Mortgage Cases

8/13/2019 Mortgage Cases

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G.R. No. L-30173 September 30, 1971

GAVINO A. TUMALAD and GENEROSA R. TUMALAD, plaintiffs-appellees,vs.ALBERTA VICENCIO and EMILIANO SIMEON, defendants-appellants.

REYES, J.B.L., J.:

Case certified to this Court by the Court of Appeals (CA-G.R. No. 27824-R) forthe reason that only questions of law are involved.

This case was originally commenced by defendants-appellants in the municipalcourt of Manila in Civil Case No. 43073, for ejectment. Having lost therein,defendants-appellants appealed to the court a quo (Civil Case No. 30993)which also rendered a decision against them, the dispositive portion of whichfollows:

WHEREFORE, the court hereby renders judgment in favor of theplaintiffs and against the defendants, ordering the latter to pay jointly and severally the former a monthly rent of P200.00 on thehouse, subject-matter of this action, from March 27, 1956, toJanuary 14, 1967, with interest at the legal rate from April 18, 1956,the filing of the complaint, until fully paid, plus attorney's fees in thesum of P300.00 and to pay the costs.

It appears on the records that on 1 September 1955 defendants-appellantsexecuted a chattel mortgage in favor of plaintiffs-appellees over their house ofstrong materials located at No. 550 Int. 3, Quezon Boulevard, Quiapo, Manila,over Lot Nos. 6-B and 7-B, Block No. 2554, which were being rented fromMadrigal & Company, Inc. The mortgage was registered in the Registry of Deedsof Manila on 2 September 1955. The herein mortgage was executed toguarantee a loan of P4,800.00 received from plaintiffs-appellees, payable withinone year at 12% per annum. The mode of payment was P150.00 monthly,starting September, 1955, up to July 1956, and the lump sum of P3,150 was

payable on or before August, 1956. It was also agreed that default in thepayment of any of the amortizations, would cause the remaining unpaidbalance to becomeimmediately due and Payable and

the Chattel Mortgage will be enforceable in accordance with theprovisions of Special Act No. 3135, and for this purpose, the Sheriff ofthe City of Manila or any of his deputies is hereby empowered andauthorized to sell all the Mortgagor's property after the necessary


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publication in order to settle the financial debts of P4,800.00, plus12% yearly interest, and attorney's fees... 2

When defendants-appellants defaulted in paying, the mortgage wasextrajudicially foreclosed, and on 27 March 1956, the house was sold at public

auction pursuant to the said contract. As highest bidder, plaintiffs-appelleeswere issued the corresponding certificate of sale. 3 Thereafter, on 18 April 1956,plaintiffs-appellant commenced Civil Case No. 43073 in the municipal court ofManila, praying, among other things, that the house be vacated and itspossession surrendered to them, and for defendants-appellants to pay rent ofP200.00 monthly from 27 March 1956 up to the time the possession issurrendered. 4 On 21 September 1956, the municipal court rendered its decision

... ordering the defendants to vacate the premises described in the

complaint; ordering further to pay monthly the amount of P200.00from March 27, 1956, until such (time that) the premises is (sic)completely vacated; plus attorney's fees of P100.00 and the costs ofthe suit. 5

Defendants-appellants, in their answers in both the municipal court and court aquo impugned the legality of the chattel mortgage, claiming that they are stillthe owners of the house; but they waived the right to introduce evidence, oralor documentary. Instead, they relied on their memoranda in support of theirmotion to dismiss, predicated mainly on the grounds that: (a) the municipalcourt did not have jurisdiction to try and decide the case because (1) the issueinvolved, is ownership, and (2) there was no allegation of prior possession; and(b) failure to prove prior demand pursuant to Section 2, Rule 72, of the Rules ofCourt. 6

During the pendency of the appeal to the Court of First Instance, defendants-appellants failed to deposit the rent for November, 1956 within the first 10 daysof December, 1956 as ordered in the decision of the municipal court. As a result,the court granted plaintiffs-appellees' motion for execution, and it was actuallyissued on 24 January 1957. However, the judgment regarding the surrender ofpossession to plaintiffs-appellees could not be executed because the subject

house had been already demolished on 14 January 1957 pursuant to the orderof the court in a separate civil case (No. 25816) for ejectment against thepresent defendants for non-payment of rentals on the land on which the housewas constructed.

The motion of plaintiffs for dismissal of the appeal, execution of the supersedeasbond and withdrawal of deposited rentals was denied for the reason that the


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liability therefor was disclaimed and was still being litigated, and under Section8, Rule 72, rentals deposited had to be held until final disposition of the appeal. 7

On 7 October 1957, the appellate court of First Instance rendered its decision,the dispositive portion of which is quoted earlier. The said decision was

appealed by defendants to the Court of Appeals which, in turn, certified theappeal to this Court. Plaintiffs-appellees failed to file a brief and this appeal wassubmitted for decision without it.

Defendants-appellants submitted numerous assignments of error which can becondensed into two questions, namely: .

(a) Whether the municipal court from which the case originatedhad jurisdiction to adjudicate the same;

(b) Whether the defendants are, under the law, legally bound topay rentals to the plaintiffs during the period of one (1) yearprovided by law for the redemption of the extrajudicially foreclosedhouse.

We will consider these questions seriatim .

(a) Defendants-appellants mortgagors question the jurisdiction of the municipalcourt from which the case originated, and consequently, the appellate jurisdiction of the Court of First Instance a quo , on the theory that the chattelmortgage is void ab initio ; whence it would follow that the extrajudicial

foreclosure, and necessarily the consequent auction sale, are also void. Thus,the ownership of the house still remained with defendants-appellants who areentitled to possession and not plaintiffs-appellees. Therefore, it is argued bydefendants-appellants, the issue of ownership will have to be adjudicated first inorder to determine possession. lt is contended further that ownership being inissue, it is the Court of First Instance which has jurisdiction and not the municipalcourt.

Defendants-appellants predicate their theory of nullity of the chattel mortgageon two grounds, which are: (a) that, their signatures on the chattel mortgage

were obtained through fraud, deceit, or trickery; and (b) that the subject matterof the mortgage is a house of strong materials, and, being an immovable, it canonly be the subject of a real estate mortgage and not a chattel mortgage.

