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S Facts:: Outhern Motors, Inc. vs. Moscoso 2 SCRA 168G.R. No. L-14475, May 30, 1961
S Facts:: Outhern Motors, Inc. vs. Moscoso 2 SCRA 168G.R. No. L-14475, May 30, 1961
Moscoso
Facts:
Southern Motors sold to Moscoso one Chevrolet truck on installment basis. Upon making a
downpayment, Moscoso executed a promissory note representing the unpaid balance of the purchase
price. To secure payment, a chattel mortgage was constituted on the truck in favor of Southern
Motors. Moscoso failed to pay 3 installments. Subsequently, Southern Motors filed a complaint
against him to recover the unpaid balance of the promissory note. A writ of attachment was issued.
The Chevrolet truck and a house and lot belonging to Moscoso were attached by the sheriff. After
attachment but before the trial of the case, the Prov Sheriff sold the truck at a public auction,
Southern Motors being the only bidder, purchased the same. Trial court then rendered a decision
against Moscoso.
Arguments:
S. Motors: claims that in filing the complaint, demanding payment of the unpaid balance of the
purchase price, it has availed of the first remedy provided in said article i.e. to exact fulfillment of the
obligation (specific performance)
Moscoso: contends that appellee had availed itself of the third remedy viz, the foreclosure of the
chattel mortgage on the truck. He submits that the matter should be looked at, not by the allegations
in the complaint, but by the very effect and result of the procedural steps taken and that appellee tried
to camouflage its acts by filing a complaint purportedly to exact the fulfillment of an obligation
petition, in an attempt to circumvent the provisions of Article 1484 of the new Civil Code. He
concludes that under his theory, a deficiency judgment would be without legal basis.
Issue:
What did S. Motors availed of under Art. 1484 of the Civil Code, the first remedy (Exact fulfillment
of the obligation) or the third (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.)?
Held:
Manifestly, 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. Had appellee elected the foreclosure, it would not
have instituted this case in court; it would not have caused the chattel to be attached under Rule 59,
and had it sold at public auction, in the manner prescribed by Rule 39. That the 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 at San Jose, Antique.
The court perceived nothing unlawful or irregular in appellee’s act of attaching the mortgaged truck
itself. Since herein appellee has chosen to exact the fulfillment of the appellant’s obligation, it may
enforce execution of the judgment that may be favorably rendered hereon, on all personal and real
properties of the latter not exempt from execution sufficient to satisfy such judgment. It should be
noted that a house and lot at San Jose, Antique were also attached. No one can successfully contest
that the attachment was merely an incident to an ordinary civil action.
FACTS:
Plaintiff Southern Motors, Inc. sold to defendant Angel Moscoso one Chevrolet truck on
installment basis,for P6,445.00. 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, achattel mortgage was constituted on the truck in favor of the
plaintiff. Of said account, the defendant hadpaid a total of P550.00, of which P110.00 was
applied to the interest and P400.00 to the principal, thusleaving an unpaid balance of P4,475.00.
The defendant failed to pay 3 installments on the balance of thepurchase price.Plaintiff filed a
complaint against the defendant, to recover the unpaid balance of the promissory note.Upon
plaintiff's petition, a writ of attachment was issued by the lower court on the properties of
thedefendant. Pursuant thereto, the said Chevrolet truck, and a house and lot belonging to
defendant, wereattached by the Sheriff and said truck was brought to the plaintiff's compound
for safe keeping. Afterattachment and before the trial of the case on the merits, acting upon the
plaintiff's motion for theimmediate sale of the mortgaged truck, the Provincial Sheriff of Iloilo
sold the truck at public auction inwhich plaintiff itself was the only bidder for P1,OOO.OO. The
trial court condemned the defendant to paythe plaintiff the amount of P4,475.00 with interest at
the rate of 12% per annum from August 16, 1957,until fully paid, plus 10% thereof as attorneys
fees and costs. Hence, this appeal by the defendant.
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:
No.Article 1484 of the Civil Code provides that in a contract of sale of personal property the
price of which ispayable in installments, the vendor may exercise any of the following remedies:
(I) Exact fulfillment of the obligation, should the vendee fail to pay; (2) Cancel the sale, should
the vendee's failure to pay covertwo or more installments; and (3) Foreclose the chattel
mortgage on the thing sold, if one has beenconstituted, should the vendee's failure to pay cover
two or more installments. In this case, he shall haveno further action against the purchaser to
recover any unpaid balance of the price. Any agreement to thecontrary shall be void.The
plaintiff had chosen the first remedy. The complaint is an ordinary civil action for recovery of
theremaining unpaid balance due on the promissory note. The plaintiff had not adopted the
procedure ormethods outlined by Sec. 14 of the Chattel Mortgage Law but those prescribed for
ordinary civil actions,under the Rules of Court. Had the plaintiff elected the foreclosure, it
would not have instituted this casein court; it would not have caused the chattel to be attached
under Rule 59, and had it sold at publicauction, in the manner prescribed by Rule 39. That the
plaintiff did not intend to foreclose the mortgagetruck, is further evinced by the fact that it had
also attached the house and lot of the appellant at SanJose, Antique.We perceive nothing
unlawful or irregular in plaintiff's act of attaching the mortgaged truck itself. Sincethe plaintiff
has chosen to exact the fulfillment of the appellant's obligation, it may enforce execution of the
judgment that may be favorably rendered hereon, on all personal and real properties of the
latter notexempt from execution sufficient to satisfy such judgment. It should be noted that a
house and lot at SanJose, Antique were also attached. No one can successfully contest that the
attachment was merely anincident to an ordinary civil action. The mortgage creditor may
recover judgment on the mortgage debtand cause an execution on the mortgaged property and
may cause an attachment to be issued andlevied on such property, upon beginning his civil
action.
1. That the plaintiffs executed the real estate mortgage subject matter of this
complaint on December 14, 1960 to secure the payment of the indebtedness of PDP
Transit, Inc. for the purchase of five (5) units of Mercedez Benz trucks under invoices
Nos. 2836, 2837, 2838, 2839 and 2840 with a total purchase price or principal
obligation of P152,506.50 but plaintiffs' guarantee is not to exceed P50,000.00 which
is the value of the mortgage.
3. That as of April 5, 1961 with reference to the two units mentioned above and as of
May 22, 1961 with reference to the three units, PDP Transit, Inc., plaintiffs' principal,
had paid to the defendant Universal Motors Corporation the sum of P92,964.91, thus
leaving a balance of P68,641.69 including interest due as of February 8, 1965.
4. That the aforementioned obligation guaranteed by the plaintiffs under the Real
Estate Mortgage, subject of this action, is further secured by separate deeds of
chattel mortgages on the Mercedez Benz units covered by the aforementioned
invoices in favor of the defendant Universal Motors Corporation.
5. That on March 19, 1965, the defendant Universal Motors Corporation filed a
complaint against PDP Transit, Inc. before, the Court of First Instance of Manila
docketed as Civil Case No. 60201 with a petition for a writ of Replevin, to collect the
balance due under the Chattel Mortgages and to repossess all the units to sold to
plaintiffs' principal PDP Transit, Inc. including the five (5) units guaranteed under the
subject Real (Estate) Mortgage.
In addition to the foregoing the Universal Motors Corporation admitted during the hearing that in its
suit (C.C. No. 60201) against the PDP Transit, Inc. it was able to repossess all the units sold to the
latter, including the five (5) units guaranteed by the subject real estate mortgage, and to foreclose all
the chattel mortgages constituted thereon, resulting in the sale of the trucks at public auction.
With the foregoing background, the spouses Lorenzo Pascual and Leonila Torres, the real estate
mortgagors, filed an action in the Court of First Instance of Quezon City (Civil Case No. 8189) for the
cancellation of the mortgage they constituted on two (2) parcels of land1 in favor of the Universal
Motors Corporation to guarantee the obligation of PDP Transit, Inc. to the extent of P50,000. The
court rendered judgment for the plaintiffs, ordered the cancellation of the mortgage, and directed the
defendant Universal Motors Corporation to pay attorney's fees to the plaintiffs in the sum of P500.00.
Unsatisfied with the decision, defendant interposed the present appeal.
In rendering judgment for the plaintiffs the lower court said in part: "... there does not seem to be any
doubt that Art. 14842 of the New Civil Code may be applied in relation to a chattel mortgage
constituted upon personal property on the installment basis (as in the present case) precluding the
mortgagee to maintain any further action against the debtor for the purpose of recovering whatever
balance of the debt secured, and even adding that any agreement to the contrary shall be null and
void."
The appellant now disputes the applicability of Article 1484 of the Civil Code to the case at bar on
the ground that there is no evidence on record that the purchase by PDP Transit, Inc. of the five (5)
trucks, the payment of the price of which was partly guaranteed by the real estate mortgage in
question, was payable in installments and that the purchaser had failed to pay two or more
installments. The appellant also contends that in any event what article 1484 prohibits is for the
vendor to recover from the purchaser the unpaid balance of the price after he has foreclosed the
chattel mortgage on the thing sold, but not a recourse against the security put up by a third party.
Both arguments are without merit. The first involves an issue of fact: whether or not the sale was one
on installments; and on this issue the lower court found that it was, and that there was failure to pay
two or more installments. This finding is not subject to review by this Court. The appellant's bare
allegation to the contrary cannot be considered at this stage of the case.
The next contention is that what article 1484 withholds from the vendor is the right to recover any
deficiency from the purchaser after the foreclosure of the chattel mortgage and not a recourse to the
additional security put up by a third party to guarantee the purchaser's performance of his obligation.
A similar argument has been answered by this Court in this wise: "(T)o sustain appellant's argument
is to overlook the fact that if the guarantor should be compelled to pay the balance of the purchase
price, the guarantor will in turn be entitled to recover what she has paid from the debtor vendee (Art.
2066, Civil Code); so that ultimately, it will be the vendee who will be made to bear the payment of
the balance of the price, despite the earlier foreclosure of the chattel mortgage given by him. Thus,
the protection given by Article 1484 would be indirectly subverted, and public policy overturned."
(Cruz vs. Filipinas Investment & Finance Corporation, L-24772, May 27, 1968; 23 SCRA 791).
The decision appealed from is affirmed, with costs against the defendant-appellant.
FILINVEST CREDIT CORPORATION vs CA 178 SCRA 188, G.R. No. 82508 September 29, 1989
FACTS:
Herein private respondents spouses Jose Sy Bang and Iluminada Tan were engaged in the sale of gravel
produced from crushed rocks and used for construction purposes. They intended to buy rock crusher
from Rizal Consolidated Corporation which carried a cash price tag of P550,000.00. They applied for
financial assistance from herein petitioner Filinvest Credit Corporation, who agreed to extend financial
aid on the certain conditions.
A contract of lease of machinery (with option to purchase) was entered into by the parties whereby the
private respondents agreed to lease from the petitioner the rock crusher for two years starting from July
5, 1981, payable as follows: P10,000.00 – first 3 months, P23,000.00 – next 6 months, P24,800.00 – next
15 months. It was likewise stipulated that at the end of the two-year period, the machine would be
owned by the private respondents. Thus the private respondent issued in favor of the petitioner a check
for P150,550.00, as initial rental (or guaranty deposit), and 24 postdated checks corresponding to the 24
monthly rentals. In addition, to guarantee their compliance with the lease contract, the private
respondent executed a real estate mortgage over two parcels of land in favor of the petitioner. The rock
crusher was delivered to the spouses.
However, 3 months later, the souses stopped payment when petitioner had not acted on the complaints
of the spouses about the machine. As a consequence, petitioner extra-judicially foreclosed the real
estate mortgage. The spouses filed a complaint before the RTC. The RTC rendered a decision in favor of
private respondent. The petitioner elevated the case to CA which affirmed the decision in toto. Hence,
this petition.
ISSUES:
2. Whether or not the remedies of the seller provided for in Article 1484 are cumulative.
HELD:
1. Yes. The intent of the parties to the subject contract is for the so-called rentals to be the installment
payments. Upon the completion of the payments, then the rock crusher, subject matter of the contract,
would become the property of the private respondents. This form of agreement has been criticized as a
lease only in name.
Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a
bargain in that form, for one reason or another, have frequently restored to the device of making
contracts in the form of leases either with options to the buyer to purchase for a small consideration at
the end of term, provided the so-called rent has been duly paid, or with stipulations that if the rent
throughout the term is paid, title shall thereupon vest in the lessee. It is obvious that such transactions
are leases only in name. The so-called rent must necessarily be regarded as payment of the price in
installments since the due payment of the agreed amount results, by the terms of bargain, in the
transfer of title to the lessee.
2. No, it is alternative. The seller of movable in installments, in case the buyer fails to pay 2 or more
installments, may elect to pursue either of the following remedies: (1) exact fulfillment by the purchaser
of the obligation; (2) cancel the sale; or (3) foreclose the mortgage on the purchased property if one was
constituted thereon. It is now settled that the said remedies are alternative and not cumulative, and
therefore, the exercise of one bars the exercise of the others. Indubitably, the device – contract of lease
with option to buy – is at times resorted to as a means to circumvent Article 1484, particularly
paragraph (3) thereof. Through the set-up, the vendor, by retaining ownership over the property in the
guise of being the lessor, retains, likewise the right to repossess the same, without going through the
process of foreclosure, in the event the vendee-lessee defaults in the payment of the installments.
There arises therefore no need to constitute a chattel mortgage over the movable sold. More important,
the vendor, after repossessing the property and, in effect, canceling the contract of sale, gets to keep all
the installments-cum-rentals already.
Facts:
Spouses Sy Bang were engaged in the sale of gravel produced from crushed rocks and used for
construction purposes. In order to increase their production, they looked for a rock crusher which Rizal
Consolidated Corporation then had for sale. A brother of Sy Bang, went to inspect the machine at the
Rizal Consolidated’s plant site. Apparently satisfied with the machine, the private respondents signified
their intent to purchase the same.
Since he does not have the financing capability, Sy Bang applied for financial assistance from Filinvest
Credit Corporation. Filinvest agreed to extend financial aid on the following conditions: (1) that the
machinery be purchased in the petitioner’s name; (2) that it be leased with option to purchase upon the
termination of the lease period; and (3) that Sy Bang execute a real estate mortgage as security for the
amount advanced by Filinvest. A contract of lease of machinery (with option to purchase) was entered
into by the parties whereby they to lease from the petitioner the rock crusher for two years. The contract
likewise stipulated that at the end of the two-year period, the machine would be owned by Sy Bang.
3 months from the date of delivery, Sy Bang claiming that they had only tested the machine that month,
sent a letter-complaint to the petitioner, alleging that contrary to the 20 to 40 tons per hour capacity of the
machine as stated in the lease contract, the machine could only process 5 tons of rocks and stones per
hour. They then demanded that the petitioner make good the stipulation in the lease contract. Sy Bang
stopped payment on the remaining checks they had issued to the petitioner.
