SECOND DIVISION

MAGNA FINANCIAL G.R. No. 158635

SERVICES GROUP, INC.,
Petitioner, Present:

PUNO,
Chairman,
AUSTRIA-MARTINEZ,
- versus - CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ.

Promulgated:
ELIAS COLARINA,
R e s p o n d e n t. December 9, 2005
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

The undisputed facts of this case show that on 11 June 1997, Elias Colarina bought
on installment from Magna Financial Services Group, Inc., one (1) unit of Suzuki
Multicab, more particularly described as follows:

MAKE - SUZUKI MULTICAB

MODEL - ER HT
ENGINE NO. - 834963
FRAME NO. - LTO -067886-RO7-C
COLOR - WHITE[1]
After making a down payment, Colarina executed a promissory note for the
balance of P229,284.00 payable in thirty-six (36) equal monthly installments
at P6,369.00 monthly, beginning 18 July 1997. To secure payment thereof,
Colarina executed an integrated promissory note and deed of chattel mortgage over
the motor vehicle.

Colarina failed to pay the monthly amortization beginning January 1999,

accumulating an unpaid balance of P131,607.00. Despite repeated demands, he
failed to make the necessary payment. On 31 October 2000 Magna Financial
Services Group, Inc. filed a Complaint for Foreclosure of Chattel Mortgage with
Replevin[2] before the Municipal Trial Court in Cities (MTCC), Branch 2, Legaspi
City, docketed as Civil Case No. 4822.[3] Upon the filing of a Replevin Bond, a
Writ of Replevin was issued by the MTCC. On 27 December 2000, summons,
together with a copy of the Writ of Replevin, was served on Colarina who
voluntarily surrendered physical possession of the vehicle to the Sheriff, Mr.
Antonio Lozano. On 02 January 2001, the aforesaid motor vehicle was turned over
by the sheriff to Magna Financial Services Group, Inc.[4] On 12 July 2001, Colarina
was declared in default for having filed his answer after more than six (6) months
from the service of summons upon him. Thereupon, the trial court rendered
judgment based on the facts alleged in the Complaint. In a decision dated 23 July
2001, it held:[5]

WHEREFORE, judgment is hereby rendered in favor of plaintiff Magna

Financial Services Group, Inc. and against the defendant Elias Colarina,
ordering the latter:

a) to pay plaintiff the principal sum of one hundred thirty one

thousand six hundred seven (P131,607.00) pesos plus
 penalty charges at 4.5% per month computed from
January, 1999 until fully paid;

b) to pay plaintiff P10,000.00 for attorneys fees; and

c) to pay the costs.

The foregoing money judgment shall be paid within ninety (90) days from
the entry of judgment. In case of default in such payment, the one (1) unit
of Suzuki Multicab, subject of the writ of replevin and chattel mortgage,
shall be sold at public auction to satisfy the said judgment.[6]

Colarina appealed to the Regional Trial Court (RTC) of Legazpi City, Branch 4,
where the case was docketed as Civil Case No. 10013. During the pendency of his
appeal before the RTC, Colarina died and was substituted in the case by his
heirs.[7] In a decision dated 30 January 2002, the RTC affirmed in toto the decision
of the MTCC.[8]

Colarina filed a Petition for Review before the Court of Appeals, docketed as CA-
G.R. SP No. 69481. On 21 January 2003, the Court of Appeals rendered its
decision[9] holding:

. . . We find merit in petitioners assertion that the MTC and the RTC erred
in ordering the defendant to pay the unpaid balance of the purchase price of
the subject vehicle irrespective of the fact that the instant complaint was for
the foreclosure of its chattel mortgage. The principal error committed by
the said courts was their immediate grant, however erroneous, of relief in
favor of the respondent for the payment of the unpaid balance without
considering the fact that the very prayer it had sought was inconsistent with
its allegation in the complaint.

Verily, it is beyond cavil that the complaint seeks the judicial foreclosure of
the chattel mortgage. The fact that the respondent had unconscionably
sought the payment of the unpaid balance regardless of its complaint for the
foreclosure of the said mortgage is glaring proof that it intentionally
 devised the same to deprive the defendant of his rights. A judgment in its
favor will in effect allow it to retain the possession and ownership of the
subject vehicle and at the same time claim against the defendant for the
unpaid balance of its purchase price. In such a case, the respondent would
luckily have its cake and eat it too. Unfortunately for the defendant, the
lower courts had readily, probably unwittingly, made themselves abettors to
respondents devise to the detriment of the defendant.

...

