Citibank vs. Court of Appeals

A writ of replevin must be supported by an affidavit of merit stating the actual value of the property, not merely its probable value; the replevin bond must be double that actual value. A receiver must take an oath of office before assuming duties; failure to do so renders the appointment void.

On 10 November 1972, Douglas F. Anama executed a promissory note for P418,000.00 in favor of Citibank, N.A., payable in sixty monthly installments of P8,722.25 beginning 10 December 1972. The note contained an acceleration clause and a stipulation for attorney’s fees. Simultaneously, Anama constituted a chattel mortgage over various machineries and equipment located at his business premises in Quezon City to secure payment. The mortgage instrument authorized Citibank, upon default, to take possession of the chattels without court order and to seek the appointment of a receiver without bond. Anama failed to pay the monthly installments due beginning January 1974. On 25 November 1974, Citibank filed a verified complaint for sum of money and replevin before the then Court of First Instance of Manila, seeking recovery of the unpaid balance of P405,820.52 and possession of the mortgaged chattels preparatory to foreclosure.

The Loan and Chattel Mortgage: Douglas F. Anama obtained a loan from Citibank, N.A. evidenced by a promissory note dated 10 November 1972 for P418,000.00, payable in sixty equal monthly installments of P8,722.25, with 12% interest per annum. The note contained an acceleration clause making the entire amount immediately due upon default in payment of any installment, and a stipulation for attorney’s fees of 10% of the total amount due. To secure the loan, Anama executed a chattel mortgage over various machineries and equipment located at No. 1302 Epifanio de los Santos Avenue, Quezon City. The chattel mortgage authorized Citibank, as mortgagee, to take actual possession of the chattels without court order upon default, to sell them, and entitled it to the appointment of a receiver without bond.

Default and Filing of Complaint: Citibank alleged that Anama defaulted on his monthly installments beginning January 1974. Despite repeated demands, the unpaid balance stood at P405,820.52. On 25 November 1974, Citibank filed a verified complaint for sum of money and replevin before the Court of First Instance of Manila, praying for recovery of the unpaid balance, delivery of the mortgaged chattels for foreclosure, and other reliefs.

Anama’s Answer: Anama denied the material allegations, asserting that he never received the full loan amount, that Citibank delayed the release of funds, and that the machineries and equipment were worth far more than the P200,000.00 “probable value” stated by Citibank — per an appraisal report, the market value was P1,710,000.00 and the replacement cost P2,342,300.00. He also contended that the properties were real, not personal, property, and that he had not defaulted.

Proceedings in the Trial Court: The trial court issued an Order of Replevin on 2 December 1974, but actual seizure was held in abeyance as the parties explored amicable settlement. On 24 March 1975, the trial court ordered joint management of Anama’s machine shop for ten days, after which Citibank was to act as receiver. Citibank thereafter took over the business as receiver on 1 April 1975. When settlement efforts failed, Citibank moved for an alias writ of seizure on 29 January 1977. Anama opposed the motion on grounds that the P400,000.00 replevin bond was grossly inadequate, he was not in default, and seizure would cripple his business. On 28 February 1977, the trial court granted the alias writ, noting that Anama could still file a counter-bond. Reconsideration was denied on 18 March 1977. The sheriff then seized, dismantled, and delivered the properties to Citibank on 17–19 March 1977.

The Court of Appeals Decision: Anama filed a petition for certiorari and prohibition with the Court of Appeals, which granted the petition on 30 July 1982. The appellate court held that the trial court acted with grave abuse of discretion, as the requirements of Rule 60 (replevin) and Rule 59 (receivership) had not been met: (1) no proper affidavit of merit accompanied the complaint; (2) the bond was insufficient; and (3) the receiver never took an oath or filed a bond. The Court of Appeals declared the alias writ and all subsequent processes void ab initio, ordered the return of the machineries to their original positions at Citibank’s expense, and made the preliminary injunction permanent.

• Judgment on the Merits: Petitioner argued that by ordering the return of the properties, the Court of Appeals effectively rendered a judgment on the merits, adjudging Anama as the person entitled to possession, even though the main case was still at trial and the issue of default had not been resolved.
• Affidavit of Merit: Petitioner maintained that its verified complaint substantially complied with the affidavit requirement of Section 2, Rule 60, because all the facts required in an affidavit of merit were set forth in the verified complaint. It further contended that Anama’s objection based on the absence of a separate affidavit was waived because it was not raised in his Answer but only in a later pleading.
• Sufficiency of Bond: Petitioner asserted that the replevin bond of P400,000.00 — double the P200,000.00 probable value stated in the complaint — satisfied the rules. It argued that if the bond were insufficient, Anama’s proper remedy was to post a counter-bond under Sections 5 and 6 of Rule 60, not to assail the order via certiorari.
• Validity of Receivership: Petitioner contended that under the old Rules, a receiver’s bond was not required for a non-ex parte application, and the chattel mortgage expressly entitled it to a receiver without bond. Petitioner also denied having assumed receivership, but even if it had, no bond was required and the absence of an oath was a minor defect.
• Grave Abuse of Discretion: Petitioner maintained that the trial court did not commit grave abuse of discretion in issuing the alias writ and allowing Citibank to act as receiver.