As a consequence of the non-payment, Filinvest extrajudicially foreclosed the real estate mortgage.
Issue:
Held:
The real intention of the parties should prevail. The nomenclature of the agreement cannot change its
true essence, i.e., a sale on installments. It is basic that a contract is what the law defines it and the
parties intend it to be, not what it is called by the parties. It is apparent here that the intent of the parties to
the subject contract is for the so-called rentals to be the installment payments. Upon the completion of the
payments, then the rock crusher, subject matter of the contract, would become the property of the private
respondents. This form of agreement has been criticized as a lease only in name.
Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a bargain
in that form, for one reason or another, have frequently resorted to the device of making contracts in the
form of leases either with options to the buyer to purchase for a small consideration at the end of term,
provided the so-called rent has been duly paid, or with stipulations that if the rent throughout the term is
paid, title shall thereupon vest in the lessee. It is obvious that such transactions are leases only in name.
The so-called rent must necessarily be regarded as payment of the price in installments since the due
payment of the agreed amount results, by the terms of bargain, in the transfer of title to the lessee.
Indubitably, the device contract of lease with option to buy is at times resorted to as a means to
circumvent Article 1484, particularly paragraph (3) thereof.Through the set-up, the vendor, by retaining
ownership over the property in the guise of being the lessor, retains, likewise, the right to repossess the
same, without going through the process of foreclosure, in the event the vendee-lessee defaults in the
payment of the installments. There arises therefore no need to constitute a chattel mortgage over the
movable sold. More important, the vendor, after repossessing the property and, in effect, canceling the
contract of sale, gets to keep all the installments-cum-rentals already paid.
Even if there was a contract of sale, Filinvest is still not liable because Sy Bang is presumed to be more
knowledgeable, if not experts, on the machinery subject of the contract, they should not therefore be
heard now to complain of any alleged deficiency of the said machinery. It was Sy Bang who was
negligent, not Filinvest. Further, Sy Bang is precluded to complain because he signed a Waiver of
Warranty.
Filipinas Investment and Finance Corporation, Jose D. Sebastian and Jose San Agustin, in his
capacity as Sheriff, defendants-appellants
Plaintiffs purchased from Supreme Sales and Development Corporation (Supreme) 2 brand new Ford
Consul Sedans, for P26,887 payable in 24 monthly installments.
To secure payment thereof, plaintiffs executed a promissory note covering the purchase price and a deed
of chattel mortgage on the two vehicles purchased and also on another car (Chevrolet) and plaintiff’s
franchise or certificate of public convenience granted by the defunct Public Service Commission for the
operation of a taxi fleet.
With the conformity of plaintiffs, the vendor Supreme assigned its rights, title and interest to the
promissory note and chattel mortgage to the defendant Filipinas Investment and Finance Corporation.
Plaintiffs failed to pay their monthly installments. Filipinas foreclosed the chattel mortgage extra-
judicially.
During the public auction, of which the plaintiffs were not notified, the 2 Ford Consul cars were bought
by defendant Filipinas, who was as the highest bidder. During another public auction, the rest of the
properties (including the taxi franchise) subject of the chattel mortgage were sold, and bought by
defendant Filipinas also.
Filipinas subsequently sold the taxi franchise to defendant Jose D. Sebastian, who filed with the Public
Service Commission an application for approval of said sale.
Plaintiffs then filed an action for annulment of contract before the CFI, against Filipinas, Sebastian, and
Sheriff San Agustin.
CFI ruling: The chattel mortgage was null and void in so far as the taxi franchise and the used Chevrolet
car were concerned, and the sale at public auction of the taxicab franchise was to be of no legal effect.
The Certificate of Sale issued by the Sheriff of Manila in favor of Filipinas concerning the taxi franchise
was cancelled and set aside. The assignment made by Filipinas in favor of Jose Sebastian was also
declared void and of no legal effect.
The CA certified the defendants’ appeal to the SC.
Ratio:
1) Article 1484 of the Civil Code is applicable. Under this article, the vendor of personal property the
purchase price of which is payable in installments, has the right, should the vendee default in the
payment of two or more of the agreed installments, 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. The vendor can only choose one option.
2) If the vendor avails himself of the right to foreclose the mortgage, the law prohibits him from further
bringing an action against the vendee for the purpose of recovering whatever balance of the debt
secured is not satisfied by the foreclosure sale.
3) Purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at
foreclosure sale for a low price and the bringing suit against the mortgagor for a deficiency judgment.
a. Without the law, the mortgagor-buyer would find himself without the property and still owing
practically the full amount of his original debt.
4) In this case, defendant Filipinas chose to foreclose the mortgage upon default of plaintiffs, and bought
the vehicles at the public auction as the highest bidder.
a. Filipinas is deemed to have renounced any and all rights which it might otherwise have under the
promissory note and the chattel mortgage as well as the payment of the unpaid balance.
5) The lower court rightly declared the nullity of the chattel mortgage in so far as the taxi franchise and the
Chevrolet were concerned, under the authority of the ruling in the case of Levy Hermanos, Inc. v Pacific
Commercial Co., et al.
6) The vendor’s right to foreclose is limited only on the thing sold.
7) The vendor of personal property sold on installment 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. (Cruz v Filipinos Investment & Finance Corporation)
a. Otherwise, if the vendee could still be compelled to pay the balance of the purchase price, the
vendee will be made to bear the payment of the balance despite the earlier foreclosure.
Judgment appealed from is affirmed.
RIDAD V FILIPINAS
Facts: The spouses Ridad purchased from the Supreme Sales Development Corporation
two (2) brand new Ford Consul Sedans complete with accessories. To secure payment
thereof, plaintiffs executed on the same date a promissory note covering the purchase price
and a deed of chattel mortgage not only on the two vehicles purchased but also on another
car (Chevrolet) and their franchise or certificate of public convenience granted by the
defunct Public Service Commission for the operation of a taxi fleet with Filipinas Investment.
Due to the failure of the plaintiffs to pay their monthly installments as per promissory note,
Filipinas Investment foreclosed on the chattel mortgage on the Ford Consul Sedans. The
foreclosure sale had a deficiency. Consequently, the corporation foreclosed the mortgage
constituted on the (Chevrolet) and their franchise or certificate of public convenience.
Issue: Whether Filipinas Investment is precluded from foreclosing the second mortgage to
recover the deficiency on the first mortgage
Held: No. 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.
If the vendor under such circumstance is prohibited from having a recourse against the
additional security for reasons therein stated, there is no ground why such vendor should
not likewise be precluded from further extrajudicially foreclosing the additional security put
up by the vendees themselves, as in the instant case, it being tantamount to a further action
5 that would violate Article 1484 of the Civil Code, for then is actually no between an
additional security put up by the vendee himself and such security put up by a third party
insofar as how the burden would ultimately fall on the vendee himself is concerned.
On April 14, 1964, plaintiffs purchased from the Supreme Sales arid Development Corporation two (2)
brand new Ford Consul Sedans complete with accessories, for P26,887 payable in 24 monthly
installments. To secure payment thereof, plaintiffs executed on the same date a promissory note covering
the purchase price and a deed of chattel mortgage not only on the two vehicles purchased but also on
another car (Chevrolet) and plaintiffs' franchise or certificate of public convenience granted by the defunct
Public Service Commission for the operation of a taxi fleet. Then, with the conformity of the plaintiffs, the
vendor assigned its rights, title and interest to the above-mentioned promissory note and chattel
mortgage to defendant Filipinas Investment and Finance Corporation.
Due to the failure of the plaintiffs to pay their monthly installments as per promissory note, the defendant
corporation foreclosed the chattel mortgage extra-judicially, and at the public auction sale of the two Ford
Consul cars, of which the plaintiffs were not notified, the defendant corporation was the highest bidder
and purchaser. Another auction sale was held on November 16, 1965, involving the remaining properties
subject of the deed of chattel mortgage since plaintiffs' obligation was not fully satisfied by the sale of the
aforesaid vehicles, and at the public auction sale, the franchise of plaintiffs to operate five units of taxicab
service was sold for P8,000 to the highest bidder, herein defendant corporation, which subsequently sold
and conveyed the same to herein defendant Jose D. Sebastian, who then filed with the Public Service
Commission an application for approval of said sale in his favor.
On February 21, 1966, plaintiffs filed an action for annulment of contract before the Court of First Instance
of Rizal, Branch I, with Filipinas Investment and Finance Corporation, Jose D. Sebastian and Sheriff Jose
San Agustin, as party-defendants. By agreement of the parties, the case was submitted for decision in the
lower court on the basis of the documentary evidence adduced by the parties during the pre-trial
conference. Thereafter, the lower court declared the chattel mortgage to be null and void in so far as the
taxicab franchise and the used Chevrolet car of plaintiffs are concerned, and the sale at public auction
conducted by the City Sheriff of Manila concerning said taxicab franchise, to be of no legal effect.
Issue:The validity of the chattel mortgage in so far as the franchise and the subsequent sale thereof are
concerned.
Ruling:
The resolution of said issue is unquestionably governed by the provisions of Article 1484 of the Civil
Code.
The precise purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at
foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment,
otherwise, the mortgagor-buyer would find himself without the property and still owing practically the full
amount of his original indebtedness.
The lower court rightly declared the nullity of the chattel mortgage in question in so far as the taxicab
franchise and the used Chevrolet car of plaintiffs are concerned, under the authority of the ruling in the
case of 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.
Southern Motors vs. Moscoso
Facts:
Southern Motors sold to Moscoso one Chevrolet truck on installment basis. Upon making a
downpayment, Moscoso executed a promissory note representing the unpaid balance of the purchase
price. To secure payment, a chattel mortgage was constituted on the truck in favor of Southern
Motors. Moscoso failed to pay 3 installments. Subsequently, Southern Motors filed a complaint
against him to recover the unpaid balance of the promissory note. A writ of attachment was issued.
The Chevrolet truck and a house and lot belonging to Moscoso were attached by the sheriff. After
attachment but before the trial of the case, the Prov Sheriff sold the truck at a public auction,
Southern Motors being the only bidder, purchased the same. Trial court then rendered a decision
against Moscoso.
Arguments:
S. Motors: claims that in filing the complaint, demanding payment of the unpaid balance of the
purchase price, it has availed of the first remedy provided in said article i.e. to exact fulfillment of the
obligation (specific performance)
Moscoso: contends that appellee had availed itself of the third remedy viz, the foreclosure of the
chattel mortgage on the truck. He submits that the matter should be looked at, not by the allegations
in the complaint, but by the very effect and result of the procedural steps taken and that appellee tried
to camouflage its acts by filing a complaint purportedly to exact the fulfillment of an obligation
petition, in an attempt to circumvent the provisions of Article 1484 of the new Civil Code. He
concludes that under his theory, a deficiency judgment would be without legal basis.
Issue:
What did S. Motors availed of under Art. 1484 of the Civil Code, the first remedy (Exact fulfillment
of the obligation) or the third (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.)?
Held:
Manifestly, 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. Had appellee elected the foreclosure, it would not
have instituted this case in court; it would not have caused the chattel to be attached under Rule 59,
and had it sold at public auction, in the manner prescribed by Rule 39. That the 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 at San Jose, Antique.
The court perceived nothing unlawful or irregular in appellee’s act of attaching the mortgaged truck
itself. Since herein appellee has chosen to exact the fulfillment of the appellant’s obligation, it may
enforce execution of the judgment that may be favorably rendered hereon, on all personal and real
properties of the latter not exempt from execution sufficient to satisfy such judgment. It should be
noted that a house and lot at San Jose, Antique were also attached. No one can successfully contest
that the attachment was merely an incident to an ordinary civil action.
FACTS:
Plaintiff Southern Motors, Inc. sold to defendant Angel Moscoso one Chevrolet truck on
installment basis,for P6,445.00. 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, achattel mortgage was constituted on the truck in favor of the
plaintiff. Of said account, the defendant hadpaid a total of P550.00, of which P110.00 was
applied to the interest and P400.00 to the principal, thusleaving an unpaid balance of P4,475.00.
The defendant failed to pay 3 installments on the balance of thepurchase price.Plaintiff filed a
complaint against the defendant, to recover the unpaid balance of the promissory note.Upon
plaintiff's petition, a writ of attachment was issued by the lower court on the properties of
thedefendant. Pursuant thereto, the said Chevrolet truck, and a house and lot belonging to
defendant, wereattached by the Sheriff and said truck was brought to the plaintiff's compound
for safe keeping. Afterattachment and before the trial of the case on the merits, acting upon the
plaintiff's motion for theimmediate sale of the mortgaged truck, the Provincial Sheriff of Iloilo
sold the truck at public auction inwhich plaintiff itself was the only bidder for P1,OOO.OO. The
trial court condemned the defendant to paythe plaintiff the amount of P4,475.00 with interest at
the rate of 12% per annum from August 16, 1957,until fully paid, plus 10% thereof as attorneys
fees and costs. Hence, this appeal by the defendant.
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:
No.Article 1484 of the Civil Code provides that in a contract of sale of personal property the
price of which ispayable in installments, the vendor may exercise any of the following remedies:
(I) Exact fulfillment of the obligation, should the vendee fail to pay; (2) Cancel the sale, should
the vendee's failure to pay covertwo or more installments; and (3) Foreclose the chattel
mortgage on the thing sold, if one has beenconstituted, should the vendee's failure to pay cover
two or more installments. In this case, he shall haveno further action against the purchaser to
recover any unpaid balance of the price. Any agreement to thecontrary shall be void.The
plaintiff had chosen the first remedy. The complaint is an ordinary civil action for recovery of
theremaining unpaid balance due on the promissory note. The plaintiff had not adopted the
procedure ormethods outlined by Sec. 14 of the Chattel Mortgage Law but those prescribed for
ordinary civil actions,under the Rules of Court. Had the plaintiff elected the foreclosure, it
would not have instituted this casein court; it would not have caused the chattel to be attached
under Rule 59, and had it sold at publicauction, in the manner prescribed by Rule 39. That the
plaintiff did not intend to foreclose the mortgagetruck, is further evinced by the fact that it had
also attached the house and lot of the appellant at SanJose, Antique.We perceive nothing
unlawful or irregular in plaintiff's act of attaching the mortgaged truck itself. Sincethe plaintiff
has chosen to exact the fulfillment of the appellant's obligation, it may enforce execution of the
judgment that may be favorably rendered hereon, on all personal and real properties of the
latter notexempt from execution sufficient to satisfy such judgment. It should be noted that a
house and lot at SanJose, Antique were also attached. No one can successfully contest that the
attachment was merely anincident to an ordinary civil action. The mortgage creditor may
recover judgment on the mortgage debtand cause an execution on the mortgaged property and
may cause an attachment to be issued andlevied on such property, upon beginning his civil
action.