On the charge of fraud, deceit or trickery, the Court of First Instance founddefendants-appellants' contentions as not supported by evidence andaccordingly dismissed the charge, 8 confirming the earlier finding of the


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municipal court that "the defense of ownership as well as the allegations offraud and deceit ... are mere allegations." 9

It has been held in Supia and Batiaco vs. Quintero and Ayala 10 that "the answeris a mere statement of the facts which the party filing it expects to prove, but it isnot evidence ; 11 and further, that when the question to be determined is one oftitle, the Court is given the authority to proceed with the hearing of the causeuntil this fact is clearly established. In the case of Sy vs. Dalman , 12 wherein thedefendant was also a successful bidder in an auction sale, it was likewise heldby this Court that in detainer cases the aim of ownership "is a matter of defenseand raises an issue of fact which should be determined from the evidence atthe trial." What determines jurisdiction are the allegations or averments in thecomplaint and the relief asked for. 13

Moreover, even granting that the charge is true, fraud or deceit does not render

a contract void ab initio , and can only be a ground for rendering the contractvoidable or annullable pursuant to Article 1390 of the New Civil Code, by aproper action in court. 14 There is nothing on record to show that the mortgagehas been annulled. Neither is it disclosed that steps were taken to nullify thesame. Hence, defendants-appellants' claim of ownership on the basis of avoidable contract which has not been voided fails.

It is claimed in the alternative by defendants-appellants that even if there wasno fraud, deceit or trickery, the chattel mortgage was still null and void ab initiobecause only personal properties can be subject of a chattel mortgage. Therule about the status of buildings as immovable property is stated in Lopez vs.Orosa, Jr . and Plaza Theatre Inc., 15 cited in Associated Insurance Surety Co., Inc.vs. Iya, et al . 16 to the effect that

... it is obvious that the inclusion of the building, separate anddistinct from the land, in the enumeration of what may constitutereal properties (art. 415, New Civil Code) could only mean onething that a building is by itself an immovable propertyirrespective of whether or not said structure and the land on which itis adhered to belong to the same owner.

Certain deviations, however, have been allowed for various reasons. In the caseof Manarang and Manarang vs. Ofilada , 17 this Court stated that "it is undeniablethat the parties to a contract may by agreement treat as personal property thatwhich by nature would be real property", citing Standard Oil Company of NewYork vs. Jaramillo . 18 In the latter case, the mortgagor conveyed and transferredto the mortgagee by way of mortgage "the following described personalproperty ." 19 The "personal property" consisted of leasehold rights and a building.Again, in the case of Luna vs. Encarnacion , 20 the subject of the contract


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designated as Chattel Mortgage was a house of mixed materials, and this Courthold therein that it was a valid Chattel mortgage because it was so expresslydesignated and specifically that the property given as security "is a house ofmixed materials, which by its very nature is considered personal property." In thelater case of Navarro vs. Pineda , 21 this Court stated that

The view that parties to a deed of chattel mortgage may agree toconsider a house as personal property for the purposes of saidcontract, "is good only insofar as the contracting parties areconcerned. It is based, partly, upon the principle of estoppel"(Evangelista vs. Alto Surety, No. L-11139, 23 April 1958). In a case, amortgaged house built on a rented land was held to be a personalproperty, not only because the deed of mortgage considered it assuch, but also because it did not form part of the land (Evangelistsvs. Abad, [CA]; 36 O.G. 2913), for it is now settled that an object

placed on land by one who had only a temporary right to thesame, such as the lessee or usufructuary, does not becomeimmobilized by attachment (Valdez vs. Central Altagracia, 222 U.S.58, cited in Davao Sawmill Co., Inc. vs. Castillo, et al ., 61 Phil. 709).Hence, if a house belonging to a person stands on a rented landbelonging to another person, it may be mortgaged as a personalproperty as so stipulated in the document of mortgage.(Evangelista vs. Abad, Supra .) It should be noted, however that theprinciple is predicated on statements by the owner declaring hishouse to be a chattel, a conduct that may conceivably estop himfrom subsequently claiming otherwise . (Ladera vs. C.N. Hodges,[CA] 48 O.G. 5374): 22

In the contract now before Us, the house on rented land is not only expresslydesignated as Chattel Mortgage; it specifically provides that "the mortgagor ...voluntarily CEDES, SELLS and TRANSFERSby way of Chattel Mortgage 23 theproperty together with its leasehold rights over the lot on which it is constructedand participation ..." 24 Although there is no specific statement referring to thesubject house as personal property, yet by ceding, selling or transferring aproperty by way of chattel mortgage defendants-appellants could only havemeant to convey the house as chattel, or at least, intended to treat the same as

such, so that they should not now be allowed to make an inconsistent stand byclaiming otherwise. Moreover, the subject house stood on a rented lot to whichdefendats-appellants merely had a temporary right as lessee, and although thiscan not in itself alone determine the status of the property, it does so whencombined with other factors to sustain the interpretation that the parties,particularly the mortgagors, intended to treat the house as personalty. Finallyunlike in the Iya cases, Lopez vs. Orosa, Jr. and Plaza Theatre, Inc . 25 and LeungYee vs. F. L. Strong Machinery and Williamson , 26 wherein third persons assailed


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the validity of the chattel mortgage, 27 it is the defendants-appellantsthemselves, as debtors-mortgagors, who are attacking the validity of the chattelmortgage in this case. The doctrine of estoppel therefore applies to the hereindefendants-appellants, having treated the subject house as personalty.

(b) Turning to the question of possession and rentals of the premises in question.The Court of First Instance noted in its decision that nearly a year after theforeclosure sale the mortgaged house had been demolished on 14 and 15January 1957 by virtue of a decision obtained by the lessor of the land on whichthe house stood. For this reason, the said court limited itself to sentencing theerstwhile mortgagors to pay plaintiffs a monthly rent of P200.00 from 27 March1956 (when the chattel mortgage was foreclosed and the house sold) until 14January 1957 (when it was torn down by the Sheriff), plus P300.00 attorney's fees.

