G.R. No. 120098 & 120109. October 2, 2001.
RUBY L. TSAI and PHILIPPINE BANK OF COMMUNICATIONS, petitioners, vs. HON. COURT OF APPEALS, EVER TEXTILE MILLS, INC. and MAMERTO R. VILLALUZ, respondents.

FACTS

Respondent Ever Textile Mills, Inc. (EVERTEX) obtained loans from petitioner Philippine Bank of Communications (PBCom), secured by a Real and Chattel Mortgage over its factory lot and specifically enumerated machinery. A subsequent loan was secured by a Chattel Mortgage over similar listed properties. EVERTEX later purchased additional machinery not listed in these mortgage contracts. In 1982, EVERTEX was declared insolvent. Despite the insolvency proceedings, PBCom extrajudicially foreclosed the mortgages. PBCom emerged as the highest bidder at the auction sales, later consolidated ownership, and eventually sold the entire factory, including the unlisted machinery, to petitioner Ruby L. Tsai.
EVERTEX filed a complaint for annulment of sale and reconveyance, arguing that the extrajudicial foreclosure during insolvency was void and that PBCom illegally appropriated the unlisted machinery, which were not validly included in the foreclosure sale. The Regional Trial Court ruled in favor of EVERTEX, ordering the reconveyance of the disputed properties and awarding damages. The Court of Appeals affirmed the decision.

ISSUE

Whether the disputed machineries, which were not specifically listed in the mortgage contracts or the notice of sheriff’s sale, were validly included in the foreclosure and subsequent sale to Tsai.

RULING

The Supreme Court denied the petitions and affirmed the Court of Appeals with modifications. The disputed machineries were not validly foreclosed and sold. The legal logic rests on the principles of mortgage law and the nature of the contracts involved. A mortgage contract is a security transaction that creates a lien on specific property. The rule is that only properties expressly included in the mortgage contract can be foreclosed. The “dragnet” or “blanket” clause in the mortgage, stating it covers “replacements, substitutions, additions, increases and accretions,” cannot be interpreted to automatically encompass after-acquired properties not otherwise identified. For such after-acquired properties to be covered, they must be sufficiently described or identified in a manner that third persons can verify the encumbrance. The disputed machines were purchased after the execution of the mortgages and were never specifically described or listed in any amendment or supplemental document to the original contracts. Therefore, they did not form part of the mortgaged collateral. Consequently, PBCom had no right to foreclose on them, and its sale of these properties to Tsai was void. Tsai, as purchaser, could not acquire better rights than PBCom, the seller. The Court modified the monetary awards, reducing the monthly compensation for use and exemplary damages, but upheld the award for attorney’s fees.