Chattel Mortgage Case Digests Mortgage.
The Deed of Chattel
B. 2140:
a. Aleman vs Catera (Julius Ragay)
Facts: Catera owned several passenger
trucks. A truck driven by Amborgo fell
into a ditch because it was overspeeding
as it was trying to overtake another
truck. Real died and Aleman was
injured. Ontanillas and Montefrio,
passengers of the truck, also died. In the
suit for damages, another truck owned
by Catera was attached. Southern
Motors, Inc. filed a third party claim to
the bus on the basis of a being the
mortgagee of the bus as vendor. The
lien was previously registered with the
registry of deeds.
Issue: Whose claim should be granted?
Ruling: Those injured in the accident. A
Mortgage in order to affect persons
should not only be registered in the
Chattel Mortgage Registry, but the same
should also be recorded in the Motor
Vehicle Office as required by section 5(e)
of the Revised Motor Vehicle Law." Here,
the Southern Motor, Inc. did not record
in the Motor Vehicle Office the mortgage
executed in it's favor. Such being the
case the mortgage is ineffective as far as
the appellees are concerned. Its right or
interest, therefore, in the truck, because
of the mortgage constituted in its favor,
cannot prevail over of that appellees
who thought mere judgement creditors
may be deemed innocent purchase of the
bus owner-operator Precentacion de
Catera, who had her purchase of the bus
from Wenceslao Defensor recorded in
the Motor Vehicles Office.
b. Allied Bank vs Salas (Junn Guazon)
Allied Bank v. Salas (Guazon)
FACTS: Allied Banks predecessor,
General Bank and Trust Company
granted Gencor Marketing a loan. It
was covered by a Deed of Chattel
Mortgage was duly recorded in the
Chattel Mortgage Registry of Quezon
City. Gencor failed to comply with its
obligation. Petitioner Allied bank
extrajudicially foreclosed the chattel
mortgage. Prior to the foreclosure,
respondent Metropolitan Bank and Trust
Company filed an action for a sum of
money with prelim attachment against
Clarencio Yujuico. Judge Salas issued a
writ of attachment over the properties of
Yujuico. Clarencio was the owner of the
property mortgaged by Gencor.
ISSUE: Who between Allied Bank and
Metropolitan Bank have preference over
the properties
RULING: Allied Bank. The registration
of the chattel mortgage prior to the writ
of attachment is an effective and binding
notice to other creditors of its existence
and creates a real right or a lien, which
being recorded, follows the chattel
wherever it goes. Allied Bank, as
attaching creditor acquired the
properties in question subject to
petitioners mortgage lien as it existed
thereon at the time of the attachment.
c. Makati Leasing vs Wearever Textiles
(Ian Mamugay)
Facts: Wearever Textile Mills, Inc.
executed a chattel mortgage contract in
favor of Makati Leasing and Finance
Corporation covering certain raw
materials and machinery. Upon default,
Makati Leasing filed a petition for
judicial foreclosure of the properties
mortgaged. Acting on Makati Leasings
application for replevin, the lower court
issued a writ of seizure. Pursuant
thereto, the sheriff enforcing the seizure
order, seized the machinery subject
matter of the mortgage. In a petition for
certiorari and prohibition by Wearever,
the Court of Appeals ordered the return
of the machinery on the ground that the
same cannot be the subject of replevin
because it is a real property pursuant to
Article 415 of the new Civil Code, the
same being attached to the ground by
means of bolts and the only way to
remove it from Wearever textiles plant
would be to drill out or destroy the
concrete floor. When the motion for
reconsideration of Makati Leasing was
denied by the Court of Appeals, Makati
Leasing elevated the matter to the
Supreme Court.
Issue:Whether the machinery is real or
personal property
Note: determination on the nature/type
of property is in question since if
Wearever is correct that machinery is
real property, the chattel mortgage
constituted is null and void.
Ruling: In an identical situation in
the case of Tumalad vs VIcencio, Court
ruled that if a house of strong materials,
like what was involved in
the Tumalad case, may be considered as
personal property for purposes of
executing a chattel mortgage thereon as
long as the parties to the contract so
agree and no innocent third party will be
prejudiced thereby, there is
absolutely no reason why a machinery,
which is movable in its nature and
becomes immobilized only by destination
or purpose, may not be likewise treated
as such. This is really because one who
has so agreed is estopped from the
denying the existence of the chattel
mortgage.
When the CA rejected the
applicability of the Tumalad doctrine, it
stressed that the house involved in that
case was built on a land that did not
belong to the owner of such house.
However, the law makes no distinction
with respect to the ownership of the land
on which the house is built and we
should not lay down distinctions not
contemplated by law.
It must be pointed out that the
characterization of the subject
machinery as chattel by the private
respondent is indicative of intention and
impresses upon the property the
character determined by the parties. It is
undeniable that the parties to a contract
may by agreement treat as personal
property that which by nature would be
real property, as long as no interest of
third parties would be prejudiced
thereby.
Wearever further contends that
estoppel cannot apply against it because
it had never agreed that the machinery
be considered as personal property but
was merely required and dictated by
Makati Leasing to sign a printed form of
chattel mortgage which was in a blank
form at the time of signing.