1. That the plaintiffs executed the real estate mortgage subject matter of this
complaint on December 14, 1960 to secure the payment of the indebtedness of PDP
Transit, Inc. for the purchase of five (5) units of Mercedez Benz trucks under invoices
Nos. 2836, 2837, 2838, 2839 and 2840 with a total purchase price or principal
obligation of P152,506.50 but plaintiffs' guarantee is not to exceed P50,000.00 which
is the value of the mortgage.
3. That as of April 5, 1961 with reference to the two units mentioned above and as of
May 22, 1961 with reference to the three units, PDP Transit, Inc., plaintiffs' principal,
had paid to the defendant Universal Motors Corporation the sum of P92,964.91, thus
leaving a balance of P68,641.69 including interest due as of February 8, 1965.
4. That the aforementioned obligation guaranteed by the plaintiffs under the Real
Estate Mortgage, subject of this action, is further secured by separate deeds of
chattel mortgages on the Mercedez Benz units covered by the aforementioned
invoices in favor of the defendant Universal Motors Corporation.
5. That on March 19, 1965, the defendant Universal Motors Corporation filed a
complaint against PDP Transit, Inc. before, the Court of First Instance of Manila
docketed as Civil Case No. 60201 with a petition for a writ of Replevin, to collect the
balance due under the Chattel Mortgages and to repossess all the units to sold to
plaintiffs' principal PDP Transit, Inc. including the five (5) units guaranteed under the
subject Real (Estate) Mortgage.
In addition to the foregoing the Universal Motors Corporation admitted during the hearing that in its
suit (C.C. No. 60201) against the PDP Transit, Inc. it was able to repossess all the units sold to the
latter, including the five (5) units guaranteed by the subject real estate mortgage, and to foreclose all
the chattel mortgages constituted thereon, resulting in the sale of the trucks at public auction.
With the foregoing background, the spouses Lorenzo Pascual and Leonila Torres, the real estate
mortgagors, filed an action in the Court of First Instance of Quezon City (Civil Case No. 8189) for the
cancellation of the mortgage they constituted on two (2) parcels of land1 in favor of the Universal
Motors Corporation to guarantee the obligation of PDP Transit, Inc. to the extent of P50,000. The
court rendered judgment for the plaintiffs, ordered the cancellation of the mortgage, and directed the
defendant Universal Motors Corporation to pay attorney's fees to the plaintiffs in the sum of P500.00.
Unsatisfied with the decision, defendant interposed the present appeal.
In rendering judgment for the plaintiffs the lower court said in part: "... there does not seem to be any
doubt that Art. 14842 of the New Civil Code may be applied in relation to a chattel mortgage
constituted upon personal property on the installment basis (as in the present case) precluding the
mortgagee to maintain any further action against the debtor for the purpose of recovering whatever
balance of the debt secured, and even adding that any agreement to the contrary shall be null and
void."
The appellant now disputes the applicability of Article 1484 of the Civil Code to the case at bar on
the ground that there is no evidence on record that the purchase by PDP Transit, Inc. of the five (5)
trucks, the payment of the price of which was partly guaranteed by the real estate mortgage in
question, was payable in installments and that the purchaser had failed to pay two or more
installments. The appellant also contends that in any event what article 1484 prohibits is for the
vendor to recover from the purchaser the unpaid balance of the price after he has foreclosed the
chattel mortgage on the thing sold, but not a recourse against the security put up by a third party.
Both arguments are without merit. The first involves an issue of fact: whether or not the sale was one
on installments; and on this issue the lower court found that it was, and that there was failure to pay
two or more installments. This finding is not subject to review by this Court. The appellant's bare
allegation to the contrary cannot be considered at this stage of the case.
The next contention is that what article 1484 withholds from the vendor is the right to recover any
deficiency from the purchaser after the foreclosure of the chattel mortgage and not a recourse to the
additional security put up by a third party to guarantee the purchaser's performance of his obligation.
A similar argument has been answered by this Court in this wise: "(T)o sustain appellant's argument
is to overlook the fact that if the guarantor should be compelled to pay the balance of the purchase
price, the guarantor will in turn be entitled to recover what she has paid from the debtor vendee (Art.
2066, Civil Code); so that ultimately, it will be the vendee who will be made to bear the payment of
the balance of the price, despite the earlier foreclosure of the chattel mortgage given by him. Thus,
the protection given by Article 1484 would be indirectly subverted, and public policy overturned."
(Cruz vs. Filipinas Investment & Finance Corporation, L-24772, May 27, 1968; 23 SCRA 791).
The decision appealed from is affirmed, with costs against the defendant-appellant.
FILINVEST CREDIT CORPORATION vs CA 178 SCRA 188, G.R. No. 82508 September 29, 1989
FACTS:
Herein private respondents spouses Jose Sy Bang and Iluminada Tan were engaged in the sale of gravel
produced from crushed rocks and used for construction purposes. They intended to buy rock crusher
from Rizal Consolidated Corporation which carried a cash price tag of P550,000.00. They applied for
financial assistance from herein petitioner Filinvest Credit Corporation, who agreed to extend financial
aid on the certain conditions.
A contract of lease of machinery (with option to purchase) was entered into by the parties whereby the
private respondents agreed to lease from the petitioner the rock crusher for two years starting from July
5, 1981, payable as follows: P10,000.00 – first 3 months, P23,000.00 – next 6 months, P24,800.00 – next
15 months. It was likewise stipulated that at the end of the two-year period, the machine would be
owned by the private respondents. Thus the private respondent issued in favor of the petitioner a check
for P150,550.00, as initial rental (or guaranty deposit), and 24 postdated checks corresponding to the 24
monthly rentals. In addition, to guarantee their compliance with the lease contract, the private
respondent executed a real estate mortgage over two parcels of land in favor of the petitioner. The rock
crusher was delivered to the spouses.
However, 3 months later, the souses stopped payment when petitioner had not acted on the complaints
of the spouses about the machine. As a consequence, petitioner extra-judicially foreclosed the real
estate mortgage. The spouses filed a complaint before the RTC. The RTC rendered a decision in favor of
private respondent. The petitioner elevated the case to CA which affirmed the decision in toto. Hence,
this petition.
ISSUES:
2. Whether or not the remedies of the seller provided for in Article 1484 are cumulative.
HELD:
1. Yes. The intent of the parties to the subject contract is for the so-called rentals to be the installment
payments. Upon the completion of the payments, then the rock crusher, subject matter of the contract,
would become the property of the private respondents. This form of agreement has been criticized as a
lease only in name.
Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a
bargain in that form, for one reason or another, have frequently restored to the device of making
contracts in the form of leases either with options to the buyer to purchase for a small consideration at
the end of term, provided the so-called rent has been duly paid, or with stipulations that if the rent
throughout the term is paid, title shall thereupon vest in the lessee. It is obvious that such transactions
are leases only in name. The so-called rent must necessarily be regarded as payment of the price in
installments since the due payment of the agreed amount results, by the terms of bargain, in the
transfer of title to the lessee.
2. No, it is alternative. The seller of movable in installments, in case the buyer fails to pay 2 or more
installments, may elect to pursue either of the following remedies: (1) exact fulfillment by the purchaser
of the obligation; (2) cancel the sale; or (3) foreclose the mortgage on the purchased property if one was
constituted thereon. It is now settled that the said remedies are alternative and not cumulative, and
therefore, the exercise of one bars the exercise of the others. Indubitably, the device – contract of lease
with option to buy – is at times resorted to as a means to circumvent Article 1484, particularly
paragraph (3) thereof. Through the set-up, the vendor, by retaining ownership over the property in the
guise of being the lessor, retains, likewise the right to repossess the same, without going through the
process of foreclosure, in the event the vendee-lessee defaults in the payment of the installments.
There arises therefore no need to constitute a chattel mortgage over the movable sold. More important,
the vendor, after repossessing the property and, in effect, canceling the contract of sale, gets to keep all
the installments-cum-rentals already.
Facts:
Spouses Sy Bang were engaged in the sale of gravel produced from crushed rocks and used for
construction purposes. In order to increase their production, they looked for a rock crusher which Rizal
Consolidated Corporation then had for sale. A brother of Sy Bang, went to inspect the machine at the
Rizal Consolidated’s plant site. Apparently satisfied with the machine, the private respondents signified
their intent to purchase the same.
Since he does not have the financing capability, Sy Bang applied for financial assistance from Filinvest
Credit Corporation. Filinvest agreed to extend financial aid on the following conditions: (1) that the
machinery be purchased in the petitioner’s name; (2) that it be leased with option to purchase upon the
termination of the lease period; and (3) that Sy Bang execute a real estate mortgage as security for the
amount advanced by Filinvest. A contract of lease of machinery (with option to purchase) was entered
into by the parties whereby they to lease from the petitioner the rock crusher for two years. The contract
likewise stipulated that at the end of the two-year period, the machine would be owned by Sy Bang.
3 months from the date of delivery, Sy Bang claiming that they had only tested the machine that month,
sent a letter-complaint to the petitioner, alleging that contrary to the 20 to 40 tons per hour capacity of the
machine as stated in the lease contract, the machine could only process 5 tons of rocks and stones per
hour. They then demanded that the petitioner make good the stipulation in the lease contract. Sy Bang
stopped payment on the remaining checks they had issued to the petitioner.
As a consequence of the non-payment, Filinvest extrajudicially foreclosed the real estate mortgage.
Issue:
Held:
The real intention of the parties should prevail. The nomenclature of the agreement cannot change its
true essence, i.e., a sale on installments. It is basic that a contract is what the law defines it and the
parties intend it to be, not what it is called by the parties. It is apparent here that the intent of the parties to
the subject contract is for the so-called rentals to be the installment payments. Upon the completion of the
payments, then the rock crusher, subject matter of the contract, would become the property of the private
respondents. This form of agreement has been criticized as a lease only in name.
Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a bargain
in that form, for one reason or another, have frequently resorted to the device of making contracts in the
form of leases either with options to the buyer to purchase for a small consideration at the end of term,
provided the so-called rent has been duly paid, or with stipulations that if the rent throughout the term is
paid, title shall thereupon vest in the lessee. It is obvious that such transactions are leases only in name.
The so-called rent must necessarily be regarded as payment of the price in installments since the due
payment of the agreed amount results, by the terms of bargain, in the transfer of title to the lessee.
Indubitably, the device contract of lease with option to buy is at times resorted to as a means to
circumvent Article 1484, particularly paragraph (3) thereof.Through the set-up, the vendor, by retaining
ownership over the property in the guise of being the lessor, retains, likewise, the right to repossess the
same, without going through the process of foreclosure, in the event the vendee-lessee defaults in the
payment of the installments. There arises therefore no need to constitute a chattel mortgage over the
movable sold. More important, the vendor, after repossessing the property and, in effect, canceling the
contract of sale, gets to keep all the installments-cum-rentals already paid.
Even if there was a contract of sale, Filinvest is still not liable because Sy Bang is presumed to be more
knowledgeable, if not experts, on the machinery subject of the contract, they should not therefore be
heard now to complain of any alleged deficiency of the said machinery. It was Sy Bang who was
negligent, not Filinvest. Further, Sy Bang is precluded to complain because he signed a Waiver of
Warranty.
Filipinas Investment and Finance Corporation, Jose D. Sebastian and Jose San Agustin, in his
capacity as Sheriff, defendants-appellants
Plaintiffs purchased from Supreme Sales and Development Corporation (Supreme) 2 brand new Ford
Consul Sedans, for P26,887 payable in 24 monthly installments.
To secure payment thereof, plaintiffs executed a promissory note covering the purchase price and a deed
of chattel mortgage on the two vehicles purchased and also on another car (Chevrolet) and plaintiff’s
franchise or certificate of public convenience granted by the defunct Public Service Commission for the
operation of a taxi fleet.
With the conformity of plaintiffs, the vendor Supreme assigned its rights, title and interest to the
promissory note and chattel mortgage to the defendant Filipinas Investment and Finance Corporation.
Plaintiffs failed to pay their monthly installments. Filipinas foreclosed the chattel mortgage extra-
judicially.
During the public auction, of which the plaintiffs were not notified, the 2 Ford Consul cars were bought
by defendant Filipinas, who was as the highest bidder. During another public auction, the rest of the
properties (including the taxi franchise) subject of the chattel mortgage were sold, and bought by
defendant Filipinas also.
Filipinas subsequently sold the taxi franchise to defendant Jose D. Sebastian, who filed with the Public
Service Commission an application for approval of said sale.
Plaintiffs then filed an action for annulment of contract before the CFI, against Filipinas, Sebastian, and
Sheriff San Agustin.
CFI ruling: The chattel mortgage was null and void in so far as the taxi franchise and the used Chevrolet
car were concerned, and the sale at public auction of the taxicab franchise was to be of no legal effect.
The Certificate of Sale issued by the Sheriff of Manila in favor of Filipinas concerning the taxi franchise
was cancelled and set aside. The assignment made by Filipinas in favor of Jose Sebastian was also
declared void and of no legal effect.
The CA certified the defendants’ appeal to the SC.
Ratio:
8) Article 1484 of the Civil Code is applicable. Under this article, the vendor of personal property the
purchase price of which is payable in installments, has the right, should the vendee default in the
payment of two or more of the agreed installments, 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. The vendor can only choose one option.
9) If the vendor avails himself of the right to foreclose the mortgage, the law prohibits him from further
bringing an action against the vendee for the purpose of recovering whatever balance of the debt
secured is not satisfied by the foreclosure sale.
10) Purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at
foreclosure sale for a low price and the bringing suit against the mortgagor for a deficiency judgment.
a. Without the law, the mortgagor-buyer would find himself without the property and still owing
practically the full amount of his original debt.
11) In this case, defendant Filipinas chose to foreclose the mortgage upon default of plaintiffs, and bought
the vehicles at the public auction as the highest bidder.
a. Filipinas is deemed to have renounced any and all rights which it might otherwise have under the
promissory note and the chattel mortgage as well as the payment of the unpaid balance.
12) The lower court rightly declared the nullity of the chattel mortgage in so far as the taxi franchise and the
Chevrolet were concerned, under the authority of the ruling in the case of Levy Hermanos, Inc. v Pacific
Commercial Co., et al.
13) The vendor’s right to foreclose is limited only on the thing sold.
14) The vendor of personal property sold on installment 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. (Cruz v Filipinos Investment & Finance Corporation)
a. Otherwise, if the vendee could still be compelled to pay the balance of the purchase price, the
vendee will be made to bear the payment of the balance despite the earlier foreclosure.
Judgment appealed from is affirmed.
