G.R. No. 158997; October 6, 2008
Fort Bonifacio Development Corporation, petitioner, vs. Yllas Lending Corporation and Jose S. Lauraya, in his official capacity as President, respondents.

FACTS

On April 24, 1998, petitioner Fort Bonifacio Development Corporation (FBDC) executed a lease contract with Tirreno, Inc. (Tirreno) for a unit at Bonifacio Global City. Tirreno defaulted on its lease payments, incurring arrears of P5,027,337.91 by July 2000. On September 29, 2000, FBDC terminated the lease, entered the premises, and appropriated Tirreno’s equipment and properties left therein pursuant to Section 22 of their Contract of Lease, which granted FBDC a lien and the right to retain, offset the value, or sell the lessee’s properties upon termination for unpaid rentals.
Subsequently, on September 27, 2001, respondents Yllas Lending Corporation and Jose S. Lauraya filed a complaint for Foreclosure of Chattel Mortgage with Replevin against Tirreno and its officers. Respondents alleged they lent P1.5 million to Tirreno, secured by a chattel mortgage dated November 9, 2000, covering the furniture, fixtures, and equipment of Savoia Ristorante and La Strega Bar. The mortgagors warranted they were the absolute owners of the properties, free from liens.
On March 4, 2002, the sheriff served an alias writ of seizure on FBDC based on respondents’ complaint. FBDC served an affidavit of title and third-party claim, asserting ownership of the properties since it had already enforced its lien on September 29, 2000, before the chattel mortgage was executed. The sheriff proceeded to seize items from FBDC’s premises and delivered them to respondents. FBDC filed a third-party claim and a Motion to Intervene and Admit Complaint in Intervention before the Regional Trial Court (RTC).
The RTC dismissed FBDC’s third-party claim and denied its motion to intervene. It ruled that Section 22 of the lease contract was void under Article 2088 of the Civil Code for being a pledge and a pactum commissorium, thus vesting no ownership title in FBDC. It also held that FBDC’s proper remedy was to file a separate action, not to intervene.

ISSUE

1. Whether Section 22 of the lease contract between FBDC and Tirreno is void for being a pledge and a pactum commissorium.
2. Whether the trial court erred in denying FBDC’s motion to intervene.
3. Whether the trial court deprived FBDC of its properties without due process by dismissing the third-party claim, denying intervention, and not requiring an indemnity bond.

RULING

1. No. Section 22 of the lease contract is not a pledge and does not constitute a pactum commissorium. The provision creates a contractual lien, not a pledge which requires delivery of the thing pledged. A pactum commissorium involves the automatic appropriation of the mortgaged property by the creditor upon the debtor’s default, which is prohibited. Section 22 does not provide for automatic appropriation; it grants FBDC the right to retain possession and offset the value of the properties against unpaid rentals or sell them, actions which require positive acts by FBDC. The lessee’s authorization for these acts negates the element of automatic forfeiture. Therefore, Section 22 is valid and enforceable.
2. Yes. The trial court erred in denying FBDC’s motion to intervene. FBDC, claiming ownership of the seized properties, has a legal interest in the matter of litigation. Its intervention would not unduly delay or prejudice the adjudication of the original parties’ rights, as it seeks to assert its superior right of ownership acquired prior to the chattel mortgage. The proper remedy for a third-party claimant is not confined to a separate action; intervention is also allowed under the Rules of Court to avoid multiplicity of suits.
3. Yes. The trial court deprived FBDC of its properties without due process. By dismissing the third-party claim and denying intervention based on an erroneous interpretation of the contract, the court effectively sanctioned the seizure and delivery of FBDC’s properties to respondents without a hearing on the merits of FBDC’s claim of ownership. Furthermore, the sheriff should not have delivered the seized properties to the judgment obligee (respondents) without first requiring an indemnity bond, as mandated by Section 16, Rule 39 of the Rules of Court, to protect the third-party claimant.
The Supreme Court granted the petition, reversed the RTC orders, and directed the RTC to admit FBDC’s complaint in intervention and conduct further proceedings.