Appellants mortgagors question this award, claiming that they were entitled to

remain in possession without any obligation to pay rent during the one yearredemption period after the foreclosure sale, i.e., until 27 March 1957. On thisissue, We must rule for the appellants.

Chattel mortgages are covered and regulated by the Chattel Mortgage Law,Act No. 1508. 28 Section 14 of this Act allows the mortgagee to have the propertymortgaged sold at public auction through a public officer in almost the samemanner as that allowed by Act No. 3135, as amended by Act No. 4118,provided that the requirements of the law relative to notice and registration arecomplied with. 29 In the instant case, the parties specifically stipulated that "thechattel mortgage will be enforceable in accordance with the provisions ofSpecial Act No. 3135 ... ." 30 (Emphasis supplied).

Section 6 of the Act referred to 31 provides that the debtor-mortgagor(defendants-appellants herein) may, at any time within one year from and afterthe date of the auction sale, redeem the property sold at the extra judicialforeclosure sale. Section 7 of the same Act 32 allows the purchaser of theproperty to obtain from the court the possession during the period ofredemption: but the same provision expressly requires the filing of a petition withthe proper Court of First Instance and the furnishing of a bond. It is only uponfiling of the proper motion and the approval of the corresponding bond that the

order for a writ of possession issues as a matter of course. No discretion is left tothe court. 33 In the absence of such a compliance, as in the instant case, thepurchaser can not claim possession during the period of redemption as a matterof right. In such a case, the governing provision is Section 34, Rule 39, of theRevised Rules of Court 34 which also applies to properties purchased inextrajudicial foreclosure proceedings . 35 Construing the said section, this Courtstated in the aforestated case of Reyes vs. Hamada .


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In other words, before the expiration of the 1-year period withinwhich the judgment-debtor or mortgagor may redeem theproperty, the purchaser thereof is not entitled, as a matter of right,to possession of the same. Thus, while it is true that the Rules of Courtallow the purchaser to receive the rentals if the purchased propertyis occupied by tenants, he is, nevertheless, accountable to the judgment-debtor or mortgagor as the case may be , for the amountso received and the same will be duly credited against theredemption price when the said debtor or mortgagor effects theredemption. Differently stated, the rentals receivable from tenants,although they may be collected by the purchaser during the

redemption period, do not belong to the latter but still pertain tothe debtor of mortgagor . The rationale for the Rule, it seems, is tosecure for the benefit of the debtor or mortgagor, the payment ofthe redemption amount and the consequent return to him of his

properties sold at public auction. (Emphasis supplied)The Hamada case reiterates the previous ruling in Chan vs. Espe . 36

Since the defendants-appellants were occupying the house at the time of theauction sale, they are entitled to remain in possession during the period ofredemption or within one year from and after 27 March 1956, the date of theauction sale, and to collect the rents or profits during the said period.

It will be noted further that in the case at bar the period of redemption had notyet expired when action was instituted in the court of origin, and that plaintiffs-appellees did not choose to take possession under Section 7, Act No. 3135, asamended, which is the law selected by the parties to govern the extrajudicialforeclosure of the chattel mortgage. Neither was there an allegation to thateffect. Since plaintiffs-appellees' right to possess was not yet born at the filing ofthe complaint, there could be no violation or breach thereof. Wherefore, theoriginal complaint stated no cause of action and was prematurely filed. For thisreason, the same should be ordered dismissed, even if there was no assignmentof error to that effect. The Supreme Court is clothed with ample authority toreview palpable errors not assigned as such if it finds that their consideration isnecessary in arriving at a just decision of the cases. 37

It follows that the court below erred in requiring the mortgagors to pay rents forthe year following the foreclosure sale, as well as attorney's fees.

FOR THE FOREGOING REASONS, the decision appealed from is reversed andanother one entered, dismissing the complaint. With costs against plaintiffs-appellees.


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Concepcion, C.J., Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee,Barredo, Villamor and Makasiar, JJ., concur.

G.R. No. L-41555 July 27, 1977

INDUSTRIAL FINANCE CORPORATION, petitioner,vs.CASTOR TOBIAS, respondent.

Santos S. Carlos for petitioner.

Amado J. Garcia for respondent.

MARTIN, J :

This is a petition for review of the decision of the Court of Appeals * in CA-G.R.No. 53916, entitled "Industrial Finance Corporation vs. Castor Tobias", affirmingthat of the Court of First Instance of Manila with a slight modification.

On June 16, 1968, respondent Castor Tobias bought on installment one (1)Dodge truck from Leelin Motors, Inc. To answer for his obligation he executed apromissory note in favor of the latter, for the sum of P29.070.28 payable in thirty-

six (36) equal installments with interest at the rate of 12% per annum payable inthe amounts and dates indicated in said promissory note. 1 To secure paymentof the promissory note, respondent Tobias executed in favor of Leelin Motors,Inc. a chattel mortgage on the Dodge truck.

On June 19, 1969, Leelin Motors, Inc. indorsed the promissory note and assignedthe chattel mortgage to petitioner Industrial Finance Corporation. As aconsequence respondent Tobias paid six (6) installments on the promissory notedirectly to the petitioner Industrial Finance Corporation the last of which wasmade on February 19, 1970. 2

On May 14, 1970, the petitioner's counsel wrote to respondent Tobias thefollowing letter:

xxx xxx xxx

Dear Mr. Tobias:


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My client, the INDUSTRIAL FINANCE CORPORATION, has referred tome for appropriate legal action your account with it (LCI-690) whichis in arrears in the amount of P4,254.65 and a balance of P25,249.65as of May 16, 1970. In view of your default in the payment of yourinstallments due pursuant to the Promissory Note and ChattelMortgage you executed in favor of Leelin Motors, Inc. and assignedto Industrial Finance Corporation, demand is- hereby made uponyou to pay the amount of P25,249.65 on or before May 24, 1970 orto surrender within the same period the following describedpersonality:

One (1) Unit 1969 Motor Vehicle DodgeD-600 FFC 197 "WB"Engine No. CPC4007Serial No. 1589070794

otherwise, the corresponding action will be filed against you plusdamages and attorney's fees.

Please consider this a final demand.