Court is not persuaded. Court
ruled that even if the argument was true,
such fact alone does not render a
contract void ab initio, but can only be a
ground for rendering said contract
voidable, or annullable pursuant to
Article 1390 of the new Civil Code, by a
proper action in court. 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. On the other hand, as pointed out
by Makati Leasing and again not refuted
by Wearever, the latter has indubitably
benefited from said contract. Equity
dictates that one should not benefit at
the expense of another. Private
respondent could not now therefore, be
allowed to impugn the efficacy of the
chattel mortgage after it has benefited
therefrom,
d. Tsai vs. Court of Appeals (Garry Gallo)
Facts: Ever Textile Mills, Inc.
(EVERTEX) obtained loan from
Philippine Bank of Communications
(PBCom), secured by a deed of Real and
Chattel Mortgage over the lot where its
factory stands, and the chattels located
therein as enumerated in a schedule
attached to the mortgage contract.
PBCom again granted a second loan to
EVERTEX which was secured by a
Chattel Mortgage over personal
properties enumerated in a list attached
thereto. These listed properties were
similar to those listed in the first
mortgage deed. After the date of the
execution of the second mortgage
mentioned above, EVERTEX purchased
various machines and equipments. Upon
EVERTEX's failure to meet its obligation
to PBCom, the latter commenced
extrajudicial foreclosure proceedings
against EVERTEX under Act 3135 and
Act 1506 or "The Chattel Mortgage
Law". PBCom then consolidated its
ownership over the lot and all the
properties in it. It leased the entire
factory premises to Ruby Tsai and sold to
the same the factory, lock, stock and
barrel including the contested
machineries.
EVERTEX filed a complaint for
annulment of sale, reconveyance, and
damages against PBCom, alleging inter
alia that the extrajudicial foreclosure of
subject mortgage was not valid, and that
PBCom, without any legal or factual
basis, appropriated the contested
properties which were not included in
the Real and Chattel Mortgage of the
first mortgage contract nor in the second
contract which is a Chattel Mortgage,
and neither were those properties
included in the Notice of Sheriff's Sale.
Petitioner Tsai argued that
assuming that PBCom's title over the
contested properties is a nullity, she is
nevertheless a purchaser in good faith
and for value who now has a better right
than EVERTEX.
Issue: (1) Is the inclusion of the
questioned properties in the foreclosed
properties proper?
(2) Is the sale of these properties
to petitioner Tsai valid?
Ruling: (1) No. Accordingly, the SCfinds
no reversible error in the respondent
appellate court's ruling that inasmuch as
the subject mortgages were intended by
the parties to involve chattels, insofar as
equipment and machinery were
concerned, the Chattel Mortgage Law
applies, which provides in Section 7
thereof that: "a chattel mortgage shall
be deemed to cover only the property
described therein and not 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." And,
since the disputed machineries were
acquired in 1981 and could not have
been involved in the 1975 or 1979
chattel mortgages, it was consequently
an error on the part of the Sheriff to
include subject machineries with the
properties enumerated in said chattel
mortgages.
(2) A purchaser in good faith and
for value is one who buys the property of
another without notice that some other
person has a right to or interest in such
property and pays a full and fair price
for the same, at the time of purchase, or
before he has notice of the claims or
interest of some other person in the
property. Records reveal, however, that
when Tsai purchased the controverted
properties, she knew of respondent's
claim thereon. Well-settled is the rule
that the person who asserts the status of
a purchaser in good faith and for value
has the burden of proving such
assertion.Petitioner Tsai failed to
discharge this burden persuasively.
e. ACME SHOE VS. CA (Kate Derrama)
While a pledge, real estate mortgage, or
antichresis may exceptionally 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.
Facts: Chua Pac, the president and
general manager of co-petitioner Acme
Shoe, Rubber & Plastic Corporation,
executed, for and in behalf of the
company, a chattel mortgage in favor of
Producers Bank of the Philippines. A
provision in the chattel mortgage
agreement xx subsequent promissory
note or notes either as a renewal of the
former note, as an extension thereof, or
as a new loan, or is given any other kind
of accommodations such as overdrafts,
letters of credit, acceptances and bills of
exchange, releases of import shipments
on Trust Receipts, etc.,xxx. The first
loan was paid by petitioner corporation.
Subsequently, in 1981, it obtained from
Producers Bank additional financial
accommodations. These borrowings
were on due date also fully paid. The
bank yet again extended a 3 rd loam to
ACME a covered by four promissory
notes. Due to financial constraints, the
loan was not settled at maturity. The
bank thereupon applied for an
extrajudicial foreclosure of the chattel
mortgage, prompting ACME to forthwith
file an action for injunction, with
damages and a prayer for a writ of
preliminary injunction.
Issue: Whether or not chattel mortgage
may secure after incurred obligations.
Held: While a pledge, real estate
mortgage, or antichresis may
exceptionally 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
a 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.
Refusal on the part of the borrower to
execute the agreement so as to cover the
after-incurred obligation can constitute
an act of default on the part of the
borrower of the financing agreement
whereon the promise is written but, of
course, the remedy of foreclosure can
only cover the debts extant at the time of
constitution and during the life of the
chattel mortgage sought to be
foreclosed.
