Tumalad vs. Vicencio

Parties to a contract may, by agreement, treat as personal property that which by nature would be real property, and the mortgagor is estopped from denying such characterization; however, a purchaser at an extrajudicial foreclosure sale is not entitled to possession or to collect rents from the mortgagor during the one-year redemption period unless the purchaser files a petition and furnishes a bond as required by Section 7 of Act No. 3135.

On September 1, 1955, the defendants (mortgagors) executed a chattel mortgage over their house of strong materials located on leased land in favor of the plaintiffs (mortgagees) to secure a P4,800 loan. The mortgage was registered and contained a stipulation that it would be enforceable in accordance with Act No. 3135 (Extrajudicial Foreclosure of Real Estate Mortgage). Upon default, the mortgage was foreclosed extrajudicially, and on March 27, 1956, the house was sold at public auction to the plaintiffs as highest bidders.

• Filed in MTC: Civil Case No. 43073 (ejectment) in the Municipal Court of Manila on April 18, 1956.
• Decision of MTC: Rendered September 21, 1956, ordering defendants to vacate and pay monthly rent of P200.00 from March 27, 1956 until vacation, plus attorney's fees.
• Appealed to CFI: Civil Case No. 30993 (Court of First Instance).
• Decision of CFI: Rendered October 7, 1957, affirming the MTC decision but limiting the rent award from March 27, 1956 to January 14, 1957 (when the house was demolished pursuant to a separate ejectment case filed by the landowner).
• Elevated to SC: Certified by the Court of Appeals (CA-G.R. No. 27824-R) on the ground that only questions of law were involved.

• Nature of Action: Ejectment (forcible entry/unlawful detainer) filed by purchasers at foreclosure sale to recover possession and rent.
• Parties: Plaintiffs-appellees are the Tumalad spouses (mortgagees/purchasers); defendants-appellants are Alberta Vicencio and Emiliano Simeon (mortgagors).
• The Mortgage: Executed September 1, 1955 over a house of strong materials built on rented land (leased from Madrigal & Company, Inc.). The mortgage contract expressly stipulated that the property was transferred "by way of Chattel Mortgage" and that foreclosure would proceed under Act No. 3135.
• Foreclosure Sale: Held March 27, 1956; plaintiffs were the highest bidders and issued a certificate of sale.
• Ejectment Suit: Filed April 18, 1956, while the one-year redemption period was still running (until March 27, 1957).
• Demolition: The house was demolished on January 14, 1957 pursuant to a separate ejectment case filed by the landowner for non-payment of land rents.
• Defense: Defendants claimed the chattel mortgage was void ab initio because (a) their signatures were obtained through fraud, and (b) the house was an immovable and could not be subject to a chattel mortgage. They also claimed entitlement to possession during the redemption period.

• Jurisdictional Defect: The municipal court lacked jurisdiction because the issue involved ownership (validity of the chattel mortgage), which is beyond the jurisdiction of municipal courts and cognizable by the Court of First Instance.
• Void Mortgage: The chattel mortgage was void ab initio because: (a) it was procured through fraud, deceit, or trickery; and (b) the subject was a house of strong materials (an immovable), which cannot be the subject of a chattel mortgage but only of a real estate mortgage.
• Redemption Rights: Under Section 6 of Act No. 3135, they were entitled to remain in possession without paying rent during the one-year redemption period following the foreclosure sale (until March 27, 1957).
• Procedural Defect: Failure to allege prior demand as required by Section 2, Rule 72 (now Rule 70) of the Rules of Court.

N/A — Plaintiffs-appellees failed to file a brief.

• Procedural Issues:
  • Whether the municipal court had jurisdiction over the ejectment case despite defendants' defense that the chattel mortgage was void and that they remained the owners.
  • Whether the complaint stated a cause of action, or was prematurely filed.
• Substantive Issues:
  • Whether a house of strong materials built on rented land may be the subject of a valid chattel mortgage.
  • Whether the purchaser at an extrajudicial foreclosure sale is entitled to possession and to collect rents from the mortgagor during the one-year redemption period without complying with Section 7 of Act No. 3135.

