intimidation, coercion, and by detaining its "man-in-charge" of said properties, the PNB was liable for damages and attorney's fees.

• Place of Sale: Respondent argued that the stipulation in the chattel mortgage contract providing for sale in Manila merely provided another place where the mortgage chattel could be sold in addition to those specified in the Chattel Mortgage Law, and that since Section 14 of Act No. 1508 vests in the mortgagee the choice where the foreclosure sale should be held, the PNB had three places from which to select and validly selected the place where the chattels were situated.
• Attorney's Fees: Respondent argued that courts should take judicial notice of the fees provided for by law which need not be proved, and that the stipulation to pay attorney's fees was clear enough to cover both cases of judicial and extra-judicial foreclosure.
• Liability for Forcible Taking: Respondent argued that it was the subsequent buyer, Mariano Bundok, who was not a party to the case, that was responsible for the forcible taking of the property, and that the PNB had given the plaintiff the opportunity to repurchase or redeem the chattels.

• Computation of Indebtedness: Whether the trial court erred in computing the plaintiff's total indebtedness to the PNB by including compound interest on accrued interests without agreement or judicial demand.
• Expenses of Foreclosure Sale: Whether the award of P298.54 as expenses of the extra-judicial foreclosure sale had legal basis.
• Attorney's Fees: Whether the award of P5,821.35 as attorney's fees was proper and reasonable under the circumstances.
• Sufficiency of Payment: Whether the proceeds of the real estate foreclosure sale together with the subsequent remittance were sufficient to liquidate the plaintiff's total obligation, thereby rendering the chattel foreclosure sale unnecessary and unlawful.
• Validity of Chattel Foreclosure Sale — Venue: Whether the chattel foreclosure sale conducted at Jose Panganiban, Camarines Norte, was valid notwithstanding the stipulation in the mortgage contract that the petition for sale should be filed with the sheriff of the City of Manila.
• Validity of Chattel Foreclosure Sale — Manner of Sale: Whether the sale of the chattels in bulk, rather than article by article, violated the requirements of Act No. 1508.
• Liability for Conversion: Whether the PNB and the Deputy Sheriff were liable for conversion of the mortgaged chattels.
• Moral and Exemplary Damages: Whether the plaintiff was entitled to moral and exemplary damages and attorney's fees.

• Computation of Indebtedness: Yes, the trial court erred. Section 5 of Act No. 2655 expressly provides that compound interest shall not be reckoned except by agreement or when the debt is judicially claimed, and no such agreement existed in the promissory notes.
• Expenses of Foreclosure Sale: No. The award of P298.54 had no evidentiary basis; the fees enumerated under the Rules of Court apply only to judicial foreclosure, while Section 4 of Act 3135 entitles the officer to a fee of P5.00 per day of actual work, and the most that could be allowed was P10.00 for two days' work.
• Attorney's Fees: No, the award of P5,821.35 was unconscionable and unreasonable. The Court reduced the stipulated 10% attorney's fees to P1,000.00 on a quantum meruit basis, considering that all the branch attorney did was file a petition with the provincial sheriff.
• Sufficiency of Payment: Yes. The total obligation as of November 21, 1961 was P57,495.86, while the total payments made amounted to P57,646.59, resulting in an excess payment of P150.73, leaving no necessity to foreclose the chattel mortgage.
• Validity of Chattel Foreclosure Sale — Venue: No. The sale at Jose Panganiban was invalid because the parties had validly waived the statutory venue by stipulating that the petition for sale should be filed with the sheriff of the City of Manila, and such waiver was a personal privilege not contrary to public policy.
• Validity of Chattel Foreclosure Sale — Manner of Sale: No. The sale in bulk was manifestly objectionable because Section 14 of Act 1508 requires the officer making the sale to make a return particularly describing the articles sold and the amount received from each article, which would be impossible if the chattels were sold as a single lot.
• Liability for Conversion: Yes. The mortgagee is guilty of conversion when it sells under the mortgage but not in accordance with its terms, or where the foreclosure proceedings do not comply with the statute, and the PNB could not escape liability by parting with its interest in the property.
• Moral and Exemplary Damages: No moral damages, as a corporation cannot experience physical sufferings or mental anguish. Yes to exemplary damages of P10,000.00 and attorney's fees of P3,000.00 for the wrongful acts of the appellees in proceeding with the sale in utter disregard of the agreement and in disposing of the chattels in gross for P4,200.00.