Contracts of security are either
personal or real. In contracts of
personal security, such as a guaranty or
a suretyship, the faithful performance of
the obligation by the principal debtor is
secured by the personal commitment of
another (the guarantor or surety). In
contracts of real security, such as a
pledge, a mortgage or an antichresis,
that fulfillment is secured by
an encumbrance of property in pledge,
the placing of movable property in the
possession of the creditor;
in chattel mortgage, by the execution of
the corresponding deed substantially in
the form prescribed by law; in real
estate mortgage, by the execution of a
public instrument encumbering the real
property covered thereby; and
in antichresis, by a written instrument
granting to the creditor the right to
receive the fruits of an immovable
property with the obligation to apply
such fruits to the payment of interest, if
owing, and thereafter to the principal of
his credit upon the essential condition
that if the principal obligation becomes
due and the debtor defaults, then the
property encumbered can be alienated
for the payment of the obligation, but
that should the obligation be duly paid,
then the contract is automatically
extinguished proceeding from the
accessory characterof the agreement.
As the law so puts it, once the obligation
is complied with, then the contract of
security becomes, ipso facto, null and
void.
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f. MONTANO, vs. JOSE LIM (Karen
Dungog)
Facts: Montano brought to the
Philippines from the US a Cadillac car
which he registered in his name in the
Motor Vehicles Office and for which he
obtained a certificate of registration. He
sold the car to Lim and his wife for
P28,000.00, payable in installments, for
which the latter executed a promissory
note. Having paid part of the price, said
spouses executed on the same date a
chattel mortgage on the car in favor of
Montano to guarantee the payment of
the balance. Because Montano did not
want to transfer the registration
certificate to Lim before the registration
of the mortgage, the latter was
registered in the office of the register of
deeds on June 4, 1952, but Montano
failed to notify the Motor Vehicles Office
of the execution of the mortgage
pursuant to the requirement of Section
5(e) of Act No. 3992, known as the
Revised Motor Vehicle Law.
Lim transferred the registration
certificate to Villanueva who
subsequently sold the car to Santos
transferring to the latter the registration
certificate. On the same date, Santos
sold the car to the Manila Trading and
on the same date this company sold the
car to Tinio for P26,000.00. Tinio made a
down payment of P12,000.00 and for the
balance he executed a promissory note
which he assumed to pay in monthly
installments. He also executed a chattel
mortgage on the same car to secure the
payment of the promissory note. This
mortgage was registered both in the
office of the register of deeds as well as
in the Motor Vehicles Office. After
paying his obligation in full, the
mortgage executed by Tinio in favor of
the Manila Trading was cancelled, and
as a consequence he secured the
transfer to his name of the certificate of
registration from the Motor Vehicles
Office. None of the transferees took the
trouble of investigating from whom Lim
had acquired the Cadillac car, and
neither did any of them investigate in
the office of the register of deeds if there
was any encumbrance existing thereon.
Lim failed to pay the balance of the
purchase price to Montano in spite of
the latter's demand and so on Montano
requested the sheriff of Manila to sell
the car in accordance with the
conditions agreed upon in the chattel
mortgage. Having found, however, that
the car was no longer in the possession
of Lim but in that of Tinio who claimed
ownership thereof, Montano commenced
an action of replevin against Lim & his
wife and Tinio.
ISSUE:
(1) whether the chattel mortgage
executed by Lim and his wife before the
car was actually registered in their name
is valid and regular?
(2) Whether or not the chattel mortgage
executed by Lim and his wife in favor of
Montano is binding against third persons
even if they failed to give notice thereof
to the Motor Vehicles Office?
HELD:
1. yes. It is not disputed that Montano
agreed to sell and Lim and his wife
agreed to buy the car for P28,000.00 for
which a promissory note was executed
and that to guarantee the same the
spouses executed a chattel mortgage
and took possession of the car sold. It is
therefore safe to conclude that at the
time of the sale wherein the parties
agreed over the car and the price, the
contract became perfected, and when
part of the purchase price was paid and
the car was delivered upon the execution
of the promissory note and the
mortgage, the same became
consummated. The fact that the
registration certificate of the car has not
as yet been transmitted to the
purchasers when the mortgage was
constituted is of no moment for, as this
Court well said: "The registry of the
transfer of automobiles and of the
certificates of license for their use in the
Bureau of Public Works (now Motor
Vehicles Office) merely constitutes an
administrative proceeding which does
not bear any essential relation to the
 contract of sale entered into between the
parties." At any rate, this flaw, if any, is
deemed to have been cured when after
the registration of the mortgage the
registration certificate was transferred
to the purchasers on June 4, 1952.
2. No."A mortgage in order to affect third
persons should not only be registered in
the Chattel Mortgage Registry, but the
same should also be recorded in the
Motor Vehicles Office as required by
section 5(e) of the Revised Motor Vehicle
Law. As between Montano whose
mortgage over the car was not recorded
in the Motor Vehicles Office and Tinio
who notified said office of his purchase
and registered the car in his name, the
latter is entitled to preference
considering that the mere registration of
the chattel mortgage in the office of the
register of deeds is in itself not sufficient
to hold it binding against third persons.