WHEREFORE, finding error in the assailed decision, the instant petition is

hereby GRANTED and the assailed decision is hereby REVERSED AND
SET ASIDE. Let the records be remanded to the court of origin.
Accordingly, the foreclosure of the chattel mortgage over the subject
vehicle as prayed for by the respondent in its complaint without any right to
seek the payment of the unpaid balance of the purchase price or any
deficiency judgment against the petitioners pursuant to Article 1484 of the
Civil Code of the Philippines, is hereby ORDERED.[10]

A Motion for Reconsideration dated 11 February 2003[11] filed by Magna Financial

Services Group, Inc., was denied by the Court of Appeals in a resolution dated 22
May 2003.[12] Hence, this Petition for Review on Certiorari based on the sole
issue:

WHAT IS THE TRUE NATURE OF A FORECLOSURE OF CHATTEL

MORTGAGE, EXTRAJUDICIAL OR JUDICIAL, AS AN EXERCISE OF
THE 3RD OPTION UNDER ARTICLE 1484, PARAGRAPH 3 OF THE
CIVIL CODE.

In its Memorandum, petitioner assails the decision of the Court of Appeals and
asserts that a mortgage is only an accessory obligation, the principal one being the
undertaking to pay the amounts scheduled in the promissory note. To secure the
payment of the note, a chattel mortgage is constituted on the thing sold. It argues
that an action for foreclosure of mortgage is actually in the nature of an action for
sum of money instituted to enforce the payment of the promissory note, with
execution of the security. In case of an extrajudicial foreclosure of chattel
mortgage, the petition must state the amount due on the obligation and the sheriff,
after the sale, shall apply the proceeds to the unpaid debt. This, according to
petitioner, is the true nature of a foreclosure proceeding as provided under Rule 68,
Section 2 of the Rules of Court.[13]

On the other hand, respondent countered that the Court of Appeals correctly set
aside the trial courts decision due to the inconsistency of the remedies or reliefs
sought by the petitioner in its Complaint where it prayed for the custody of the
chattel mortgage and at the same time asked for the payment of the unpaid balance
on the motor vehicle.[14]

Article 1484 of the Civil Code explicitly provides:

ART. 1484. In a contract of sale of personal property the price of which is

payable in installments, the vendor may exercise any of the following
remedies:

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

(2) Cancel the sale, should the vendees failure to pay cover two or more
installments;

(3) Foreclose the chattel mortgage or the thing sold, if one has been
constituted, should the vendees failure to pay cover two or more
installments. In this case, he shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to the
contrary shall be void.
Our Supreme Court in Bachrach Motor Co., Inc. v. Millan[15] held: Undoubtedly
the principal object of the above amendment (referring to Act 4122 amending Art.
1454, Civil Code of 1889) was to remedy the abuses committed in connection with
the foreclosure of chattel mortgages. This amendment prevents mortgagees from
seizing the mortgaged property, buying it at foreclosure sale for a low price and
then bringing the suit against the mortgagor for a deficiency judgment. The almost
invariable result of this procedure was that the mortgagor found himself minus the
property and still owing practically the full amount of his original indebtedness.

In its Complaint, Magna Financial Services Group, Inc. made the following prayer:

WHEREFORE, it is respectfully prayed that judgment render ordering

defendant:

1. To pay the principal sum of P131,607.00 with penalty charges at 4.5%

per month from January 1999 until paid plus liquidated damages.

2. Ordering defendant to reimburse the plaintiff for attorneys fee at 25% of

the amount due plus expenses of litigation at not less than P10,000.00.

3. Ordering defendant to surrender to the plaintiff the possession of the

Multicab described in paragraph 2 of the complaint.

4. Plaintiff prays for other reliefs just and equitable in the premises.

It is further prayed that pendent lite, an Order of Replevin issue

commanding the Provincial Sheriff at Legazpi City or any of his deputies to
take such multicab into his custody and, after judgment, upon default in the
payment of the amount adjudged due to the plaintiff, to sell said chattel at
public auction in accordance with the chattel mortgage law.[16]
In its Memorandum before us, petitioner resolutely declared that it has opted for
the remedy provided under Article 1484(3) of the Civil Code,[17] that is,
to foreclose the chattel mortgage.

