Chattel Mortgage

CHATTEL MORTGAGE ACT NO. 1508 - AN ACT PROVIDING FOR THE MORTGAGING OF PERSONAL PROPERTY AND FOR THE REGISTRATION OF THE MORTGAGES SO EXECUTED - Sec. 3. Chattel mortgage defined. ² A chattel mortgage is a conditional sale of personal property as security for the payment of a debt, or the performance of some other obligation specified therein, the condition being that the sale shall be void upon the seller paying to the purchaser a sum of money or doing some other act named. If the condition is performed according to its terms the mortgage and sale immediately become void, and the mortgagee is thereby divested of his title. (ARTICLES 2140-2141, CHATTEL MORTGAGE LAW) Art. 2140. By a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge and not a chattel mortgage. (n) CHATTEL MORTGAGE > Contract by virtue of which personal property is recorded in the Chattel Mortgage Register as security for the performance of an obligation CHARACTERISTICS 1. Accessory contract 2. Formal contract WHAT MAKES IT DIFFERENT FROM A PLEDGE?

3. Revised Administrative Code 4. Revised Penal Code OFFENSES INVOLVING CHATTEL MORTGAGE 1. Knowingly removing personal property mortgaged to any province or city other than the one in which it was located at the time of the execution of the mortgage without the written consent 2. Selling or pledging personal property already mortgaged or any part thereof, under the terms of the Chattel Mortgage Law without the consent of the mortgage written on the back of the mortgage and duly recorded in the CM Register Subject Matter of Chattel Mortgage 1. Shares of stock in a corporation 2. Interest in business 3.Machinery and house of mixed materials treated byparties as personal property and no innocent third person will beprejudiced thereby (Makati Leasing and Finance Corporation vs.Weaver Textile Mills, Inc.,122 SCRA 296 [1983]. 4. Vessels, the mortgage of which have been recorded withthe Philippine Coast Guard in order to be effective as to third persons 5. Motor vehicles, the mortgage of which had beenregistered both with the Land Transportation Commission and theChattel Mortgage Registry is order to affect third persons 6. House which is intended to be demolished

1. Delivery of the personal property to the mortgagee is not necessary 7. Growing crops and large cattle (section 7, paragraphs 2and 3, Act No. 1508) 2. The registration in the Register is required by law Note: 3. Procedure for the sale of the thing is different 4. If the property is foreclosed and there is excess, the amount goes to the debtor 5. If there is deficiency, the creditor may recover the deficiency WHEN DO YOU DO A Chattel Mortgage OR PLEDGE? > When property needs to be retained by the debtor, then opt for a chattel mortgage Art. 2141. The provisions of this Code on pledge, insofar as they are not in conflict with the Chattel Mortgage Law shall be applicable to chattel mortgages. (n) LAWS GOVERNING CHATTEL MORTGAGE 1. Chattel mortgage law, Act 1508 2. Civil Code provisions FORM OF CONTRACT AS STATED IN THE LAW. Section 7 of the Chattel Mortgage Law does not demanda minute and specific description of every chattel mortgaged in thedeed of mortgage, but only requires that the description of themortgaged property be such as to enable the parties to the mortgageor any other person to identify the same after a reasonableinvestigation and inquiry (Saldana vs. Phil. Guaranty Co., Inc., 106 Phil.919 [1960]); otherwise, the mortgage is invalid REGISTRATION > Registration shall be done in the Register of Deeds where the mortgagor resides > And when the property is situated somewhere else, it needs to be registered also in the Register of Deeds of the area where the property is situated > Chattel mortgage would not be valid and binding as against third persons absent any registration > If what is mortgaged is a car, registration with the LTO is also needed. invalid as against third persons Absent this, again, it would not be binding and

> Theoretically, the mortgagor may sign the contract alone but practically, the mortgagee must sign also given that they both need to sign the affidavit of good faith AFFIDAVIT OF GOOD FAITH > Part of the chattel mortgage contract wherein it is stated that the chattel mortgage has been constituted to secure a principal obligation and not meant for fraud or any ill purpose > It is possible to defraud using mortgage. You can take away property through mortgage from an unsecured creditor.

Construction, Inc.,supra; Bank of the Philippine Isalnd vs. Olutanga Lumber Co., 47 Phil.20 [1924]). The action may be sought within ten (10) years from thetime the cause of action accrues. 2. If the chattel mortgage is constituted, whether by the debtor-vendee or a third person, as security for the purchase of personalproperty payable in installments, no deficiency judgment can be askedand any agreement to the contrary shall be void (Article 1484) 3. The chattel mortgagee is entitled to deficiency judgment in anaction for specific performance (Article 1484 [1]) where the mortgagedproperty is subsequently attached and sold. The execution sale insuch case is not a foreclosure sale.(Industrial Finance Corporation vs.Ramirez , 77 SCRA 152 [1977]) CHAPTER 1

FORMAL REQUIREMENT OF DESCRIPTION OF PROPERTY > Attach a description or schedule of the properties mortgaged PROVISIONS COMMON TO PLEDGE AND MORTGAGE > There is also the requirement of payment of registration fees and documentary stamp taxes Art. 2085. The following requisites are essential to the contracts of pledge and mortgage: FORECLOSURE (SIMILAR BUT NOT IDENTICAL WITH REM) SECTION 14, CHATTEL MORTGAGE LAW (1) That they be constituted to secure the fulfillment of a principal obligation; 1. There is a 30-day cooling off period before the public auction, from the time the condition is broken (2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; 2. Notice²at least 10 days notice of the time, day, place, and purpose of such sale has been posted at 2 or more public places in such municipality. Personal notice or mail shall also be given to the mortgagor or person holding under him and the persons holding subsequent mortgages of the time and place of sale. 3. Sheriff should possess the property as he needs to deliver the same to the winning bidder. If the mortgagor refuses to do so, the mortgagee can seek the help of the court. There could also be a stipulation in the contract as well. But if the debtor is not willing and able, the loss is with the creditor. 4. There is a 30-day equity of redemption period (payment of obligation) 5. After foreclosure, there could be recovery of deficiency, but there is Recto Law (1484) pertaining to sale of personal property in installments and there is a Chattel Mortgage to secure payment of price. AN ACTION FOR SPECIFIC PERFORMANCE IS TANTAMOUNT TO THE ABANDONMENT OF RIGHTS OF MORTGAGEE APPLICATION OF PROCEEDS OF FORECLOSURE 1. Costs 2. Obligation itself. Pay first the interest and then the principal. If there is penalty, then pay it first. Therefore, the debtor's heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied. Neither can the creditor's heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been paid. From these provisions is expected the case in which, there being several things given in mortgage or pledge, each one of them guarantees only a determinate portion of the credit. The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied. (1860) Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor. (1858) Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. (1859a) Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor. (3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. (1857) Art. 2086. The provisions of Article 2052 are applicable to a pledge or mortgage. (n)

3. Junior encumbrances 4. Owner Right of Mortgagee to Recover Deficiency 1. The creditor may maintain an action for the deficiency althoughthe Chattel Mortgage Law is silent on this point (Ablaza vs. Ignacio,(unrep) 103 Phil. 1151 [1958];Garrido vs. Tuason, 24 SCRA 727[1968]¶Phil. National Bank vs. Manila Investment &

Art. 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable. (n) Art. 2091. The contract of pledge or mortgage may secure all kinds of obligations, be they pure or subject to a suspensive or resolutory condition. (1861) Art. 2092. A promise to constitute a pledge or mortgage gives rise only to a personal action between the contracting parties, without prejudice to the criminal responsibility incurred by him who defrauds another, by offering in pledge or mortgage as unencumbered, things which he knew were subject to some burden, or by misrepresenting himself to be the owner of the same. (1862) CHAPTER 2PLEDGE Art. 2093. In addition to the requisites prescribed in Article 2085, it is necessary, in order to constitute the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement. (1863) Art. 2094. All movables which are within commerce may be pledged, provided they are susceptible of possession. (1864) Art. 2095. Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares of stock, bonds, warehouse receipts and similar documents may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. (n) Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument. (1865a) Art. 2097. With the consent of the pledgee, the thing pledged may be alienated by the pledgor or owner, subject to the pledge. The ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledgee consents to the alienation, but the latter shall continue in possession. (n) Art. 2098. The contract of pledge gives a right to the creditor to retain the thing in his possession or in that of a third person to whom it has been delivered, until the debt is paid. (1866a) Art. 2099. The creditor shall take care of the thing pledged with the diligence of a good father of a family; he has a right to the reimbursement of the expenses made for its preservation, and is liable for its loss or deterioration, in conformity with the provisions of this Code. (1867) Art. 2100. The pledgee cannot deposit the thing pledged with a third person, unless there is a stipulation authorizing him to do so. The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged. (n) Art. 2101. The pledgor has the same responsibility as a bailor in commodatum in the case under Article 1951. (n) Art. 2102. If the pledge earns or produces fruits, income, dividends, or interests, the creditor shall compensate what he receives with those which are owing him; but if none are owing him, or insofar as the amount may exceed that which is due, he shall apply it to the principal. Unless there is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the right pledged. In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of animals pledged, but shall be subject to the pledge, if there is no stipulation to the contrary. (1868a) Art. 2103. Unless the thing pledged is expropriated, the debtor continues to be the owner thereof.

Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it from, or defend it against a third person. (1869) Art. 2104. The creditor cannot use the thing pledged, without the authority of the owner, and if he should do so, or should misuse the thing in any other way, the owner may ask that it be judicially or extrajudicially deposited. When the preservation of the thing pledged requires its use, it must be used by the creditor but only for that purpose. (1870a) Art. 2105. The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in a proper case. (1871) Art. 2106. If through the negligence or wilful act of the pledgee, the thing pledged is in danger of being lost or impaired, the pledgor may require that it be deposited with a third person. (n) Art. 2107. If there are reasonable grounds to fear the destruction or impairment of the thing pledged, without the fault of the pledgee, the pledgor may demand the return of the thing, upon offering another thing in pledge, provided the latter is of the same kind as the former and not of inferior quality, and without prejudice to the right of the pledgee under the provisions of the following article. The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged. (n) Art. 2108. If, without the fault of the pledgee, there is danger of destruction, impairment, or diminution in value of the thing pledged, he may cause the same to be sold at a public sale. The proceeds of the auction shall be a security for the principal obligation in the same manner as the thing originally pledged. (n) Art. 2109. If the creditor is deceived on the substance or quality of the thing pledged, he may either claim another thing in its stead, or demand immediate payment of the principal obligation. (n) Art. 2110. If the thing pledged is returned by the pledgee to the pledgor or owner, the pledge is extinguished. Any stipulation to the contrary shall be void. If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner, there is a prima facie presumption that the same has been returned by the pledgee. This same presumption exists if the thing pledged is in the possession of a third person who has received it from the pledgor or owner after the constitution of the pledge. (n) Art. 2111. A statement in writing by the pledgee that he renounces or abandons the pledge is sufficient to extinguish the pledge. For this purpose, neither the acceptance by the pledgor or owner, nor the return of the thing pledged is necessary, the pledgee becoming a depositary. (n) Art. 2112. The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the sale of the thing pledged. This sale shall be made at a public auction, and with notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the first auction the thing is not sold, a second one with the same formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In this case he shall be obliged to give an acquittance for his entire claim. (1872a) Art. 2113. At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right if he should offer the same terms as the highest bidder. The pledgee may also bid, but his offer shall not be valid if he is the only bidder. (n)

Art. 2114. All bids at the public auction shall offer to pay the purchase price at once. If any other bid is accepted, the pledgee is deemed to have been received the purchase price, as far as the pledgor or owner is concerned. (n) Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary. (n) Art. 2116. After the public auction, the pledgee shall promptly advise the pledgor or owner of the result thereof. (n) Art. 2117. Any third person who has any right in or to the thing pledged may satisfy the principal obligation as soon as the latter becomes due and demandable.(n) Art. 2118. If a credit which has been pledged becomes due before it is redeemed, the pledgee may collect and receive the amount due. He shall apply the same to the payment of his claim, and deliver the surplus, should there be any, to the pledgor. (n) Art. 2119. If two or more things are pledged, the pledgee may choose which he will cause to be sold, unless there is a stipulation to the contrary. He may demand the sale of only as many of the things as are necessary for the payment of the debt. (n) Art. 2120. If a third party secures an obligation by pledging his own movable property under the provisions of Article 2085 he shall have the same rights as a guarantor under Articles 2066 to 2070, and Articles 2077 to 2081. He is not prejudiced by any waiver of defense by the principal obligor. (n) Art. 2121. Pledges created by operation of law, such as those referred to in Articles 546, 1731, and 1994, are governed by the foregoing articles on the possession, care and sale of the thing as well as on the termination of the pledge. However, after payment of the debt and expenses, the remainder of the price of the sale shall be delivered to the obligor. (n) Art. 2122. A thing under a pledge by operation of law may be sold only after demand of the amount for which the thing is retained. The public auction shall take place within one month after such demand. If, without just grounds, the creditor does not cause the public sale to be held within such period, the debtor may require the return of the thing. (n) Art. 2123. With regard to pawnshops and other establishments, which are engaged in making loans secured by pledges, the special laws and regulations concerning them shall be observed, and subsidiarily, the provisions of this Title. (1873a) PLEDGE (ARTICLES 2085-2123) PROVISIONS COMMON TO PLEDGE AND MORTGAGE Art. 2085. The following requisites are essential to the contracts of pledge and mortgage: (1) That they be constituted to secure the fulfillment of a principal obligation; (2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; (3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose.

Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. (1857) Art. 2086. The provisions of Article 2052 are applicable to a pledge or mortgage. (n) Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor. (1858) PLEDGE > Contract by virtue of which the debtor delivers to the creditor or to a third person a movable, or document evidencing incorporeal rights, for the purpose of securing the fulfillment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions KINDS OF PLEDGE 1. Voluntary or conventional 2. Legal REQUISITES TO A CONTRACT OF PLEDGE 1. It be constituted to secure the fulfillment of a principal obligation 2. The pledgor be the absolute owner of the thing pledged 3. That the persons constituting the pledge have the free disposal of the property and in the absence thereof, that they be legally authorized for the purpose 4. The pledge is perfected by the delivery of the thing pledged 5. When the principal obligation becomes due, the things, which the pledge consists, may be alienated for the payment of the creditor. CHARACTERISTICS OF A CONTRACT OF PLEDGE 1. Real contract²perfected by the delivery of the things pledged by the debtor who is called the pledgor to the creditor who is called by the pledgee, or to a third person by common agreement 2. Accessory contract 3. Unilateral contract 4. Subsidiary contract WHAT IS THE CAUSE OR CONSIDERATION IN PLEDGE? > Pledge is an accessory contract

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Its cause is the principal obligation

CONSTITUTED TO SECURE THE FULFILLMENT OF THE PRINCIPAL OBLIGATION CONSTITUTED BY THE ABSOLUTE OWNER 1. Future property cannot be the subject of a pledge or mortgage 2. A pledge or mortgage executed by one who is not the owner of the property pledged or mortgaged is without legal existence and registration cannot validate it 3. Share in a co-ownership²shall be limited to the portion which may be alienated by him in the division upon the termination of the co-ownership What is the absolute owner? It means unencumbered property. The absolute owner has legal and beneficial ownership. In the earlier example, P is the legal owner and S is the beneficial owner. This being the case, neither of them can pledge the property. WHAT IS THE DIFFERENCE BETWEEN FREE DISPOSAL AND CAPACITY TO DISPOSE? > > FREE DISPOSAL OF THE PROPERTY²property must not be subject to any claim of a third person CAPACITY TO DISPOSE²pledgor or mortgagor has the capacity or authority to make a disposition of the property

TSAI V. COURT OF APPEALS 336 SCRA 324 FACTS: EVERTEX secured a loan from PBC, guaranteed by a real estate and chattel mortgage over a parcel of land where the factory stands, and the chattels located therein, as included in a schedule attached to the mortgage contract. Another loan was obtained secured by a chattel mortgage over properties with similar descriptions listed in the first schedule. During the date of execution of the second mortgage, EVERTEX purchased machineries and equipment. Due to business reverses, EVERTEX filed for insolvency proceedings. It failed to pay its obligation and thus, PBC initiated extrajudicial foreclosure of the mortgages. PBC was the highest bidder in the public auctions, making it the owner of the properties. It then leased the factory premises to Tsai. Afterwards, EVERTEX sought the annulment of the sale and conveyance of the properties to PBC as it was allegedly a violation of the INSOLVENCY LAW. The RTC held that the lease and sale were irregular as it involved properties not included in the schedule of the mortgage contract. HELD: While it is true that the controverted properties appear to be immobile, a perusal of the contract of REM and CM executed by the parties gives a contrary indication. In the case at bar, both the trial and appellate courts show that the intention was to treat the machineries as movables or personal property. Assuming that the properties were considered immovables, nothing detracts the parties from treating it as chattels to secure an obligation under the principle of estoppel. Tsai v. CA Facts: Ever Textile Mills obtained a loan from PBCom. To secure the loan, EVERTEX executed a real estate and chattel mortgage on its machineries in favor of PBCom. EVERTEX defaulted in its obligations, hence, PBCom commenced extrajudicial foreclosure on the mortgages. Issue: Whether or not the machineries mortgaged should be treated as chattels.

THING PLEDGED OR MORTGAGED MAY BE ALIENATED > Necessarily implied as an inherent element of the transaction of the mortgage or pledge

> The only remedy for the pledgee is to have the security given sold at public auction and the proceeds of the sale be applied to the payment of the obligation secured by the mortgage or pledge PLEDGOR OR MORTGAGOR MAY BE A THIRD PERSON 1. Accommodation pledge or mortgage 2. Duty of mortgagee to make proper inquiry 3. Where mortgage is gratuitous²same should be strictly construed 4. Liability for deficiency²pledgor not liable for any deficiency should the property be not sufficient to cover the debt

Ruling: When the facts, taken together, evince the conclusion that the parties intention is to treat the units of machinery as chattels, a fortiori, the after-acquired properties, which are of the same description as the units referred to earlier must also be referred to as chattels. As such, the Chattel Mortgage law which provides that the chattel mortgage shall be deemed to cover only the property described therein and not the like or substituted property thereafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged anything in the mortgage to the contrary notwithstanding, applies.

Davao Sawmill Co. v. Castillo 61 Phil. 709 Facts: The Davao Saw Mill Co., Inc., is the holder of a lumber concession from the Government of the Philippine Islands. It has operated a sawmill in the sitio of Maa, barrio of Tigatu, municipality of Davao, Province of Davao. However, the land upon which the business was conducted belonged to another person. On the land the sawmill company erected a building which housed the machinery used by it. Some of the implements thus used were clearly personal property, the conflict concerning machines which were placed and mounted on foundations of cement. In the contract of lease between the sawmill company and the owner of the land there appeared the following provision: That on the expiration of the period agreed upon, all the improvements and buildings introduced and erected by the party of the second part shall pass to the exclusive ownership of the party of the first part without any obligation on its part to pay any amount for said improvements and buildings; also, in the event the party of the second part should leave or abandon the land leased before the time herein stipulated, the improvements and buildings shall likewise pass to the ownership of the party of the first part as though the time agreed upon had expired: Provided, however, That the machineries and accessories are not included in the improvements which will pass to the party of the first part on the expiration or abandonment of the land leased. The trial judge found that those properties were personal in nature and as a consequence absolved the defendants from the complaint. Issue: Whether or not the trial judge erred in finding that the subject properties are personal in nature. Held: As connecting up with the facts, it should further be explained that the Davao Saw Mill Co., Inc., has on a number of occasions treated the machinery as personal property by executing chattel mortgages in favor of third persons. One of such persons is the appellee by assignment from the original mortgages. Article 334, paragraphs 1 and 5, of the Civil Code, is in point. According to the Code, real property consists of 1. Land, buildings, roads and constructions of all kinds adhering to the soil; 5. Machinery, liquid containers, instruments or implements intended by the owner of any building or land for use in connection with any industry or trade being carried on therein and which are expressly adapted to meet the requirements of such trade of industry. Appellant emphasizes the first paragraph, and appellees the last mentioned paragraph. We entertain no doubt that the trial judge and appellees are right in their appreciation of the legal doctrines flowing from the facts. The judgment appealed from is hereby affirmed. July 21, 1921 G.R. No. L-17393 BACHRACH MOTOR COMPANY, INC., plaintiff, vs. RICARDO SUMMERS, defendant. Gibbs, McDonough and Johnson and Benedicto M. Javier for plaintiff. Claro M. Recto and Jose M. Casal for defendant.Street, J.:

On March 9, 1920, Elias Aboitiz executed a chattel mortgage upon a Nash automobile, bearing the Factory No. 143643, in favor of the Bachrach Motor Company, Inc., to secure a debt for P3,675, payable in twelve installments. In the month of November of the same year, the mortgagor defaulted in the payment of the installment for that month; and as a consequence the Motor Company determined to have the car sold for the purpose of foreclosing the mortgage, in the manner prescribed in section 14 of the Chattel Mortgage Law (Act No. 1508). It accordingly requested Ricardo Summers, as sheriff of the city of Manila, to take the car from the debtor and to expose it to public sale, as provided in said section. Acting in pursuance of this authority the sheriff applied to the mortgagor for the automobile; but the mortgagor refused to surrender possession; and the Motor Company instituted an action of replevin to recover the car. However, its effort to get possession were again destined to be temporarily baffled, as Aboitiz gave bond for the retention of the automobile pendente lite. The Motor Company thereupon filed the present petition in this court for the writ of mandamus to compel the sheriff to seize the car from the mortgagor and sell it. To this petition the sheriff demurred, and the cause is now before us for the determination of the issues thus presented. The question to which we shall first address ourselves and which is really the vital point in the case is whether, after default by the mortgagor in the performance of the conditions of a chattel mortgage, the sheriff is unconditionally bound to seize the mortgaged property, at the instance of the creditor, and sell it to satisfy the debt. The petitioner supposes that the sheriff must so proceed and that, upon failure to do so, he can be compelled thereto by the writ of mandamus. In commercial usage the property which is the subject of a chattel mortgage is, as well known, almost invariably left in the possession of the mortgagor, and this possession is not disturbed until the mortgagor defaults in the payment of the secured debt or otherwise fails to comply with the condition of the mortgage. When default occurs and the creditor desires to foreclose, he must necessarily take the mortgaged property into his hands; and his right to do this is clearly implied in the provision which gives the right to sell. Says the statue: "The mortgagee . . . may, after thirty days from the time of condition broken, cause the mortgaged property, or any part thereof, to be sold at public auction by a public officer at a public place in the municipality where the mortgagor resides," etc. (Sec. 14, Act No. 1508.) As will be seen, this provision supposes that the creditor has possession of the mortgaged property, for the power to sell imports a power to make delivery of the thing sold to the purchaser; and without actual possession delivery would be impossible. The right of the mortgagee to have possession after condition broken must therefore be taken to be unquestionable; and to this effect is the great weight of American authority. (11 C.J., 560; 28 Am. and Eng. Encyc. of Law, 2d ed., 782; 5 R.C., 462; St. Mary's Machine Co. vs. National Supply Co., 96 Am. St. Rep., 677, 684, note.) Where, however, the debtor refuses to yield up the property, the creditor must institute an action, either to effect a judicial foreclosure directly, or to secure possession as a preliminary to the sale contemplated in the provision above quoted. He cannot lawfully take the property by force against the will of the debtor. Upon this point the American authorities are even more harmonious than they are upon the point that the creditor is entitled to possession. As was said many years ago by the writer of this opinion in a monographic article contributed to an encyclopedic legal treatise, "if possession cannot be peaceably obtained the mortgagee must bring an action." (Trust Deeds and Power of Sale Mortgages, 28 Am. and Eng. Encyc. of Law, 2d ed., 783.) In the article on Chattel Mortgages, in Corpus Juris, we find the following statement of the law on the same point: "The only restriction on the mode by which the mortgagee shall secure possession of the mortgaged property after breach of condition is that he must act in an orderly manner and without creating a breach of the peace, subjecting himself to an action for trespass." (11 C.J., 560; see also 5 R.C.L., 462.) 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. The debtor, for instance, may claim in good faith, and

rightly or wrongly, that the debt is paid, or that for some other reason the alleged default is nonexistent. His possession in this situation is as fully entitled to protection as that of any other person, and in the language of article 446 of the Civil Code he must be respected therein. To allow the creditor to seize the property against the will of the debtor would make the former to a certain extent both judge and executioner in his own cause a thing which is inadmissible in the absence of unequivocal agreement in the contract itself or express provision to that effect in the statute qn3cM. It will be observed that the law places the responsibility of conducting the sale upon "a public officer;" and it might be supposed that an officer, such as the sheriff, can seize the property where the creditor could not. This suggestion is, we think, without force, as it is manifest that the sheriff or other officer proceeding under the authority of the language already quoted from section 14 of the Chattel Mortgage Law, becomes pro hac vice the mere agent of the creditor. There is nothing in this provision which creates a specific duty on the part of the officer to seize the mortgaged property; and no intention on the part of the law-making body to impose such a duty can be implied. The conclusion is clear that for the recovery of possession, where the right is disputed, the creditor must proceed along the usual channels by action in court. Whether the sheriff, upon being indemnified by the creditor, could safely proceed to take the property from the debtor, is a point upon which we express no opinion. In the brief of counsel attention is directed to the circumstance that in section 3 of Act No. 1508, the chattel mortgage is said to be a conditional sale; and an inference is drawn therefrom supposedly favorable to the contention of the petitioner. It is undeniable that the language there used supports the view that the mortgagee is the owner of the mortgaged property and therefore entitled to possession after condition broken, but that provision is in no wise concerned with the problem as to how possession may be acquired if the mortgagor refuses to yield it up. In this connection a few words of comment exhibiting the true import of that provision will not be out of place. The language referred to is as follows: Sec. 3. A chattel mortgage is a conditional sale of personal property as security for the payment of a debt, or the performance of some other obligation specified therein, the condition being that the sale shall be void upon the seller paying to the purchaser a sum of money or doing some other act named. If the condition is performed according to its terms the mortgage and sale immediately become void, and the mortgagee is thereby divested of its title. The use of the term conditional sale in connection with the chattel mortgage is apt to be misleading to a person unacquainted with the common-law history of the contract of mortgage; and it is unfortunate that such an expression should have been incorporated in a statute intended to operate in the Philippine Islands. As will be readily seen, the idea is totally foreign to the conception of the mortgage which is entertained by the civil law. What is worse it does not even reflect with fidelity the actual state of the American and English law on the same subject. Rightly understood, in connection with the common-law history of the mortgage, the meaning of the section quoted may be exhibited in some such proposition as the following: A chattel mortgage is a contract which purports to be, and in form is, a sale of personal property, intended as security for the payment of a debt, or the performance of some other obligation specified therein, upon the condition subsequent that such sale shall be void upon payment of the debt or performance of the specified obligation according to the terms of the contract. Now, while the proposition which we have here formulated contains a true description of the external features of the chattel mortgage, it does not by any means embody a correct statement of its judicial effects. A visit to any recorder's office in a common-law State will supply abundant proof that chattel mortgages are commonly drawn in the form of a straight sale, to which a clause of defeasance is added, declaring that in case the debt is paid or other obligation performed the contract will be void. But the form of the contract is merely a heritage from the remote past, and does not be any means reveal the exact

import of the transaction. Every person, however superficially versed in American and English law, knows that in equity the mortgage, however drawn, is to be treated as a mere security. The contract in fact merely imposes on the mortgaged property a subsidiary obligation by which it is bound for the debt or other principal obligation of the mortgagor. This is the equitable conception of the mortgage; and ever since the English Court of Chancery attained to supremacy in this department of jurisprudence, mortgages have been dealt with in this sense in every land where English law has taken root. The old formulas may, it is true, remain, but a new spirit has been breathed into them. And of course sooner or later the ancient forms are discarded. Look, for instance, at the form of a chattel mortgage given in section 5 of Act No. 1508, where it is said that the mortgagor "conveys and mortgages." This means "conveys by way of mortgage;" and the word "mortgages" alone would of course be equally effective. In fact we note that in the contract executed in the present case, it is merely said that Elias Aboitiz "mortgages" the automobiles to which the contract relates. In describing the chattel mortgage as a conditional sale we are merely rattling the bones of an antiquated skeleton from which all semblance of animate life has long since departed. The author of Section 3 of the Chattel Mortgage Law was most unhappy in his effort to elucidate to civilian jurists the American conception of the contract of mortgage. But whatever conclusion may be drawn in the premises with respect to the true nature of a chattel mortgage, the result must in this case be the same; for whether the mortgagee becomes the real owner of the mortgaged property as some suppose or acquires only certain rights therein, it is none the less clear that he has after default the right of possession; though it cannot be admitted that he may take the law into his own hands and wrest the property violently from the possession of the mortgagor. Neither can he do through the medium of a public officer that which he cannot directly do himself. The consequence is that in such case the creditor must either resort to a civil action to recover possession as a preliminary to a sale, or preferably he may bring an action to obtain a judicial foreclosure in conformity, so far as practicable, with the provisions of the Chattel Mortgage Law. Only a few words will be added with reference to the question whether this court has jurisdiction to entertain the present proceeding. In this connection it is insisted by the attorneys for the respondent that the sheriff is an officer of the Court of First Instance and the petitioner should, so it is insisted, address himself to that court as the proper court to control the activities of the sheriff. While this criticism would be valid if the purpose were to control the sheriff in the matter of carrying into effect any judgment, order, or writ of a Court of First Instance, it is not applicable in a case like the present where the act to be done is defined by general law and has no relation to the office of sheriff as the executive officer of the Court of First Instance. As to such activities this court must be considered to have concurrent jurisdiction with the Court of First Instance under section 515 of the Code of Civil Procedure. The demurrer must be sustained, and the writ prayed for will be denied. It is so ordered, with costs against the petitioner gYSAeZ7P. Mapa, C.J., Araullo, Avance a and Villamor, JJ., concur. LmmNy.

Piansay v. David[G.R. No. L-19468. October 30, 1964.] En Banc, Cocnepcion (J): 10 concur Facts: On 11 December 1943, Conrado S. David received a loan of P3,000 with interest at 12% per annum from Claudia B. Vda. de Uy Kim, and to secure the payment of the same, David executed a chattel mortgage on a house situated at 1259 Sande Street, Tondo, Manila. The chattel mortgage was registered with the Register of Deeds of Manila on 19 December 1948. On 10 February 1953, the mortgaged house was sold at public auction to satisfy the indebtedness to Claudia B. Vda. de Uy Kim, and the house was sold to Claudia B. Vda. de Uy Kim in the said foreclosure proceedings. On 22 March 1954, Vda. de Uy Kim sold the same house to Salvador Piansay for P5,000.00.