C. Article 2141:
a. Cerna vs CA (Christal Javier)
Facts: Delgado and Leviste entered into
a loan agreement which was evidenced
by a promissory note. On the same date,
Delgado executed a chattel mortgage
over a Willy's jeep owned by him. And
acting as the attorney-in-fact of Manuel
Cerna, he also mortgage a "Taunus' car
owned by Cerna. The period lapsed
without Delgado paying the loan. This
prompted Leviste to a file a collection
suit against Delgado and Cerna as
solidary debtors. Delgado died. Cerna
argued that the suit should be filed
against the estate of Delgado.
Issue: Can the owner of the mortgaged
property be sued in a collection for a
sum of money based on a promissory
note when it was not signed by him but
by the principal debtor?
Ruling: No. Only Delgado signed the
promissory note and accordingly, he was
the only one bound by the contract of
loan. Nowhere did it appear in the
promissory note that Cerna was a co-
debtor. The law is clear that contracts
take effect only between the parties. But
by some stretch of the imagination,
Cerna was held solidarily liable for the
debt allegedly because he was a co-
mortgagor of the principal debtor,
Delgado. This ignores the basic precept
that there is solidary liability only when
the obligation expressly so states, or
when the law or the nature of the
obligation requires solidarity.
There is also no legal provision nor
jurisprudence in our jurisdiction which
makes a third person who secures the
fulfillment of another's obligation by
mortgaging his own property to be
solidarily bound with the principal
obligor. A chattel mortgage may be "an
accessory contract" to a contract of loan,
but that fact alone does not make a
third-party mortgagor solidarily bound
with the principal debtor in fulfilling the
principal obligation that is, to pay the
loan. The signatory to the principal
contract loan remains to be
primarily bound. It is only upon the
default of the latter that the creditor
may have been recourse on the
mortgagors by foreclosing the
mortgaged properties in lieu of an action
for the recovery of the amount of the
loan. And the liability of the third-party
mortgagors extends only to the property
mortgaged. Should there be any
deficiency, the creditors has recourse on
the principal debtor.
Only Delgado signed as the
mortgagor. The Special Power of
Attroney executed by Cerna in favor of
Delgado to mortgage his property does
not make him a mortgagor.
We agree with Cerna that the filing
of collection suit barred the foreclosure
of the mortgage. A mortgage who files a
suit for collection abandons the remedy
of foreclosure of the chattel mortgage
constituted over the personal property
as security for the debt or value of the
promissory note which he seeks to
recover in the said collection suit. The
creditor must choose one remedy:
foreclose the mortgage or file a
collection suit.
b. Magna Financial Services Group vs.
Colarina (R-U, Glenna)
Facts: Elias Colarina bought on
installment from Magna Financial
Services Group, Inc., 1 unit of Suzuki
Multicab. After making a down payment,
Colarina executed a PN for the balance
of P229,284. To secure payment thereof,
Colarina executed an integrated PN 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. Despite repeated demands, he
failed to make the necessary payment.
Magna Financial Services Group,
Inc. filed a Complaint for Foreclosure of
Chattel Mortgage with Replevin before
the MTCC. Upon filing of a bond, a writ
of replevin was issued. Colarina who
voluntarily surrendered physical
possession of the vehicle to the Sheriff.
After declaring Colarina in default, the
trial court ruled against defendant and
ordered him to pay the sum of P131,607
plus penalty charges, attorneys fees and
cost. In case of nonpayment, the
multicab shall be sold at public auction.
The RTC affirmed. The CA rendered its
decision ruling that the courts erred in
ordering the defendant to pay the unpaid
balance of the purchase price
irrespective of the fact that the
complaint was for the foreclosure of the
chattel mortgage.
Issue: What is the true nature of a
foreclosure of chattel mortgage under
Article 1484(3).
Ratio: Our Supreme Court in Bachrach
Motor Co., Inc. v. Millan 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
prayed for the principal sum of
P131,607, attorneys fees etc. 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. In its
Memorandum before us, petitioner
resolutely declared that it has opted for
the remedy provided under Article
1484(3) CC 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.
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.
Contrary to petitioners 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. 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. 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.
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.
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 courts decision and
instead rendered a judgment of
foreclosure as prayed for by the
petitioner.
Issue: WON there has been an actual
foreclosure of the vehicle
Ratio: 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, 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. 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.
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.
c. BA Finance vs CA (Krizea Duron)
FACTS: Private respondents Manuel
Cuady and Lilia Cuady obtained from
Supercars, Inc. a credit of P39,574.80,
which amount covered the cost of one
unit of Ford Escort 1300, four-door
sedan. Said obligation was evidenced by
a promissory note executed by private
respondents in favor of Supercars, Inc.,
obligating themselves to pay the latter
the sum of P39,574.80, inclusive of
interest at 14% per annum, payable on
monthly installments August 16, 1977,
and on the 16th day of the next 35
months from September 16, 1977 until
full payment thereof. There was also
stipulated a penalty of P10.00 for every
month of late installment payment. To
secure the faithful and prompt
compliance of the obligation under the
said promissory note, the Cuady spouses
constituted a chattel mortage on the
aforementioned motor vehicle. On July
25, 1977, Supercars, Inc. assigned the
promissory note, together with the
chattel mortgage, to B.A. Finance
Corporation. The Cuadys paid a total of
P36,730.15 to the B.A. Finance
Corporation, thus leaving an unpaid
balance of P2,344.65 as of July 18, 1980.
