CREDIT TRANSACTIONS
Case Assignment No. 4
Provisions Common to Pledge and Mortgage
1. Guillermo Adriano vs. Romulo Pangilinan
G.R. No. 137471, January 16, 2002
Facts: Guillermo Adriano is the registered owner of a parcel of land, he
entrusted the TCT of his land to Angelina Salvador, a distant relative for
purpose of securing a mortgage. Without the knowledge and consent of
Adriano, Angelina Salvador mortgaged the property to Romulo
Pangilinan, a businessman involves in buy and sell as in the mortgage
of real estate properties. Upon verification of Adriano to Registry of
Deeds, he was surprised that the REM was annotated in the TCT in favor
of Pangilinan. Adriano denied that he executed such deed of mortgage
and denounced his signature as forgery. He repeats the demand from
Pangilinan the return or conveyance of the said land but ignored. Thus,
this petition.
Issue: Whether or not there was a valid Mortgage?
Held:
No. The mortgage was void and produces no force and effect.
The following requisites are essential to the contracts of pledge
and mortgage: (1) That they be constituted to secure the fulfillment of a
principal obligation; (2) That the pledgor or mortgagor be the absolute
owner of the thing pledged or mortgaged; (3) That the persons
constituting the pledge or mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for
that purpose.
In the case at bar, not only was it proven in the trial court that the
signature of the mortgagor had been forged, but also that somebody else
-- an impostor --had pretended to be the owner when the mortgagee
made an ocular inspection of the subject property. The respondent is not
innocent mortgagee for value. Because he failed to observe due
diligence in the grant of the loan and in the execution of the real estate
mortgage. Not having executed a Special power of attorney in favor of
Angela Salvador, Adriano clearly did not authorize her to be his agent in
procuring the mortgage.
2. BANKO SENTRAL NG PILIPINAS Vs. AGUSTIN LIBO-ON
FACTS: Spouses Libo-on secured loans from the Rural Bank of
Hinirigan, Inc. In the amount of P100,000 and P300,000, respectively.
They executed PN payable to the order of Rural Bank for a period of 360
days and executed a deed of Real Estate Mortgage. Rural bank in turn
secured a loan from petitioner BSP in the amount of P800,000 and
640,000, respectively. As security for the loan the bank pledged and
deposited to BSP PN's with supporting TCT's including the PN and TCT
of spouses Libo-on mortgage to the former.
BSP now demanded from the Spouses Libo-on the payment of their
outstanding loan with Rural Bank of Hinirigan but they failed to settle
their obligation. BSP filed an application for extrajudicial foreclosure of
the property. Spouses Libo-on contested extrajudicial foreclosure and
filed application for preliminary injunction which was granted by the trial
court. BSP Appealed with CA but it was denied.
ISSUES: 1. Whether or not Rural Bank has the right to pledge the
property.
2. Whether or not BSP has the authority to foreclosed the subject
mortgage
RULING: 1.No, Rural Bank has no authority to pledge the security
documents to BSP during the term of the real estate mortgage contract
between Rural bank and the spouses Libo-on because if it is within the
term of the contract, the mortgage property remains to be property of the
Spouses Libo-on. For a contract of pledge to be valid, it is necessary
that: 1. the pledge is constituted to secure the fulfillment of the principal
obligation; 2. the pledgor be the absolute owner of the thing pledged; 3.
the person constituting the pledge has the free disposal of his property,
and in the absence thereof, that he be legally authorized for the purpose.
The Rural Bank of Hinirigan was neither the absolute owner of the
subject property nor the security documents it had pledge to BSP.
2.No, BSP has no authority to foreclosed the subject mortgage. The
mere pledge and deposit of the mortgage contract, transfer certificate of
title and PN executed by the Rural Bank of Hinirigan in favor of BSP
does not produce the effect of giving BSP the authority to intervene with
the transaction between the spouses Libo-on and the Rural Bank much
more to foreclosed the mortgage property.
3. A. Francisco Realty and Development Corporation
v. Court of Appeals and Spouses Javillonar (JAG)
FACTS:
A. Francisco Realty and Development Corporation granted a loan
of to the spouses Romulo and Erlinda Javillonar, in consideration
executed a promissory note expressing when the spouses fail to
pay the interest on the loan, the property will be transferred to
A.Francisco and the deed of sale will be registered. A.Francisco
claimed that Javillonar failed to pay the interest and thus
registered the land in its favor. Spouses loaned an additional from
A.Francisco in exchange for another promissory note with a
provision that upon failure to pay their loans, they would
immediately vacate the premises. A.Francisco now demanded
possession of the property. The spouses refused. A.Francisco
then filed an action for possession and payment of the interest
from the loan with the RTC. Spouses counterclaimed for the
cancellation of the TCT of A.Francisco. RTC ruled in favor of
A.Francisco. CA reversed the decision of the RTC. The deed of
sale was void because it was in fact a pactum commissorium
prohibited by Art.2088 of the NCC.
ISSUES:
W/N the contractual documents are constitutive of pactum
commissorium?
HELD: YES it was a pactum commissorium and thus the
registration of A.Francisco is void. The prohibition on pactum
commissorium stipulations is provided for by Article 2088 of the
Civil Code: Art. 2088. The creditor cannot appropriate the things
given by way of pledge or mortgagee, or dispose of the same. Any
stipulation to the contrary is null and void. The aforequoted
provision furnishes the two elements for pactum commissorium to
exist: (1) that there should be a pledge or mortgage wherein a
property is pledged or mortgaged by way of security for the
payment of the principal obligation; and (2) that there should be
a stipulation for an automatic appropriation by the creditor of the
thing pledged or mortgaged in the event of non-payment of the
principal obligation within the stipulated period.
PLEDGE:
1. Ong vs. IAC
G.R. No. 74073, September 13, 1991
Madrigal Shipping Co., Inc., owner of a Barge, pledged said
vessel and tugboat to secure the Shipping Company's obligation
to private respondent Solidbank. Both parties executed a
document denominated as "Pledge Agreement".
2. MANILA SURETY v VELAYO
Facts: Manila Surety & Fidelity Co., upon request of Rodolfo
Velayo, executed a bond for P2,800.00 for the dissolution of a writ
of attachment obtained by one Jovita Granados in a suit against
Rodolfo Velayo in the Court of First Instance of Manila. Velayo
undertook to pay the surety company an annual premium of
P112.00 and provided collateral jewelry with the authority to sell
in case Manila Surety will be obliged to pay. Judgment having
been rendered in favor of Jovita Granados and against Rodolfo
Velayo, and execution having been returned unsatisfied, the
surety company was forced to pay P2,800.00 that it later sought
to recoup from Velayo; and upon the latter's failure to do so, the
surety caused the pledged jewelry to be sold, realizing therefrom
a net product of P235.00 only The surety files a claim against
Velayo because the security is insufficient. Velayo claims the sale
of the jewelry even if insufficient, extinguishes the principal
obligation.
Issue: Won Velayo’s contention is correct?
Ruling: Yes.The sale of the thing pledged shall extinguish the
principal obligation, whether or not the proceeds of the sale are
equal to the amount of the principal obligation, interest and
expenses in a proper case.

