054. Acme Shoe, Rubber & Plastic Corp. v.

CA
August 22, 1996
Vitug, J.
Topic: Certain Financial Transactions and Documents; Security Devices and Other Credit
Supports/Enhancements; Certain Issues: Validity of after-acquired property and after-incurredobligation clauses in a chattel mortgage
SV: President of Acme Shoe executed a 1978 chattel mortgage in favor of Producers Bank as security for
corporate loan of P3M. The mortgage agreement included a clause that extends its coverage to
obligations yet to be contracted or incurred is valid. The P3M loan was paid fully. Acme Shoe loaned
again P2.7M, which was also paid on time. In 1984, a third loan was made by Acme Shoe from Producers
Bank for P1M, which was not fully paid, therefore the bank proceeded to foreclose the 1978 chattel
mortgage. RTC and CA ordered the foreclosure of the mortgage. Petitioner now assails the validity of the
mortgage agreement clause. HELD: A chattel mortgage can only cover obligations existing at the time
the mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are
yet to be contracted can be a binding commitment that can be compelled upon, the security itself does not
come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt
is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably
with the form prescribed by the Chattel Mortgage Law. Since the 1978 chattel mortgage had ceased to
exist coincidentally with the full payment of the P3M loan, there no longer was any chattel mortgage that
could cover the new loans that were concluded thereafter.
PETITIONERS: Acme Shoe, Rubber & Plastic Corp and Chua Pac
DEFENDANT-APPELLEES: Producers Bank of the Philippines and Regional Sheriff of Caloocan City
FACTS:
Chua Pac, the president and general manager of Acme Shoe executed on 27 June 1978, for and in behalf
of the company, a chattel mortgage in favor of Producers Bank of the Philippines (BANK). The mortgage
stood by way of security for Acme Shoe's corporate loan of P3M. A provision in the chattel mortgage
agreement was to this effect

(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform the full
obligation or obligations above-stated according to the terms thereof, then this mortgage shall be null
and void. . . .

In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the
former note, as an extension thereof, or as a new loan, or is given any other kind of accommodations
such as overdrafts, letters of credit, acceptances and bills of exchange, releases of import shipments
on Trust Receipts, etc., this mortgage shall also stand as security for the payment of the said
promissory note or notes and/or accommodations without the necessity of executing a new
contract and this mortgage shall have the same force and effect as if the said promissory note or
notes and/or accommodations were existing on the date thereof. This mortgage shall also stand as
security for said obligations and any and all other obligations of the MORTGAGOR to the
MORTGAGEE of whatever kind and nature, whether such obligations have been contracted
before, during or after the constitution of this mortgage.

The P3M loan was paid. In 1981, Acme Shoe obtained another loan of P2.7M, also subsequently fully
paid.

In 1984, Acme Show again obtained a P1M loan from the BANK, covered by 4 promissory notes for
P250k each. Due to financial constraints, the loan was not settled at maturity. The bank thereupon applied
for an extra judicial foreclosure of the chattel mortgage with the Sheriff of Caloocan City, prompting Acme
Shoe to file an action for injunction, with damages and a prayer for a writ of preliminary injunction

RTC: Dismissed the complaint and ordered the foreclosure of the chattel mortgage. Acme Show is bound
by the stipulations of the chattel mortgage.

CA: Affirmed RTC decision.

Acme Shoe filed the instant Petition for Review, asking whether the clause in a chattel mortgage that
extends its coverage to obligations yet to be contracted or incurred is valid.
ISSUE: Would it be valid and effective to have a clause in a chattel mortgage that purports to
likewise extend its coverage to obligations yet to be contracted or incurred? NO.
SC: While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred
obligations so long as these future debts are accurately described, a chattel mortgage, however, can
only cover obligations existing at the time the mortgage is constituted. Although
a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding
commitment that can be compelled upon, the security itself does not come into existence or arise
until after a chattel mortgage agreement covering the newly contracted debt is executed either by
concluding a fresh chattel mortgage or by amending the old contract conformably with the form
prescribed by the Chattel Mortgage Law.
A chattel mortgage must comply substantially with the form prescribed by the Chattel Mortgage Law.
Section 5 of said law provides that the parties to the contract must execute an oath that
. . . (the) mortgage is made for the purpose of securing the obligation specified in
the conditions thereof, and for no other purpose, and that the same is a just and valid
obligation, and one not entered into for the purpose of fraud.
makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely
contemplated.

In the chattel mortgage here involved, the only obligation specified in the chattel mortgage contract was
the P3M loan which Acme Shoe later fully paid. By virtue of Section 3 1 of the Chattel Mortgage Law, the
payment of the obligation automatically rendered the chattel mortgage void or terminated.

In Belgian Catholic Missionaries vs. Magallanes Press, the SC held that a mortgage that contains a
stipulation in regard to future advances in the credit will take effect only from the date the same are made
and not from the date of the mortgage.

1 Sec. 3. Chattel mortgage defined. A chattel mortgage is a conditional sale of personal property as security for the payment of a
debt, or the performance of some other obligation specified therein, the condition being that the sale shall be void upon the seller
paying to the purchaser a sum of money or doing some other act named. If the condition is performed according to its terms the
mortgage and sale immediately become void, and the mortgagee is thereby divested of his title.

Since the 1978 chattel mortgage had ceased to exist coincidentally with the full payment of the P3M loan,
there no longer was any chattel mortgage that could cover the new loans that were concluded thereafter.
DISPOSITIVE: CA and RTC decisions set aside without prejudice to the appropriate legal recourse by
Producers Bank as may still be warranted as an unsecured creditor.
Digest by: Agee Romero