In addition thereto, the Cuadys owe B.A.
Finance Corporation P460.00
representing penalties or surcharges for
tardy monthly instalments. B.A. Finance
Corporation, as the assignee of the
mortgage lien obtained the renewal of
the insurance coverage over the
aforementioned motor vehicle for the
year 1980 with Zenith Insurance
Corporation, when the Cuadys failed to
renew said insurance coverage
themselves. Under the terms and
conditions of the said insurance
coverage, any loss under the policy shall
be payable to the B.A. Finance
Corporation. On April 18, 1980, the
aforementioned motor vehicle figured in
an accident and was badly damaged. The
unfortunate happening was reported to
the B.A. Finance Corporation and to the
insurer, Zenith Insurance Corporation.
The Cuadys asked the B.A. Finance
Corporation to consider the same as a
total loss, and to claim from the insurer
the face value of the car insurance policy
and apply the same to the payment of
their remaining account and give them
the surplus thereof, if any. But instead of
heeding the request of the Cuadys, B.A.
Finance Corporation prevailed upon the
former to just have the car repaired. Not
long thereafter, however, the car bogged
down. The Cuadys wrote B.A. Finance
Corporation requesting the latter to
pursue their prior instruction of
enforcing the total loss provision in the
insurance coverage. When B.A. Finance
Corporation did not respond favorably to
their request, the Cuadys stopped paying
their monthly installments on the
promissory note. BA finance sued them
for the payment of the remaining
instalments.
ISSUE: Whether or not B.A. Finance
Corporation waive its right to collect the
unpaid balance of the Cuady spouses on
the promissory note for failure of the
former to enforce the total loss provision
in the insurance coverage of the motor
vehicle subject of the chattel mortgage.
RULING: Yes. B.A. Finance Corporation
was deemed subrogated to the rights
and obligations of Supercars, Inc. when
the latter assigned the promissory note,
together with the chattel mortgage
constituted on the motor vehicle in
question in favor of the former.
Consequently, B.A. Finance Corporation
is bound by the terms and conditions of
the chattel mortgage executed between
the Cuadys and Supercars, Inc. Under
the deed of chattel mortgage, B.A.
Finance Corporation was constituted
attorney-in-fact with full power and
authority to file, follow-up, prosecute,
compromise or settle insurance claims;
to sign execute and deliver the
corresponding papers, receipts and
documents to the Insurance Company as
may be necessary to prove the claim,
and to collect from the latter the
proceeds of insurance to the extent of its
interests, in the event that the
mortgaged car suffers any loss or
damage. In granting B.A. Finance
Corporation the aforementioned powers
and prerogatives, the Cuady spouses
created in the former's favor an agency.
Thus, under Article 1884 of the Civil
Code of the Philippines, B.A. Finance
Corporation is bound by its acceptance
to carry out the agency, and is liable for
damages which, through its non-
performance, the Cuadys, the principal
in the case at bar, may suffer.
Unquestionably, the Cuadys suffered
pecuniary loss in the form of salvage
value of the motor vehicle in question,
not to mention the amount equivalent to
the unpaid balance on the promissory
note, when B.A. Finance Corporation
steadfastly refused and refrained from
proceeding against the insurer for the
payment of a clearly valid insurance
claim, and continued to ignore the
yearning of the Cuadys to enforce the
total loss provision in the insurance
policy, despite the undeniable fact that
Rea Auto Center, the auto repair shop
chosen by the insurer itself to repair the
aforementioned motor vehicle,
misrepaired and rendered it completely
useless and unserviceable.
d. BICOL SAVINGS v GUINHAWA
(Krizza Batulan)
Facts: Victorio Depositario together with
private respondent Jaime Guinhawa,
acting as solidary co-maker, took a loan
from petitioner Bicol Savings and Loan
Association (BISLA) payable every 19th
day of each month. To secure the
payment of the foregoing loan
obligation, the principal borrower
Victorio Depositario put up as security a
chattel mortgage which was a Yamaha
Motorcycle. Said motorcycle was
eventually foreclosed by reason of the
failure of Depositario and private
respondent Guinhawa to pay the loan.
There was a deficiency in the amount of
P5,158.06 where BISLA made a demand
to pay the same. Petitioner BISLA
(plaintiff therein) filed a complaint for
the recovery of a sum of money
constituting the deficiency after
foreclosure of the chattel mortgage put
up by the principal borrower Depositario
against the latter and his solidary co-
maker Guinhawa (herein private
respondent) as defendants. Eventually, a
stipulation of facts was entered into
between BISLA and Guinhawa. They
agreed to drop Depositario, as "his
whereabouts being unknown now and he
could not be served with summons". The
creditor claims that he can maintain an
action for deficiency and claim P5k
balance.
Issue: Won creditor can claim remaining
balance?