Very truly yours,

C.R. SANCHEZ LAW OFFICE

SGD. CATALINO R. SANCHEZ.3

At the time the foregoing letter was written, respondent Tobias was in arrear inthe payment of more than two (2) installments. 4

On May 27, 1970, respondent Tobias wrote petitioner's counsel the followingletter:

Dear Sir:

This is in response to your letter of demand dated May 14, 1970asking me to surrender Dodge Truck with engine no. CPC-4007Serial No. 1589070794. I am now voluntarily and willingly surrenderingsaid truck due to the ff. reasons:

1. That said truck has been with Leelin Motors ever sincethe later part of February when it met an accident.


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2. That there is too much delay in the repair of saidtruck because until now the truck is not yet completelyfinished.

3. That upon seeing said truck, I am not satisfied with

the repair of the finished portions.

I am now giving full authority to your client Industrial FinanceCorporation to get said truck at Leelin Motors, Inc.

I am hoping that due to the ff. good reasons my name will not beblacklisted in your credit division.

Very truly yours,

Castor Tobias 5

Upon learning that the truck met an accident, petitioner decided not to get thetruck anymore from Leelin Motors, Inc.

On February 16, 1971, petitioner filed in the Court of First Instance of Manila anaction against respondent Tobias to recover the unpaid balance of thepromissory note.- The lower court dismissed the complaint on the ground that"(I)nasmuch as the defendant voluntarily and willingly surrendered the truck andgave the Industrial Finance Corporation full authority to get said truck fromLeelin Motors, Inc. (Exhibit 2) pursuant to the demand to surrender (Exhibit B) the

defendant complied with the demands of the plaintiff. 6

On appeal, the Court of Appeals affirmed the decision of the lower courtdismissing the complaint of petitioner Industrial Finance Corporation butmodifying the same by ordering respondent Tobias to pay the cost of repairs ofthe damaged truck in the amount of P5,396.78 plus interest.

The main thrust of the petitioner's argument is that the respondent Court ofAppeals erred in affirming the dismissal of the complaint of the petitioner in thelower court by not considering his right as an unpaid vendor of the truck inquestion under Art. 1484 of the New Civil Code. 7 Petitioner claims that underArt. 1484 of the New Civil Code, an unpaid vendor may choose any of theremedies provided therein and that as an unpaid vendor, it has chosen to exactfulfillment of the obligation for failure of the vendee to pay. Respondent Tobias,however, claims that petitioner is estopped to insist on its claim on the balanceof the promissory note when it demanded the return or surrender of the truck inits letter of May 14, 1970, to which demand, respondent acceded in his letterdated May 27, 1970.


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The claim of respondent cannot be sustained. Art. 1484 is clear that "should thevendee or purchaser of a personal property be in default in the payment of twoor more of the agreed installments, the vendor or seller has the option to eitherexact fulfillment by the purchaser of -the obligation, or to cancel the sale, or toforeclose the mortgage on the purchased personal property, if one wasconstituted. 8 Since the case involves the sale of personal property oninstallments Art. 1484 of the Civil Code should apply. The remedies provided forin Art. 1484 are considered alternative, not cumulative 9 such that the exerciseof one would bar the exercise by the others. 10 Here, petitioner has notcancelled the sale, nor has it exercised the remedy of foreclosure. Foreclosure, judicial or extra-judicial, presupposes something more than a mere demand tosurrender possession of the object of the mortgage. 11 Since the petitioner hasnot availed itself of the remedy of cancelling the sale of the truck in question orof foreclosing the chattel mortgage on said truck, petitioner is still free to avail ofthe remedy of exacting fulfillment ' of the obligation of respondent Tobias, the

vendee of the truck in question. In Radiowealth Inc. vs. Lavin ,12

the facts ofwhich are similar to the 'present case, the issue was "whether the plaintiff isprecluded to press for collection of an account secured by a chattelmortgagee after it shall have informed the defendants of its intention toforeclose said mortgage, and the voluntary acceptance of such step(foreclosure) by defendant mortgagor," the Supreme Court ruled in favor of theplaintiff mortgagee. Said the Court:

The contract being a sale of machinery payable in installments, theapplicable provision of law is Article 1484 of the Civil Code, whichgives the vendor the option to exercise any one of the alternativeremedies therein mentioned: exact fulfillment of the obligation,cancel the sale, or foreclose the chattel mortgage. But the vendor-mortgagor in the present case desisted, on its own initiative, fromconsummating the auction sale, without gaining any advantage orbenefit, and without causing any disadvantage, or harm to thevendees-mortgagees. The least that could be said is that suchdesistance of the plaintiff from proceeding with auction sale was atimely disavowal that cancelled and rendered useless its previouschoice to foreclose; its acts, being extra-judicial, brought no troubleupon any court, and were harmless to the defendants. For this

reason, the plaintiff can not be considered as having "exercised"(the Code uses the word "exercise") the remedy of foreclosurebecause of its incomplete implementation, and, therefore, theplaintiff is not barred from suing on the unpaid account.

In effect this ruling answers the issue of estoppel raised by respondent Tobias.Besides, to hold the petitioner in estoppel, it must be shown that when it gavethe respondent the choice of either paying the balance of the purchase price


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or of surrending the truck, it had already knowledge of the accident and theconsequent damage to the truck. In the present case petitioner claims it had noknowledge of the accident 13 when it gave the respondent the choice of eitherpaying the balance of the promissory note or of surrendering the truck. It is hardto believe that petitioner would make such offer to respondent either to pay thebalance on the promissory, note or to surrender the truck in question if it knewthat the truck has had an accident. The more plausible thing it would haveasked the respondent is to ask for the balance on the promissory note. Besidesthe allegation of petitioner that it had no knowledge of the accident is anegative allegation and needs no evidence to support it, not being an essentialpart of the statement of the right on which the cause of action is founded. 14 It istherefore the respondent Tobias who has the burden of disproving the claim ofpetitioner that he has no knowledge of the accident when it made the offer torespondent either to pay the balance on the promissory note or to surrender thetruck. Respondent failed in this.

