G.R. No. L-15836 and L-16220; September 29, 1962
Apolinario Dee, et al., plaintiffs-appellees, vs. Igor A. Masloff, et al., defendants, Rizal Surety & Insurance Co., bondsman-appellant; and Apolinario Dee, et al., plaintiffs-appellees, vs. Rehabilitation Finance Corporation, et al., defendants, Rehabilitation Finance Corporation, defendant-appellant.

FACTS

In 1946, Apolinario Dee and other investors filed a replevin suit (Civil Case No. 797) to recover possession of the Capalonga Sawmill from Igor Masloff. The court appointed a receiver, but later allowed Masloff to regain possession upon posting a P30,000 bond from Rizal Surety. Meanwhile, before the receivership, Masloff obtained a loan from the Agricultural and Industrial Bank (predecessor of the Rehabilitation Finance Corporation or RFC) by mortgaging the sawmill. The bank, unaware of the pending litigation, approved the loan. When Masloff defaulted, the RFC foreclosed and scheduled a public auction.
To prevent the sale, the plaintiffs filed a separate suit (Civil Case No. 6114) against the RFC and Masloff to annul the mortgage and enjoin the auction. The court issued a preliminary injunction, but it did not reach the sheriff in time, and the auction proceeded with RFC as the highest bidder. The two cases were jointly tried. The trial court ruled in favor of the plaintiffs in both cases, ordering Masloff to pay P50,000 in damages in the replevin case (with liability extending to his surety bond) and, in the annulment case, ordering Masloff and the RFC to pay another P50,000 jointly. Masloff did not appeal. The RFC and Rizal Surety appealed their respective liabilities.

ISSUE

The core issues were: (1) Whether the RFC, as a mortgagee in good faith, could be held liable for damages for the loss of the sawmill properties; and (2) Whether the surety bond could be held liable for damages after the bonded properties were lost.

RULING

The Supreme Court reversed the judgment against the RFC but affirmed the liability under the surety bond. On the first issue, the Court held the RFC could not be held liable. It was a mortgagee in good faith, having processed Masloff’s loan application without knowledge of the ongoing litigation over the sawmill’s ownership. The subsequent loss of the mortgaged properties was not attributable to the RFC. After the foreclosure sale, the RFC placed guards to preserve the properties. However, upon finding this arrangement unprofitable, it sought and obtained court permission to withdraw the guards. The plaintiffs, who were actively seeking possession and were notified of the RFC’s petition, then assumed the duty to preserve the properties. Their failure to do so led to the loss, for which the RFC bore no responsibility. The Court also found the RFC’s counterclaim for damages from the injunction baseless, as the auction proceeded unimpeded.
On the second issue, the Court affirmed the liability of Rizal Surety. The bond was posted to secure Masloff’s possession of the properties upon the dissolution of the receivership. The bond’s purpose was to answer for any damages resulting from that turnover. Since the trial court validly found Masloff liable for damages for wrongfully withholding the properties, the surety’s contingent liability was properly activated. The Court noted the inequity of the two judgments ordering Masloff to pay P50,000 twice for the same properties, but as he did not appeal, that aspect of the ruling in Civil Case No. 6114 stood only against him.