On 22 November 1949, David mortgaged the said house to Marcos Mangubat. On 1 March 1956, Mangubat filed a complaint against David with the CFI Manila (Civil Case 29078), for the collection of the loan of P2,000. On 24 March 1956, the complaint was amended to include Piansay and Vda. de Uy Kim as party defendants and praying that auction sale of 10 February 1953 and the deed of absolute sale between Vda. De Uy Kim and Piansay be annulled. The Court ordered David to pay Mangubat the sum of P2,000, damages and attorney¶s fees; but dismissed the case against Uy Kim and Piansay. The case was appealed to the Court of Appeals, which affirmed the decision but setting aside the award of damages in favor of Uy Kim. In the execution of Civil Case 29078, which was affirmed by the Court of Appeals (CA-GR 21797-R), the house which had been bought by Uy Kim at the foreclosure proceedings and sold by her to Piansay was levied upon at the instance of Mangubat. To prevent the sale at public auction of the house in question, Piansay and Uy Kim filed a petition for certiorari and mandamus with preliminary injunction in the CA (CA-GR 28974-R, Claudia B. Vda. de Uy Kim and Salvador Piansay vs. Hon. Judge Jesus Y. Perez, et al.). Acting upon the said petition, the CA denied the petition to lift or discharge the writ of execution on 28 April 1961. Thereupon, or on 31 July 1961, Piansay and Uy Kim instituted the present action at the CFI Manila (Civil Case 47664), against David and Mangubat. After due hearing the lower court issued the order appealed from granting said motion and dismissing the complaint, with costs against the Piansay and Uy Kim. A reconsideration of said order having been denied, Piansay and Uy Kim interposed an appeal directly to the Supreme Court. The Supreme Court affirmed the orders affirmed from, with costs against Piansay and Vda. De Uy Kim. 1. Building and construction partake the nature of the principal thing, i.e. land

The mere fact that the dispositive part of the decision in Civil Case 29078 states that the complaint is dismissed with respect to defendants Claudia B. de Uy Kim, Leonardo Uy Kim and Salvador Piansay is of no moment because the chattel mortgage executed by David in favor of Claudia B. de Uy Kim might not be annulled but still it did not transmit any right from David to Uy Kim. Piansay in Civil Case 47664 cannot assail the right of Mangubat to levy execution upon the house in question because it had remained the property of defendant David. 5. action Chattel mortgage of a house between parties is valid, but does not bind third persons; Plaintiffs have no cause of

Regardless of the validity of a contract constituting a chattel mortgage on a house, as between the parties to said contract (Standard Oil Co. of N.Y. vs. Jaramillo), the same cannot and does not bind third persons, who are not parties to the aforementioned contract or their privies (Leung Yee vs. Strong Machinery Co.; Evangelista vs. Alto Surety; Navarro vs. Pineda). As a consequence, the sale of the house in question in the proceedings for the extra-judicial foreclosure of said chattel mortgage, is null and void insofar as defendant Mangubat is concerned, and did not confer upon Mrs. Uy Kim, as buyer in said sale, any dominical right in and to said house (De la Riva vs. Ah Yee), so that she could not have transmitted to her assignee, Piansay, any such right as against Mangubat. In short, plaintiffs have no cause of action against the defendants herein. Tumalad v. Vicencio[G.R. No. L-30173. September 30, 1971.] En Banc, Reyes JBL (J): 10 concur Facts: On 1 September 1955 Vicencio and Simeon, defendants-appellants, executed a chattel mortgage in favor of the Tumalads, plaintiff-appellees over their house of strong materials located at 550 Int. 3, Quezon Boulevard, Quiapo, Manila, over Lot 6-B and 7-B, Block 2554, which were being rented from Madrigal & Company, Inc. The mortgage was registered in the Registry of Deeds of Manila on 2 September 1955. The mortgage was executed to guarantee a loan of P4,800.00 received from the Tumalads, payable within one year at 12% per annum. The mode of payment was P150.00 monthly, starting September, 1955, up to July 1956, and the lump sum of P3,150 was payable on or before August, 1956. It was also agreed that default in the payment of any of the amortizations would cause the remaining unpaid balance to become immediately due and payable, the Chattel Mortgage enforceable, and the Sheriff of Manila authorized the Mortgagor¶s property after necessary publication. When Vicencio and Simeon defaulted in paying, the mortgage was extrajudicially foreclosed, and on 27 March 1956, the house was sold at public auction pursuant to the said contract. As highest bidder, the Tumalads were issued the corresponding certificate of sale. On 18 April 1956, the Tumalads commenced Civil Case 43073 in the municipal court of Manila, praying, among other things, that the house be vacated and its possession surrendered to them, and for Vicencio and Simeon to pay rent of P200.00 monthly from 27 March 1956 up to the time the possession is surrendered. On 21 September 1956, the municipal court rendered its decision in favor of the Tumalads. Having lost therein, appealed to the court a quo (Civil Case 30993) which also rendered a decision against them. On appeal, the case was certified to the Supreme Court by the Court of Appeals (CA-G.R. No. 27824-R) for the reason that only questions of law are involved. Plaintiffs-appellees failed to file a brief and this appeal was submitted for decision without it. Nearly a year after the foreclosure sale the mortgaged house had been demolished on 14 and 15 January 1957 by virtue of a decision obtained by the lessor of the land on which the house stood. The Supreme Court reversed the decision appealed from and entered another dismissing the complaint, with costs against plaintiffs-appellees.

Since it is a rule in the law that buildings and constructions are regarded as mere accessories to the land (following the Roman maxim omne quod solo inaedificatur solo credit) it is logical that said accessories should partake of the nature of the principal thing, which is the land, forming, as they do, but a single object (res) with it in contemplation of law (Ladera v. Hodges). 2. Act of registering in Chattel Mortgage register of an interest in the nature of real property is futile Tthe registration of the document in the registry of chattels is merely a futile act, where the interest conveyed is in the nature of real property. The registration of the chattel mortgage of a building of strong materials produced no effect as far as the building is concerned (Leung Yee vs. Strong Machinery Co., cited in Ladera v. Hodges). 3. No right acquired by chattel Mortgage creditor who purchase real property at extra-judicial foreclosure sale

A mortgage creditor who purchases real properties at an extra- judicial foreclosure sale thereof by virtue of a chattel mortgage constituted in his favor, which mortgage has been declared null and void with respect to said real properties, acquires no right thereto by virtue of said sale'. (De la Riva vs. Ah Kee, cited in Ladera v. Hodges). In the present case, Uy Kim had no right to foreclose the alleged chattel mortgage constituted in her favor, because it was in reality a mere contract of an unsecured loan. It follows that the Sheriff was not authorized to sell the house as a result of the foreclosure of such chattel mortgage. And Uy Kim could not have acquired the house at public auction, she could not have sold it validly to Salvador Piansay. 4. House may be levied upon as it remained the property of mortgage debtor

1.

Answer a mere statement and not evidence; Allegations or averments determines jurisdiction

his house to be a chattel, a conduct that may conceivably estop him from subsequently claiming otherwise. (Ladera vs. C.N. Hodges). 5. House treated by parties as chattel; factors to determine

It has been held in Supia and Batiaco vs. Quintero and Ayala that "the answer is a mere statement of the facts which the party filing it expects to prove, but it is not evidence; and further, that when the question to be determined is one of title, the Court is given the authority to proceed with the hearing of the cause until this fact is clearly established. In the case of Sy vs. Dalman, wherein the defendant was also a successful bidder in an auction sale, it was likewise held by the Court that in detainer cases the claim of ownership "is a matter of defense and raises an issue of fact which should be determined from the evidence at the trial." What determines jurisdiction are the allegations or averments in the complaint and the relief asked for. 2. Fraud and deceit renders a contract voidable or annullable, and not void ab initio; Claim of ownership by virtue of voidable contract fails without evidence that steps were made to annul the same Fraud or deceit does not render a contract void ab initio, and can only be a ground for rendering the contract voidable or annullable pursuant to Article 1390 of the New Civil Code, by a proper action in court. In the present case, the charge of fraud, deceit or trickery, the conterntions are not supported by evidence. Further, there is nothing on record to show that the mortgage has been annulled. Neither is it disclosed that steps were taken to nullify the same. Hence, defendants-appellants' claim of ownership on the basis of a voidable contract which has not been voided fails. 3. Buildings as immovable

In the contract, the house on rented land is not only expressly designated as Chattel Mortgage; it specifically provides that "the mortgagor voluntarily cedes, sells and transfers by way of Chattel Mortgage the property together with its leasehold rights over the lot on which it is constructed and participation;" whcih could only have meant to convey the house as chattel, or at least, intended to treat the same as such, so that they should not now be allowed to make an inconsistent stand by claiming otherwise. Moreover, the subject house stood on a rented lot to which defendants-appellants merely had a temporary right as lessee, and although this can not in itself alone determine the status of the property, it does so when combined with other factors to sustain the interpretation that the parties, particularly the mortgagors, intended to treat the house as personality. 6. Estoppel; Party in chattel mortgage cannot question validity of chattel mortgage entered into

Inlike in the Iya cases, Lopez vs. Orosa, Jr. and Plaza Theatreand Leung Yee vs. F. L. Strong Machinery and Williamson, wherein third persons assailed the validity of the chattel mortgage, it is the defendants-appellants themselves, as debtorsmortgagors, who are attacking the validity of the chattel mortgage in this case. The doctrine of estoppel therefore applies to the herein defendants-appellants, having treated the subject house as personalty. 7. Chattel mortgage covered by Act 1508, Chattel Mortgage Law

The rule about the status of buildings as immovable property is stated in Lopez vs. Orosa, Jr. and Plaza Theatre, Inc., cited in Associated Insurance Surety Co., Inc. vs. Iya, et al. 16 to the effect that the inclusion of the building, separate and distinct from the land, in the enumeration of what may constitute real properties (art. 415, New Civil Code) could only mean one thing that a building is by itself an immovable property irrespective of whether or not said structure and the land on which it is adhered to belong to the same owner. 4. Deviations allowed, parties¶ treatment of real property as personal property; cases

Chattel mortgages are covered and regulated by the Chattel Mortgage Law, Act 1508. Section 14 of this Act allows the mortgagee to have the property mortgaged sold at public auction through a public officer in almost the same manner as that allowed by Act 3135, as amended by Act 4118, provided that the requirements of the law relative to notice and registration are complied with. In the present case, the parties specifically stipulated that "the chattel mortgage will be enforceable in accordance with the provisions of Special Act 3135. 8. Mortgagors entitled to remain in possession without rent within redemption period