Madrigal failed to pay its obligation to the Solidbank. When the

latter was about to sell the pledge property, the same was no
where to be found from its bodega. Meanwhile, petitioner
Honesto Ong bought one barge, the same barge which was the
subject of the pledge. Solidbank filed a complaint against Honesto
Ong, et al. Petitioner contends that they are purchaser in good
faith, and the contract of pledge by and between Solidbank and
Madrigal Shipping Co., Inc. was not recorded under Section 804
and 809 of the Tariff and Custom Code, hence, not binding on
third person like the petitioners. Private respondent argued that
petitioner acted in bad faith, and that it complied with all the
requirements necessary to bind third persons.

ISSUE: WON the contract of pledge entered into by and between

Solidbank and Madrigal Shipping Co., Inc. is binding to petitioner
Ong?

HELD:
YES, it is binding on said petitioners. Article 2096 of the Civil
Code requires that a pledge to take effect against third persons, it
should be in a “Public Instrument” which must contain the
description of the thing pledged and the date of the pledges. In
the case at bar, all three requirements have been complied.
Real Estate Mortgage
1. Prudential Bank Vs. Hon. Panis, Fernando Magcale &
Teodula Maluyut-Magcale
Facts:
Spouses Magcale secured a loan from Prudential Bank. As
security, respondent’s spouses executed a real estate mortgage,
their residential building as security. Since the respondents was
not able to fulfil their obligation, the security was extrajudicial
foreclosed and was eventually sold in a public auction. Hence this
case, to assail the validity of the mortgage and to recover the
foreclosed land.
Issue:
Whether or not a real estate mortgage can be instituted on
the building of a land belonging to another?
Held:
While it is true that a mortgage of land necessarily includes in the
absence of stipulation of the improvements thereon,
buildings, still a building in itself may be mortgaged by itself
apart from the land on which it is built. Such a mortgage would
still be considered as a REM for the building would still be
considered as immovable property even if dealt with separately
and apart from the land.
The original mortgage on the building and right to occupancy of
the land was executed before the issuance of the sales
patent and before thegovernment was divested of title to t
he land. Under the foregoing, it is
evident that the mortgage executed by private respondent o
n his own building was a valid mortgage.
2. DIONISIO MOJIA vs. CA, Rural Bank of Kawit, Inc.
Facts:
Deceased Spouses Mojica obtained a loan with Rural bank of
Kawit, Inc. and secured by a real estate mortgage. Spouses failed
to pay their obligation after its maturity. Rural bank extra judicially
foreclosed the real estate mortgage on the justification that it was
adopted as a mortgage for the new loan. There was auction sale,
defendant rural bank was the highest bidder. The proceeds from
the sale of the piece of land of plaintiffs spouses were applied to
their outstanding obligation with defendant bank. It was recorded
in the Office of the Register of Deeds of Cavite. The one-year
period for redemption elapses without plaintiff’s spouses having
redeemed the foreclosure property.
Now, Dionisio Mojica, the son of petitioners-spouses, attempt to
pay the debt. Dionisio Mojica and one Teodorico Rufido, brother-
in-law of plaintiff Leonardo Mojica, were notified of such auction
sale However, no sale was consummated during that scheduled
sale and the property concerned up to now still remains in the
possession of respondent bank. The refusal of the same bank to
allow Dionisio Mojica to pay the unpaid balance of the loan as per
the "Computation Slip" amounting to P21,272.50, resulted in the
filing of a complaint. TC dismissed complaint. CA affirmed.
ISSUE: WON the foreclosure sale had for its basis, a valid
and subsisting mortgage contract.
RULING:
It has long been settled by a long line of decisions that
mortgages given to secure future advancements are valid and
legal contracts; that the amounts named as consideration in said
contract do not limit the amount for which the mortgage may stand
as security if from the four corners of the instrument the intent to
secure future and other indebtedness can be gathered.
A mortgage given to secure advancements is a
continuing security and is not discharged by repayment of the
