Philippine Savings Bank v. Lantin

An unpaid contractor's claim under Article 2242 of the Civil Code does not acquire the character of a statutory lien co-equal to a registered mortgagee's encumbrance absent insolvency or equivalent liquidation proceedings; a mortgagee in good faith and for value takes registered land free from unrecorded liens and encumbrances.

The spouses Filomeno and Socorro Tabligan owned a lot covered by TCT No. 86195 situated at San Diego Street, Sampaloc, Manila. Private respondent Candido Ramos, a duly licensed architect and building contractor, constructed a duplex-apartment house on the lot for the spouses. The spouses separately obtained loans from petitioner Philippine Savings Bank secured by real estate mortgages over the same property. The dispute concerns whether Ramos's unpaid contractor's claim is entitled to pro-rata distribution from the property's value alongside the bank's registered mortgage under Article 2242 of the Civil Code, which enumerates preferred claims and liens on specific immovable property, and Article 2249, which provides for pro-rata satisfaction among such preferred creditors.

The spouses Filomeno and Socorro Tabligan owned a lot covered by TCT No. 86195 situated at San Diego Street, Sampaloc, Manila. Private respondent Candido Ramos, a duly licensed architect and building contractor, built a duplex-apartment house on the lot for the spouses at a total cost of P32,927.00. The spouses paid Ramos only P7,139.00, compelling him to use P25,788.50 of his own money to finish the construction.

Meanwhile, on December 16, 1966, February 1, 1967, and February 28, 1967, the spouses obtained three loans totaling P35,000.00 from petitioner Philippine Savings Bank, the stated purpose of which was to complete the duplex-apartment construction. The spouses executed three promissory notes and three deeds of real estate mortgages over the property to secure payment. The bank registered the mortgages with the Register of Deeds of Manila on December 19, 1966, February 2, 1967, and March 1, 1967, respectively. At the time of registration, TCT No. 86195 was free from all liens and encumbrances. The bank had no actual or constructive knowledge of any lien against the property, as the loan amount of P35,000.00 appeared sufficient to finance the entire construction costing P32,927.00.

The spouses failed to pay their monthly amortizations, prompting the bank to foreclose the mortgages. At the public auction held on July 23, 1969, the bank was the highest bidder. It registered the certificate of sale on August 5, 1969, consolidated ownership on August 9, 1970, and obtained TCT No. 101864 issued in its name.

Separately, Ramos had filed a collection action against the spouses for the unpaid construction cost before the CFI Manila, Branch I, docketed as Civil Case No. 69228. During its pendency, Ramos obtained a writ of preliminary attachment and had the property attached, resulting in a notice of adverse claim annotated at the back of TCT No. 86195. On August 26, 1968, a decision was rendered in favor of Ramos, but the writ of execution was returned unsatisfied because the spouses had no properties to satisfy the judgment.

Ramos then addressed a letter to the bank demanding delivery of his pro-rata share in the value of the duplex-apartment pursuant to Article 2242 of the Civil Code. The bank refused, prompting Ramos to file the instant action before the CFI Manila, Branch VII, docketed as Civil Case No. 79914. The lower court ruled in favor of Ramos, ordering the bank to pay P15,000.00 as his pro-rata share in the value of the duplex-apartment, plus legal interest from the filing of the complaint, P500.00 as attorney's fees, and costs. The bank's counterclaim was dismissed. The bank filed a motion for reconsideration, which was denied, leading to the present petition for review.

• Nature of Proceedings: Petitioner argued that the proceedings before the lower court were not the insolvency or liquidation proceedings contemplated in De Barreto vs. Villanueva that would sustain the court's authority to adjudicate the claims of all preferred creditors under Article 2242.
• No Insolvency Possible: Petitioner argued that for Article 2242 to apply, there must have been an insolvency proceeding or other liquidation proceedings of similar import, and that under the facts obtaining, there could have been no insolvency proceeding since there were only two known creditors, whereas Section 20 of the Insolvency Law requires a petition by three or more creditors.
• Subordination of Contractor's Claim: Petitioner argued that absent insolvency or equivalent liquidation, Ramos's unpaid contractor's claim did not acquire the character of a statutory lien co-equal to the bank's registered mortgage.