Certain deviations, however, have been allowed for various reasons. In the case of Manarang and Manarang vs. Ofilada, it was held that "it is undeniable that the parties to a contract may by agreement treat as personal property that which by ,nature would be real property", citing Standard Oil Company of New York vs. Jaramillo. In the latter case, the mortgagor conveyed and transferred to the mortgagee by way of mortgage "the following described personal property." The "personal property" consisted of leasehold rights and a building. In the case of Luna vs. Encarnacion, the subject of the contract designated as Chattel Mortgage was a house of mixed materials, and the Court held therein that it was a valid Chattel mortgage because it was so expressly designated and specifically that the property given as security "is a house of mixed materials, which by its very nature is considered personal property." In Navarro vs. Pineda, the Court stated that the view that parties to a deed of chattel mortgage may agree to consider a house as personal property for the purposes of said contract, 'is good only insofar as the contracting parties are concerned. It is based, partly, upon the principle of estoppel' (Evangelista vs. Alto Surety). In a case, a mortgaged house built on a rented land was held to be a personal property, not only because the deed of mortgage considered it as such, but also because it did not form part of the land, for it is now settled that an object placed on land by one who had only a temporary right to the same, such as the lessee or usufructuary, does not become immobilized by attachment (Valdez vs. Central Altagracia, cited in Davao Sawmill vs. Castillo). Hence, if a house belonging to a person stands on a rented land belonging to another person, it may be mortgaged as a personal property as so stipulated in the document of mortgage. It should be noted, however that the principle is predicated on statements by the owner declaring

Nearly a year after the foreclosure sale the mortgaged house had been demolished on 14 and 15 January 1957 by virtue of a decision obtained by the lessor of the land on which the house stood. The CFI sentenced the mortgagors to pay a monthly rent of P200.00 from the time the chattel mortgage was foreclosed until when it was torn down by the sheriff. The Court ruled that the mortgagors were entitled to remain in possession without any obligation to pay rent during the one year redemption period after the foreclosure sale. Section 6 of Act 3135 provides that the debtor-mortgagor may, at any time within one year from and after the date of the auction sale, redeem the property sold at the extra judicial foreclosure sale. Section 7 of the same Act allows the purchaser of the property to obtain from the court the possession during the period of redemption: but the same provision expressly requires the filing of a petition with the proper CFI and the furnishing of a bond. It is only upon filing of the proper motion and the approval of the corresponding bond that the order for a writ of possession issues as a matter of course. No discretion is left to the court. In the absence of such a compliance, as in the instant case, the purchaser can not claim possession during the period of redemption as a matter of right. In such a case, the governing provision is Section 34, Rule 39, of the Revised Rules of Court which also applies to properties purchased in extrajudicial foreclosure proceedings. 9. Rentals received during redemption period credited to redemption price

Before the expiration of the 1-year period within which the judgment-debtor or mortgagor may redeem the property, the purchaser thereof is not entitled, as a matter of right, to possession of the same. Thus, while it is true that the Rules of Court allow the purchaser to receive the rentals if the purchased property is occupied by tenants, he is, nevertheless, accountable to the judgment-debtor or mortgagor as the case may be, for the amount so received and the same will be duly credited against the redemption price when the said debtor or mortgagor effects the redemption. Differently stated, the rentals receivable from tenants, although they may be collected by the purchaser during the redemption period, do not belong to the latter but still pertain to the debtor of mortgagor. The rationale for the Rule, it seems, is to secure for the benefit of the debtor or mortgagor, the payment of the redemption amount and the consequent return to him of his properties sold at public auction. (Reyes vs. Hamada, reiterating Chan v. Espe) 10. Case prematurely filed

Ruling: Where the obligation is one of loan secured by a chattel mortgage and not a sale where the price is payable in installments, an independent civil action may be instituted for the recovery of said deficiency of after the extra-judicial foreclosure of such chattel mortgage, a deficiency exists. The payment of deficiency may be enforced against the principal debtor or his solidary co-maker who also acted as surety. The bringin of an action against the principal debtor to enforce payment of the obligation is not inconsistent with, and does not preclude, the bringing of another action to compel the surety to fulfill his obligation under the agreement Acme Shoe v. CA Facts: Acme Shoe, Rubber & Plastic Corp. executed a chattel mortgage in favor Producers Bank. The chattel mortgage contained a provision that the coverage of the mortgage shall extend to obligations yet to be contracted or incurred. Acme was not able to settle its obligations with Producer s bank, which prompted Producers Bank to extrajudicially foreclose the chattel mortgage. Issue: Whether or nota chattel mortgage can secure after-incurred obligations. Ruling: While a pledge, real estate mortgage, or antichresis may secure after-incurred obligations so long as these future debts are accurately described, a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although the promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law. Acme Shoe vs. CA

The period of redemption had not yet expired when action was instituted in the court of origin, and that plaintiffs-appellees did not choose to take possession under Section 7, Act 3135, as amended, which is the law selected by the parties to govern the extrajudicial foreclosure of the chattel mortgage. Neither was there an allegation to that effect. Since plaintiffs-appellees' right to possess was not yet born at the filing of the complaint, there could be no violation or breach thereof. Wherefore, the original complaint stated no cause of action and was prematurely filed. 11. Court¶s authority to review errors not assigned

Even if there was no assignment of error to that effect, the Supreme Court is clothed with ample authority to review palpable errors not assigned as such if it finds that their consideration is necessary in arriving at a just decision of the case. Filipinas Marble v. IAC Facts: Filipinas Marble applied a loan with DBP which is secured by a chattel mortgage together with DBP s management contract of Filipinas Marble. It was alleged that DBP mismanaged and misspent the loan leaving Filipinas Marble desolate and devastated. Instead of helpingFilipinas Marble, DBP abandoned the project and proceeded to foreclose the properties mortgaged.Filipinas contested the foreclosure for there was no loan to speak because there was a failure of consideration. Issue: Whether or not a chattel mortgage can exist even if there is no loan to speak of. Whether or not a chattel mortgage is valid even if it is not registered. Ruling: For mismanaging the corporation, it is as if the loan was never delivered to it and thus, there was failure on the part of DBP to deliver the consideration for which the mortgage were executed. The foreclosure ofFilipinas Marble s properties is not valid. There was no mortgage in the first place because there is no loan to speak of. The mortgage being an accessory contract, its validity is dependent on the validity of the loan secured by it. However, a chattel mortgage that is unregistered is not null and void. Under the Civil Code, registration is necessary only for the purpose of binding third persons Bicol Savings v. Guinhawa Facts: Depositario together with Guinhawa took a loan from Bicol Savings & Loan Assoc. which was secured by a chattel mortgage over the motorcycle of Depositario. Said motorcycle was eventually foreclosed by reason of the respondent s failure to pay its debt. As result of the foreclosure, there was a deficiency; hence, Bicol Savings made a demand for the deficiency. Issue: Whether or not Bicol Savings may recover deficiency from the foreclosure sale.

Facts Petitioner Chua, president of the Acme Shoe, Rubber and Corporation executed a chattel mortgage in favor of Bank of the Philippines to secure a loan with a stipulation on the said chattel mortgage that it would cover future obligations.At first the Acme shoes were able to pay their loans but on the succeeding loans they defaulted thus the foreclosure of the property being the subject of the said chattel mortgage. Petitoner filed an action for injunction before the RTC, it was denied, appealed in CA, CA affirmed the decision of RTC in toto, still they filed motion for reconsideration and it was granted. Issue Whether or not it is correct to put a stipulation on the chattel mortgage that it may cover future obligations. Held It was held by the SC that a stipulation expressed in chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon the security itself, however, it can only be executed (the new contract) either by concluding a new chattel mortgage or by amending the old one. The ruling is based on the requirement of Affidavit of Good Faith which must certain an oath that the mortgage is made for the purpose of securing the obligation specified in the conditions and for no other purpose ± which makes it obvious that the debt refereed to in the law is a current, not an obligation that is yet merely contemplated. WHEREFORE, the questioned decisions of the appellate court and the lower court are set aside without prejudice to the appropriate legal recourse by private respondent as may still be warranted as an unsecured creditor. No costs Cebu Int l Finance v. CA Facts: Jacinto Dy executed a special power of attorney in favor of AngTay, authorizing the latter to sell the cargo vessel owned by Dy and christened LCT Asiatic . AngTay sold the subject vessel to Robert Ong. It was stipulated in the deed of sale that LCT Asiatic shall not be registered or transferred to Robert Ong until complete payment . Thereafter, Ong obtained possession of the vessel and he likewise obtained copies of the unnotarized deed of sale. However, the aforeqouted condition in