Ruling: Yes. The creditor may maintain
an action for deficiency although the
chattel mortgage law Is silent on this
point. The reason is tat a chattel
mortgage is only given as a security and
not as payment for the debt in case of
failure of payment
e. PAMECA WOOD v CA (June Lacpao)
FACTS: On April 17, 1980,PAMECA
Wood Treatment Plant, Inc. (PAMECA)
obtained a loan of US$267,881.67, or the
equivalent of P2,000,000.00 from
Development Bank. By virtue of this
loan, petitioner PAMECA, through its
President, petitioner Herminio C. Teves,
executed a promissory note for the said
amount, promising to pay the loan by
installment.
As security for the said loan, a
chattel mortgage was also executed over
PAMECA's properties in Dumaguete City,
consisting of inventories, furniture and
equipment, to cover the whole value of
the loan.
On January 18, 1984, and upon
petitioner PAMECA's failure to pay,
Development Bank extrajudicially
foreclosed the chattel mortgage, and, as
sole bidder in the public auction,
purchased the foreclosed properties for
a sum of P322, 350.00.
On June 29, 1984, Development
Bank filed a complaint for the collection
of the balance.
PAMECA submit that Articles 1484 and
2115 of the Civil Code be applied in
analogy to the instant case to preclude
the recovery of a deficiency claim.
ISSUES: Whether or not the foreclosure
of the chattel mortgage was valid?
RULING: Yes. The court did not find
anything irregular or fraudulent in the
circumstance that respondent bank was
the sole bidder in the sale, as all the
legal procedures for the conduct of a
foreclosure sale have been complied
with, thus giving rise to the presumption
of regularity in the performance of
public duties.
The effects of foreclosure under
the Chattel Mortgage Law run
inconsistent with those of pledge under
Article 2115. Whereas, in pledge, the
sale of the thing pledged extinguishes
the entire principal obligation, such that
the pledgor may no longer recover
proceeds of the sale in excess of the
amount of the principal obligation,
Section 14 of the Chattel Mortgage Law
expressly entitles the mortgagor to the
balance of the proceeds, upon
satisfaction of the principal obligation
and costs.
Since the Chattel Mortgage Law bars the
creditor-mortgagee from retaining the
excess of the sale proceeds there is a
corollary obligation on the part of the
debtor-mortgagee to pay the deficiency
in case of a reduction in the price at
public auction.
As correctly pointed out by the
trial court, the said article applies
clearly and solely to the sale of personal
property the price of which is payable in
installments. Although Article 1484,
paragraph (3) expressly bars any further
action against the purchaser to recover
an unpaid balance of the price, where
the vendor opts to foreclose the chattel
mortgage on the thing sold, should the
vendee's failure to pay cover two or
more installments, this provision is
specifically applicable to a sale on
installments.
f. Superlines vs ICC, G.R. No.
150673. February 28, 2003 (Salesheil
Du)
Facts: Superlines Transportation Co.,
Inc. (Superlines) decided to acquire five
new buses from the Diamond Motors
Corporation. However, Superlines lacked
financial resources for the purpose. By
virtue of a board resolution, Superlines
authorized its President and General
Manager, Lavides, to look for and
negotiate with a financing corporation
for a loan for the purchase of said buses.
Lavides negotiated with ICC Leasing &
Financing Corporation (ICC, for brevity)
for a financial scheme for the planned
purchase. ICC agreed to finance the
purchase of the new buses via a loan and
proposed a three-year term for the
payment at a fixed interest rate of 22%
per annum. The new buses to be
purchased were to be used by Superlines
as security for the loan. ICC required
Superlines to submit certificates of
registration of the said buses under the
name of Superlines before the
appropriate document was executed by
the parties and their transactions
consummated. In October 1995,
Diamond Motors Corporation sold to
Superlines five new buses. Superlines,
through Lavides, acknowledged receipt
of the buses. In November 1995, the
vehicle invoices were filed with the LTO
which then issued certificates of
registration covering the five buses
under the name of Superlines. With the
buses now registered under its name,
Superlines, through Lavides, executed
two documents, namely: a deed of
chattel mortgage over the said buses as
security for the purchase price of the
buses loaned by ICC to Superlines,
which deed was annotated on the face of
said certificates of
registration, and a promissory note in
favor of ICC binding and obliging itself
to pay the latter Superlines and Lavides
executed a Continuing Guaranty to pay
jointly and severally in favor of ICC.
After paying only seven monthly
amortizations, Superlines defaulted in
the payment of its obligation to ICC. In
April 1997, ICC wrote Superlines
demanding full payment of its
outstanding obligation. However,
Superlines failed to heed said demand.
ICC filed a complaint for collection of
sum of money with prayer for a writ
of replevin of the Regional Trial Court
Superlines and Lavides.
Issue: Is respondent entitled to a
deficiency judgment against the
petitioners?