RIDAD V FILIPINAS
Facts: The spouses Ridad purchased from the Supreme Sales Development Corporation
two (2) brand new Ford Consul Sedans complete with accessories. To secure payment
thereof, plaintiffs executed on the same date a promissory note covering the purchase price
and a deed of chattel mortgage not only on the two vehicles purchased but also on another
car (Chevrolet) and their franchise or certificate of public convenience granted by the
defunct Public Service Commission for the operation of a taxi fleet with Filipinas Investment.
Due to the failure of the plaintiffs to pay their monthly installments as per promissory note,
Filipinas Investment foreclosed on the chattel mortgage on the Ford Consul Sedans. The
foreclosure sale had a deficiency. Consequently, the corporation foreclosed the mortgage
constituted on the (Chevrolet) and their franchise or certificate of public convenience.
Issue: Whether Filipinas Investment is precluded from foreclosing the second mortgage to
recover the deficiency on the first mortgage
Held: No. 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.
If the vendor under such circumstance is prohibited from having a recourse against the
additional security for reasons therein stated, there is no ground why such vendor should
not likewise be precluded from further extrajudicially foreclosing the additional security put
up by the vendees themselves, as in the instant case, it being tantamount to a further action
5 that would violate Article 1484 of the Civil Code, for then is actually no between an
additional security put up by the vendee himself and such security put up by a third party
insofar as how the burden would ultimately fall on the vendee himself is concerned.
On April 14, 1964, plaintiffs purchased from the Supreme Sales arid Development Corporation two (2)
brand new Ford Consul Sedans complete with accessories, for P26,887 payable in 24 monthly
installments. To secure payment thereof, plaintiffs executed on the same date a promissory note covering
the purchase price and a deed of chattel mortgage not only on the two vehicles purchased but also on
another car (Chevrolet) and plaintiffs' franchise or certificate of public convenience granted by the defunct
Public Service Commission for the operation of a taxi fleet. Then, with the conformity of the plaintiffs, the
vendor assigned its rights, title and interest to the above-mentioned promissory note and chattel
mortgage to defendant Filipinas Investment and Finance Corporation.
Due to the failure of the plaintiffs to pay their monthly installments as per promissory note, the defendant
corporation foreclosed the chattel mortgage extra-judicially, and at the public auction sale of the two Ford
Consul cars, of which the plaintiffs were not notified, the defendant corporation was the highest bidder
and purchaser. Another auction sale was held on November 16, 1965, involving the remaining properties
subject of the deed of chattel mortgage since plaintiffs' obligation was not fully satisfied by the sale of the
aforesaid vehicles, and at the public auction sale, the franchise of plaintiffs to operate five units of taxicab
service was sold for P8,000 to the highest bidder, herein defendant corporation, which subsequently sold
and conveyed the same to herein defendant Jose D. Sebastian, who then filed with the Public Service
Commission an application for approval of said sale in his favor.
On February 21, 1966, plaintiffs filed an action for annulment of contract before the Court of First Instance
of Rizal, Branch I, with Filipinas Investment and Finance Corporation, Jose D. Sebastian and Sheriff Jose
San Agustin, as party-defendants. By agreement of the parties, the case was submitted for decision in the
lower court on the basis of the documentary evidence adduced by the parties during the pre-trial
conference. Thereafter, the lower court declared the chattel mortgage to be null and void in so far as the
taxicab franchise and the used Chevrolet car of plaintiffs are concerned, and the sale at public auction
conducted by the City Sheriff of Manila concerning said taxicab franchise, to be of no legal effect.
Issue:The validity of the chattel mortgage in so far as the franchise and the subsequent sale thereof are
concerned.
Ruling:
The resolution of said issue is unquestionably governed by the provisions of Article 1484 of the Civil
Code.
The precise purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at
foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment,
otherwise, the mortgagor-buyer would find himself without the property and still owing practically the full
amount of his original indebtedness.
The lower court rightly declared the nullity of the chattel mortgage in question in so far as the taxicab
franchise and the used Chevrolet car of plaintiffs are concerned, under the authority of the ruling in the
case of 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.
Facts:
Southern Motors sold to Moscoso one Chevrolet truck on installment basis. Upon making a
downpayment, Moscoso executed a promissory note representing the unpaid balance of the purchase
price. To secure payment, a chattel mortgage was constituted on the truck in favor of Southern
Motors. Moscoso failed to pay 3 installments. Subsequently, Southern Motors filed a complaint
against him to recover the unpaid balance of the promissory note. A writ of attachment was issued.
The Chevrolet truck and a house and lot belonging to Moscoso were attached by the sheriff. After
attachment but before the trial of the case, the Prov Sheriff sold the truck at a public auction,
Southern Motors being the only bidder, purchased the same. Trial court then rendered a decision
against Moscoso.
Arguments:
S. Motors: claims that in filing the complaint, demanding payment of the unpaid balance of the
purchase price, it has availed of the first remedy provided in said article i.e. to exact fulfillment of the
obligation (specific performance)
Moscoso: contends that appellee had availed itself of the third remedy viz, the foreclosure of the
chattel mortgage on the truck. He submits that the matter should be looked at, not by the allegations
in the complaint, but by the very effect and result of the procedural steps taken and that appellee tried
to camouflage its acts by filing a complaint purportedly to exact the fulfillment of an obligation
petition, in an attempt to circumvent the provisions of Article 1484 of the new Civil Code. He
concludes that under his theory, a deficiency judgment would be without legal basis.
Issue:
What did S. Motors availed of under Art. 1484 of the Civil Code, the first remedy (Exact fulfillment
of the obligation) or the third (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.)?
Held:
Manifestly, 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. Had appellee elected the foreclosure, it would not
have instituted this case in court; it would not have caused the chattel to be attached under Rule 59,
and had it sold at public auction, in the manner prescribed by Rule 39. That the 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 at San Jose, Antique.
The court perceived nothing unlawful or irregular in appellee’s act of attaching the mortgaged truck
itself. Since herein appellee has chosen to exact the fulfillment of the appellant’s obligation, it may
enforce execution of the judgment that may be favorably rendered hereon, on all personal and real
properties of the latter not exempt from execution sufficient to satisfy such judgment. It should be
noted that a house and lot at San Jose, Antique were also attached. No one can successfully contest
that the attachment was merely an incident to an ordinary civil action.
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:
No.Article 1484 of the Civil Code provides that in a contract of sale of personal property the
price of which ispayable in installments, the vendor may exercise any of the following remedies:
(I) Exact fulfillment of the obligation, should the vendee fail to pay; (2) Cancel the sale, should
the vendee's failure to pay covertwo or more installments; and (3) Foreclose the chattel
mortgage on the thing sold, if one has beenconstituted, should the vendee's failure to pay cover
two or more installments. In this case, he shall haveno further action against the purchaser to
recover any unpaid balance of the price. Any agreement to thecontrary shall be void.The
plaintiff had chosen the first remedy. The complaint is an ordinary civil action for recovery of
theremaining unpaid balance due on the promissory note. The plaintiff had not adopted the
procedure ormethods outlined by Sec. 14 of the Chattel Mortgage Law but those prescribed for
ordinary civil actions,under the Rules of Court. Had the plaintiff elected the foreclosure, it
would not have instituted this casein court; it would not have caused the chattel to be attached
under Rule 59, and had it sold at publicauction, in the manner prescribed by Rule 39. That the
plaintiff did not intend to foreclose the mortgagetruck, is further evinced by the fact that it had
also attached the house and lot of the appellant at SanJose, Antique.We perceive nothing
unlawful or irregular in plaintiff's act of attaching the mortgaged truck itself. Sincethe plaintiff
has chosen to exact the fulfillment of the appellant's obligation, it may enforce execution of the
judgment that may be favorably rendered hereon, on all personal and real properties of the
latter notexempt from execution sufficient to satisfy such judgment. It should be noted that a
house and lot at SanJose, Antique were also attached. No one can successfully contest that the
attachment was merely anincident to an ordinary civil action. The mortgage creditor may
recover judgment on the mortgage debtand cause an execution on the mortgaged property and
may cause an attachment to be issued andlevied on such property, upon beginning his civil
action.
1. That the plaintiffs executed the real estate mortgage subject matter of this
complaint on December 14, 1960 to secure the payment of the indebtedness of PDP
Transit, Inc. for the purchase of five (5) units of Mercedez Benz trucks under invoices
Nos. 2836, 2837, 2838, 2839 and 2840 with a total purchase price or principal
obligation of P152,506.50 but plaintiffs' guarantee is not to exceed P50,000.00 which
is the value of the mortgage.
4. That the aforementioned obligation guaranteed by the plaintiffs under the Real
Estate Mortgage, subject of this action, is further secured by separate deeds of
chattel mortgages on the Mercedez Benz units covered by the aforementioned
invoices in favor of the defendant Universal Motors Corporation.
5. That on March 19, 1965, the defendant Universal Motors Corporation filed a
complaint against PDP Transit, Inc. before, the Court of First Instance of Manila
docketed as Civil Case No. 60201 with a petition for a writ of Replevin, to collect the
balance due under the Chattel Mortgages and to repossess all the units to sold to
plaintiffs' principal PDP Transit, Inc. including the five (5) units guaranteed under the
subject Real (Estate) Mortgage.
In addition to the foregoing the Universal Motors Corporation admitted during the hearing that in its
suit (C.C. No. 60201) against the PDP Transit, Inc. it was able to repossess all the units sold to the
latter, including the five (5) units guaranteed by the subject real estate mortgage, and to foreclose all
the chattel mortgages constituted thereon, resulting in the sale of the trucks at public auction.
With the foregoing background, the spouses Lorenzo Pascual and Leonila Torres, the real estate
mortgagors, filed an action in the Court of First Instance of Quezon City (Civil Case No. 8189) for the
cancellation of the mortgage they constituted on two (2) parcels of land1 in favor of the Universal
Motors Corporation to guarantee the obligation of PDP Transit, Inc. to the extent of P50,000. The
court rendered judgment for the plaintiffs, ordered the cancellation of the mortgage, and directed the
defendant Universal Motors Corporation to pay attorney's fees to the plaintiffs in the sum of P500.00.
Unsatisfied with the decision, defendant interposed the present appeal.
In rendering judgment for the plaintiffs the lower court said in part: "... there does not seem to be any
doubt that Art. 14842 of the New Civil Code may be applied in relation to a chattel mortgage
constituted upon personal property on the installment basis (as in the present case) precluding the
mortgagee to maintain any further action against the debtor for the purpose of recovering whatever
balance of the debt secured, and even adding that any agreement to the contrary shall be null and
void."
The appellant now disputes the applicability of Article 1484 of the Civil Code to the case at bar on
the ground that there is no evidence on record that the purchase by PDP Transit, Inc. of the five (5)
trucks, the payment of the price of which was partly guaranteed by the real estate mortgage in
question, was payable in installments and that the purchaser had failed to pay two or more
installments. The appellant also contends that in any event what article 1484 prohibits is for the
vendor to recover from the purchaser the unpaid balance of the price after he has foreclosed the
chattel mortgage on the thing sold, but not a recourse against the security put up by a third party.
Both arguments are without merit. The first involves an issue of fact: whether or not the sale was one
on installments; and on this issue the lower court found that it was, and that there was failure to pay
two or more installments. This finding is not subject to review by this Court. The appellant's bare
allegation to the contrary cannot be considered at this stage of the case.
The next contention is that what article 1484 withholds from the vendor is the right to recover any
deficiency from the purchaser after the foreclosure of the chattel mortgage and not a recourse to the
additional security put up by a third party to guarantee the purchaser's performance of his obligation.
A similar argument has been answered by this Court in this wise: "(T)o sustain appellant's argument
is to overlook the fact that if the guarantor should be compelled to pay the balance of the purchase
price, the guarantor will in turn be entitled to recover what she has paid from the debtor vendee (Art.
2066, Civil Code); so that ultimately, it will be the vendee who will be made to bear the payment of
the balance of the price, despite the earlier foreclosure of the chattel mortgage given by him. Thus,
the protection given by Article 1484 would be indirectly subverted, and public policy overturned."
(Cruz vs. Filipinas Investment & Finance Corporation, L-24772, May 27, 1968; 23 SCRA 791).
The decision appealed from is affirmed, with costs against the defendant-appellant.
FILINVEST CREDIT CORPORATION vs CA 178 SCRA 188, G.R. No. 82508 September 29, 1989
FACTS:
Herein private respondents spouses Jose Sy Bang and Iluminada Tan were engaged in the sale of gravel
produced from crushed rocks and used for construction purposes. They intended to buy rock crusher
from Rizal Consolidated Corporation which carried a cash price tag of P550,000.00. They applied for
financial assistance from herein petitioner Filinvest Credit Corporation, who agreed to extend financial
aid on the certain conditions.
A contract of lease of machinery (with option to purchase) was entered into by the parties whereby the
private respondents agreed to lease from the petitioner the rock crusher for two years starting from July
5, 1981, payable as follows: P10,000.00 – first 3 months, P23,000.00 – next 6 months, P24,800.00 – next
15 months. It was likewise stipulated that at the end of the two-year period, the machine would be
owned by the private respondents. Thus the private respondent issued in favor of the petitioner a check
for P150,550.00, as initial rental (or guaranty deposit), and 24 postdated checks corresponding to the 24
monthly rentals. In addition, to guarantee their compliance with the lease contract, the private
respondent executed a real estate mortgage over two parcels of land in favor of the petitioner. The rock
crusher was delivered to the spouses.
However, 3 months later, the souses stopped payment when petitioner had not acted on the complaints
of the spouses about the machine. As a consequence, petitioner extra-judicially foreclosed the real
estate mortgage. The spouses filed a complaint before the RTC. The RTC rendered a decision in favor of
private respondent. The petitioner elevated the case to CA which affirmed the decision in toto. Hence,
this petition.
ISSUES:
2. Whether or not the remedies of the seller provided for in Article 1484 are cumulative.
HELD:
1. Yes. The intent of the parties to the subject contract is for the so-called rentals to be the installment
payments. Upon the completion of the payments, then the rock crusher, subject matter of the contract,
would become the property of the private respondents. This form of agreement has been criticized as a
lease only in name.
Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a
bargain in that form, for one reason or another, have frequently restored to the device of making
contracts in the form of leases either with options to the buyer to purchase for a small consideration at
the end of term, provided the so-called rent has been duly paid, or with stipulations that if the rent
throughout the term is paid, title shall thereupon vest in the lessee. It is obvious that such transactions
are leases only in name. The so-called rent must necessarily be regarded as payment of the price in
installments since the due payment of the agreed amount results, by the terms of bargain, in the
transfer of title to the lessee.