• Defects in Replevin: Respondent countered that the alias writ was issued without an affidavit of merit stating that the properties had not been taken for a tax assessment or under execution, and without stating their actual value. The bond of P400,000.00, based on Citibank’s arbitrary “probable value” of P200,000.00, was grossly inadequate in light of the properties’ true market value of at least P1,710,000.00.
• Defective Receivership: Respondent argued that the receiver never took the oath prescribed by Section 5, Rule 59, a mandatory requirement that rendered the appointment void.
• Grave Abuse of Discretion: Respondent maintained that the trial court acted with grave abuse of discretion by ignoring these fatal procedural defects and depriving him of his property without due process.

• Affidavit of Merit: Whether Citibank’s verified complaint substantially complied with the affidavit of merit requirement under Rule 60, Section 2.
• Sufficiency of Replevin Bond: Whether the bond of P400,000.00 was sufficient given the dispute over the actual value of the properties.
• Waiver of Defect: Whether Anama was barred from raising the absence of an affidavit of merit because he did not plead it in his Answer.
• Validity of Receivership: Whether the receivership was valid despite the receiver’s failure to take an oath and, if required, to post a bond.
• Grave Abuse of Discretion: Whether the trial court acted with grave abuse of discretion in issuing the alias writ of seizure and allowing Citibank to act as receiver.

• Affidavit of Merit: The verified complaint did not contain all the facts required in an affidavit of merit. It omitted the statement that the properties had not been taken for a tax assessment or under execution, and it declared only a “probable value” of P200,000.00 instead of the actual value. The Rules mandate that the affidavit state the “actual value” — i.e., the price the property would command in a voluntary sale between a willing seller and a willing buyer, neither acting under compulsion. Because actual value was not stated, no substantial compliance with Section 2, Rule 60 was achieved.
• Sufficiency of Replevin Bond: The bond of P400,000.00, computed on a mere probable value, was insufficient. Section 2, Rule 60 requires a bond “in double the value of the property as stated in the affidavit,” which means double the actual value. Since Anama had disputed the valuation from the outset — presenting evidence that the market value was P1,710,000.00 and that Citibank itself later insured the properties for over P1,000,000.00 — the trial court should have first determined the actual value before approving the bond. A defendant who objects to the sufficiency of the plaintiff’s bond is not obliged to file a counter-bond; the remedies of objecting to the plaintiff’s bond and posting a redelivery bond are alternative, not cumulative.
• Waiver of Defect: The defense of lack of a proper affidavit of merit, though meritorious, was raised by Anama only in his Reply before the Court of Appeals, not in his Answer before the trial court. Under the omnibus motion rule, defenses not pleaded in a motion to dismiss or in the answer are deemed waived. However, this procedural waiver did not cure the substantive defect in the complaint — i.e., the failure to state the actual value — which was directly relevant to the adequacy of the bond.
• Validity of Receivership: Citibank did, in fact, assume receivership, as evidenced by its letter of 1 April 1975 formally taking over the machine shop. Under the old Rules of Court then in effect, a bond was not generally required for a non-ex parte receivership, and the chattel mortgage waived any bond requirement. Nonetheless, Section 5, Rule 59 mandates that before entering upon his duties, the receiver “must be sworn to perform them faithfully.” Citibank’s representative never took the requisite oath. That omission rendered the assumption of receivership defective.
• Grave Abuse of Discretion: The trial court acted with grave abuse of discretion by issuing the alias writ of seizure without first inquiring into the sufficiency of the replevin bond and by allowing Citibank to act as receiver without the statutory oath. Consequently, the Court of Appeals correctly nullified the orders.