It is claimed by respondent Tobias that he has surrendered the truck to petitionerin his letter dated May 27, 1970. But the alleged surrender was ineffectual as faras the petitioner is concerned because petitioner could not take possession ofthe truck in question as it was in the custody of Leelin Motors, Inc., which had amechanic's lien over it. Even respondent Tobias cannot expect petitioner toaccept the term of surrender because aside from the fact that the truck beingsurrendered met an accident petitioner was not satisfied with the repair of thefinished portion of the truck in question. Petitioner therefore was justified refusingto accept such surrender and in bringing suit to recover the balance of thepurchase price.

IN VIEW OF THE FOREGOING, the judgment of the respondent Court of Appealsand of the lower court are hereby set aside and a new one rendered orderingrespondent Tobias to pay petitioner the balance of the purchase price of thetruck in question in the amount of P27,210.77 plus legal rate of interest from thetime of the filing of the complaint. Costs against the respondent.

SO ORDERED.

G.R. No. L-30583 October 23, 1982

EUTROPIO ZAYAS, JR., petitioner,vs.LUNETA MOTOR COMPANY and HONORABLE JUAN O. REYES, Presiding Judge ofthe Court of First Instance of Manila, Branch XXI, respondents.


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Pantaleon Z. Salcedo for petitioner.

Leandro B. Fernandez for respondents.

GUTIERREZ, JR., J.:

Eutropio Zayas, Jr., filed this petition for review by certiorari to secure a reversalof the respondent court's orders which remanded Civil Case No. 74381 forfurther proceedings instead of affirming the city court's order of dismissal,

The petitioner Eutropio Zayas, Jr, purchased on installment basis a motor vehicledescribed as ONE (1) UNIT FORD THAMES FREIGHTER W/PUJ BODY with EngineNo. 400E-127738 and Chassis No. 400E-127738 from Mr. Roque Escao of theEscao Enterprises in Cagayan de Oro City, dealer of respondent Luneta MotorCompany, under the following terms and conditions:

Sellingprice

P7,500.00

Financingcharge

P1,426.82

TotalSelling

Price

P8,926.82

Payableon Delivery

P1,006.82

Payable in24 monthsat 12%interest perannum

P7,920.00

The motor vehicle was delivered to the petitioner who 1) paid the initialpayment in the amount of P1,006.82; and 2) executed a promissory note in theamount of P7,920.00, the balance of the total selling price, in favor ofrespondent Luneta Motor Company. The promissory note stated the amountsand dates of payment of twenty-six installments covering the P7,920.00 debt.Simultaneously with the execution of the promissory note and to secure itspayment, the petitioner executed a chattel mortgage on the subject motor


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vehicle in favor of the respondent. After paying a total amount of P3,148.00, thepetitioner was unable to pay further monthly installments prompting therespondent Luneta Motor Company to extra-judicially foreclose the chattelmortgage (Annex "A" to Answer, Original Record, p. 10, supra ). The motorvehicle was sold at public auction with the respondent Luneta Motor Companyrepresented by Atty. Leandro B. Fernandez as the highest bidder in the amountof P5,000.00 (Annex "B" to Answer, Original Record, p. 11, supra ). Since thepayments made by petitioner Eutropio Zayas, Jr. plus the P5,000.00 realized fromthe foreclosure of the chattel mortgage could not cover the total amount of thepromissory note executed by the petitioner in favor of the respondent LunetaMotor Company, the latter filed Civil Case No. 165263 with the City Court ofManila for the recovery of the balance of P1,551.74 plus interests.

Luneta Motor Company alleged in its complaint that defendant Eutropio Zayas,Jr. executed a promissory note in the amount of P7,920.00 in its favor; that out of

the P7,920.00, Eutropio Zayas, Jr. had paid only P6,368.26 plus interest up to thedate of the sale at public auction of the motor vehicle; that the balance ofP1,551.74 plus interest of 12% thereon from that date had already become dueand payable but despite repeated demands to pay the same, Eutropio Zayas,Jr., refused and failed to pay.

In his answer with affirmative defenses and counterclaim, Eutropio Zayas, Jr.admitted having executed the promissory note for the monthly payments, on aFord Thames vehicle bearing Engine No. 400E-127738 which he purchased fromthe Luneta Motor Company but he denied his alleged outstanding liability ofP1,551.74 plus interest thereon ... the said obligation if there was any, hadalready been discharged either by payment or by sale in public auction of thesaid motor vehicle as evidenced by a Notice of Sale marked as Annex "A" andCertificate of Sale marked as Annex "B"; (Answer, p. 7, Original Record). Healleged as affirmative defenses, among others: 1) that the plaintiff has no causeof action against him; and 2) that pursuant to Article 1484 of the New Civil Codeand the case of Pacific Commercial Co. v. De La Rama, (72 Phil. 380) hisobligation per the promissory note was extinguished by the sale at publicauction of the motor vehicle, the subject of the chattel mortgage which wasexecuted by him in favor of the plaintiff as security for the payment of saidpromissory note. (Answer, p. 8, Original Record)

In its Reply, Luneta Motor Company denied the applicability of Article 1484 ofthe Civil Code ... for the simple reason that the contract involved between theparties is not one for a sale on installment" (Reply, p. 13, Original Record).

After several postponements, the case was set for hearing. As a result of thenon- appearance of the plaintiff and its counsel on the date set for hearing,defendant Zayas, Jr. moved to have the case dismissed for lack of interest on


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the part of the plaintiff. He also asked the court to allow him to discuss the meritsof his affirmative defense as if a motion to dismiss had been filed. The issueraised and argued by the defendant was whether or not a deficiency amountafter the motor vehicle, subject of the chattel mortgage, has been sold atpublic auction could still be recovered. Zayas cited the case of Ruperto Cruz v.Filipinas Investment (23 SCRA 791).

Acting on the motion, the city court issued an Order:

On Petition of counsel for the defendant for the dismissal of thiscase on the ground that the defendant is no longer liable for thedeficiency judgment inas much as the chattel mortgage has beenforeclosed, with the plaintiff as the highest bidder thereof, citing thecase of Ruperto G. Cruz v. Filipinas Investment decided on May 27,1968, G.R. No. L-24772 in connection with Article 1484 of the Civil

Code, and finding the same well taken.Let this case be dismissed without pronouncement as to costs.