• Equivalent Liquidation: Respondent maintained that the proceedings before the lower court qualified as a general liquidation of the estate of the Tabligan spouses because the only existing property of said spouses was the subject property, and that there were no known creditors other than the plaintiff and defendant, thus allowing the court to ascertain and bindingly adjudicate their respective claims.

• Pro-Rata Entitlement: Whether private respondent Ramos is entitled to claim a pro-rata share in the value of the property in question under Article 2242 of the Civil Code.
• Nature of Proceedings: Whether the proceedings in the court below constitute insolvency or other liquidation proceedings of similar import as required for the full application of Articles 2242 and 2249.

• Pro-Rata Entitlement: No. Ramos is not entitled to a pro-rata share because the proceedings below did not constitute the insolvency or equivalent liquidation proceeding required under De Barreto vs. Villanueva for the full application of Articles 2242 and 2249.
• Nature of Proceedings: No. The collection action filed by Ramos was merely to collect unpaid construction costs and did not partake of the nature of insolvency proceedings or settlement of a decedent's estate, both of which are proceedings in rem binding against the whole world.

• Pro-Rata Entitlement: Under Article 2242, claims of architects, engineers, and contractors engaged in construction are preferred credits constituting encumbrances on the building. Under Article 2249, all preferred creditors under Article 2242, except taxes which enjoy absolute preference, enjoy no priority among themselves and shall be satisfied pro-rata. However, per De Barreto vs. Villanueva, the full application of Articles 2242 and 2249 demands that there first be some proceeding where the claims of all preferred creditors may be bindingly adjudicated, such as insolvency, settlement of a decedent's estate under Rule 87, or other liquidation proceedings of similar import. The collection action filed by Ramos was merely to collect unpaid construction costs and was far from being a general liquidation of the estate of the Tabligan spouses. Since no insolvency or equivalent liquidation was conducted, the established principle applies that a purchaser in good faith and for value takes registered land free from liens and encumbrances other than statutory liens and those recorded in the certificate of title. The bank's mortgages were registered when the title was free from all liens, and the bank had no knowledge of any contractor's lien, having financed what appeared to be the entire construction. Accordingly, Ramos's claim remained subordinate to the bank's title evidenced by TCT No. 101864.

• Nature of Proceedings: Insolvency proceedings and settlement of a decedent's estate are both proceedings in rem, binding against the whole world, such that all persons having interest in the subject matter, whether notified or not, are equally bound. An equivalent general liquidation must also necessarily be a proceeding in rem so that all interested persons, whether known to the parties or not, may be bound. Although the lower court found only two known creditors, this finding is not conclusive and would not bar other creditors from later presenting claims against the bank. Allowing pro-rata distribution without in rem proceedings would render TCT No. 101864 issued in favor of the bank constantly unstable and questionable, undermining the faith and credit accorded to Torrens titles and the beneficial objectives of the Land Registration Act. The Court emphasized that it is not excessively burdensome to require privileged creditors to cause their claims to be recorded in the books of the Register of Deeds should they desire to protect their rights even outside of insolvency or liquidation proceedings.

• Concurrence of Credits — When the same specific property of the debtor is subjected to the claims of several creditors and the assets are insufficient to satisfy all claims, the question of preference arises as to which creditor is paid ahead of others. Under Article 2249, only taxes and assessments upon immovable property enjoy absolute preference; all other preferred creditors under Article 2242 enjoy no priority among themselves and shall be satisfied pro-rata, i.e., in proportion to the amount of their respective credits.

• Requirement of Insolvency or Liquidation Proceedings for Article 2242 Application — The full application of Articles 2242 and 2249 demands that there first be some proceeding where the claims of all preferred creditors may be bindingly adjudicated, such as insolvency, settlement of a decedent's estate under Rule 87 of the Rules of Court, or other liquidation proceedings of similar import. Such proceedings must be in rem, binding against the whole world, so that all interested persons, whether known to the parties or not, may be bound. A mere collection action between two creditors does not qualify, as it cannot ascertain the pro-rata dividend corresponding to each when the rights of other preferred creditors under Article 2242 cannot be determined.

