Director of Public Works v. Juco
REITERATIONFacts
The Antecedents: On September 28, 1920, the title to a parcel of land in Iloilo was owned by Mariano de la Rama, Gonzalo Mariano Tanboontien, Sing Juco, and Sing Bengco. On November 23, 1920, these owners mortgaged the land to the Philippine National Bank (PNB) to secure a credit of up to P170,000. The mortgage was registered on November 26, 1920. In 1921, the Government, through the Bureau of Public Works, planned harbor improvements requiring dredging of the Iloilo River. A contract was executed between the Director of Public Works and the landowners for the deposit of dredged material on the landowners' low-lying property. The contract stipulated that the price would be based on the actual cost of filling, with surcharges, and payable in five annual installments. A bond of P150,000 was required for payment. This contract was noted on the Torrens certificate of title on January 8, 1924. The dredging operations were conducted, and after liquidation, the amount due was determined. The landowners failed to pay the first installment, prompting the Director of Public Works to file an action to recover the amount due and enforce a lien on the property. PNB was made a party defendant due to its prior mortgage, as was the widow of Tan Toco, who was allegedly liable as a surety through an unauthorized signature by Mariano de la Rama. Procedural History: The trial court ruled that the landowners were indebted to the Government, declared the Government's lien superior to PNB's mortgage, and held Tan Ong Sze, Viuda de Tan Toco, personally liable on the surety bond. The court also dismissed the landowners' claim for damages and PNB's counterclaim for foreclosure. The Petition: Various defendants appealed the trial court's decision. The landowners and sureties appealed the findings of liability and the denial of damages. Tan Ong Sze appealed her personal liability. PNB appealed the ruling that the Government's lien had priority over its mortgage.
Issue(s)
Whether the Government breached its contract by failing to raise the land to a specified level. Whether Tan Ong Sze, Viuda de Tan Toco, is liable on the contract of suretyship. Whether the Government's lien for the filling improvement has priority over the mortgage credit of the Philippine National Bank.
Ruling
The Supreme Court affirmed the trial court's judgment in part and reversed it in part. It affirmed the dismissal of the cross-complaint for damages, the amount of the Government's claim, and the joint and several judgment against the principal obligors. However, it reversed the ruling holding Tan Ong Sze liable on the suretyship contract and the declaration that the Government's lien had priority over the bank's mortgage. The Court declared that the bank's credit is entitled to priority, with any residue to be applied to the Government's lien.
Ratio Decidendi
On the alleged breach of contract by the Government: The Court found the landowners' contention untenable. The contract did not obligate the Government to raise the land to any specific level, but only to deposit dredged material from the Iloilo River improvement. The owners had accepted a modification clarifying this. The amount of material deposited was substantial, and the cost charged to the owners was considered moderate. Therefore, there was no breach of contract on the part of the Government. On the liability of Tan Ong Sze, Viuda de Tan Toco: The Court ruled that Tan Ong Sze was not liable on the contract of suretyship. The powers of attorney presented did not explicitly grant Mariano de la Rama the authority to bind her as a surety. The general words in the powers of attorney, interpreted under the rule of ejusdem generis, related to contracts concerning property and did not extend to exceptional contracts like suretyship. Article 1827 of the Civil Code states that guaranty shall not be presumed and must be expressed, supporting the conclusion that such power cannot be inferred from vague general words. On the priority of credits: The Court held that the Philippine National Bank's mortgage credit has priority over the Government's lien. The bank's mortgage was registered on November 26, 1920, while the filling contract and its lien were registered on January 8, 1924, over three years later. Although the contract created an express lien, it was made after the mortgage was registered. The owners, at the time of the filling contract, only possessed the equity of redemption, and the lien could only operate on that interest. The deposited material became an irremovable fixture, and the mortgage lien attached to this increment. To grant priority to the Government's lien would prejudice the prior registered mortgage creditor, which is not permissible. The Court distinguished this case from Unson vs. Urquijo, Zuluoaga and Escubi where the machinery retained its identity.
Main Doctrine
The mortgage credit registered prior to the registration of a lien created by an improvement contract has priority over the latter, as the lien created by contract can only operate upon the equity of redemption existing at the time of its creation and cannot prejudice the prior registered mortgage creditor.