Luneta Motor Company filed an "Urgent Motion for Reconsideration" reiteratingits stand that Article 1484 of the New Civil Code on sale of personal property byinstallment was not applicable and that the contract involving the parties was amere case of an ordinary loan secured by chattel mortgage. According to theplaintiff, the defendant executed the promissory note and chattel mortgage tosecure the plaintiff's interest for having financed the purchase of the motorvehicle by the defendant from the Escao Enterprises of Cagayan de Oro City,an entity entirely different and distinct from the plaintiff corporation (p. 33,Original Record).

The court denied the motion for reconsideration for lack of merit.

Luneta Motor Company appealed the case to the Court of First Instance ofManila where it was docketed as Civil Case No. 74381.

After various incidents, the respondent court issued an order which, in part,reads:

This is an appeal taken by plaintiff from the order of the City Courtof Manila, dismissing its complaint on the ground that thedefendant is no longer liable for the deficiency judgment inasmuchas the chattel mortgage has been foreclosed, with the plaintiff asthe highest bidder thereof, in line with the ruling of the SupremeCourt in the case of Ruperto G. Cruz v. Filipinas Investment (G.R. No.L24772) in connection with Article 1484 of the Civil Code.


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xxx xxx xxx

After going over the pleadings in this case, more particularly thecomplaint and the answer to the complaint filed with the City Courtof Manila, this Court is of the impression that the case at bar may

not be decided merely, as the City Court had done, on thequestion of law since the presentation of evidence is necessary toadjudicate the questions involved. WHEREFORE, this case is herebyremanded to the court of origin for further proceedings. (pp. 82-83,Original Record)

Hence, this petition.

Petitioner Eutropio Zayas, Jr. now maintains::

That Respondent Court of First Instance erred:

1. IN HOLDING THAT THE QUESTION OF LAW CANNOT BE DECIDEDSINCE PRESENTATION OF EVIDENCE IS NECESSARY- REGARDING THEQUESTION OF RECOVERY OF THE DEFICIENCY AMOUNT IN A CHATTEMORTGAGE AFTER SELLING IT IN A PUBLIC AUCTION;

2. IN ORDERING THE REMAND OF THE CASE TO THE CITY COURT FORFURTHER PROCEEDINGS TAKEN BY THE RESPONDENT FROM THE CITCOURT TO THE COURT OF FIRST INSTANCE, BRANCH XXI, MANILA; an

3. IN NOT DISMISSING THE APPEAL TAKEN BY THE PRIVATERESPONDENT FROM THE CITY COURT TO THE COURT OF FIRSTINSTANCE.

The main defense of respondent Luneta Motor Company is that EscanoEnterprises, Cagayan de Oro City from which petitioner Eutropio Zayas, Jr.purchased the subject motor vehicle was a distinct and different entity; that therole of Luneta Motor Company in the said transaction was only to finance thepurchase price of the motor vehicle; and that in order to protect its interest asregards the promissory note executed in its favor, a chattel mortgage coveringthe same motor vehicle was also executed by petitioner Eutropio Zayas, Jr. Inshort, respondent Luneta Motor Company maintains that the contract betweenthe company and the petitioner was only an ordinary loan removed from thecoverage of Article 1484 of the New Civil Code.

The respondent's arguments have no merit.


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The Escao Enterprises of Cagayan de Oro City was an agent of Luneta MotorCompany. A very significant evidence which proves the nature of therelationship between Luneta Motor Company and Escao Enterprises is Annex"A. of the petitioner's OPPOSITION TO URGENT MOTION FOR RECONSIDERATION.(Original Record, p. 36) Annex "A" is a Certification from the cashier of EscanoEnterprises on the monthly installments paid by Mr. Eutropio Zayas, Jr. In thecertification, the promissory note in favor of Luneta Motor Company wasspecifically mentioned. There was only one promissory note executed byEutropio Zayas, Jr. in connection with the purchase of the motor vehicle. Thepromissory note mentioned in the certification refers to the promissory noteexecuted by Eutropio Zayas, Jr. in favor of respondent Luneta Motor Company.Thus:

C E R T I F I C A T I O N

This is to certify that Mr. EUTROPIO ZAYAS, JR. has paid from us thefollowing, of his FORD THAMES BEARING Engine No. 400E-127738,promissory note dated October 6, 1966. Viz:

ES

.R

DATERECEIVED

A

UNT

U

BE

R09998

Octobe

P1,000


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r5,1966

.00

10064

October2

0,1966

242.00

10188

November8,1966

166.00

10355

December1

400.00


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2,1966

L

.R.

40031

January19,1

967

270.00

10536

Febr uary1,1967

60.00

10645

Febr uary27,

100.00


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1967

10704

Mar ch13,196

7

100.00

10749

Mar ch22,1967

60.00

10132

Mar ch30,1967

100.00

107

April

100


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88

8,1967

.00

10795

April11,1967

100.00

10827

April18,1967

100.00

10934

May10,1967

100.00

10991

May26,196

100.00


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7

11105

June19,1967

150.00

P3,148.00

ESCAO ENTERPRISES

(SGD.) EMELITA H. BACULIO

Escano Enterprises, a dealer of respondent Luneta Motor Company, was merelya collecting-agent as far as the purchase of the subject motor vehicle was

concerned. The principal and agent relationship is clear.But even assuming that the "distinct and independent entity" theory of theprivate respondent is valid, the nature of the transaction as a sale of personalproperty on installment basis remains. When, therefore, Escao Enterprises,assigned its rights vis-a-vis the sale to respondent Luneta Motor Company, thenature of the transaction involving Escano Enterprises and Eutropio Zayas, Jr. didnot change at all. As assignee, respondent Luneta Motor Company had no


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better rights than assignor Escao Enterprises under the same transaction. Thetransaction would still be a sale of personal property in installments covered byArticle 1484 of the New Civil Code. To rule otherwise would pave the way forsubverting the policy underlying Article 1484 of the New Civil Code, on theforeclosure of chattel mortgages over personal property sold on installmentbasis.