2. No, it is alternative. The seller of movable in installments, in case the buyer fails to pay 2 or more
installments, may elect to pursue either of the following remedies: (1) exact fulfillment by the purchaser
of the obligation; (2) cancel the sale; or (3) foreclose the mortgage on the purchased property if one was
constituted thereon. It is now settled that the said remedies are alternative and not cumulative, and
therefore, the exercise of one bars the exercise of the others. Indubitably, the device – contract of lease
with option to buy – is at times resorted to as a means to circumvent Article 1484, particularly
paragraph (3) thereof. Through the set-up, the vendor, by retaining ownership over the property in the
guise of being the lessor, retains, likewise the right to repossess the same, without going through the
process of foreclosure, in the event the vendee-lessee defaults in the payment of the installments.
There arises therefore no need to constitute a chattel mortgage over the movable sold. More important,
the vendor, after repossessing the property and, in effect, canceling the contract of sale, gets to keep all
the installments-cum-rentals already.
Facts:
Spouses Sy Bang were engaged in the sale of gravel produced from crushed rocks and used for
construction purposes. In order to increase their production, they looked for a rock crusher which Rizal
Consolidated Corporation then had for sale. A brother of Sy Bang, went to inspect the machine at the
Rizal Consolidated’s plant site. Apparently satisfied with the machine, the private respondents signified
their intent to purchase the same.
Since he does not have the financing capability, Sy Bang applied for financial assistance from Filinvest
Credit Corporation. Filinvest agreed to extend financial aid on the following conditions: (1) that the
machinery be purchased in the petitioner’s name; (2) that it be leased with option to purchase upon the
termination of the lease period; and (3) that Sy Bang execute a real estate mortgage as security for the
amount advanced by Filinvest. A contract of lease of machinery (with option to purchase) was entered
into by the parties whereby they to lease from the petitioner the rock crusher for two years. The contract
likewise stipulated that at the end of the two-year period, the machine would be owned by Sy Bang.
3 months from the date of delivery, Sy Bang claiming that they had only tested the machine that month,
sent a letter-complaint to the petitioner, alleging that contrary to the 20 to 40 tons per hour capacity of the
machine as stated in the lease contract, the machine could only process 5 tons of rocks and stones per
hour. They then demanded that the petitioner make good the stipulation in the lease contract. Sy Bang
stopped payment on the remaining checks they had issued to the petitioner.
As a consequence of the non-payment, Filinvest extrajudicially foreclosed the real estate mortgage.
Issue:
Held:
The real intention of the parties should prevail. The nomenclature of the agreement cannot change its
true essence, i.e., a sale on installments. It is basic that a contract is what the law defines it and the
parties intend it to be, not what it is called by the parties. It is apparent here that the intent of the parties to
the subject contract is for the so-called rentals to be the installment payments. Upon the completion of the
payments, then the rock crusher, subject matter of the contract, would become the property of the private
respondents. This form of agreement has been criticized as a lease only in name.
Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a bargain
in that form, for one reason or another, have frequently resorted to the device of making contracts in the
form of leases either with options to the buyer to purchase for a small consideration at the end of term,
provided the so-called rent has been duly paid, or with stipulations that if the rent throughout the term is
paid, title shall thereupon vest in the lessee. It is obvious that such transactions are leases only in name.
The so-called rent must necessarily be regarded as payment of the price in installments since the due
payment of the agreed amount results, by the terms of bargain, in the transfer of title to the lessee.
Indubitably, the device contract of lease with option to buy is at times resorted to as a means to
circumvent Article 1484, particularly paragraph (3) thereof.Through the set-up, the vendor, by retaining
ownership over the property in the guise of being the lessor, retains, likewise, the right to repossess the
same, without going through the process of foreclosure, in the event the vendee-lessee defaults in the
payment of the installments. There arises therefore no need to constitute a chattel mortgage over the
movable sold. More important, the vendor, after repossessing the property and, in effect, canceling the
contract of sale, gets to keep all the installments-cum-rentals already paid.
Even if there was a contract of sale, Filinvest is still not liable because Sy Bang is presumed to be more
knowledgeable, if not experts, on the machinery subject of the contract, they should not therefore be
heard now to complain of any alleged deficiency of the said machinery. It was Sy Bang who was
negligent, not Filinvest. Further, Sy Bang is precluded to complain because he signed a Waiver of
Warranty.
Filipinas Investment and Finance Corporation, Jose D. Sebastian and Jose San Agustin, in his
capacity as Sheriff, defendants-appellants
Plaintiffs purchased from Supreme Sales and Development Corporation (Supreme) 2 brand new Ford
Consul Sedans, for P26,887 payable in 24 monthly installments.
To secure payment thereof, plaintiffs executed a promissory note covering the purchase price and a deed
of chattel mortgage on the two vehicles purchased and also on another car (Chevrolet) and plaintiff’s
franchise or certificate of public convenience granted by the defunct Public Service Commission for the
operation of a taxi fleet.
With the conformity of plaintiffs, the vendor Supreme assigned its rights, title and interest to the
promissory note and chattel mortgage to the defendant Filipinas Investment and Finance Corporation.
Plaintiffs failed to pay their monthly installments. Filipinas foreclosed the chattel mortgage extra-
judicially.
During the public auction, of which the plaintiffs were not notified, the 2 Ford Consul cars were bought
by defendant Filipinas, who was as the highest bidder. During another public auction, the rest of the
properties (including the taxi franchise) subject of the chattel mortgage were sold, and bought by
defendant Filipinas also.
Filipinas subsequently sold the taxi franchise to defendant Jose D. Sebastian, who filed with the Public
Service Commission an application for approval of said sale.
Plaintiffs then filed an action for annulment of contract before the CFI, against Filipinas, Sebastian, and
Sheriff San Agustin.
CFI ruling: The chattel mortgage was null and void in so far as the taxi franchise and the used Chevrolet
car were concerned, and the sale at public auction of the taxicab franchise was to be of no legal effect.
The Certificate of Sale issued by the Sheriff of Manila in favor of Filipinas concerning the taxi franchise
was cancelled and set aside. The assignment made by Filipinas in favor of Jose Sebastian was also
declared void and of no legal effect.
The CA certified the defendants’ appeal to the SC.
Ratio:
15) Article 1484 of the Civil Code is applicable. Under this article, the vendor of personal property the
purchase price of which is payable in installments, has the right, should the vendee default in the
payment of two or more of the agreed installments, 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. The vendor can only choose one option.
16) If the vendor avails himself of the right to foreclose the mortgage, the law prohibits him from further
bringing an action against the vendee for the purpose of recovering whatever balance of the debt
secured is not satisfied by the foreclosure sale.
17) Purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at
foreclosure sale for a low price and the bringing suit against the mortgagor for a deficiency judgment.
a. Without the law, the mortgagor-buyer would find himself without the property and still owing
practically the full amount of his original debt.
18) In this case, defendant Filipinas chose to foreclose the mortgage upon default of plaintiffs, and bought
the vehicles at the public auction as the highest bidder.
a. Filipinas is deemed to have renounced any and all rights which it might otherwise have under the
promissory note and the chattel mortgage as well as the payment of the unpaid balance.
19) The lower court rightly declared the nullity of the chattel mortgage in so far as the taxi franchise and the
Chevrolet were concerned, under the authority of the ruling in the case of Levy Hermanos, Inc. v Pacific
Commercial Co., et al.
20) The vendor’s right to foreclose is limited only on the thing sold.
21) The vendor of personal property sold on installment 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. (Cruz v Filipinos Investment & Finance Corporation)
a. Otherwise, if the vendee could still be compelled to pay the balance of the purchase price, the
vendee will be made to bear the payment of the balance despite the earlier foreclosure.
Judgment appealed from is affirmed.
RIDAD V FILIPINAS
Facts: The spouses Ridad purchased from the Supreme Sales Development Corporation
two (2) brand new Ford Consul Sedans complete with accessories. To secure payment
thereof, plaintiffs executed on the same date a promissory note covering the purchase price
and a deed of chattel mortgage not only on the two vehicles purchased but also on another
car (Chevrolet) and their franchise or certificate of public convenience granted by the
defunct Public Service Commission for the operation of a taxi fleet with Filipinas Investment.
Due to the failure of the plaintiffs to pay their monthly installments as per promissory note,
Filipinas Investment foreclosed on the chattel mortgage on the Ford Consul Sedans. The
foreclosure sale had a deficiency. Consequently, the corporation foreclosed the mortgage
constituted on the (Chevrolet) and their franchise or certificate of public convenience.
Issue: Whether Filipinas Investment is precluded from foreclosing the second mortgage to
recover the deficiency on the first mortgage
Held: No. 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.
If the vendor under such circumstance is prohibited from having a recourse against the
additional security for reasons therein stated, there is no ground why such vendor should
not likewise be precluded from further extrajudicially foreclosing the additional security put
up by the vendees themselves, as in the instant case, it being tantamount to a further action
5 that would violate Article 1484 of the Civil Code, for then is actually no between an
additional security put up by the vendee himself and such security put up by a third party
insofar as how the burden would ultimately fall on the vendee himself is concerned.
On April 14, 1964, plaintiffs purchased from the Supreme Sales arid Development Corporation two (2)
brand new Ford Consul Sedans complete with accessories, for P26,887 payable in 24 monthly
installments. To secure payment thereof, plaintiffs executed on the same date a promissory note covering
the purchase price and a deed of chattel mortgage not only on the two vehicles purchased but also on
another car (Chevrolet) and plaintiffs' franchise or certificate of public convenience granted by the defunct
Public Service Commission for the operation of a taxi fleet. Then, with the conformity of the plaintiffs, the
vendor assigned its rights, title and interest to the above-mentioned promissory note and chattel
mortgage to defendant Filipinas Investment and Finance Corporation.
Due to the failure of the plaintiffs to pay their monthly installments as per promissory note, the defendant
corporation foreclosed the chattel mortgage extra-judicially, and at the public auction sale of the two Ford
Consul cars, of which the plaintiffs were not notified, the defendant corporation was the highest bidder
and purchaser. Another auction sale was held on November 16, 1965, involving the remaining properties
subject of the deed of chattel mortgage since plaintiffs' obligation was not fully satisfied by the sale of the
aforesaid vehicles, and at the public auction sale, the franchise of plaintiffs to operate five units of taxicab
service was sold for P8,000 to the highest bidder, herein defendant corporation, which subsequently sold
and conveyed the same to herein defendant Jose D. Sebastian, who then filed with the Public Service
Commission an application for approval of said sale in his favor.
On February 21, 1966, plaintiffs filed an action for annulment of contract before the Court of First Instance
of Rizal, Branch I, with Filipinas Investment and Finance Corporation, Jose D. Sebastian and Sheriff Jose
San Agustin, as party-defendants. By agreement of the parties, the case was submitted for decision in the
lower court on the basis of the documentary evidence adduced by the parties during the pre-trial
conference. Thereafter, the lower court declared the chattel mortgage to be null and void in so far as the
taxicab franchise and the used Chevrolet car of plaintiffs are concerned, and the sale at public auction
conducted by the City Sheriff of Manila concerning said taxicab franchise, to be of no legal effect.
Issue:The validity of the chattel mortgage in so far as the franchise and the subsequent sale thereof are
concerned.
Ruling:
The resolution of said issue is unquestionably governed by the provisions of Article 1484 of the Civil
Code.
The precise purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at
foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment,
otherwise, the mortgagor-buyer would find himself without the property and still owing practically the full
amount of his original indebtedness.
The lower court rightly declared the nullity of the chattel mortgage in question in so far as the taxicab
franchise and the used Chevrolet car of plaintiffs are concerned, under the authority of the ruling in the
case of 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.
Facts:
Southern Motors sold to Moscoso one Chevrolet truck on installment basis. Upon making a
downpayment, Moscoso executed a promissory note representing the unpaid balance of the purchase
price. To secure payment, a chattel mortgage was constituted on the truck in favor of Southern
Motors. Moscoso failed to pay 3 installments. Subsequently, Southern Motors filed a complaint
against him to recover the unpaid balance of the promissory note. A writ of attachment was issued.
The Chevrolet truck and a house and lot belonging to Moscoso were attached by the sheriff. After
attachment but before the trial of the case, the Prov Sheriff sold the truck at a public auction,
Southern Motors being the only bidder, purchased the same. Trial court then rendered a decision
against Moscoso.
Arguments:
S. Motors: claims that in filing the complaint, demanding payment of the unpaid balance of the
purchase price, it has availed of the first remedy provided in said article i.e. to exact fulfillment of the
obligation (specific performance)
Moscoso: contends that appellee had availed itself of the third remedy viz, the foreclosure of the
chattel mortgage on the truck. He submits that the matter should be looked at, not by the allegations
in the complaint, but by the very effect and result of the procedural steps taken and that appellee tried
to camouflage its acts by filing a complaint purportedly to exact the fulfillment of an obligation
petition, in an attempt to circumvent the provisions of Article 1484 of the new Civil Code. He
concludes that under his theory, a deficiency judgment would be without legal basis.
Issue:
What did S. Motors availed of under Art. 1484 of the Civil Code, the first remedy (Exact fulfillment
of the obligation) or the third (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.)?
Held:
Manifestly, 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. Had appellee elected the foreclosure, it would not
have instituted this case in court; it would not have caused the chattel to be attached under Rule 59,
and had it sold at public auction, in the manner prescribed by Rule 39. That the 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 at San Jose, Antique.
The court perceived nothing unlawful or irregular in appellee’s act of attaching the mortgaged truck
itself. Since herein appellee has chosen to exact the fulfillment of the appellant’s obligation, it may
enforce execution of the judgment that may be favorably rendered hereon, on all personal and real
properties of the latter not exempt from execution sufficient to satisfy such judgment. It should be
noted that a house and lot at San Jose, Antique were also attached. No one can successfully contest
that the attachment was merely an incident to an ordinary civil action.
FACTS:
Plaintiff Southern Motors, Inc. sold to defendant Angel Moscoso one Chevrolet truck on
installment basis,for P6,445.00. 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, achattel mortgage was constituted on the truck in favor of the
plaintiff. Of said account, the defendant hadpaid a total of P550.00, of which P110.00 was
applied to the interest and P400.00 to the principal, thusleaving an unpaid balance of P4,475.00.
The defendant failed to pay 3 installments on the balance of thepurchase price.Plaintiff filed a
complaint against the defendant, to recover the unpaid balance of the promissory note.Upon
plaintiff's petition, a writ of attachment was issued by the lower court on the properties of
thedefendant. Pursuant thereto, the said Chevrolet truck, and a house and lot belonging to
defendant, wereattached by the Sheriff and said truck was brought to the plaintiff's compound
for safe keeping. Afterattachment and before the trial of the case on the merits, acting upon the
plaintiff's motion for theimmediate sale of the mortgaged truck, the Provincial Sheriff of Iloilo
sold the truck at public auction inwhich plaintiff itself was the only bidder for P1,OOO.OO. The
trial court condemned the defendant to paythe plaintiff the amount of P4,475.00 with interest at
the rate of 12% per annum from August 16, 1957,until fully paid, plus 10% thereof as attorneys
fees and costs. Hence, this appeal by the defendant.