• Procedural:
  • Jurisdiction: The municipal court had jurisdiction. Jurisdiction is determined by the allegations in the complaint and the relief sought, not by the defenses raised. The complaint sought recovery of possession and rent; the defense of ownership (alleging the mortgage was void) was merely a matter of defense that raised an issue of fact to be determined at trial, which does not oust the municipal court of jurisdiction.
  • Cause of Action: The complaint was prematurely filed and stated no cause of action. At the time of filing (April 18, 1956), the one-year redemption period had not yet expired (ending March 27, 1957). Plaintiffs had not complied with Section 7 of Act No. 3135 (filing a petition with the CFI and furnishing a bond) to obtain possession during the redemption period. Therefore, plaintiffs' right to possession was not yet born, and there could be no breach thereof.
• Substantive:
  • Validity of Chattel Mortgage: A house of strong materials built on rented land may be the subject of a valid chattel mortgage. Parties may agree to treat as personal property that which by nature would be real property. Here, the mortgagors expressly ceded the property "by way of Chattel Mortgage" and stipulated that foreclosure would proceed under Act No. 3135 (a real estate mortgage law), demonstrating intent to treat the house as personalty. Having treated the property as personalty, the mortgagors are estopped from claiming otherwise. Fraud, if any, would only render the contract voidable, not void ab initio, and no action to annul had been filed.
  • Right to Possession and Rents: The purchaser at an extrajudicial foreclosure sale is not entitled to possession or to collect rents from the mortgagor during the redemption period without complying with Section 7 of Act No. 3135 (filing a petition with the CFI and furnishing a bond). Until such compliance, the mortgagor is entitled to remain in possession and to the rents and profits of the property. Any rents collected by the purchaser during the redemption period must be credited against the redemption price if the mortgagor redeems.

Final Disposition: The decision of the Court of First Instance was reversed; the complaint was dismissed.

• Treaty of Immovables as Personal Property (Estoppel by Contract) — Parties to a contract may by agreement treat as personal property that which by nature would be real property. This principle operates only between the contracting parties and is based on estoppel. When the mortgagor themselves executes a chattel mortgage over a building and treats it as personalty, they cannot subsequently claim it is an immovable to defeat the contract.
• Jurisdiction in Forcible Entry and Unlawful Detainer — The jurisdiction of the municipal court is determined by the allegations of the complaint and the relief sought. A claim of ownership raised as a defense does not oust the municipal court of jurisdiction; it is treated as a matter of defense raising an issue of fact to be resolved at trial.
• Redemption Rights under Act No. 3135 — During the one-year redemption period after an extrajudicial foreclosure sale:
  • The purchaser has no right to possession as a matter of right.
  • To obtain possession during the redemption period, the purchaser must file a petition with the Court of First Instance and furnish a bond equivalent to twelve months' rent/use of the property (Section 7, Act No. 3135).
  • Absent such compliance, the mortgagor retains possession and is entitled to rents/profits.
  • Any rents collected by the purchaser during the redemption period are held in trust for the mortgagor and must be credited against the redemption price (Rule 39, Section 34).

• "Parties to a contract may by agreement treat as personal property that which by nature would be real property."
• "The view that parties to a deed of chattel mortgage may agree to consider a house as personal property for the purposes of said contract, 'is good only insofar as the contracting parties are concerned. It is based, partly, upon the principle of estoppel.'"
• "Before the expiration of the 1-year period within which the judgment-debtor or mortgagor may redeem the property, the purchaser thereof is not entitled, as a matter of right, to possession of the same."
• "The rentals receivable from tenants, although they may be collected by the purchaser during the redemption period, do not belong to the latter but still pertain to the debtor or mortgagor."

• Manarang and Manarang vs. Ofilada (99 Phil. 109) — Established that parties may agree to treat immovables as personal property.
• Navarro vs. Pineda (9 SCRA 631) — Explained that treating a house as personalty is based on estoppel and is effective only between the parties; distinguished from cases where third persons assail the mortgage.
• Reyes vs. Hamada (14 SCRA 215) — Controlling precedent establishing that a purchaser at foreclosure sale is not entitled to possession during redemption without complying with Section 7 of Act No. 3135, and that rents collected belong to the mortgagor.
• Sy vs. Dalman (22 SCRA 834) — Held that in detainer cases, a claim of ownership is a matter of defense that does not defeat the municipal court's jurisdiction.

• Article 415, New Civil Code — Enumeration of real properties (buildings are immovables).
• Article 1390, New Civil Code — Voidable contracts; fraud does not render a contract void ab initio but merely voidable.
• Act No. 1508 (Chattel Mortgage Law), Section 14 — Procedure for extrajudicial foreclosure of chattel mortgages.
• Act No. 3135, Section 6 — One-year redemption period for extrajudicial foreclosure sales.
• Act No. 3135, Section 7 — Procedure for purchaser to obtain possession during redemption period (petition to CFI + bond).
• Rule 39, Section 34 of the Revised Rules of Court — Rents and profits pending redemption; purchaser accountable to debtor for rents received.
• Rule 51, Section 7 — Authority of the SC to review palpable errors not assigned as errors.

N/A — All justices concurred in the decision without separate opinions.