ART. 1484. In a contract of sale of personal property the price ofwhich is payable in installments, the vendor may exercise any of thefollowing remedies:

xxx xxx xxx

xxx xxx xxx

(3) Foreclose the chattel ;mortgage on the thing sold, if one hasbeen constituted, should the vendee's failure to pay cover two ormore installments. In this case, he shall have no further actionagainst the purchaser to recover any unpaid balance of the price.Any agreement to the contrary shall be void.

xxx xxx xxx

... the established rule is to the effect that the foreclosure and actual sale of amortgaged chattel bars further recovery by the vendor of any balance on thepurchaser's outstanding obligation not so satisfied by the sale. And the reason

for this doctrine was aptly stated in the case of Bachrach Motor Co. vs. Millan, supra , thus:

Undoubtedly the principal object of the aboveamendment was to remedy the abuses committed inconnection with the foreclosure of chattel mortgages.This amendment prevents mortgagees from seizing themortgaged property, buying it at foreclosure sale for alow price and then bringing suit against the mortgagorfor a deficiency judgment. The almost invariable result

of this procedure was that the mortgagor found himselfminus the property and still owing practically the fullamount of his original indebtedness. Under thisamendment the vendor of personal property, thepurchase price of which is payable in installments, hasthe right to cancel the sale or foreclose the mortgage ifone has been given on the property. Whichever rightthe vendor elects he need not return to the purchaser


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the amount of the installments already paid, "if therebe an agreement to that effect". Furthermore, if thevendor avails himself of the right to foreclose themortgage this amendment prohibits him from bringingan action against the purchaser for the unpaidbalance. ( Cruz v. Filipinas Investment & FinanceCorporation , 23 SCRA 791)

Our findings and conclusions are borne out by the records available to therespondent court. There was no necessity for the remand of records to the citycourt for the presentation of evidence on the issue raised in the case.

WHEREFORE, the instant petition is hereby granted. The orders remanding thecase to the court of origin and denying the motion for reconsideration of theCourt of First Instance of Manila, Branch XXI issued in Civil Case No. 74381 are

annulled. Accordingly, the Court of First Instance of Manila, Branch XXI isdirected to dismiss the appeal in Civil Case No. 74381. The Order of the CityCourt of Manila dismissing the complaint in Civil Case No. 165263 is affirmed.

SO ORDERED.

G.R. No. L-39806 January 27, 1983

LUIS RIDAD and LOURDES RIDAD, plaintiffs-appellees,vs.FILIPINAS INVESTMENT and FINANCE CORPORATION, JOSE D. SEBASTIAN and JOSE

SAN AGUSTIN, in his capacity as Sheriff, defendants-appellants.

Osmundo Victoriano for plaintiffs-appellees.

Wilhelmina V. Joven for defendant-appellants.

DE CASTRO, J:

Appeal from the decision of the Court of First Instance of Rizal, Branch I, in CivilCase No. 9140 for annulment of contract, originally filed with the Court ofAppeals but was subsequently certified to this Court pursuant to Section 3 ofRule 50 of the Rules of Court, there being no issue of fact involved in this appeal.

The materials facts of the case appearing on record may be stated as follows:On April 14, 1964, plaintiffs purchased from the Supreme Sales arid DevelopmentCorporation two (2) brand new Ford Consul Sedans complete with accessories,


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for P26,887 payable in 24 monthly installments. To secure payment thereof,plaintiffs executed on the same date a promissory note covering the purchaseprice and a deed of chattel mortgage not only on the two vehicles purchasedbut also on another car (Chevrolet) and plaintiffs' franchise or certificate ofpublic convenience granted by the defunct Public Service Commission for theoperation of a taxi fleet. Then, with the conformity of the plaintiffs, the vendorassigned its rights, title and interest to the above-mentioned promissory note andchattel mortgage to defendant Filipinas Investment and Finance Corporation.

Due to the failure of the plaintiffs to pay their monthly installments as perpromissory note, the defendant corporation foreclosed the chattel mortgageextra-judicially, and at the public auction sale of the two Ford Consul cars, ofwhich the plaintiffs were not notified, the defendant corporation was the highestbidder 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 aforesaidvehicles, and at the public auction sale, the franchise of plaintiffs to operate fiveunits of taxicab service was sold for P8,000 to the highest bidder, hereindefendant corporation, which subsequently sold and conveyed the same toherein defendant Jose D. Sebastian, who then filed with the Public ServiceCommission an application for approval of said sale in his favor.

On February 21, 1966, plaintiffs filed an action for annulment of contract beforethe Court of First Instance of Rizal, Branch I, with Filipinas Investment and FinanceCorporation, Jose D. Sebastian and Sheriff Jose San Agustin, as party-defendants. By agreement of the parties, the case was submitted for decision inthe lower court on the basis of the documentary evidence adduced by theparties during the pre-trial conference. Thereafter, the lower court rendered judgment as follows:

IN VIEW OF THE ABOVE CONSIDERATIONS, this Court declares thechattel mortgage, Exhibit "C", to be null and void in so far as thetaxicab franchise and the used Chevrolet car of plaintiffs areconcerned, and the sale at public auction conducted by the CitySheriff of Manila concerning said taxicab franchise, to be of nolegal effect. 1wph1.t The certificate of sale issued by the City

Sheriff of Manila in favor of Filipinas Investment and FinanceCorporation concerning plaintiffs' taxicab franchise for P8,000 isaccordingly cancelled and set aside, and the assignment thereofmade by Filipinas Investment in favor of defendant Jose Sebastian isdeclared void and of no legal effect. (Record on Appeal, p. 128).


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From the foregoing judgment, defendants appealed to the Court of Appealswhich, as earlier stated, certified the appeal to this Court, appellants imputing tothe lower court five alleged errors, as follows:

I

THE LOWER COURT ERRED IN DECLARING THE CHATTEL MORTGAGEEXHIBIT "C", NULL AND VOID.

II

THE LOWER COURT ERRED IN HOLDING THAT THE SALE AT PUBLICAUCTION CONDUCTED BY THE CITY SHERIFF OF MANILACONCERNING THE TAXICAB FRANCHISE IS OF NO LEGAL EFFECT.