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:
No.Article 1484 of the Civil Code provides that in a contract of sale of personal property the
price of which ispayable in installments, the vendor may exercise any of the following remedies:
(I) Exact fulfillment of the obligation, should the vendee fail to pay; (2) Cancel the sale, should
the vendee's failure to pay covertwo or more installments; and (3) Foreclose the chattel
mortgage on the thing sold, if one has beenconstituted, should the vendee's failure to pay cover
two or more installments. In this case, he shall haveno further action against the purchaser to
recover any unpaid balance of the price. Any agreement to thecontrary shall be void.The
plaintiff had chosen the first remedy. The complaint is an ordinary civil action for recovery of
theremaining unpaid balance due on the promissory note. The plaintiff had not adopted the
procedure ormethods outlined by Sec. 14 of the Chattel Mortgage Law but those prescribed for
ordinary civil actions,under the Rules of Court. Had the plaintiff elected the foreclosure, it
would not have instituted this casein court; it would not have caused the chattel to be attached
under Rule 59, and had it sold at publicauction, in the manner prescribed by Rule 39. That the
plaintiff did not intend to foreclose the mortgagetruck, is further evinced by the fact that it had
also attached the house and lot of the appellant at SanJose, Antique.We perceive nothing
unlawful or irregular in plaintiff's act of attaching the mortgaged truck itself. Sincethe plaintiff
has chosen to exact the fulfillment of the appellant's obligation, it may enforce execution of the
judgment that may be favorably rendered hereon, on all personal and real properties of the
latter notexempt from execution sufficient to satisfy such judgment. It should be noted that a
house and lot at SanJose, Antique were also attached. No one can successfully contest that the
attachment was merely anincident to an ordinary civil action. The mortgage creditor may
recover judgment on the mortgage debtand cause an execution on the mortgaged property and
may cause an attachment to be issued andlevied on such property, upon beginning his civil
action.
1. That the plaintiffs executed the real estate mortgage subject matter of this
complaint on December 14, 1960 to secure the payment of the indebtedness of PDP
Transit, Inc. for the purchase of five (5) units of Mercedez Benz trucks under invoices
Nos. 2836, 2837, 2838, 2839 and 2840 with a total purchase price or principal
obligation of P152,506.50 but plaintiffs' guarantee is not to exceed P50,000.00 which
is the value of the mortgage.
3. That as of April 5, 1961 with reference to the two units mentioned above and as of
May 22, 1961 with reference to the three units, PDP Transit, Inc., plaintiffs' principal,
had paid to the defendant Universal Motors Corporation the sum of P92,964.91, thus
leaving a balance of P68,641.69 including interest due as of February 8, 1965.
4. That the aforementioned obligation guaranteed by the plaintiffs under the Real
Estate Mortgage, subject of this action, is further secured by separate deeds of
chattel mortgages on the Mercedez Benz units covered by the aforementioned
invoices in favor of the defendant Universal Motors Corporation.
5. That on March 19, 1965, the defendant Universal Motors Corporation filed a
complaint against PDP Transit, Inc. before, the Court of First Instance of Manila
docketed as Civil Case No. 60201 with a petition for a writ of Replevin, to collect the
balance due under the Chattel Mortgages and to repossess all the units to sold to
plaintiffs' principal PDP Transit, Inc. including the five (5) units guaranteed under the
subject Real (Estate) Mortgage.
In addition to the foregoing the Universal Motors Corporation admitted during the hearing that in its
suit (C.C. No. 60201) against the PDP Transit, Inc. it was able to repossess all the units sold to the
latter, including the five (5) units guaranteed by the subject real estate mortgage, and to foreclose all
the chattel mortgages constituted thereon, resulting in the sale of the trucks at public auction.
With the foregoing background, the spouses Lorenzo Pascual and Leonila Torres, the real estate
mortgagors, filed an action in the Court of First Instance of Quezon City (Civil Case No. 8189) for the
cancellation of the mortgage they constituted on two (2) parcels of land1 in favor of the Universal
Motors Corporation to guarantee the obligation of PDP Transit, Inc. to the extent of P50,000. The
court rendered judgment for the plaintiffs, ordered the cancellation of the mortgage, and directed the
defendant Universal Motors Corporation to pay attorney's fees to the plaintiffs in the sum of P500.00.
Unsatisfied with the decision, defendant interposed the present appeal.
In rendering judgment for the plaintiffs the lower court said in part: "... there does not seem to be any
doubt that Art. 14842 of the New Civil Code may be applied in relation to a chattel mortgage
constituted upon personal property on the installment basis (as in the present case) precluding the
mortgagee to maintain any further action against the debtor for the purpose of recovering whatever
balance of the debt secured, and even adding that any agreement to the contrary shall be null and
void."
The appellant now disputes the applicability of Article 1484 of the Civil Code to the case at bar on
the ground that there is no evidence on record that the purchase by PDP Transit, Inc. of the five (5)
trucks, the payment of the price of which was partly guaranteed by the real estate mortgage in
question, was payable in installments and that the purchaser had failed to pay two or more
installments. The appellant also contends that in any event what article 1484 prohibits is for the
vendor to recover from the purchaser the unpaid balance of the price after he has foreclosed the
chattel mortgage on the thing sold, but not a recourse against the security put up by a third party.
Both arguments are without merit. The first involves an issue of fact: whether or not the sale was one
on installments; and on this issue the lower court found that it was, and that there was failure to pay
two or more installments. This finding is not subject to review by this Court. The appellant's bare
allegation to the contrary cannot be considered at this stage of the case.
The next contention is that what article 1484 withholds from the vendor is the right to recover any
deficiency from the purchaser after the foreclosure of the chattel mortgage and not a recourse to the
additional security put up by a third party to guarantee the purchaser's performance of his obligation.
A similar argument has been answered by this Court in this wise: "(T)o sustain appellant's argument
is to overlook the fact that if the guarantor should be compelled to pay the balance of the purchase
price, the guarantor will in turn be entitled to recover what she has paid from the debtor vendee (Art.
2066, Civil Code); so that ultimately, it will be the vendee who will be made to bear the payment of
the balance of the price, despite the earlier foreclosure of the chattel mortgage given by him. Thus,
the protection given by Article 1484 would be indirectly subverted, and public policy overturned."
(Cruz vs. Filipinas Investment & Finance Corporation, L-24772, May 27, 1968; 23 SCRA 791).
The decision appealed from is affirmed, with costs against the defendant-appellant.
FILINVEST CREDIT CORPORATION vs CA 178 SCRA 188, G.R. No. 82508 September 29, 1989
FACTS:
Herein private respondents spouses Jose Sy Bang and Iluminada Tan were engaged in the sale of gravel
produced from crushed rocks and used for construction purposes. They intended to buy rock crusher
from Rizal Consolidated Corporation which carried a cash price tag of P550,000.00. They applied for
financial assistance from herein petitioner Filinvest Credit Corporation, who agreed to extend financial
aid on the certain conditions.
A contract of lease of machinery (with option to purchase) was entered into by the parties whereby the
private respondents agreed to lease from the petitioner the rock crusher for two years starting from July
5, 1981, payable as follows: P10,000.00 – first 3 months, P23,000.00 – next 6 months, P24,800.00 – next
15 months. It was likewise stipulated that at the end of the two-year period, the machine would be
owned by the private respondents. Thus the private respondent issued in favor of the petitioner a check
for P150,550.00, as initial rental (or guaranty deposit), and 24 postdated checks corresponding to the 24
monthly rentals. In addition, to guarantee their compliance with the lease contract, the private
respondent executed a real estate mortgage over two parcels of land in favor of the petitioner. The rock
crusher was delivered to the spouses.
However, 3 months later, the souses stopped payment when petitioner had not acted on the complaints
of the spouses about the machine. As a consequence, petitioner extra-judicially foreclosed the real
estate mortgage. The spouses filed a complaint before the RTC. The RTC rendered a decision in favor of
private respondent. The petitioner elevated the case to CA which affirmed the decision in toto. Hence,
this petition.
ISSUES:
2. Whether or not the remedies of the seller provided for in Article 1484 are cumulative.
HELD:
1. Yes. The intent of the parties to the subject contract is for the so-called rentals to be the installment
payments. Upon the completion of the payments, then the rock crusher, subject matter of the contract,
would become the property of the private respondents. This form of agreement has been criticized as a
lease only in name.
Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a
bargain in that form, for one reason or another, have frequently restored to the device of making
contracts in the form of leases either with options to the buyer to purchase for a small consideration at
the end of term, provided the so-called rent has been duly paid, or with stipulations that if the rent
throughout the term is paid, title shall thereupon vest in the lessee. It is obvious that such transactions
are leases only in name. The so-called rent must necessarily be regarded as payment of the price in
installments since the due payment of the agreed amount results, by the terms of bargain, in the
transfer of title to the lessee.
2. No, it is alternative. The seller of movable in installments, in case the buyer fails to pay 2 or more
installments, may elect to pursue either of the following remedies: (1) exact fulfillment by the purchaser
of the obligation; (2) cancel the sale; or (3) foreclose the mortgage on the purchased property if one was
constituted thereon. It is now settled that the said remedies are alternative and not cumulative, and
therefore, the exercise of one bars the exercise of the others. Indubitably, the device – contract of lease
with option to buy – is at times resorted to as a means to circumvent Article 1484, particularly
paragraph (3) thereof. Through the set-up, the vendor, by retaining ownership over the property in the
guise of being the lessor, retains, likewise the right to repossess the same, without going through the
process of foreclosure, in the event the vendee-lessee defaults in the payment of the installments.
There arises therefore no need to constitute a chattel mortgage over the movable sold. More important,
the vendor, after repossessing the property and, in effect, canceling the contract of sale, gets to keep all
the installments-cum-rentals already.
Spouses Sy Bang were engaged in the sale of gravel produced from crushed rocks and used for
construction purposes. In order to increase their production, they looked for a rock crusher which Rizal
Consolidated Corporation then had for sale. A brother of Sy Bang, went to inspect the machine at the
Rizal Consolidated’s plant site. Apparently satisfied with the machine, the private respondents signified
their intent to purchase the same.
Since he does not have the financing capability, Sy Bang applied for financial assistance from Filinvest
Credit Corporation. Filinvest agreed to extend financial aid on the following conditions: (1) that the
machinery be purchased in the petitioner’s name; (2) that it be leased with option to purchase upon the
termination of the lease period; and (3) that Sy Bang execute a real estate mortgage as security for the
amount advanced by Filinvest. A contract of lease of machinery (with option to purchase) was entered
into by the parties whereby they to lease from the petitioner the rock crusher for two years. The contract
likewise stipulated that at the end of the two-year period, the machine would be owned by Sy Bang.
3 months from the date of delivery, Sy Bang claiming that they had only tested the machine that month,
sent a letter-complaint to the petitioner, alleging that contrary to the 20 to 40 tons per hour capacity of the
machine as stated in the lease contract, the machine could only process 5 tons of rocks and stones per
hour. They then demanded that the petitioner make good the stipulation in the lease contract. Sy Bang
stopped payment on the remaining checks they had issued to the petitioner.
As a consequence of the non-payment, Filinvest extrajudicially foreclosed the real estate mortgage.
Issue:
Held:
The real intention of the parties should prevail. The nomenclature of the agreement cannot change its
true essence, i.e., a sale on installments. It is basic that a contract is what the law defines it and the
parties intend it to be, not what it is called by the parties. It is apparent here that the intent of the parties to
the subject contract is for the so-called rentals to be the installment payments. Upon the completion of the
payments, then the rock crusher, subject matter of the contract, would become the property of the private
respondents. This form of agreement has been criticized as a lease only in name.
Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a bargain
in that form, for one reason or another, have frequently resorted to the device of making contracts in the
form of leases either with options to the buyer to purchase for a small consideration at the end of term,
provided the so-called rent has been duly paid, or with stipulations that if the rent throughout the term is
paid, title shall thereupon vest in the lessee. It is obvious that such transactions are leases only in name.
The so-called rent must necessarily be regarded as payment of the price in installments since the due
payment of the agreed amount results, by the terms of bargain, in the transfer of title to the lessee.
Indubitably, the device contract of lease with option to buy is at times resorted to as a means to
circumvent Article 1484, particularly paragraph (3) thereof.Through the set-up, the vendor, by retaining
ownership over the property in the guise of being the lessor, retains, likewise, the right to repossess the
same, without going through the process of foreclosure, in the event the vendee-lessee defaults in the
payment of the installments. There arises therefore no need to constitute a chattel mortgage over the
movable sold. More important, the vendor, after repossessing the property and, in effect, canceling the
contract of sale, gets to keep all the installments-cum-rentals already paid.
Even if there was a contract of sale, Filinvest is still not liable because Sy Bang is presumed to be more
knowledgeable, if not experts, on the machinery subject of the contract, they should not therefore be
heard now to complain of any alleged deficiency of the said machinery. It was Sy Bang who was
negligent, not Filinvest. Further, Sy Bang is precluded to complain because he signed a Waiver of
Warranty.
Filipinas Investment and Finance Corporation, Jose D. Sebastian and Jose San Agustin, in his
capacity as Sheriff, defendants-appellants
Plaintiffs purchased from Supreme Sales and Development Corporation (Supreme) 2 brand new Ford
Consul Sedans, for P26,887 payable in 24 monthly installments.
To secure payment thereof, plaintiffs executed a promissory note covering the purchase price and a deed
of chattel mortgage on the two vehicles purchased and also on another car (Chevrolet) and plaintiff’s
franchise or certificate of public convenience granted by the defunct Public Service Commission for the
operation of a taxi fleet.
With the conformity of plaintiffs, the vendor Supreme assigned its rights, title and interest to the
promissory note and chattel mortgage to the defendant Filipinas Investment and Finance Corporation.
Plaintiffs failed to pay their monthly installments. Filipinas foreclosed the chattel mortgage extra-
judicially.
During the public auction, of which the plaintiffs were not notified, the 2 Ford Consul cars were bought
by defendant Filipinas, who was as the highest bidder. During another public auction, the rest of the
properties (including the taxi franchise) subject of the chattel mortgage were sold, and bought by
defendant Filipinas also.
Filipinas subsequently sold the taxi franchise to defendant Jose D. Sebastian, who filed with the Public
Service Commission an application for approval of said sale.
Plaintiffs then filed an action for annulment of contract before the CFI, against Filipinas, Sebastian, and
Sheriff San Agustin.
