The Supreme Court decision in Mandy Commodities Co., Inc. v. The International Commercial Bank of China underscores a crucial principle in property law: parties to a contract can stipulate that what is ordinarily considered real property may be treated as personal property for purposes of a chattel mortgage. However, the Court also clarified that procedural remedies must be correctly followed. The Court ultimately ruled that the remedy of annulment of a lower court’s order was not the proper recourse in this instance, emphasizing the importance of adhering to the correct legal procedures. This decision impacts how businesses and individuals can use their assets as collateral, highlighting the necessity of clearly defining the nature of the property in mortgage agreements to avoid disputes during foreclosure.

Buildings as Chattels: Can Parties Agree to Mortgage Immovable Property as Movable?

Mandy Commodities Co., Inc. secured a loan from The International Commercial Bank of China using two deeds of chattel mortgage over twenty-five two-story concrete buildings. A key aspect of this agreement was the explicit stipulation between the parties to treat these buildings as chattels, making them subject to chattel mortgage laws. When Mandy Commodities defaulted, the bank initiated foreclosure proceedings, treating the properties as personal assets. The legal battle that ensued questioned whether the parties’ agreement could override the typical classification of buildings as immovable property and the validity of the subsequent foreclosure based on chattel mortgage rules.

The central question revolved around whether the parties could validly agree to treat buildings as chattels for the purpose of a mortgage. The Supreme Court addressed this by examining the intent of the parties as manifested in their agreement. It acknowledged that parties have the autonomy to contract and stipulate terms and conditions, provided they are not contrary to law, morals, good customs, public order, or public policy. In this case, the agreement explicitly stated that the buildings would be considered chattels, demonstrating a clear intention to deviate from their inherent classification as real property.

This principle is rooted in the doctrine of **estoppel**, which prevents a party from denying representations made that have been relied upon by another party. The Supreme Court has consistently recognized the validity of chattel mortgages over properties that, by their nature, would typically be considered immovable. However, the Court also emphasized that this recognition is conditional on the existence of a specific agreement between the parties to treat the property as personal.

“On the day of the execution of the first deed, petitioner and respondent entered into an agreement whereby they specifically stipulated to consider the buildings ‘as chattels, and as such, they can be the subject of a Chattel Mortgage under the law.’”

The Court’s analysis hinged on the presence of this agreement and its impact on the subsequent foreclosure proceedings. While recognizing the validity of treating the buildings as chattels, the Court ultimately found that the petitioner had pursued the wrong remedy in challenging the foreclosure. Specifically, Mandy Commodities sought to annul the trial court’s order for a writ of possession, arguing that the foreclosure sale was void because it did not comply with the notice requirements under the Chattel Mortgage Law (Act No. 1508).

However, the Supreme Court pointed out that the proper remedy to question the trial court’s order was an ordinary appeal, not a petition for annulment of judgment under Rule 47 of the Rules of Court. The grounds for annulment are limited to lack of jurisdiction and extrinsic fraud, neither of which were sufficiently established in this case. The Court emphasized that the trial court had jurisdiction over the subject matter and the parties, and any errors in its judgment should have been addressed through a timely appeal.

The Court elucidated the distinction between jurisdiction and the exercise thereof. Jurisdiction is the authority to hear and determine a case, while the exercise of jurisdiction refers to the manner in which that authority is exercised. Errors committed in the exercise of jurisdiction, such as procedural errors or errors in judgment, do not negate the court’s jurisdiction itself. These errors are correctable through an appeal, not through a petition for annulment.

This ruling underscores the importance of following the correct legal procedures when challenging a court’s decision. The failure to pursue the appropriate remedy can result in the dismissal of the case, even if there are valid grounds for challenging the underlying decision. The Court reiterated that the remedy of annulment of judgment is an extraordinary one, available only when the ordinary remedies of appeal or new trial are no longer available.

Moreover, the Court noted that Mandy Commodities had previously attempted to challenge the foreclosure through a separate petition, which was dismissed for violating the principle of hierarchy of courts. This prior attempt further demonstrated the petitioner’s failure to pursue the correct legal avenues, ultimately leading to the dismissal of the current petition.

The Supreme Court also addressed the issue of the writ of possession, which the trial court had ordered to be issued in favor of the bank. The Court acknowledged that the issuance of a writ of possession is generally a ministerial duty of the court, especially in cases of extrajudicial foreclosure under Act No. 3135 (the Real Estate Mortgage Law). However, because the properties were treated as chattels, the provisions of Act No. 3135 were not directly applicable.

Despite this discrepancy, the Court upheld the Court of Appeals’ decision, emphasizing that the focus should be on the procedural errors committed by the petitioner in seeking the wrong remedy. The Court reiterated that it is not within its purview to correct errors of judgment when the proper remedy has not been pursued.

In conclusion, the Supreme Court’s decision in this case serves as a reminder of the importance of clear contractual agreements and adherence to proper legal procedures. While parties have the freedom to stipulate the nature of their property for mortgage purposes, they must also ensure that they pursue the correct legal remedies when challenging foreclosure proceedings.

FAQs

What was the key issue in this case?	The key issue was whether parties could agree to treat buildings as chattels for purposes of a chattel mortgage, and if so, whether the subsequent foreclosure was valid. The Court also addressed whether the proper remedy was used to challenge the foreclosure.
Can a building be considered personal property?	Yes, under certain circumstances. If the parties to a mortgage agreement expressly stipulate that a building is to be treated as personal property, the courts will generally uphold that agreement.
What is a chattel mortgage?	A chattel mortgage is a security agreement where personal property is used as collateral for a loan. If the borrower defaults, the lender can seize and sell the property to recover the debt.
What is a writ of possession?	A writ of possession is a court order directing the sheriff to place a party in possession of real or personal property. In foreclosure cases, it allows the buyer to take possession of the property.
What is annulment of judgment?	Annulment of judgment is an extraordinary remedy used to set aside a final judgment or order of a court. It is available only on limited grounds, such as lack of jurisdiction or extrinsic fraud.
What is the significance of Act No. 1508?	Act No. 1508, also known as the Chattel Mortgage Law, governs the creation, registration, and foreclosure of chattel mortgages. It outlines the procedures that must be followed in chattel mortgage transactions.
What is the significance of Act No. 3135?	Act No. 3135, also known as the Real Estate Mortgage Law, governs the extrajudicial foreclosure of real estate mortgages. It provides the procedure for foreclosing on real property outside of court.
What is the proper remedy for challenging a foreclosure sale?	The proper remedy depends on the circumstances. Generally, an appeal is the appropriate remedy for challenging errors in a court’s decision. Annulment of judgment is an extraordinary remedy available only in limited cases.
What is the doctrine of estoppel?	The doctrine of estoppel prevents a party from denying a representation made that has been relied upon by another party. In this case, it prevented Mandy Commodities from denying their agreement to treat the buildings as chattels.

The Mandy Commodities case underscores the need for careful drafting of mortgage agreements and the importance of understanding the proper legal remedies available. By explicitly defining the nature of the property and following the correct procedures, parties can avoid costly and time-consuming litigation. Understanding such is vital in protecting one’s rights under the law.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Mandy Commodities Co., Inc. v. The International Commercial Bank of China, G.R. No. 166734, July 03, 2009