• Actual Value in Replevin — The affidavit of merit in an application for a writ of replevin must state the “actual value” of the property, meaning the price it would command in an ordinary voluntary sale between a willing seller and a willing buyer, neither under compulsion. A statement of “probable value” does not suffice. The replevin bond must be double this actual value as stated in the affidavit. The requirement is essential because the bond serves to indemnify the defendant for any loss resulting from the compelled surrender of possession and for damages if judgment is rendered in his favor.
• Alternative Remedies in Replevin — Under Sections 5 and 6, Rule 60, a defendant in a replevin suit has two mutually exclusive remedies: (a) object to the sufficiency of the plaintiff’s bond, in which case he cannot simultaneously demand return of the property by filing a counter-bond; or (b) within five days from seizure, file a redelivery bond in double the value of the property as stated in the plaintiff’s affidavit, without having objected to the sufficiency of the plaintiff’s bond. A defendant who opts to challenge the bond’s sufficiency is not required to post a counter-bond.
• Oath of Receiver — Before entering upon his duties, a receiver must be sworn to perform them faithfully. The oath requirement is mandatory; failure to comply invalidates the appointment.
• Waiver of Defenses — Defenses and objections not pleaded in a motion to dismiss or in the answer are deemed waived under the omnibus motion rule (Sec. 2, Rule 9 of the old Rules). However, a waiver of a procedural defense does not cure substantive defects in the plaintiff’s pleading that affect the validity of the provisional remedy.
• Respect for Possession — A possessor is entitled to respect and protection of his possession and cannot be deprived of it without due process. A creditor’s right to possess mortgaged chattels is conditioned on the fact of default, and self‑help seizure against the debtor’s will is not permitted because the existence of default may be genuinely disputed.

• “Actual value (or actual market value) means ‘the price which an article would command in the ordinary course of business, that is to say, when offered for sale by one willing to sell, but not under compulsion to sell and purchased by another who is willing to buy, but under no obligation to purchase it’.” — Establishing the controlling definition of “actual value” for replevin bonds.
• “Under the Revised Rules of Court, the property seized under a writ of replevin is not to be delivered immediately to the plaintiff. This is because a possessor has every right to be respected in its possession and may not be deprived of it without due process.” — Underscoring the strict procedural safeguards before deprivation of possession.
• “The reason why the law does not allow the creditor to possess himself of the mortgaged property with violence and against the will of the debtor is to be found in the fact that the creditor’s right of possession is conditioned upon the fact of default, and the existence of this fact may naturally be the subject of controversy.” (quoting Filinvest Credit Corporation v. Court of Appeals, 248 SCRA 549) — Articulating the policy against extrajudicial seizure.

• Filinvest Credit Corporation vs. Court of Appeals, 248 SCRA 549 — Applied for the principle that a secured creditor may not take possession of mortgaged property by violence or against the debtor’s will; possession must be respected pending judicial determination of default.
• La Tondeña Distillers, Inc. vs. Court of Appeals, 209 SCRA 553 — Relied upon for the rule that a defendant’s objection to the sufficiency of the plaintiff’s replevin bond and the filing of a counter-bond are alternative remedies; a defendant who objects to the bond’s sufficiency cannot simultaneously seek redelivery by posting a counter-bond.
• Mendiola vs. Court of Appeals, 258 SCRA 492 — Cited to define a judgment on the merits as one that determines the rights and liabilities of the parties based on the disclosed facts, regardless of formal or dilatory objections; used to show the Court of Appeals did not render such a judgment.
• Bayog, et al. vs. Natino, et al., 258 SCRA 378 — Cited for the proposition that a verified complaint may substitute for a separate affidavit of merit if it contains all the facts required by the rule, amounting to substantial compliance.

• Section 2, Rule 60, Revised Rules of Court — Sets forth the required contents of the affidavit of merit and the bond for replevin: the plaintiff must show by affidavit that he is the owner or entitled to possession, the property is wrongfully detained, it has not been taken for a tax assessment or under execution, and its actual value; the bond must be double that value. Applied to fault the complaint for omitting the “actual value” and for the bond’s insufficiency.
• Sections 5 and 6, Rule 60 — Govern the defendant’s remedies: objecting to the sufficiency of the plaintiff’s bond or posting a counter-bond for return of the property. Applied to hold that Anama, having objected to the bond’s sufficiency, was not required to file a redelivery bond.
• Section 5, Rule 59 — Requires the receiver, before entering upon his duties, to be sworn to perform them faithfully and to file a bond. Applied to invalidate the receivership for lack of an oath.
• Section 2, Rule 9 (old Rules) — The omnibus motion rule, providing that defenses not pleaded in the answer are waived. Applied to rule that Anama waived the defense of lack of a separate affidavit of merit, but this did not cure the flaw in the complaint’s valuation.

Romero, Vitug, Panganiban, and Gonzaga-Reyes, JJ.