CFI ruling: The chattel mortgage was null and void in so far as the taxi franchise and the used Chevrolet
car were concerned, and the sale at public auction of the taxicab franchise was to be of no legal effect.
The Certificate of Sale issued by the Sheriff of Manila in favor of Filipinas concerning the taxi franchise
was cancelled and set aside. The assignment made by Filipinas in favor of Jose Sebastian was also
declared void and of no legal effect.
The CA certified the defendants’ appeal to the SC.
Ratio:
22) Article 1484 of the Civil Code is applicable. Under this article, the vendor of personal property the
purchase price of which is payable in installments, has the right, should the vendee default in the
payment of two or more of the agreed installments, 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. The vendor can only choose one option.
23) If the vendor avails himself of the right to foreclose the mortgage, the law prohibits him from further
bringing an action against the vendee for the purpose of recovering whatever balance of the debt
secured is not satisfied by the foreclosure sale.
24) Purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at
foreclosure sale for a low price and the bringing suit against the mortgagor for a deficiency judgment.
a. Without the law, the mortgagor-buyer would find himself without the property and still owing
practically the full amount of his original debt.
25) In this case, defendant Filipinas chose to foreclose the mortgage upon default of plaintiffs, and bought
the vehicles at the public auction as the highest bidder.
a. Filipinas is deemed to have renounced any and all rights which it might otherwise have under the
promissory note and the chattel mortgage as well as the payment of the unpaid balance.
26) The lower court rightly declared the nullity of the chattel mortgage in so far as the taxi franchise and the
Chevrolet were concerned, under the authority of the ruling in the case of Levy Hermanos, Inc. v Pacific
Commercial Co., et al.
27) The vendor’s right to foreclose is limited only on the thing sold.
28) The vendor of personal property sold on installment 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. (Cruz v Filipinos Investment & Finance Corporation)
a. Otherwise, if the vendee could still be compelled to pay the balance of the purchase price, the
vendee will be made to bear the payment of the balance despite the earlier foreclosure.
Judgment appealed from is affirmed.
RIDAD V FILIPINAS
Facts: The spouses Ridad purchased from the Supreme Sales Development Corporation
two (2) brand new Ford Consul Sedans complete with accessories. To secure payment
thereof, plaintiffs executed on the same date a promissory note covering the purchase price
and a deed of chattel mortgage not only on the two vehicles purchased but also on another
car (Chevrolet) and their franchise or certificate of public convenience granted by the
defunct Public Service Commission for the operation of a taxi fleet with Filipinas Investment.
Due to the failure of the plaintiffs to pay their monthly installments as per promissory note,
Filipinas Investment foreclosed on the chattel mortgage on the Ford Consul Sedans. The
foreclosure sale had a deficiency. Consequently, the corporation foreclosed the mortgage
constituted on the (Chevrolet) and their franchise or certificate of public convenience.
Issue: Whether Filipinas Investment is precluded from foreclosing the second mortgage to
recover the deficiency on the first mortgage
Held: No. 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.
If the vendor under such circumstance is prohibited from having a recourse against the
additional security for reasons therein stated, there is no ground why such vendor should
not likewise be precluded from further extrajudicially foreclosing the additional security put
up by the vendees themselves, as in the instant case, it being tantamount to a further action
5 that would violate Article 1484 of the Civil Code, for then is actually no between an
additional security put up by the vendee himself and such security put up by a third party
insofar as how the burden would ultimately fall on the vendee himself is concerned.
On April 14, 1964, plaintiffs purchased from the Supreme Sales arid Development Corporation two (2)
brand new Ford Consul Sedans complete with accessories, for P26,887 payable in 24 monthly
installments. To secure payment thereof, plaintiffs executed on the same date a promissory note covering
the purchase price and a deed of chattel mortgage not only on the two vehicles purchased but also on
another car (Chevrolet) and plaintiffs' franchise or certificate of public convenience granted by the defunct
Public Service Commission for the operation of a taxi fleet. Then, with the conformity of the plaintiffs, the
vendor assigned its rights, title and interest to the above-mentioned promissory note and chattel
mortgage to defendant Filipinas Investment and Finance Corporation.
Due to the failure of the plaintiffs to pay their monthly installments as per promissory note, the defendant
corporation foreclosed the chattel mortgage extra-judicially, and at the public auction sale of the two Ford
Consul cars, of which the plaintiffs were not notified, the defendant corporation was the highest bidder
and purchaser. Another auction sale was held on November 16, 1965, involving the remaining properties
subject of the deed of chattel mortgage since plaintiffs' obligation was not fully satisfied by the sale of the
aforesaid vehicles, and at the public auction sale, the franchise of plaintiffs to operate five units of taxicab
service was sold for P8,000 to the highest bidder, herein defendant corporation, which subsequently sold
and conveyed the same to herein defendant Jose D. Sebastian, who then filed with the Public Service
Commission an application for approval of said sale in his favor.
On February 21, 1966, plaintiffs filed an action for annulment of contract before the Court of First Instance
of Rizal, Branch I, with Filipinas Investment and Finance Corporation, Jose D. Sebastian and Sheriff Jose
San Agustin, as party-defendants. By agreement of the parties, the case was submitted for decision in the
lower court on the basis of the documentary evidence adduced by the parties during the pre-trial
conference. Thereafter, the lower court declared the chattel mortgage to be null and void in so far as the
taxicab franchise and the used Chevrolet car of plaintiffs are concerned, and the sale at public auction
conducted by the City Sheriff of Manila concerning said taxicab franchise, to be of no legal effect.
Issue:The validity of the chattel mortgage in so far as the franchise and the subsequent sale thereof are
concerned.
Ruling:
The resolution of said issue is unquestionably governed by the provisions of Article 1484 of the Civil
Code.
The precise purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at
foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment,
otherwise, the mortgagor-buyer would find himself without the property and still owing practically the full
amount of his original indebtedness.
The lower court rightly declared the nullity of the chattel mortgage in question in so far as the taxicab
franchise and the used Chevrolet car of plaintiffs are concerned, under the authority of the ruling in the
case of 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.
Facts:
Southern Motors sold to Moscoso one Chevrolet truck on installment basis. Upon making a
downpayment, Moscoso executed a promissory note representing the unpaid balance of the purchase
price. To secure payment, a chattel mortgage was constituted on the truck in favor of Southern
Motors. Moscoso failed to pay 3 installments. Subsequently, Southern Motors filed a complaint
against him to recover the unpaid balance of the promissory note. A writ of attachment was issued.
The Chevrolet truck and a house and lot belonging to Moscoso were attached by the sheriff. After
attachment but before the trial of the case, the Prov Sheriff sold the truck at a public auction,
Southern Motors being the only bidder, purchased the same. Trial court then rendered a decision
against Moscoso.
Arguments:
S. Motors: claims that in filing the complaint, demanding payment of the unpaid balance of the
purchase price, it has availed of the first remedy provided in said article i.e. to exact fulfillment of the
obligation (specific performance)
Moscoso: contends that appellee had availed itself of the third remedy viz, the foreclosure of the
chattel mortgage on the truck. He submits that the matter should be looked at, not by the allegations
in the complaint, but by the very effect and result of the procedural steps taken and that appellee tried
to camouflage its acts by filing a complaint purportedly to exact the fulfillment of an obligation
petition, in an attempt to circumvent the provisions of Article 1484 of the new Civil Code. He
concludes that under his theory, a deficiency judgment would be without legal basis.
Issue:
What did S. Motors availed of under Art. 1484 of the Civil Code, the first remedy (Exact fulfillment
of the obligation) or the third (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.)?
Held:
Manifestly, 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. Had appellee elected the foreclosure, it would not
have instituted this case in court; it would not have caused the chattel to be attached under Rule 59,
and had it sold at public auction, in the manner prescribed by Rule 39. That the 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 at San Jose, Antique.
The court perceived nothing unlawful or irregular in appellee’s act of attaching the mortgaged truck
itself. Since herein appellee has chosen to exact the fulfillment of the appellant’s obligation, it may
enforce execution of the judgment that may be favorably rendered hereon, on all personal and real
properties of the latter not exempt from execution sufficient to satisfy such judgment. It should be
noted that a house and lot at San Jose, Antique were also attached. No one can successfully contest
that the attachment was merely an incident to an ordinary civil action.
FACTS:
Plaintiff Southern Motors, Inc. sold to defendant Angel Moscoso one Chevrolet truck on
installment basis,for P6,445.00. 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, achattel mortgage was constituted on the truck in favor of the
plaintiff. Of said account, the defendant hadpaid a total of P550.00, of which P110.00 was
applied to the interest and P400.00 to the principal, thusleaving an unpaid balance of P4,475.00.
The defendant failed to pay 3 installments on the balance of thepurchase price.Plaintiff filed a
complaint against the defendant, to recover the unpaid balance of the promissory note.Upon
plaintiff's petition, a writ of attachment was issued by the lower court on the properties of
thedefendant. Pursuant thereto, the said Chevrolet truck, and a house and lot belonging to
defendant, wereattached by the Sheriff and said truck was brought to the plaintiff's compound
for safe keeping. Afterattachment and before the trial of the case on the merits, acting upon the
plaintiff's motion for theimmediate sale of the mortgaged truck, the Provincial Sheriff of Iloilo
sold the truck at public auction inwhich plaintiff itself was the only bidder for P1,OOO.OO. The
trial court condemned the defendant to paythe plaintiff the amount of P4,475.00 with interest at
the rate of 12% per annum from August 16, 1957,until fully paid, plus 10% thereof as attorneys
fees and costs. Hence, this appeal by the defendant.
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:
No.Article 1484 of the Civil Code provides that in a contract of sale of personal property the
price of which ispayable in installments, the vendor may exercise any of the following remedies:
(I) Exact fulfillment of the obligation, should the vendee fail to pay; (2) Cancel the sale, should
the vendee's failure to pay covertwo or more installments; and (3) Foreclose the chattel
mortgage on the thing sold, if one has beenconstituted, should the vendee's failure to pay cover
two or more installments. In this case, he shall haveno further action against the purchaser to
recover any unpaid balance of the price. Any agreement to thecontrary shall be void.The
plaintiff had chosen the first remedy. The complaint is an ordinary civil action for recovery of
theremaining unpaid balance due on the promissory note. The plaintiff had not adopted the
procedure ormethods outlined by Sec. 14 of the Chattel Mortgage Law but those prescribed for
ordinary civil actions,under the Rules of Court. Had the plaintiff elected the foreclosure, it
would not have instituted this casein court; it would not have caused the chattel to be attached
under Rule 59, and had it sold at publicauction, in the manner prescribed by Rule 39. That the
plaintiff did not intend to foreclose the mortgagetruck, is further evinced by the fact that it had
also attached the house and lot of the appellant at SanJose, Antique.We perceive nothing
unlawful or irregular in plaintiff's act of attaching the mortgaged truck itself. Sincethe plaintiff
has chosen to exact the fulfillment of the appellant's obligation, it may enforce execution of the
judgment that may be favorably rendered hereon, on all personal and real properties of the
latter notexempt from execution sufficient to satisfy such judgment. It should be noted that a
house and lot at SanJose, Antique were also attached. No one can successfully contest that the
attachment was merely anincident to an ordinary civil action. The mortgage creditor may
recover judgment on the mortgage debtand cause an execution on the mortgaged property and
may cause an attachment to be issued andlevied on such property, upon beginning his civil
action.
3. That as of April 5, 1961 with reference to the two units mentioned above and as of
May 22, 1961 with reference to the three units, PDP Transit, Inc., plaintiffs' principal,
had paid to the defendant Universal Motors Corporation the sum of P92,964.91, thus
leaving a balance of P68,641.69 including interest due as of February 8, 1965.
4. That the aforementioned obligation guaranteed by the plaintiffs under the Real
Estate Mortgage, subject of this action, is further secured by separate deeds of
chattel mortgages on the Mercedez Benz units covered by the aforementioned
invoices in favor of the defendant Universal Motors Corporation.
5. That on March 19, 1965, the defendant Universal Motors Corporation filed a
complaint against PDP Transit, Inc. before, the Court of First Instance of Manila
docketed as Civil Case No. 60201 with a petition for a writ of Replevin, to collect the
balance due under the Chattel Mortgages and to repossess all the units to sold to
plaintiffs' principal PDP Transit, Inc. including the five (5) units guaranteed under the
subject Real (Estate) Mortgage.
In addition to the foregoing the Universal Motors Corporation admitted during the hearing that in its
suit (C.C. No. 60201) against the PDP Transit, Inc. it was able to repossess all the units sold to the
latter, including the five (5) units guaranteed by the subject real estate mortgage, and to foreclose all
the chattel mortgages constituted thereon, resulting in the sale of the trucks at public auction.
With the foregoing background, the spouses Lorenzo Pascual and Leonila Torres, the real estate
mortgagors, filed an action in the Court of First Instance of Quezon City (Civil Case No. 8189) for the
cancellation of the mortgage they constituted on two (2) parcels of land1 in favor of the Universal
Motors Corporation to guarantee the obligation of PDP Transit, Inc. to the extent of P50,000. The
court rendered judgment for the plaintiffs, ordered the cancellation of the mortgage, and directed the
defendant Universal Motors Corporation to pay attorney's fees to the plaintiffs in the sum of P500.00.
Unsatisfied with the decision, defendant interposed the present appeal.
In rendering judgment for the plaintiffs the lower court said in part: "... there does not seem to be any
doubt that Art. 14842 of the New Civil Code may be applied in relation to a chattel mortgage
constituted upon personal property on the installment basis (as in the present case) precluding the
mortgagee to maintain any further action against the debtor for the purpose of recovering whatever
balance of the debt secured, and even adding that any agreement to the contrary shall be null and
void."
The appellant now disputes the applicability of Article 1484 of the Civil Code to the case at bar on
the ground that there is no evidence on record that the purchase by PDP Transit, Inc. of the five (5)
trucks, the payment of the price of which was partly guaranteed by the real estate mortgage in
question, was payable in installments and that the purchaser had failed to pay two or more
installments. The appellant also contends that in any event what article 1484 prohibits is for the
vendor to recover from the purchaser the unpaid balance of the price after he has foreclosed the
chattel mortgage on the thing sold, but not a recourse against the security put up by a third party.
Both arguments are without merit. The first involves an issue of fact: whether or not the sale was one
on installments; and on this issue the lower court found that it was, and that there was failure to pay
two or more installments. This finding is not subject to review by this Court. The appellant's bare
allegation to the contrary cannot be considered at this stage of the case.
The next contention is that what article 1484 withholds from the vendor is the right to recover any
deficiency from the purchaser after the foreclosure of the chattel mortgage and not a recourse to the
additional security put up by a third party to guarantee the purchaser's performance of his obligation.