the original deed of sale does not appear on Ong s copies. Ong was able to notarize the deed of sale and subsequently acquired a Certificate of Ownership over the subject vessel. Ong successfully acquired a loan from Cebu Int lFinance which was secured by a chattel mortgage over the subject vessel. Ong defaulted in payment. AngTay and Dy filed a civil case for rescission and replevin against Ong. Issue: Whether or not the mortgagee has a right to rely in good faith on the certificate of title of the mortgagor to the property given as security and in the absence of any sign that might arouse suspicion, has no obligation to undertake further investigation. Ruling: The prevailing jurisprudence is that a mortgagee has a right to rely in good faith on the certificate of title of the mortgagor to the property given as security and in the absence of any sign that might arouse suspicion, has no obligation to undertake further investigation. Hence, even if the mortgagor is not the rightful owner of or does not have a valid title to the mortgaged property, the mortgagee or transferee in good faith is nonetheless entitled to protection.23 Although this rule generally pertains to real property, particularly registered land, it may also be applied by analogy to personal property, in this case specifically, since shipowners are, likewise, required by law to register their vessels with the Philippine Coast Guard. Rosario v.PCI leasing Facts: Spouses Rosario purchased a Pick-up vehicle from Car Merchants. The spouses then applied for a loan with PCI Leasing to pay for the balance of the vehicle. To secure the payment of the loan, a chattel mortgage was executed in favor of PCI Leasing over the subject vehicle. Spouses Rosario failed to pay its monthly amortizations which prompted PCI Leasing to file a complaint for sum of money together with a prayer for writ of replevin. Spouses Rosario contends that the chattel mortgage they executed with PCI Leasing is a sale of personal property payable in installments which is governed by Art. 1484 of the NCC. Issue: Whether or not PCI Leasing, the mortgagee, is a vendor of the chattel mortgage Ruling: Article 1418 of the new Civil Code will not apply as against a mortgagee who is not the vendor of the chattel mortgaged. Thus, a suit for replevin is not equivalent to an exercise of the remedy of foreclosure under Article 1418 of the New Civil Code. Hence, a vendor- mortgagee is not barred from making a claim for specific performance against the buyermortgagor by the mere fact that former was already able to secure a writ of replevin. Alejandra Torres et. al. plaintiff-appelleesvs.Francisco Limjap, Special Administrator of deceased Jose B. Henson, defendantappellantG.R. No. 34385 FACTS: The plaintiffs alleged that the defendant, in his lifetime, executed in their favor a chattel mortgage(Exhibit A) on his drug store at Nos. 101-103 Calle Rosario, known as Farmacia Henson, to secure a loan of P7,000, although it was made to appear in the instrument that the loan was for P20,000. The defendant deniedgenerally and specifically the plaintiffs' allegations and set up the defense that the chattel mortgages (Exhibit A,in G.R. No. 34385 and Exhibit A, in G.R. No. 34286) are null and void for lack of sufficient particularity in thedescription of the property mortgaged. A judgment was rendered in favor of the plaintiff and against thedefendant, confirming the attachment of said drug store by the sheriff of the City of Manila and the deliverythereof to the plaintiff.The defendant appealed from the judgment and made the assignments of error, among others, that the lower court erred in failing to make a finding on the question of the sufficiency of the description of the chattelsmortgaged and in failing to hold that the chattel mortgages were null and void for lack of particularity in thedescription of the chattels mortgaged and in refusing to allow the defendant to introduce evidence tending toshow that the stock of merchandise found in the two drug stores was in existence or owned by the mortgagor atthe time of execution of the

mortgages in question. Defendant then insists that a stipulation authorizing thedisposal and substitution of chattels mortgage does not operate to extend the mortgage to after-acquired party,and that such stipulation is in contravention of the express provision of the last paragraph of section 7 Act No.1508, which provides that ³ A chattel mortgage shall be deemed to cover only the property described thereinand not like or substituted property thereafter acquired by the mortgagor and placed in the same depository asthe property originally mortgaged, anything in the mortgage to the contrary notwithstanding´ .ISSUE: Whether or not the provision in the chattel mortgage law that extends coverage to after-acquired property is valid and binding. HELD: We are of the opinion that (a.) the provision of the last paragraph of section 7 of Act No. 1508 is notapplicable to drug stores, bazaars and all other stores in the nature of a revolving and floating business; (b) thatthe stipulation in the chattel mortgages in question, extending their effect to after-acquired property, is valid and binding; and (c) that the lower court committed no error in not permitting the defendant-appellant to introduceevidence tending to show that the goods seized by the sheriff were in the nature of after-acquired property.In order to give a correct construction to the above-quoted provision of our Chattel Mortgage Law (Act No.1508), the spirit and intent of the law must first be ascertained. When said Act was placed on our statute books by the United States Philippine Commission on July 2, 1906, the primary aim of that law-making body wasundoubtedly to promote business and trade in these Islands and to give impetus to the economic development of the country. Bearing this in mind, it could not have been the intention of the Philippine Commission to applythe provision of section 7 above quoted to stores open to the public for retail business, where the goods areconstantly sold and substituted with new stock, such as drug stores, grocery stores, dry-goods stores, etc. If said provision were intended to apply to this class of business, it would be practically impossible to constitute amortgage on such stores without closing them, contrary to the very spirit about a handicap to trade and business,would restrain the circulation of capital, and would defeat the purpose for which the law was enacted, to wit, the promotion of business and the economic development of the country.The judgment appealed from is in accordance with the facts and the law, and the same should be and is herebyaffirmed, with costs. NORTHERN MOTORS VS. COQUIAG.R. No. L-40018 December 15, 1975 Facts: Manila Yellow Taxicab, executed a chattel mortgage over several taxicabs in favorof Northern Motors. TROPICAL is a judgment creditor of Yellow Taxicab whoassigned the judgment to ONG. On December 12 1974, Sheriff then levied upon 20taxicabs, 8 of which are security for the chattel mortgage. Northern Motors filed anintervention on December 18, 1974; however, the levied taxicabs were sold thesame day at 2pm although agreement shows that it should have happened at 4pm.Indemnity bond was posted by TROPICAL, but the bond was cancelled after the salewithout notice to Northern Motors. The petitioner now seek reconsideration also onthe reinstatement of the bond.A second levy was made upon 35 taxicabs, 7 of which are mortgaged to NorthernMotors.This is a motion for reconsideration in the SC decision pronouncing that theMortgagee has a better right than the judgment debtor over the taxicabs.The taxies were levied and sold at an auction sale. Ong argues admits that themortgagee has a better right that the judgment creditor, but argues that thepurchaser from the auction sale must have a right superior to that of themortgagee. The auction sale proceeded and the purchasers were of unknownaddresses, hence the 8 taxicabs cannot be recovered. The proceeds of the auctionwere in contest and the sheriff is deducting the expenses of the execution sale fromthe proceeds. Issue/s: Whether the expenses for the execution sale should be deducted from the proceedsthereof?Whether the purchaser has a better right than the creditor?Whether the bond should be reinstated? Held:

1st: No, it was already established that the levy on the property was illegal, it istherefore improper to deduct the expenses of an illegal auction from the proceedsthereof. The mortgagee can only able to collect the proceeds from the auction salebecause the purchasers are of unknown addresses. The full proceeds of the sale aredue to the mortgagee without any unreasonable and illegal deductions. 2nd: No, the purchaser of the auction sale merely steps in the shoes of thejudgment creditor as they have been aware of the claim of the mortgagee. Themortgagee has a better right to the possession of the taxicabs, however, since theaddresses of the purchasers are unknown, the proceeds of the sale must bedelivered to the mortgagee 3rd: Yes, the bond should be reinstated, as it is to serve as indemnity for damagesin cases that the sold taxicabs cannot be recovered. Proceedings in the lower courtwould be an exercise in futility if the bond will not be reinstated Levy Hermanos, Inc. vs. Pacific Commercial Co., et al., 71 Phil. 587, the facts of which are similar to those in the case at bar. There, we have the same situation wherein the vendees offered as security for the payment of the purchase price not only the motor vehicles which were bought on installment, but also a residential lot and a house of strong materials. This Court sustained the pronouncement made by the lower court on the nullity of the mortgage in so far as it included the house and lot of the vendees, holding that under the law, should the vendor choose to foreclose the mortgage, he has to content himself with the proceeds of the sale at the public auction of the chattels which were sold on installment and mortgaged to him and having chosen the remedy of foreclosure, he cannot nor should he be allowed to insist on the sale of the house and lot of the vendees, for to do so would be equivalent to obtaining a writ of execution against them concerning other properties which are separate and distinct from those which were sold on installment. This would indeed be contrary to public policy and the very spirit and purpose of the law, limiting the vendor's right to foreclose the chattel mortgage only on the thing sold. Cruz vs. Filipina Investment Facts Ruperto Cruz purchased on installment unit of Isuzu Diesel Bus payable on installments and to secure payment, Cruz executed in favor of the seller, Far East Motor Corporation, a chattel mortgage over the said vehicle. Cruz defaulted in payment and the Far East Motor Corpartion finds that even foreclosing the said vehicle, it will not be enough to satisfy the debt of Cruz thus requiring Cruz to SECOND MORTGAGE on a parcel of land. The said bus was foreclosed and still the Far Eastern Motor Corporation finds Cruz to be still indebted to them and they moved to foreclose the land contained in the second mortgage. Ruperto Cruz filed an action for the cancellation of the real estate mortgage constituted on the said land alleging the same that after foreclosing the bus he is freed from any obligation in connection with the chattel mortgage executed. Issue Whether or not the foreclosure of the bus even the proceeds thereof are insufficient to satisfy the debt of Mr. Cruz precludes the Far Eastern Motor Corporation for further recovery. Held It was held by the SC that the provisions of Article 1484 of the NCC should apply in this case. As it provides that; ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: (1) Exact fulfillment of the obligation, should the vendee fail to pay; (2) Cancel the sale, should the vendee's failure to pay cover two or more installments;

(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void. That it is clear under paragraph number 3 of the said article precludes the defendant from further recovering any amount from the plaintiff after foreclosing the said bus. This Court ruled that the vendor of personal property sold on the installment basis is precluded, after foreclosing the chattel mortgage on the thing sold from having a recourse against the additional security put up by a third party to guarantee the purchaser's performance of his obligation on the theory that to sustain the same would overlook the fact that if the guarantor should be compelled to pay the balance of the purchase price, said guarantor will in turn be entitled to recover what he has paid from the debtor-vendee, and ultimately it will be the latter who will be made to bear the payment of the of the balance of the price, despite the earlier foreclosure of the chattel mortgage given by him, thereby indirectly subverting the protection given the latter. Southern Motors Inc vs. Moscoso Facts Plaintiff sold to defendant one Chevrolet truck on installment basis.Upon making a down payment the defendant executed a promissory note for the sum of P4,915.00, representing the unpaid balance of the purchase price, to secure the payment of which, a chattel mortgage was constituted on the truck in favor of the plaintiff The defendant failed to pay three installments on the balance of the purchase price.Plaintiff filed an action to recover the unpaid balance.The court issued a writ of attachment against the house of the defendant and on the said truck.TheProvincial Sheriff of Iloilo sold the truck at public auction in which plaintiff itself was the only bidder for P1,000.00. The trial court condemned the defendant to pay the plaintiff the remaining amount of P4,475.00 with interest. The defendant filed an appeal and contends that that the attachment caused to be levied on the truck and its immediate sale at public auction, was tantamount to the foreclosure of the chattel mortgage on said truck; thus extinguished his obligation. Issue Whether or not the attachment caused to be levied on the truck and its immediate sale at public auction, was tantamount to the foreclosure of the chattel mortgage on said truck. Held It was held by the SC that under article ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: (1) Exact fulfillment of the obligation, should the vendee fail to pay; . (2) Cancel the sale, should the vendee's failure to pay cover two or more installments; (3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void. The defendant¶s contention that the present circumstances falls into paragraph number 3 is bereft of merit. The SC finds that the appellee had chosen the first remedy. The complaint is an ordinary civil action for recovery of the remaining unpaid balance due on the promissory note. The plaintiff had not adopted the procedure or methods outlined by Sec. 14 of the Chattel Mortgage Law but those prescribed for ordinary civil actions, under the Rules of Court.Herein appellee did not intend to foreclose the mortgage truck, is further evinced by the fact that it had also attached the house and lot of the appellant. That in sales on installments, where the action instituted is for and the mortgaged property is subsequently attached and sold, the sales thereof does not amount to a foreclosure of the mortgage, hence, the seller creditor is entitled to a deficiency judgment, does not for the stand of the appellants for that case is entirely different from the case at bar. In that case, the vendor has availed of the first remedy provided by Article 1484 of the Civil Code, i.e., to exact fulfillment of the obligation whereas in the present case, the remedy availed of was foreclosure of the chattel mortgage.