• Computation of Indebtedness: The Court examined the promissory notes and found that the agreed interest was six percent (6%) per annum from the respective dates "until paid." The PNB's statement of account compounded the principal and accrued interest each time the yearly amortizations became due, and charged additional delinquency interest on the compounded amounts. The Court held this was erroneous, citing Section 5 of Act No. 2655, which provides that compound interest shall not be reckoned except by agreement or when the debt is judicially claimed, and Article 2212 of the Civil Code, which provides that interest due shall earn legal interest only from the time it is judicially demanded. Article 1959 likewise ordains that interest due and unpaid shall not earn interest. Since no stipulation to capitalize interest was found in the promissory notes, the trial court erred in awarding interest on accrued interests.

• Expenses of Foreclosure Sale: The trial court had awarded P298.54 based on the sheriff's fees and commission under the Rules of Court, but the Court found no evidence of record to support this conclusion. The fees enumerated under paragraphs k and n, Section 7, of Rule 130 (now Rule 141) are demandable only by a sheriff serving processes of the court in connection with judicial foreclosure of mortgages under Rule 68, not in cases of extra-judicial foreclosure under Act 3135. The applicable law is Section 4 of Act 3135, which provides that the officer conducting the sale is entitled to collect a fee of P5.00 for each day of actual work performed in addition to his expenses. Since the PNB failed to prove the number of working days the sheriff actually spent, the most that could be allowed was P10.00 for two days' work — one for preparing the notices of sale, and the other for conducting the auction sale and issuing the certificate of sale.

• Attorney's Fees: The Court found that the stipulation in the mortgage contract to pay attorney's fees was clear enough to cover both judicial and extra-judicial foreclosure, and the ambiguity suggested by the appellant due to faulty sentence construction should not defeat the clear intention of the parties. However, the Court found merit in the appellant's contention that the award of P5,821.35 was unconscionable and unreasonable, considering that all the branch attorney did was file a petition with the provincial sheriff requesting the sale. The Court cited the principle that courts should reduce stipulated attorney's fees whenever found unreasonable, and that contracts for attorney's services stand upon a different footing from contracts for other services. The Court fixed the attorney's fees at P1,000.00, considering the amount and character of services rendered, the responsibility imposed, and the results secured.

• Sufficiency of Payment: The Court computed the total obligation as of November 21, 1961 as follows: principal loans of P27,500.00 and P15,500.00, with interest at 6% per annum computed at P8,751.78 and P4,734.08 respectively, sheriff's fees of P10.00, and attorney's fees of P1,000.00, totaling P57,495.86. The total payments made were P56,908.00 from the real estate foreclosure proceeds and P738.59 remitted on December 18, 1961, totaling P57,646.59. This resulted in an excess payment of P150.73, making it clear that there was no further necessity to foreclose the chattel mortgage on December 21, 1961. On this ground alone, the sale of the chattels was declared illegal and void.

• Validity of Chattel Foreclosure Sale — Venue: The Court disagreed with the trial court's rationale that the stipulation merely provided another place for the sale in addition to those specified in the Chattel Mortgage Law. While the law grants the mortgagee the power to sell at a public place in the municipality where the mortgagor resides or where the property is situated, the Court held that when the parties agreed to have the sale in the City of Manila, which is the residence of the mortgagor, the mortgagee no longer retained the power to select from among the places provided for in the law and the place designated in their agreement over the objection of the mortgagor. The rights arising under the law are personal to the parties and may validly be waived, as they do not affect public policy or the rights of third persons. The correlative obligations arising from the agreement have the force of law between the parties and should be complied with in good faith under Article 1159 of the Civil Code.