• Good Faith Mortgagee/Purchaser of Registered Land — A purchaser in good faith and for value takes registered land free from liens and encumbrances other than statutory liens and those recorded in the certificate of title. In the absence of insolvency or liquidation proceedings, an unpaid contractor's claim does not acquire the character and rank of a statutory lien co-equal to a mortgagee's recorded encumbrance and must remain subordinate to the latter. Privileged creditors should cause their claims to be recorded in the Register of Deeds to protect their rights even outside insolvency or liquidation proceedings.

• "Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosure sale (as in the case now before us) is not the proceeding contemplated by law for the enforcement of preferences under Article 2242, unless the claimant were enforcing a credit for taxes that enjoy absolute priority. If none of the claims is for taxes, a dispute between two creditors will not enable the Court to ascertain the pro rata dividend corresponding to each because the rights of the other creditors likewise enjoying preference under Article 2242 can not be ascertained." — This passage from De Barreto vs. Villanueva, quoted and applied by the Court, articulates the ratio decidendi: that pro-rata distribution under Article 2242 requires a proceeding where all preferred creditors' claims can be bindingly adjudicated, not merely a bilateral dispute.

• "In the absence of insolvency proceedings (or other equivalent general liquidation of the debtor's estate), the conflict between the parties now before us must be decided pursuant to the well established principle concerning registered lands; that a purchaser in good faith and for value (as the appellant concededly is) takes registered property free from liens and encumbrances other then statutory liens and those recorded in the certificate of title. There being no insolvency or liquidation, the claim of the appellee, as unpaid vendor, did not acquire the character and rank of a statutory lien co-equal to the mortgagee's recorded encumbrance, and must remain subordinate to the latter." — This passage from De Barreto vs. Villanueva states the controlling rule applied in this case: absent insolvency or liquidation, an unrecorded privileged claim is subordinate to a registered mortgagee's encumbrance.

• "We are understandably loath (absent a clear precept of law so commanding) to adopt a rule that would undermine the faith and credit to be accorded to registered Torrens titles and nullify the beneficient objectives sought to be obtained by the Land Registration Act." — This passage underscores the Torrens-title policy rationale that animates the Court's refusal to allow unrecorded statutory liens to defeat a good-faith mortgagee's rights outside of liquidation proceedings.

• De Barreto vs. Villanueva, 6 SCRA 928 — Controlling precedent. Both parties relied on this case. The Court applied its ruling that the full application of Articles 2242 and 2249 requires insolvency or equivalent liquidation proceedings, and that absent such proceedings, a good-faith purchaser for value takes registered land free from unrecorded liens, with the unpaid claimant's right remaining subordinate to the registered mortgagee's encumbrance.
• Manila Railroad Co. vs. Luzon Stevedoring Co., 100 Phil. 135 — Cited in support of the proposition that recording a claim in the Register of Deeds would facilitate enforcement of a legal statutory right which cannot be barred by laches.

• Article 2242, Civil Code — Enumerates the claims, mortgages, and liens preferred with reference to specific immovable property and real rights of the debtor, including (3) claims of architects, engineers, and contractors engaged in construction upon the building, and (5) mortgage credits recorded in the Registry of Property. The Court applied this provision to determine whether Ramos's contractor's claim and the bank's registered mortgage were both preferred credits entitled to pro-rata distribution.
• Article 2249, Civil Code — Provides that only taxes and assessments upon immovable property enjoy absolute preference, and that all remaining specified classes of preferred creditors under Article 2242 enjoy no priority among themselves and shall be satisfied pro-rata. The Court cited this provision to explain the pro-rata rule but held it inapplicable absent insolvency or equivalent liquidation proceedings.
• Article 2243, Civil Code — Mentioned as considering claims and credits under Article 2242 as statutory liens, though the Court noted this characterization does not sanction instability of Torrens titles.
• Section 20, Insolvency Law — Provides that adjudication of insolvency must be made on the petition of three or more creditors. The petitioner cited this provision to argue that no insolvency proceeding could have been instituted with only two known creditors.

Teehankee, Melencio-Herrera, Plana, Vasquez, and Relova, JJ., concur.