Ruling: The evidence on record shows
that under the Promissory Note, Chattel
Mortgage and Continuing Guaranty,
respondent was the creditor-mortgagee
of petitioner Superlines and not the
vendor of the new buses. Hence,
petitioners cannot find refuge in Article
1484(3) of the New Civil Code. As
correctly held by the Court of Appeals,
what should apply was the Chattel
Mortgage executed by petitioner
Superlines and respondent in relation to
the Chattel Mortgage Law. This Court
had consistently ruled that if in an extra-
judicial foreclosure of a chattel
mortgage a deficiency exists, an
independent civil action may be
instituted for the recovery of said
deficiency. To deny the mortgagee the
right to maintain an action to recover
the deficiency after foreclosure of the
chattel mortgage would be to overlook
the fact that the chattel mortgage is only
given as security and not as payment for
the debt in case of failure of
payment. Both the Chattel Mortgage
Law and Act 3135 governing extra-
judicial foreclosure of real estate
mortgage, do not contain any provision,
expressly or impliedly, precluding the
mortgagee from recovering deficiency of
the principal obligation.
In a case of recent vintage, this Court
held that if the proceeds of the sale are
insufficient to cover the debt in an extra-
judicial foreclosure of the mortgage, the
mortgagee is still entitled to claim the
deficiency from the debtor:
To begin with, it is settled that if the
proceeds of the sale are insufficient to
cover the debt in an extrajudicial
foreclosure of the mortgage, the
mortgagee is entitled to claim the
deficiency from the debtor. For when the
legislature intends to deny the right of a
creditor to sue for any deficiency
resulting from foreclosure of security
given to guarantee an obligation it
expressly provides as in the case of
pledges [Civil Code, Art. 2115] and in
chattel mortgages, while silent as to the
mortgagees right to recover, does not,
on the other hand, prohibit recovery of
deficiency. Accordingly, it has been held
that a deficiency claim arising from the
extrajudicial foreclosure is allowed.
In the case of PAMECA Wood
Treatment Plant, Inc. vs. Court of
Appeals, this Court declared that under
Section 14 of the Chattel Mortgage Law,
the mortgagor is entitled to recover the
balance of the proceeds, upon
satisfaction of the principal obligation
and costs, thus there is a corollary
obligation on the part of the debtor-
mortgagor to pay the deficiency in case
of a reduction in the price at public
auction. In fine then, the Court of
Appeals correctly ruled that respondent
is entitled to a deficiency judgment
against the petitioners.
g. Esguerra vs CA (Celeste Suamen)
FACTS: GA Machineries Inc.(GAMI) sold
a Ford-trader cargo to Hilario Lagmay
and Bonifacio Masilungan. Subsequently,
Montelibano Esguerra bought the right
to the cargo truck and assumed paying
the unpaid purchase price.In so doing,
Esguerra executed in favor of GAMI a
promissory note and chattel mortgage
over the truck. Esguerra defaulted in his
obligations. Gami took the truck from
Esguerra who gave his consent on the
condition that he be allowed to recover
its possession upon payment of its
account. Esguerra tried to repossess the
truck by sending his wife to Gami to
partially settle his account. Still, Gami
refused to deliver the truck, compelling
Esguerra to file a complaint. The trial
court dismissed the complaint. CA
sustained the findings of the trial court
that it was not unlawful on the part of
GAMI to repossess the cargo truck in
question as Esguerra gave his consent to
the repossession. However, said
appellate court, took exception to
GAMI's failure to sell at public auction
said truck. It held that while it is true the
chattel mortgage contract, the
mortgagee can take possession of the
chattel but such taking did not amount
to the foreclosure of the mortgage.
Otherwise stated, GAMI should have
foreclosed the mortgage.
ISSUE: WON the mortgage vendor of
personal property sold on installment is
legally obligated to foreclose the chattel
mortgage and sell the chattel subject
thereof at public auction in case the
mortgagor-vendee defaults in the
payment of the agreed installments.
HELD: The respondent appellate court
did not err in holding that while the
mortgagee can take possession of the
chattel, such taking did not amount to
the foreclosure of the mortgage.
Otherwise stated, the taking of
Esguerra's truck without proceeding to
the sale of the same at public auction,
but instead, appropriating the same in
payment of Esguerra's indebtedness, is
not lawful.
As clearly stated in the chattel mortgage
contract, the express purpose of the
taking of the mortgaged property is to
sell the same and/or foreclose the
mortgage constituted thereon either
judicially or extrajudicially and thereby,
liquidate the indebtedness in accordance
with law.
More than that, even if such automatic
appropriation of the cargo truck in
question can be inferred from or be
contemplated under the aforesaid
mortgage contract, such stipulation
would be pactum commissorium which is
expressly prohibited by Article 2088 of
the Civil Code and therefore, null and
void.
Having opted to foreclose the
chattel mortgage, respondent GAMI can
no longer cancel the sale. The three
remedies of the vendor in case the
vendee defaults, in a contract of sale of
personal property the price of which is
payable in installment under Article
1484 of the Civil Code, are alternative
and cannot be exercised simultaneously
or cumulatively by the vendor-creditor.In
Cruz vs. Filipinas Investment and
Finance Corporation (23 SCRA 791,
[19681; the Supreme Court construing
Article 1484 of the Civil Code, held:
Should the vendee or purchaser of a
personal property default in the payment
of two or more of the agreed
installments, the vendor or seller has the
option to avail of any one of these three
remedies either to exact fulfillment by
the purchaser of the obligation, or to
cancel the sale, or to foreclose the
mortgage on the purchased personal
property, if one was constituted. These
remedies have been recognized as
alternative, not cumulative, that the
exercise of one would bar the exercise of
the others. It may also be stated that the
established rule is to the effect that the
foreclosure and actual sale of a
mortgaged chattel bars further recovery
by the vendor of any balance on the
purchaser's outstanding obligation not
so satisfied by the sale.