• Validity of Chattel Foreclosure Sale — Manner of Sale: The Court noted that Section 14 of Act 1508 requires the officer making the sale to make a return of his doings which shall particularly describe the articles sold and the amount received from each article. This requirement was totally disregarded when the Deputy Sheriff sold the chattels in bulk, notwithstanding that the chattels consisted of no less than twenty different items as shown in the bill of sale. In the absence of any evidence that the mortgagor had agreed or consented to such sale in gross, the sale should be set aside.

• Liability for Conversion: The Court cited the rule that the mortgagee is guilty of conversion when it sells under the mortgage but not in accordance with its terms, or where the foreclosure proceedings do not comply with the statute. This rule applied squarely to the facts, where the PNB insisted on proceeding with the sale at Jose Panganiban in utter disregard of the valid objection of the mortgagor, and the deputy sheriff sold all the chattels as a single lot in violation of the law. The PNB could not escape liability for conversion by parting with its interest in the property, and its claim that it gave the appellant a chance to repurchase did not improve its position, as the mortgagor is not under obligation to take affirmative steps to repossess the chattels that were converted by the mortgagee.

• Moral and Exemplary Damages: The Court denied moral damages because an artificial person like a corporation cannot experience physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation which are the basis of moral damages under Article 2217 of the Civil Code. However, the Court awarded exemplary damages of P10,000.00 for the wrongful acts of the appellees in proceeding with the sale in utter disregard of the agreement to have the chattels sold in Manila, and in disposing of the chattels in gross for the miserable amount of P4,200.00. The Court also awarded P3,000.00 as attorney's fees for the appellant.

• Compound Interest Prohibition — Under Section 5 of Act No. 2655 and Articles 1959 and 2212 of the Civil Code, compound interest shall not be reckoned except by agreement or when the debt is judicially claimed. The Court applied this doctrine to strike down the PNB's computation that compounded the principal and accrued interest each time the yearly amortizations became due, absent any stipulation in the promissory notes authorizing such capitalization.

• Reduction of Stipulated Attorney's Fees — Courts may reduce stipulated attorney's fees whenever found unconscionable or unreasonable, fixing them on a quantum meruit basis. The Court applied this doctrine to reduce the stipulated 10% attorney's fees from P5,821.35 to P1,000.00, considering that all the branch attorney did was file a petition for foreclosure with the sheriff, and that the stipulation was fair enough for judicial foreclosure but unreasonable for extra-judicial foreclosure.

• Waiver of Statutory Venue in Chattel Mortgage Foreclosure — The rights granted to the mortgagor and mortgagee under Section 14 of Act No. 1508 regarding the place of sale are personal to them and may validly be waived by agreement. When the parties stipulate a specific place for the foreclosure sale, such agreement has the force of law between them and should be complied with in good faith, and the mortgagee cannot select another place over the objection of the mortgagor.

• Conversion by Mortgagee — A mortgagee is guilty of conversion when it sells under the mortgage but not in accordance with its terms, or where the foreclosure proceedings do not comply with the statute. The mortgagee cannot escape liability for conversion by parting with its interest in the property, and the mortgagor is not under obligation to take affirmative steps to repossess the chattels that were converted.

• Moral Damages for Corporations — An artificial person like a corporation cannot experience physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation which are the basis of moral damages under Article 2217 of the Civil Code. A corporation may have a good reputation which, if besmirched, may be a ground for moral damages, but not under the facts of this case where the corporation had already ceased business operations.

• "Section 5 of Act No. 2655 expressly provides that in computing the interest on any obligation, promissory note or other instrument or contract, compound interest shall not be reckoned, except by agreement, or in default thereof, whenever the debt is judicially claimed. This is also the clear mandate of Article 2212 of the new Civil Code which provides that interest due shall earn legal interest only from the time it is judicially demanded, and of Article 1959 of the same code which ordains that interest due and unpaid shall not earn interest." — This passage articulates the controlling rule against compound interest and was the basis for striking down the PNB's erroneous computation of the appellant's indebtedness.

• "The principle that courts should reduce stipulated attorney's fees whenever it is found under the circumstances of the case that the same is unreasonable, is now deeply rooted in this jurisdiction to entertain any serious objection to it." — This passage states the canonical formulation of the doctrine allowing judicial reduction of unconscionable attorney's fees, which the Court applied to reduce the stipulated 10% fee to P1,000.00.