A similar argument has been answered by this Court in this wise: "(T)o sustain appellant's argument
is to overlook the fact that if the guarantor should be compelled to pay the balance of the purchase
price, the guarantor will in turn be entitled to recover what she has paid from the debtor vendee (Art.
2066, Civil Code); so that ultimately, it will be the vendee who will be made to bear the payment of
the balance of the price, despite the earlier foreclosure of the chattel mortgage given by him. Thus,
the protection given by Article 1484 would be indirectly subverted, and public policy overturned."
(Cruz vs. Filipinas Investment & Finance Corporation, L-24772, May 27, 1968; 23 SCRA 791).
The decision appealed from is affirmed, with costs against the defendant-appellant.
FILINVEST CREDIT CORPORATION vs CA 178 SCRA 188, G.R. No. 82508 September 29, 1989
FACTS:
Herein private respondents spouses Jose Sy Bang and Iluminada Tan were engaged in the sale of gravel
produced from crushed rocks and used for construction purposes. They intended to buy rock crusher
from Rizal Consolidated Corporation which carried a cash price tag of P550,000.00. They applied for
financial assistance from herein petitioner Filinvest Credit Corporation, who agreed to extend financial
aid on the certain conditions.
A contract of lease of machinery (with option to purchase) was entered into by the parties whereby the
private respondents agreed to lease from the petitioner the rock crusher for two years starting from July
5, 1981, payable as follows: P10,000.00 – first 3 months, P23,000.00 – next 6 months, P24,800.00 – next
15 months. It was likewise stipulated that at the end of the two-year period, the machine would be
owned by the private respondents. Thus the private respondent issued in favor of the petitioner a check
for P150,550.00, as initial rental (or guaranty deposit), and 24 postdated checks corresponding to the 24
monthly rentals. In addition, to guarantee their compliance with the lease contract, the private
respondent executed a real estate mortgage over two parcels of land in favor of the petitioner. The rock
crusher was delivered to the spouses.
However, 3 months later, the souses stopped payment when petitioner had not acted on the complaints
of the spouses about the machine. As a consequence, petitioner extra-judicially foreclosed the real
estate mortgage. The spouses filed a complaint before the RTC. The RTC rendered a decision in favor of
private respondent. The petitioner elevated the case to CA which affirmed the decision in toto. Hence,
this petition.
ISSUES:
2. Whether or not the remedies of the seller provided for in Article 1484 are cumulative.
HELD:
1. Yes. The intent of the parties to the subject contract is for the so-called rentals to be the installment
payments. Upon the completion of the payments, then the rock crusher, subject matter of the contract,
would become the property of the private respondents. This form of agreement has been criticized as a
lease only in name.
Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a
bargain in that form, for one reason or another, have frequently restored to the device of making
contracts in the form of leases either with options to the buyer to purchase for a small consideration at
the end of term, provided the so-called rent has been duly paid, or with stipulations that if the rent
throughout the term is paid, title shall thereupon vest in the lessee. It is obvious that such transactions
are leases only in name. The so-called rent must necessarily be regarded as payment of the price in
installments since the due payment of the agreed amount results, by the terms of bargain, in the
transfer of title to the lessee.
2. No, it is alternative. The seller of movable in installments, in case the buyer fails to pay 2 or more
installments, may elect to pursue either of the following remedies: (1) exact fulfillment by the purchaser
of the obligation; (2) cancel the sale; or (3) foreclose the mortgage on the purchased property if one was
constituted thereon. It is now settled that the said remedies are alternative and not cumulative, and
therefore, the exercise of one bars the exercise of the others. Indubitably, the device – contract of lease
with option to buy – is at times resorted to as a means to circumvent Article 1484, particularly
paragraph (3) thereof. Through the set-up, the vendor, by retaining ownership over the property in the
guise of being the lessor, retains, likewise the right to repossess the same, without going through the
process of foreclosure, in the event the vendee-lessee defaults in the payment of the installments.
There arises therefore no need to constitute a chattel mortgage over the movable sold. More important,
the vendor, after repossessing the property and, in effect, canceling the contract of sale, gets to keep all
the installments-cum-rentals already.
Facts:
Spouses Sy Bang were engaged in the sale of gravel produced from crushed rocks and used for
construction purposes. In order to increase their production, they looked for a rock crusher which Rizal
Consolidated Corporation then had for sale. A brother of Sy Bang, went to inspect the machine at the
Rizal Consolidated’s plant site. Apparently satisfied with the machine, the private respondents signified
their intent to purchase the same.
Since he does not have the financing capability, Sy Bang applied for financial assistance from Filinvest
Credit Corporation. Filinvest agreed to extend financial aid on the following conditions: (1) that the
machinery be purchased in the petitioner’s name; (2) that it be leased with option to purchase upon the
termination of the lease period; and (3) that Sy Bang execute a real estate mortgage as security for the
amount advanced by Filinvest. A contract of lease of machinery (with option to purchase) was entered
into by the parties whereby they to lease from the petitioner the rock crusher for two years. The contract
likewise stipulated that at the end of the two-year period, the machine would be owned by Sy Bang.
3 months from the date of delivery, Sy Bang claiming that they had only tested the machine that month,
sent a letter-complaint to the petitioner, alleging that contrary to the 20 to 40 tons per hour capacity of the
machine as stated in the lease contract, the machine could only process 5 tons of rocks and stones per
hour. They then demanded that the petitioner make good the stipulation in the lease contract. Sy Bang
stopped payment on the remaining checks they had issued to the petitioner.
As a consequence of the non-payment, Filinvest extrajudicially foreclosed the real estate mortgage.
Issue:
Held:
The real intention of the parties should prevail. The nomenclature of the agreement cannot change its
true essence, i.e., a sale on installments. It is basic that a contract is what the law defines it and the
parties intend it to be, not what it is called by the parties. It is apparent here that the intent of the parties to
the subject contract is for the so-called rentals to be the installment payments. Upon the completion of the
payments, then the rock crusher, subject matter of the contract, would become the property of the private
respondents. This form of agreement has been criticized as a lease only in name.
Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a bargain
in that form, for one reason or another, have frequently resorted to the device of making contracts in the
form of leases either with options to the buyer to purchase for a small consideration at the end of term,
provided the so-called rent has been duly paid, or with stipulations that if the rent throughout the term is
paid, title shall thereupon vest in the lessee. It is obvious that such transactions are leases only in name.
The so-called rent must necessarily be regarded as payment of the price in installments since the due
payment of the agreed amount results, by the terms of bargain, in the transfer of title to the lessee.
Indubitably, the device contract of lease with option to buy is at times resorted to as a means to
circumvent Article 1484, particularly paragraph (3) thereof.Through the set-up, the vendor, by retaining
ownership over the property in the guise of being the lessor, retains, likewise, the right to repossess the
same, without going through the process of foreclosure, in the event the vendee-lessee defaults in the
payment of the installments. There arises therefore no need to constitute a chattel mortgage over the
movable sold. More important, the vendor, after repossessing the property and, in effect, canceling the
contract of sale, gets to keep all the installments-cum-rentals already paid.
Even if there was a contract of sale, Filinvest is still not liable because Sy Bang is presumed to be more
knowledgeable, if not experts, on the machinery subject of the contract, they should not therefore be
heard now to complain of any alleged deficiency of the said machinery. It was Sy Bang who was
negligent, not Filinvest. Further, Sy Bang is precluded to complain because he signed a Waiver of
Warranty.
Luis Ridad and Lourdes Ridad, plaintiffs-appellees, v
Filipinas Investment and Finance Corporation, Jose D. Sebastian and Jose San Agustin, in his
capacity as Sheriff, defendants-appellants
Plaintiffs purchased from Supreme Sales and Development Corporation (Supreme) 2 brand new Ford
Consul Sedans, for P26,887 payable in 24 monthly installments.
To secure payment thereof, plaintiffs executed a promissory note covering the purchase price and a deed
of chattel mortgage on the two vehicles purchased and also on another car (Chevrolet) and plaintiff’s
franchise or certificate of public convenience granted by the defunct Public Service Commission for the
operation of a taxi fleet.
With the conformity of plaintiffs, the vendor Supreme assigned its rights, title and interest to the
promissory note and chattel mortgage to the defendant Filipinas Investment and Finance Corporation.
Plaintiffs failed to pay their monthly installments. Filipinas foreclosed the chattel mortgage extra-
judicially.
During the public auction, of which the plaintiffs were not notified, the 2 Ford Consul cars were bought
by defendant Filipinas, who was as the highest bidder. During another public auction, the rest of the
properties (including the taxi franchise) subject of the chattel mortgage were sold, and bought by
defendant Filipinas also.
Filipinas subsequently sold the taxi franchise to defendant Jose D. Sebastian, who filed with the Public
Service Commission an application for approval of said sale.
Plaintiffs then filed an action for annulment of contract before the CFI, against Filipinas, Sebastian, and
Sheriff San Agustin.
CFI ruling: The chattel mortgage was null and void in so far as the taxi franchise and the used Chevrolet
car were concerned, and the sale at public auction of the taxicab franchise was to be of no legal effect.
The Certificate of Sale issued by the Sheriff of Manila in favor of Filipinas concerning the taxi franchise
was cancelled and set aside. The assignment made by Filipinas in favor of Jose Sebastian was also
declared void and of no legal effect.
The CA certified the defendants’ appeal to the SC.
Ratio:
29) Article 1484 of the Civil Code is applicable. Under this article, the vendor of personal property the
purchase price of which is payable in installments, has the right, should the vendee default in the
payment of two or more of the agreed installments, 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. The vendor can only choose one option.
30) If the vendor avails himself of the right to foreclose the mortgage, the law prohibits him from further
bringing an action against the vendee for the purpose of recovering whatever balance of the debt
secured is not satisfied by the foreclosure sale.
31) Purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at
foreclosure sale for a low price and the bringing suit against the mortgagor for a deficiency judgment.
a. Without the law, the mortgagor-buyer would find himself without the property and still owing
practically the full amount of his original debt.
32) In this case, defendant Filipinas chose to foreclose the mortgage upon default of plaintiffs, and bought
the vehicles at the public auction as the highest bidder.
a. Filipinas is deemed to have renounced any and all rights which it might otherwise have under the
promissory note and the chattel mortgage as well as the payment of the unpaid balance.
33) The lower court rightly declared the nullity of the chattel mortgage in so far as the taxi franchise and the
Chevrolet were concerned, under the authority of the ruling in the case of Levy Hermanos, Inc. v Pacific
Commercial Co., et al.
34) The vendor’s right to foreclose is limited only on the thing sold.
35) The vendor of personal property sold on installment 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. (Cruz v Filipinos Investment & Finance Corporation)
a. Otherwise, if the vendee could still be compelled to pay the balance of the purchase price, the
vendee will be made to bear the payment of the balance despite the earlier foreclosure.
Judgment appealed from is affirmed.
RIDAD V FILIPINAS
Facts: The spouses Ridad purchased from the Supreme Sales Development Corporation
two (2) brand new Ford Consul Sedans complete with accessories. To secure payment
thereof, plaintiffs executed on the same date a promissory note covering the purchase price
and a deed of chattel mortgage not only on the two vehicles purchased but also on another
car (Chevrolet) and their franchise or certificate of public convenience granted by the
defunct Public Service Commission for the operation of a taxi fleet with Filipinas Investment.
Due to the failure of the plaintiffs to pay their monthly installments as per promissory note,
Filipinas Investment foreclosed on the chattel mortgage on the Ford Consul Sedans. The
foreclosure sale had a deficiency. Consequently, the corporation foreclosed the mortgage
constituted on the (Chevrolet) and their franchise or certificate of public convenience.
Issue: Whether Filipinas Investment is precluded from foreclosing the second mortgage to
recover the deficiency on the first mortgage
Held: No. 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.
If the vendor under such circumstance is prohibited from having a recourse against the
additional security for reasons therein stated, there is no ground why such vendor should
not likewise be precluded from further extrajudicially foreclosing the additional security put
up by the vendees themselves, as in the instant case, it being tantamount to a further action
5 that would violate Article 1484 of the Civil Code, for then is actually no between an
additional security put up by the vendee himself and such security put up by a third party
insofar as how the burden would ultimately fall on the vendee himself is concerned.
On April 14, 1964, plaintiffs purchased from the Supreme Sales arid Development Corporation two (2)
brand new Ford Consul Sedans complete with accessories, for P26,887 payable in 24 monthly
installments. To secure payment thereof, plaintiffs executed on the same date a promissory note covering
the purchase price and a deed of chattel mortgage not only on the two vehicles purchased but also on
another car (Chevrolet) and plaintiffs' franchise or certificate of public convenience granted by the defunct
Public Service Commission for the operation of a taxi fleet. Then, with the conformity of the plaintiffs, the
vendor assigned its rights, title and interest to the above-mentioned promissory note and chattel
mortgage to defendant Filipinas Investment and Finance Corporation.
Due to the failure of the plaintiffs to pay their monthly installments as per promissory note, the defendant
corporation foreclosed the chattel mortgage extra-judicially, and at the public auction sale of the two Ford
Consul cars, of which the plaintiffs were not notified, the defendant corporation was the highest bidder
and purchaser. Another auction sale was held on November 16, 1965, involving the remaining properties
subject of the deed of chattel mortgage since plaintiffs' obligation was not fully satisfied by the sale of the
aforesaid vehicles, and at the public auction sale, the franchise of plaintiffs to operate five units of taxicab
service was sold for P8,000 to the highest bidder, herein defendant corporation, which subsequently sold
and conveyed the same to herein defendant Jose D. Sebastian, who then filed with the Public Service
Commission an application for approval of said sale in his favor.
On February 21, 1966, plaintiffs filed an action for annulment of contract before the Court of First Instance
of Rizal, Branch I, with Filipinas Investment and Finance Corporation, Jose D. Sebastian and Sheriff Jose
San Agustin, as party-defendants. By agreement of the parties, the case was submitted for decision in the
lower court on the basis of the documentary evidence adduced by the parties during the pre-trial
conference. Thereafter, the lower court declared the chattel mortgage to be null and void in so far as the
taxicab franchise and the used Chevrolet car of plaintiffs are concerned, and the sale at public auction
conducted by the City Sheriff of Manila concerning said taxicab franchise, to be of no legal effect.
Issue:The validity of the chattel mortgage in so far as the franchise and the subsequent sale thereof are
concerned.
Ruling:
The resolution of said issue is unquestionably governed by the provisions of Article 1484 of the Civil
Code.
The precise purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at
foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment,
otherwise, the mortgagor-buyer would find himself without the property and still owing practically the full
amount of his original indebtedness.
The lower court rightly declared the nullity of the chattel mortgage in question in so far as the taxicab
franchise and the used Chevrolet car of plaintiffs are concerned, under the authority of the ruling in the
case of 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.