It is, however, unmistakable from the Complaint that petitioner preferred to avail
itself of the first and third remedies under Article 1484, at the same time suing for
replevin. For this reason, the Court of Appeals justifiably set aside the decision of
the RTC. Perusing the Complaint, the petitioner, under its prayer number 1, sought
for the payment of the unpaid amortizations which is a remedy that is provided
under Article 1484(1) of the Civil Code, allowing an unpaid vendee to exact
fulfillment of the obligation. At the same time, petitioner prayed that Colarina be
ordered to surrender possession of the vehicle so that it may ultimately be sold at
public auction, which remedy is contained under Article 1484(3). Such a scheme is
not only irregular but is a flagrant circumvention of the prohibition of the law. By
praying for the foreclosure of the chattel, Magna Financial Services Group, Inc.
renounced whatever claim it may have under the promissory note.[18]

Article 1484, paragraph 3, provides that if the vendor has availed himself of the
right to foreclose the chattel mortgage, he shall have no further action against the
purchaser to recover any unpaid balance of the purchase price. Any agreement to
the contrary shall be void. In other words, in all proceedings for the foreclosure of
chattel mortgages executed on chattels which have been sold on the installment
plan, the mortgagee is limited to the property included in the mortgage.[19]

Contrary to petitioners claim, a contract of chattel mortgage, which is the

transaction involved in the present case, is in the nature of a conditional sale of
personal property given as a security for the payment of a debt, or the performance
of some other obligation specified therein, the condition being that the sale shall be
void upon the seller paying to the purchaser a sum of money or doing some other
act named.[20] If the condition is performed according to its terms, the mortgage
and sale immediately become void, and the mortgagee is thereby divested of his
title.[21] On the other hand, in case of non payment, foreclosure is one of the
remedies available to a mortgagee by which he subjects the mortgaged property to
the satisfaction of the obligation to secure that for which the mortgage was given.
Foreclosure may be effected either judicially or extrajudicially, that is, by ordinary
action or by foreclosure under power of sale contained in the mortgage. It may be
effected by the usual methods, including sale of goods at public
auction.[22] Extrajudicial foreclosure, as chosen by the petitioner, is attained by
causing the mortgaged property to be seized by the sheriff, as agent of the
mortgagee, and have it sold at public auction in the manner prescribed by Section
14 of Act No. 1508, or the Chattel Mortgage Law.[23] This rule governs
extrajudicial foreclosure of chattel mortgage.
In sum, since the petitioner has undeniably elected a remedy of foreclosure under
Article 1484(3) of the Civil Code, it is bound by its election and thus may not be
allowed to change what it has opted for nor to ask for more. On this point, the
Court of Appeals correctly set aside the trial courts decision and instead rendered a
judgment of foreclosure as prayed for by the petitioner.

The next issue of consequence is whether or not there has been an actual
foreclosure of the subject vehicle.

In the case at bar, there is no dispute that the subject vehicle is already in the
possession of the petitioner, Magna Financial Services Group, Inc. However,
actual foreclosure has not been pursued, commenced or concluded by it.
Where the mortgagee elects a remedy of foreclosure, the law requires the actual
foreclosure of the mortgaged chattel. Thus, in Manila Motor Co. v.
Fernandez,[24] our Supreme Court said that it is actual sale of the mortgaged chattel
in accordance with Sec. 14 of Act No. 1508 that would bar the creditor (who
chooses to foreclose) from recovering any unpaid balance.[25] And it is deemed that
there has been foreclosure of the mortgage when all the proceedings of the
foreclosure, including the sale of the property at public auction, have been
accomplished.[26]

That there should be actual foreclosure of the mortgaged vehicle was reiterated in
the case of De la Cruz v. Asian Consumer and Industrial Finance Corporation:[27]

It is thus clear that while ASIAN eventually succeeded in taking possession

of the mortgaged vehicle, it did not pursue the foreclosure of the mortgage
as shown by the fact that no auction sale of the vehicle was ever conducted.
As we ruled in Filinvest Credit Corp. v. Phil. Acetylene Co., Inc. (G.R. No.
50449, 30 January 1982, 111 SCRA 421)

Under the law, the delivery of possession of the mortgaged property to the
mortgagee, the herein appellee, can only operate to extinguish appellants
liability if the appellee had actually caused the foreclosure sale of the
mortgaged property when it recovered possession thereof (Northern
Motors, Inc. v. Sapinoso, 33 SCRA 356 [1970]; Universal Motors Corp. v.
Dy Hian Tat, 28 SCRA 161 [1969]; Manila Motors Co., Inc. v. Fernandez,
99 Phil. 782 [1956]).

Be that as it may, although no actual foreclosure as contemplated under the law has
taken place in this case, since the vehicle is already in the possession of Magna
Financial Services Group, Inc. and it has persistently and consistently avowed that
it elects the remedy of foreclosure, the Court of Appeals, thus, ruled correctly in
directing the foreclosure of the said vehicle without more.