• "By said agreement the parties waived the legal venue, and such waiver is valid and legally effective, because it was merely a personal privilege they waived, which is not contrary to public policy or to the prejudice of third persons. It is a general principle that a person may renounce any right which the law gives unless such renunciation is expressly prohibited or the right conferred is of such nature that its renunciation would be against public policy." — This passage establishes the validity of waiving the statutory venue in chattel mortgage foreclosures and was the basis for declaring the sale at Jose Panganiban invalid.

• "It is said that the mortgagee is guilty of conversion when he sells under the mortgage but not in accordance with its terms, or where the proceedings as to the sale of foreclosure do not comply with the statute." — This passage defines the doctrine of conversion by a mortgagee and was applied to hold the PNB and the Deputy Sheriff jointly and severally liable for the value of the chattels.

• Bachrach vs. Golingco, 39 Phil. 138 — Cited as controlling authority for the principle that courts may reduce stipulated attorney's fees when found unreasonable or unconscionable, and that contracts for attorney's services stand upon a different footing from contracts for other services. Also cited for the rule that a mortgagee who carries off property to be sold irregularly is liable for the full value of the property at the time of the illegal taking.

• Gorospe, et al. vs. Gochangco, L-12735, October 30, 1959 — Cited in support of the principle that courts should disregard stipulations for counsel fees whenever they appear to be a source of speculative profit at the expense of the debtor or mortgagor.

• Delgado vs. De la Rama, 43 Phil. 419 — Cited for the circumstances to be considered in determining the compensation of an attorney, including the amount and character of services rendered, the responsibility imposed, the amount of money or value of property affected, the skill and experience required, the professional standing of the attorney, the results secured, and whether the fee is contingent or absolute.

• Riosa vs. Stilianopulos, Inc., 67 Phil. 422 — Cited for the rule that the sale of a mortgaged chattel may be made in a place other than that where it is found, provided that the owner consents thereto or there is an agreement to this effect between the mortgagor and the mortgagee.

• General Azucarera de Tarlac vs. De Leon, 56 Phil. 169 — Cited for the general principle that a person may renounce any right which the law gives unless such renunciation is expressly prohibited or the right conferred is of such nature that its renunciation would be against public policy.

• Bautista vs. De Borja, et al., L-20600, October 28, 1966 — Cited in support of the principle that a person may renounce any right which the law gives unless such renunciation is expressly prohibited or against public policy.

• Section 5, Act No. 2655 — Provides that in computing the interest on any obligation, promissory note or other instrument or contract, compound interest shall not be reckoned, except by agreement, or in default thereof, whenever the debt is judicially claimed. Applied to strike down the PNB's computation that compounded interest on accrued interests without agreement or judicial demand.

• Article 2212, Civil Code — Provides that interest due shall earn legal interest only from the time it is judicially demanded. Applied to prohibit the award of interest on accrued interests before judicial demand.

• Article 1959, Civil Code — Provides that interest due and unpaid shall not earn interest. Applied to prohibit the compounding of interest absent stipulation.

• Article 1159, Civil Code — Provides that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Applied to enforce the stipulation in the chattel mortgage contract designating Manila as the venue for foreclosure sale.

• Article 2217, Civil Code — Lists the bases for moral damages, including physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock and social humiliation. Applied to deny moral damages to the corporation, which cannot experience such feelings.

• Section 4, Act No. 3135 — Provides that the officer conducting an extra-judicial foreclosure sale is entitled to collect a fee of P5.00 for each day of actual work performed in addition to his expenses. Applied to determine the allowable sheriff's fees, which the Court fixed at P10.00 for two days' work.

• Section 14, Act No. 1508 — Provides that the officer making the sale of mortgaged chattels should make a return of his doings which shall particularly describe the articles sold and the amount received from each article. Applied to invalidate the sale of chattels in bulk, which made it impossible to state the amount received for each item.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro and Fernando, JJ., concurred. Bengzon, J.P., J., took no part.