Respondent GAMI is hereby
ordered to foreclose the chattel
mortgage by selling the subject cargo
truck at public auction and liquidate the
indebtedness in accordance with law.
h. BPI Credit v. CA (Julius Ragay)
Facts: Cabacungan purchased a vehicle
from BM Domingo Motor Sales on
installment basis to be used in his
furniture business. A 2% penalty charge
per month is added on each unpaid
installment from the date of its maturity.
Aside from a promissory note,
Cabacungan executed a chattel
mortgage to secure the obligation. In a
Deed of Assignment, BM Domingo
assigned to Filinest its rights, title and
interest in the chattel mortgage and
promissory note. Cabacungan delayed in
his payments, saying that he wanted a
recomputation of the interest because he
was paying amounts in excess of the
stipulated installment. Subsequently,
Filinvest seized the vehicle from the
employees of Cabacungan. Cabacungan
tendered a check for the unpaid
installments but it was not accepted by
Filinvest, which demanded the balance
of the entire promissory note.
Issue: Did Filinvest have the right to
take possession of the vehicle?
Ruling: No, because it did not make a
prior demand to Cabacungan to
surrender the vehicle prior to making
the seizure. The law does not allow the
creditor himself to possess the
mortgaged property through violence
and against the will of the debtor
because 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. While Filinvest may have all
the right in the world to foreclose the
mortgage, that right did not grant it
untrammeled license to intercept the
property subject of the mortgage and
seize it wherever it may be found, in a
manner contrary to the stipulations set
forth in the Chattel Mortgage contract.
Although he had not yet fully paid
its purchase price, Cabacungan became
the owner of the vehicle, otherwise the
seller would not have accepted it in
mortgage. He was entitled to its
possession and use until appropriate
lawful proceedings would have been
taken by Filinvest to obtain possession of
the vehicle preliminary to foreclosure of
the mortgage.
i. Servicewide Vs. CA (Junn Guazon)
FACTS: Leticia Laus purchased on credit
a Colt Galant from Fortune Motors
(Phils.) Corporation and executed a
promissory note for the amount
of P56,028.00, inclusive of 12% annual
interest, payable within a period of 48
months. In case of default in the
payment of any installment, the total
principal sum, together with the interest,
shall become immediately due and
payable. As a security for the promissory
note, a chattel mortgage was constituted
over the said motor vehicle, with a deed
of assignment incorporated therein such
that the credit and mortgage rights were
assigned by Fortune Motors Corp. in
favor of Filinvest Credit Corporation
with the consent of the mortgagor-
debtor Laus. Filinvest in turn assigned
the credit in favor of Servicewide
Specialists, Inc.Laus failed to pay the
monthly installment for April 1977 and
the succeeding 17 months. Servicewide
demanded payment of the entire
outstanding balance with interests
but Laus failed to pay despite formal
demands. As a result of Laus failure to
settle her obligation, or at least to
surrender possession of the motor
vehicle for foreclosure, Servicewide
instituted a complaint for replevin,
impleading Hilda Tee and John Dee in
whose custody the vehicle was believed
to be at the time of the filing of the
suit. Plaintiff alleged, among others, that
it had superior lien over the mortgaged
vehicle. The court approved the replevin
bond. Alberto Villafranca filed a third
party claim contending that he is the
absolute owner of the subject motor
vehicle after purchasing it from a certain
Remedios Yang free from all lien and
emcumbrances; and that on July 1984,
the said automobile was taken from his
residence by Deputy Sheriff Bernardo
Bernabe pursuant to the seizure order
issued by the court a quo.
party, should have been impleaded in the
complaint for replevin and damages. An
indispensable party is one whose
interest will be affected by the courts
action in the litigation, and without
whom no final determination of the case
can be had.

ISSUE: WON a case for replevin may be

pursued against the defendant, Alberto
Villafranca, without impleading the
absconding debtor-mortgagor
RULING: No. Rule 60 of the Revised
Rules of Court requires that an applicant
for replevin must show that he is the
owner of the property claimed,
particularly describing it, or is entitled
to the possession thereof. Where the
right of the plaintiff to the possession of
the specified property is so conceded or
evident, the action need only be
maintained against him who so
possesses the property. However, in
case the right of possession on the part
of the plaintiff, or his authority to claim
such possession or that of his principal,
is put to great doubt (a contending party
may contest the legal bases for plaintiffs
cause of action or an adverse and
independent claim of ownership or right
of possession may be raised by that
party), it could become essential to have
other persons involved and impleaded
for a complete determination and
resolution of the controversy. In a suit
for replevin, a clear right of possession
must be established. The conditions
essential for foreclosure of chattel
mortgage would be to show, firstly, the
existence of the chattel mortgage and,
secondly, the default of the
mortgagor. Since the mortgagees right
of possession is conditioned upon the
actual fact of default which itself may be
controverted, the inclusion of other
parties, like the debtor or the mortgagor
himself, may be required in order to
allow a full and conclusive determination
of the case. Laus, being an indispensable