WHEREFORE, premises considered, the instant petition is DENIED for lack of

merit and the decision of the Court of Appeals dated 21 January 2003 is
AFFIRMED. Costs against petitioner.

SO ORDERED.

MINITA V. CHICO-NAZARIO
Associate Justice

WE CONCUR:

REYNATO S. PUNO
Associate Justice
Chairman

MA. ALICIA AUSTRIA-MARTINEZ ROMEO J. CALLEJO, SR.

Associate Justice Associate Justice

DANTE O. TINGA
Associate Justice

ATTESTATION
I attest that the conclusions in the above Decision were reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
Associate Justice
Chairman, Second Division

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, and the Division

Chairmans Attestation, it is hereby certified that the conclusions in the above
Decision were reached in consultation before the case was assigned to the writer of
the opinion of the Courts Division.

HILARIO G. DAVIDE, JR.

Chief Justice

[1]
Rollo, p. 50.
[2]
Annex A, CA Rollo, p. 23.
[3]
Annex I, Rollo, p. 50.
[4]
CA Rollo, p. 39.
[5]
CA Rollo, pp. 40-41.
[6]
CA Rollo, p. 41.
[7]
CA Rollo, p. 15.
[8]
Annex H, CA Rollo, pp. 43-47.
[9]
Penned by Associate Justice Josefina GuevaraSalonga with Associate Justices Marina L. Buzon and Danilo B.
Pine, concurring; CA Rollo, pp. 66-73.
[10]
CA Rollo, pp. 71-73.
[11]
Rollo, pp. 27-30.
[12]
Rollo, p. 39.

[13]
Memorandum for the Petitioner, p. 3; Rollo, p. 87.
Rule 68, Section 2 of the Revised Rules of Court on Foreclosure of Real Estate Mortgage provides:
SEC. 2. Judgment on foreclosure for payment or sale. If upon the trial in such action the court shall find the facts set
forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or
obligation, including interest and other charges as approved by the court, and costs, and shall render
judgment for the sum so found due and order that the same be paid to the court or to the judgment obligee
within a period of not less than ninety (90) days nor more than one hundred twenty (120) days from the
entry of judgment, and that in default of such payment the property shall be sold at public auction to satisfy
the judgment.
[14]
Rejoinder, Rollo, p. 95.
[15]
61 Phil. 409, 415 (1935).
[16]
CA Rollo, pp. 24-25.
[17]
Rollo, p. 88.
[18]
Luneta Motor Co. v. Dimagiba, 113 Phil. 864 (1961).
[19]
Macondray and Co., Inc. v. Benito, et al., 62 Phil. 137, 142 (1935).
[20]
Act No. 1508 - An Act providing for the Mortgaging of personal property and for the registration of the
mortgages so executed.
Section 3. A chattel mortgage is a conditional sale of personal property as security for the payment of a debt, or the
performance of some other obligation specified therein, the condition being that the sale shall be void upon
the sellers 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.
[21]
Bachrach Motor Co. v. Summers, 42 Phil. 3 (1921).
[22]
59 C.J.S. 482 cited in De Leon Credit Transaction, 1995 Ed., p. 384.
[23]
Bataan Hardwood Corporation v. Dy Pac and Co., G.R. No. L- 29492, 29 February 1972, 43 SCRA 450.
Section 14, Act No. 1508 of the Chattel Mortgage Law provides:

SEC. 14 The mortgagee, his executor, administrator, or assign, may, after thirty days from the time of condition
broken, cause the mortgaged property, or any part thereof, to be sold at public auction by a public officer at
a public place in the municipality where the mortgagor resides, or where the property is situated, provided
at least ten days notice of the time, place, and purpose of such sale has been posted at two or more public
places in such municipality, and the mortgagee, his executor, administrator, or assign, shall notify the
mortgagor or person holding under him and the persons holding subsequent mortgages of the time and
place of sale, either by notice in writing directed to him or left at his abode, if within the municipality, or
sent by mail if he does not reside in such municipality, at least ten days previous to the sale.
[24]
99 Phil. 782, 786 (1956).
[25]
Pacific Commercial Co. v. De la Rama, 72 Phil. 380 (1941).
[26]
Macondray & Co., Inc. v. Tan, 38 O.G. 2606; see also Radiowealth, Inc. v. Lavin, L-18563, 27 April 1963, 7
SCRA 804; Vda. De Quiambao, et al. v. Manila Motor Co., Inc., G.R. No. L-17334, 31 October 1961, 3
SCRA 444, 448-449.
[27]
G.R. No. 94828, 18 September 1992, 214 SCRA 103, 107.