G.R. No. L-25546 April 22, 1974 EVA ARANETA SERRA, petitioner, -versus-HONORABLE JESUS S. RODRIGUEZ, Judge of the Court of First Instance of Iloilo, MANUEL LORING, JR., MILAGROS L. LORING, and THE PROVINCIAL SHERIFF OF ILOILO, respondents. Manuel O. Soriano and Associates for petitioner. E. B. Treñas and C. Miraflores for respondent. MAKASIAR, J.: Petitioner Eva Araneta Serra interposed this appeal by certiorari praying for the nullification of the order dated December 27, 1965 of the respondent Judge. It is undisputed that on September 13, 1965, private respondents-spouses Manuel Loring Jr. and Milagros L. Loring filed a complaint for the recovery of P101,000.00 against spouses Enrique Ordoñez and Maria G, Ordoñez based on a promissory note, docketed as Civil Case No. 6846 of the respondent Court of First Instance of Iloilo. Upon motion of said private respondents-spouses as plaintiffs in said civil case, pursuant to their prayer in their complaint, a writ of preliminary attachment was issued and on September 14, 1965, a notice of levy of said attachment was registered on TCT No. T-18847 covering the residential lot and the residential house of strong materials thereon of the Ordoñez spouses. Because the value of the debtors' real estate levied upon as aforestated was insufficient to satisfy the claim, their personal properties consisting of pieces of furniture, chandeliers, silverware, electrical appliances, etc., were also attached on September 14, 1965. On September 30, 1965, debtor Maria G. Ordoñez, alone by herself without the prior consent of or authority from her husband, debtor Enrique Ordoñez, executed a deed of chattel mortgage over the aforementioned personal properties in favor of herein petitioner Eva Araneta Serra allegedly as security for a loan of P20,000.00 which was duly registered on October 1, 1965 (pp. 19-20, rec.) By virtue of said chattel mortgage, on November 2, 1965, about a month and two days from its execution, petitioner Serra filed a third-party claim over the attached personal assets with the respondent provincial sheriff alleging that the aforementioned enlisted properties are valued no less than P35,000.00 (Annex C, pp. 15-18, rec.). By virtue of the said third-party claim, the respondent provincial sheriff accordingly informed the Loring spouses and required them to file a bond in the amount of P22,000.00 within three days from receipt, otherwise, he will be obliged to turn over the personal properties to the third-party claimant, herein petitioner Eva Araneta Serra (Annex B, p. 27, rec.). In a motion dated November 23, 1965, private respondents Manuel Loring and Milagros L. Loring prayed for the disapproval of the third-party claim of Serra as improper and invalid on the ground that Serra has neither title to the personal assets of the debtors nor right of possession thereof within the purview of Section 13 of Rule 57 of the Revised Rules of Court; because a chattel mortgagee is not entitled to the possession of the mortgaged personal properties as the chattel mortgage is merely a security for the loan and if possession is delivered to the chattel mortgagee, the contract becomes a pledge and ceases to be a chattel mortgage (Art. 2140 of the New Civil Code of the Philippines). Sustaining the position of herein private respondents as creditors, respondent Court issued the questioned order dated December 27, 1965 directing the respondent provincial sheriff to re-attach the personal properties of the Ordoñez spouses as listed in the third-party claim of herein petitioner Serra (Annex F, pp. 32-34). We affirm. Under Section 14 of Rule 57 of the Revised Rules of Court, a third-party claimant to a property levied upon by a writ of attachment must show that he has title thereto or right to the possession thereof. This excludes a chattel mortgagee because a chattel mortgage is merely a security for a loan and does not transfer title of the property mortgaged to the chattel mortgagee. Neither is a chattel mortgagee entitled to the possession of the property upon the execution of the chattel mortgage for otherwise the contract becomes a pledge and ceases to be a chattel mortgage (see concurring opinion of Mr. Justice Padilla in Contreras vs. Felix, 78 Phil. 570, 582). The old view that a chattel mortgage is a conditional sale and therefore transfers immediately the title to the chattel mortgagee who may thus properly file a third-party claim to a property subject matter of attachment

(Contreras vs. Molina, 64 Phil. 1), has been expressly repudiated by Article 2140 of the new Civil Code, which defines a chattel mortgage, thus: ART. 2140. By chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge and not a chattel mortgage. The change was deliberate according to the Code Commission, which categorically stated that the "definition of the chattel mortgage even in the Chattel Mortgage Law is inaccurate for it considers a chattel mortgage as a conditional sale. Therefore, a new definition is given in Article 2140" (Report of the Code Commission, p. 158). From the denial of a third-party claim to defeat the attachment caused to be levied by a creditor, neither an appeal nor a petition by certiorari is the proper remedy (see Santos vs. Mojica, L-19618, Feb. 18, 1964, 10 SCRA 318, 320-321; Potenciano vs. Dineros, 97 Phil. 196, 200). The remedy of petitioner would be to file a separate and independent action to determine the ownership of the attached property or to file a complaint for damages chargeable against the bond filed by the judgment creditor in favor of the provincial sheriff. Or herein petitioner could have filed a motion for intervention. However, such a motion is addressed to the wise discretion of the trial judge whose denial thereof may not be reviewed by this Court in the absence of grave abuse on his part. Moreover, the chattel mortgage executed alone by the wife, Maria G. Ordoñez, is of doubtful validity since only the husband, as administrator of the conjugal assets (Art. 165, New Civil Code), has the power to dispose of the same for the benefit of the family, especially for the purposes specified in Articles 161 and 162 of the New Civil Code (Art. 171, New Civil Code). And the wife cannot bind the conjugal partnership without the husband's consent, except in cases provided by law (Art. 172, New Civil Code). There is no showing that the consent of the husband was obtained for the wife to execute the chattel mortgage or that the wife was granted special authority by the husband embodied in a public instrument to administer the conjugal assets (Art. 168, New Civil Code). Furthermore, the chattel mortgage may be rescinded on the ground that it refers to things under litigation and entered into by the defendant debtor "without the knowledge and approval of the litigants or of competent judicial authority" or that the same was executed "in fraud of creditors when the latter cannot in any other manner collect the claim from them" (pars. 3 & 4, Art. 1381, New Civil Code). It should be recalled that the personal assets were levied by virtue of the writ of preliminary attachment on September 14, 1965; while the chattel mortgage was executed on September 30, 1965 and registered only on October 1, 1965. The execution of said chattel mortgage was without the knowledge and approval of the private respondents creditors much less the court, in which case said chattel mortgage is patently rescissible under paragraph 4 of Article 1381 of the New Civil Code. As heretofore intimated, said chattel mortgage may likewise be rescinded as a fraudulent scheme to defeat the right of herein private respondents creditors under paragraph 3 of Article 1381 of the New Civil Code if it is shown that the creditor has no other remedy to completely recover his claim (Panlillo vs. Victoria, 35 Phil. 706), or because it is presumed to be fraudulent as the personal assets mortgaged had been levied upon under a writ of attachment 16 days prior to the execution of the chattel mortgage which was registered only on October 1, 1965, about 17 days after the writ of attachment (Art. 1397, New Civil Code; see Gaston vs, Hernaez, 58 Phil. 823; Gaspar vs. Dorado, et al., L-17884, Nov. 29, 1965, 15 SCRA 331). WHEREFORE, THE PETITION IS HEREBY DENIED AND THE ORDER DATED DECEMBER 27, 1965 IS HEREBY AFFIRMED, WITH COSTS AGAINST PETITIONER.

G.R. No. 158635 December 9, 2005 MAGNA FINANCIAL SERVICES GROUP, INC., Petitioner, vs.ELIAS COLARINA, Respondent.D E C I S I O NCHICO-NAZARIO, J.: The undisputed facts of this case show that on 11 June 1997, Elias Colarina bought on installment from Magna Financial Services Group, Inc., one (1) unit of Suzuki Multicab, more particularly described as follows: MAKE - SUZUKI MULTICAB MODEL - ER HT ENGINE NO. - 834963 FRAME NO. - LTO -067886-RO7-C COLOR - WHITE1 After making a down payment, Colarina executed a promissory note for the balance of P229,284.00 payable in thirty-six (36) equal monthly installments at P6,369.00 monthly, beginning 18 July 1997. To secure payment thereof, Colarina executed an integrated promissory note and deed of chattel mortgage over the motor vehicle. Colarina failed to pay the monthly amortization beginning January 1999, accumulating an unpaid balance of P131,607.00. Despite repeated demands, he failed to make the necessary payment. On 31 October 2000 Magna Financial Services Group, Inc. filed a Complaint for Foreclosure of Chattel Mortgage with Replevin2 before the Municipal Trial Court in Cities (MTCC), Branch 2, Legaspi City, docketed as Civil Case No. 4822.3 Upon the filing of a Replevin Bond, a Writ of Replevin was issued by the MTCC. On 27 December 2000, summons, together with a copy of the Writ of Replevin, was served on Colarina who voluntarily surrendered physical possession of the vehicle to the Sheriff, Mr. Antonio Lozano. On 02 January 2001, the aforesaid motor vehicle was turned over by the sheriff to Magna Financial Services Group, Inc.4 On 12 July 2001, Colarina was declared in default for having filed his answer after more than six (6) months from the service of summons upon him. Thereupon, the trial court rendered judgment based on the facts alleged in the Complaint. In a decision dated 23 July 2001, it held:5 WHEREFORE, judgment is hereby rendered in favor of plaintiff Magna Financial Services Group, Inc. and against the defendant Elias Colarina, ordering the latter: a) to pay plaintiff the principal sum of one hundred thirty one thousand six hundred seven (P131,607.00) pesos plus penalty charges at 4.5% per month computed from January, 1999 until fully paid; b) to pay plaintiff P10,000.00 for attorney¶s fees; and c) to pay the costs. The foregoing money judgment shall be paid within ninety (90) days from the entry of judgment. In case of default in such payment, the one (1) unit of Suzuki Multicab, subject of the writ of replevin and chattel mortgage, shall be sold at public auction to satisfy the said judgment.6