III

THE LOWER COURT ERRED IN SETTING ASIDE THE CERTIFICATE OF SISSUED BY THE CITY SHERIFF OF MANILA IN FAVOR OF FILIPINASINVESTMENT AND FINANCE CORPORATION COVERING PLAINTIFFS'TAXICAB FRANCHISE.

IV

THE LOWER COURT ERRED IN DECLARING VOID AND OF NO LEGALEFFECT THE ASSIGNMENT OF THE TAXICAB FRANCHISE MADE BY

FILIPINAS INVESTMENT AND FINANCE CORPORATION IN FAVOR OFDEFENDANT.

V

THE LOWER COURT (sic) IN NOT DECIDING THE CASE IN FAVOR OFTHE DEFENDANTS. Appellants' Brief, pp. 9 & 10)

From the aforequoted assignment of errors, the decisive issue for consideration isthe validity of the chattel mortgage in so far as the franchise and thesubsequent sale thereof are concerned.

The resolution of said issue is unquestionably governed by the provisions ofArticle 1484 of the Civil Code which states:

Art. 1484. In a contract of sale of personal property the price ofwhich is payable in installments, the vendor may exercise y of thefollowing remedies:


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(1) Exact fulfillment of the obligation, should the vendee fail to pay;

(2) Cancel the sale, should the vendee's failure to pay cover two ormore installments;

(3) Foreclose the chattel mortgage on the thing sold, if one hasbeen constituted, should the vendee's failure to pay cover two ormore installments. In this case, he shall have no further actionagainst the purchaser to recover any unpaid balance of the price.Any agreement to the contrary shall be void.

Under the above-quoted article of the Civil Code, the vendor of personalproperty 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 agreedinstallments, to exact fulfillment by the purchaser of the obligation, or to cancelthe sale, or to foreclose the mortgage on the purchased personal property, ifone was constituted. 1 Whichever right the vendor elects, he cannot avail of theother, these remedies being alternative, not cumulative. 2 Furthermore, if thevendor avails himself of the right to foreclose his mortgage, the law prohibits himfrom further bringing an action against the vendee for the purpose ofrecovering whatever balance of the debt secured not satisfied by theforeclosure sale. 3 The precise purpose of the law is to prevent mortgagees fromseizing the mortgaged property, buying it at foreclosure sale for a low price andthen bringing suit against the mortgagor for a deficiency judgment, otherwise,the mortgagor-buyer would find himself without the property and still owingpractically the full amount of his original indebtedness. 4

In the instant case, defendant corporation elected to foreclose its mortgageupon default by the plaintiffs in the payment of the agreed installments. Havingchosen to foreclose the chattel mortgage, and bought the purchased vehiclesat the public auction as the highest bidder, it submitted itself to theconsequences of the law as specifically mentioned, by which it is deemed tohave renounced any and all rights which it might otherwise have under thepromissory note and the chattel mortgage as well as the payment of the unpaidbalance.

Consequently, the lower court rightly declared the nullity of the chattelmortgage in question in so far as the taxicab franchise and the used Chevroletcar of plaintiffs are concerned, under the authority of the ruling in the case ofLevy Hermanos, Inc. vs. Pacific Commercial Co., et al., 71 Phil. 587, the facts ofwhich are similar to those in the case at bar. There, we have the same situationwherein the vendees offered as security for the payment of the purchase pricenot only the motor vehicles which were bought on installment, but also aresidential lot and a house of strong materials. This Court sustained the


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pronouncement made by the lower court on the nullity of the mortgage in so faras 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 himselfwith the proceeds of the sale at the public auction of the chattels which weresold on installment and mortgaged to him and having chosen the remedy offoreclosure, he cannot nor should he be allowed to insist on the sale of thehouse and lot of the vendees, for to do so would be equivalent to obtaining awrit of execution against them concerning other properties which are separateand distinct from those which were sold on installment. This would indeed becontrary to public policy and the very spirit and purpose of the law, limiting thevendor's right to foreclose the chattel mortgage only on the thing sold.

In the case of Cruz v. Filipinos Investment & Finance Corporation, 23 SCRA 791,this Court ruled that the vendor of personal property sold on the installment basisis precluded, after foreclosing the chattel mortgage on the thing sold from

having a recourse against the additional security put up by a third party toguarantee the purchaser's performance of his obligation on the theory that tosustain the same would overlook the fact that if the guarantor should becompelled to pay the balance of the purchase price, said guarantor will in turnbe entitled to recover what he has paid from the debtor-vendee, and ultimatelyit will be the latter who will be made to bear the payment of the of the balanceof the price, despite the earlier foreclosure of the chattel mortgage given byhim, thereby indirectly subverting the protection given the latter. Consequently,the additional mortgage was ordered cancelled. Said ruling was reiterated inthe case of Pascual v. Universal Motors Corporation, 61 SCRA 121. If the vendorunder such circumstance is prohibited from having a recourse against theadditional security for reasons therein stated, there is no ground why suchvendor should not likewise be precluded from further extrajudicially foreclosingthe 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 theCivil Code, for then is actually no between an additional security put up by thevendee himself and such security put up by a third party insofar as how theburden would ultimately fall on the vendee himself is concerned.

Reliance on the ruling in Southern Motors, inc. v. Moscoso, 2 SCRA 168, that insales on installments, where the action instituted is for and the mortgaged

property is subsequently attached and sold, the sales thereof does not amountto a foreclosure of the mortgage, hence, the seller creditor is entitled to adeficiency judgment, does not for the stand of the appellants for that case isentirely different from the case at bar. In that case, the vendor has availed ofthe first remedy provided by Article 1484 of the Civil Code, i.e., to exactfulfillment of the obligation whereas in the present case, the remedy availed ofwas foreclosure of the chattel mortgage.


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The foregoing disposition renders superfluous a determination of the other issueraised by the parties as to the validity of the auction sale, in so far as thefranchise of plaintiffs is concerned, which sale had been admittedly heldwithout any notice to the plaintiffs.

IN VIEW HEREOF, the judgment appealed from is hereby affirmed, with costsagainst the appellants.

SO ORDERED.

Makasiar (Chairman), Aquino, Concepcion, Jr., Guerrero, Abad Santos andEscolin, JJ., concur.

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Mortgage Cases