Colarina appealed to the Regional Trial Court (RTC) of Legazpi City, Branch 4, where the case was docketed as Civil Case No. 10013. During the pendency of his appeal before the RTC, Colarina died and was substituted in the case by his heirs.7 In a decision dated 30 January 2002, the RTC affirmed in toto the decision of the MTCC.8 Colarina filed a Petition for Review before the Court of Appeals, docketed as CA-G.R. SP No. 69481. On 21 January 2003, the Court of Appeals rendered its decision9 holding: . . . We find merit in petitioners¶ assertion that the MTC and the RTC erred in ordering the defendant to pay the unpaid balance of the purchase price of the subject vehicle irrespective of the fact that the instant complaint was for the foreclosure of its chattel mortgage. The principal error committed by the said courts was their immediate grant, however erroneous, of relief in favor of the respondent for the payment of the unpaid balance without considering the fact that the very prayer it had sought was inconsistent with its allegation in the complaint. Verily, it is beyond cavil that the complaint seeks the judicial foreclosure of the chattel mortgage. The fact that the respondent had unconscionably sought the payment of the unpaid balance regardless of its complaint for the foreclosure of the said mortgage is glaring proof that it intentionally devised the same to deprive the defendant of his rights. A judgment in its favor will in effect allow it to retain the possession and ownership of the subject vehicle and at the same time claim against the defendant for the unpaid balance of its purchase price. In such a case, the respondent would luckily have its cake and eat it too. Unfortunately for the defendant, the lower courts had readily, probably unwittingly, made themselves abettors to respondent¶s devise to the detriment of the defendant. ... WHEREFORE, finding error in the assailed decision, the instant petition is hereby GRANTED and the assailed decision is hereby REVERSED AND SET ASIDE. Let the records be remanded to the court of origin. Accordingly, the foreclosure of the chattel mortgage over the subject vehicle as prayed for by the respondent in its complaint without any right to seek the payment of the unpaid balance of the purchase price or any deficiency judgment against the petitioners pursuant to Article 1484 of the Civil Code of the Philippines, is hereby ORDERED.10 A Motion for Reconsideration dated 11 February 200311 filed by Magna Financial Services Group, Inc., was denied by the Court of Appeals in a resolution dated 22 May 2003.12 Hence, this Petition for Review on Certiorari based on the sole issue: WHAT IS THE TRUE NATURE OF A FORECLOSURE OF CHATTEL MORTGAGE, EXTRAJUDICIAL OR JUDICIAL, AS AN EXERCISE OF THE 3RD OPTION UNDER ARTICLE 1484, PARAGRAPH 3 OF THE CIVIL CODE. In its Memorandum, petitioner assails the decision of the Court of Appeals and asserts that a mortgage is only an accessory obligation, the principal one being the undertaking to pay the amounts scheduled in the promissory note. To secure the payment of the note, a chattel mortgage is constituted on the thing sold. It argues that an action for foreclosure of mortgage is actually in the nature of an action for sum of money instituted to enforce the payment of the promissory note, with execution of the security. In case of an extrajudicial foreclosure of chattel mortgage, the petition must state the amount due on the obligation and the sheriff, after the sale, shall apply the proceeds to the unpaid debt. This, according to petitioner, is the true nature of a foreclosure proceeding as provided under Rule 68, Section 2 of the Rules of Court.13 On the other hand, respondent countered that the Court of Appeals correctly set aside the trial court¶s decision due to the inconsistency of the remedies or reliefs sought by the petitioner in its Complaint where it prayed for the custody of the chattel mortgage and at the same time asked for the payment of the unpaid balance on the motor vehicle.14

Article 1484 of the Civil Code explicitly provides: ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: (1) Exact fulfillment of the obligation, should the vendee fail to pay; (2) Cancel the sale, should the vendee¶s failure to pay cover two or more installments; (3) Foreclose the chattel mortgage or the thing sold, if one has been constituted, should the vendee¶s failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void. Our Supreme Court in Bachrach Motor Co., Inc. v. Millan15 held: "Undoubtedly the principal object of the above amendment (referring to Act 4122 amending Art. 1454, Civil Code of 1889) was to remedy the abuses committed in connection with the foreclosure of chattel mortgages. This amendment prevents mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing the suit against the mortgagor for a deficiency judgment. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing practically the full amount of his original indebtedness." In its Complaint, Magna Financial Services Group, Inc. made the following prayer: WHEREFORE, it is respectfully prayed that judgment render ordering defendant: 1. To pay the principal sum of P131,607.00 with penalty charges at 4.5% per month from January 1999 until paid plus liquidated damages. 2. Ordering defendant to reimburse the plaintiff for attorney¶s fee at 25% of the amount due plus expenses of litigation at not less than P10,000.00. 3. Ordering defendant to surrender to the plaintiff the possession of the Multicab described in paragraph 2 of the complaint. 4. Plaintiff prays for other reliefs just and equitable in the premises. It is further prayed that pendent lite, an Order of Replevin issue commanding the Provincial Sheriff at Legazpi City or any of his deputies to take such multicab into his custody and, after judgment, upon default in the payment of the amount adjudged due to the plaintiff, to sell said chattel at public auction in accordance with the chattel mortgage law.16 In its Memorandum before us, petitioner resolutely declared that it has opted for the remedy provided under Article 1484(3) of the Civil Code,17 that is, to foreclose the chattel mortgage. It is, however, unmistakable from the Complaint that petitioner preferred to avail itself of the first and third remedies under Article 1484, at the same time suing for replevin. For this reason, the Court of Appeals justifiably set aside the decision of the RTC. Perusing the Complaint, the petitioner, under its prayer number 1, sought for the payment of the unpaid amortizations which is a remedy that is provided under Article 1484(1) of the Civil Code, allowing an unpaid vendee to exact fulfillment of the obligation. At the same time, petitioner prayed that Colarina be ordered to surrender possession of the vehicle so that it may ultimately be sold at public auction, which remedy is contained under Article 1484(3). Such a scheme

is not only irregular but is a flagrant circumvention of the prohibition of the law. By praying for the foreclosure of the chattel, Magna Financial Services Group, Inc. renounced whatever claim it may have under the promissory note.18 Article 1484, paragraph 3, provides that if the vendor has availed himself of the right to foreclose the chattel mortgage, "he shall have no further action against the purchaser to recover any unpaid balance of the purchase price. Any agreement to the contrary shall be void." In other words, in all proceedings for the foreclosure of chattel mortgages executed on chattels which have been sold on the installment plan, the mortgagee is limited to the property included in the mortgage.19 Contrary to petitioner¶s claim, a contract of chattel mortgage, which is the transaction involved in the present case, is in the nature of a conditional sale of personal property given as a security for the payment of a debt, or the performance of some other obligation specified therein, the condition being that the sale shall be void upon the seller paying to the purchaser a sum of money or doing some other act named.20 If the condition is performed according to its terms, the mortgage and sale immediately become void, and the mortgagee is thereby divested of his title.21 On the other hand, in case of non payment, foreclosure is one of the remedies available to a mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation to secure that for which the mortgage was given. Foreclosure may be effected either judicially or extrajudicially, that is, by ordinary action or by foreclosure under power of sale contained in the mortgage. It may be effected by the usual methods, including sale of goods at public auction.22 Extrajudicial foreclosure, as chosen by the petitioner, is attained by causing the mortgaged property to be seized by the sheriff, as agent of the mortgagee, and have it sold at public auction in the manner prescribed by Section 14 of Act No. 1508, or the Chattel Mortgage Law.23 This rule governs extrajudicial foreclosure of chattel mortgage. In sum, since the petitioner has undeniably elected a remedy of foreclosure under Article 1484(3) of the Civil Code, it is bound by its election and thus may not be allowed to change what it has opted for nor to ask for more. On this point, the Court of Appeals correctly set aside the trial court¶s decision and instead rendered a judgment of foreclosure as prayed for by the petitioner. The next issue of consequence is whether or not there has been an actual foreclosure of the subject vehicle. In the case at bar, there is no dispute that the subject vehicle is already in the possession of the petitioner, Magna Financial Services Group, Inc. However, actual foreclosure has not been pursued, commenced or concluded by it. Where the mortgagee elects a remedy of foreclosure, the law requires the actual foreclosure of the mortgaged chattel. Thus, in Manila Motor Co. v. Fernandez,24 our Supreme Court said that it is actual sale of the mortgaged chattel in accordance with Sec. 14 of Act No. 1508 that would bar the creditor (who chooses to foreclose) from recovering any unpaid balance.25 And it is deemed that there has been foreclosure of the mortgage when all the proceedings of the foreclosure, including the sale of the property at public auction, have been accomplished.26 That there should be actual foreclosure of the mortgaged vehicle was reiterated in the case of De la Cruz v. Asian Consumer and Industrial Finance Corporation:27 It is thus clear that while ASIAN eventually succeeded in taking possession of the mortgaged vehicle, it did not pursue the foreclosure of the mortgage as shown by the fact that no auction sale of the vehicle was ever conducted. As we ruled in Filinvest Credit Corp. v. Phil. Acetylene Co., Inc. (G.R. No. 50449, 30 January 1982, 111 SCRA 421) ± Under the law, the delivery of possession of the mortgaged property to the mortgagee, the herein appellee, can only operate to extinguish appellant¶s liability if the appellee had actually caused the foreclosure sale of the mortgaged property when it

recovered possession thereof (Northern Motors, Inc. v. Sapinoso, 33 SCRA 356 [1970]; Universal Motors Corp. v. Dy Hian Tat, 28 SCRA 161 [1969]; Manila Motors Co., Inc. v. Fernandez, 99 Phil. 782 [1956]). Be that as it may, although no actual foreclosure as contemplated under the law has taken place in this case, since the vehicle is already in the possession of Magna Financial Services Group, Inc. and it has persistently and consistently avowed that it elects the remedy of foreclosure, the Court of Appeals, thus, ruled correctly in directing the foreclosure of the said vehicle without more. WHEREFORE, premises considered, the instant petition is DENIED for lack of merit and the decision of the Court of Appeals dated 21 January 2003 is AFFIRMED. Costs against petitioner.