amount named in the mortgage, until the full amount of the
advancements are paid fact, it has also been held that where the
annotation on the back of a certificate of title about a first
mortgage states "that the mortgage secured the payment of a
certain amount of money plus interest plus other obligations.
There was no necessity for any notation of the later loans
on the mortgagors' title. It was incumbent upon any subsequent
mortgagee or encumbrances of the property in question to entry
in the books and records of the bank, as first mortgagee,
regarding the credit standing of the debtors.
ISSUE: WON the RB is correct for not allowing the sales as
per computation slip.
RULING:
Yes. The property covered by the REM became the
acquired asset of the bank. The petitioners have lost its right of
legal redemption after the lapse of one year the date of certificate
of sale was registered in the ROD. Conventional redemption was
subject to be exercised up to March 3, 1982 and was extended up
to April 19, 1982 for a fixed amount of P85,000.00. The
respondent bank even favored the petitioner by giving them the
first preference to repurchase the property but they failed to avail
of this opportunity, although the bank "is certainly disposed to
release at anytime" the deposits.
Further, the evidence on record also shows that the mortgage
property was auctioned on June 27, 1979. The only bidder was
the respondent bank which bid for P26,387.04. As the highest
bidder, the respondent bank can rightfully consolidate its title over
the property.
The petition is DISMISSED.
3. CLAUDIO(s) VS. Spouses Federico and Norma Saraza
Facts:
This case is for annullment of sale, power of attorney and
mortgage with prayer of damages by petitioners Claudios against
Florentino Cladio and Spouses Federico and Norma Saraza. It
was alleged on this case, Florentino excuted a deed of real estate
mortage over the property of their deceased parents. The siblings
averred that the signatures where forged. That such property was
sold by their parents to Florentino was void.
RTC and CA favored respondents Spouses Saraza as Mortgagee
in good faith. Thus this petition.
Whether or not the respondent spouses was a mortgagee in
good faith?
No. They are morgagee in bad faith. The Real estate mortage was
executed on June 22, 2004, in the name of FLorentino, was
issued by the Register of deeds only 6 (six) days later or on June
28, 2004. Evidently, the property, offered as collateral to the Loan
of P1M, was not in Florentino's name yet when he entered into a
mortgage agreement with spouses Saraza.
The doctrine of mortgagee in good faith only applies when the
mortgagor has already obtained a certificate of title in his or her
name at the time of the mortgage. Accordingly, an innocent
mortgagee for value is one who entered into a mortgage contract
with a mortgagor bearing a certificate of title in his name over the
mortgaged property. Such was not the situation of Spouses
Saraza. They cannot claim the protection accorded by law to
innocent mortgagees for value considering that there was no
certificate of title yet in the name of Florentino to rely on when the
mortgaged contract was executed.
Good faith connotes an honest intention to abstain from taking
unconscientious advantage of another. Spouses Saraza could not
be deemed to have acted in good faith because they knew that
they were not dealing with the registered owner of the property
when it was mortgaged and that the subject land had yet to be
titled in the name of mortgagor Florentino.
4. Maybank Philippines, Inc. (Formerly PNB-Republic Bank),
Petitioner vs. Spouses Oscar and Nenita Tarrosa,
Respondents.
Facts:
On December 15, 1980, respondent Spouses Tarrosa
obtained a loan from PNB-Republic Bank, now Maybank
Philippines, secured by a real estate mortgage. After payment of
said loan, the respondents again obtained another loan from
Maybank on March 11, 1984. Respondents failed to pay upon
maturity. Sometime in April 1998, a Final Demand Letter was sent
by petitioner bank to respondents requiring the latter to settle their
loan obligation inclusive of principal, interest, and penalty
charges. The spouses offered to settle it in a lesser amount to
which the bank refused. On June 25, 1998, Maybank instituted an
extrajudicial foreclosure proceeding and the subject property was
eventually sold in a public auction to Philmay Property Inc. (PPI).
The spouses then filed a complaint for declaration of nullity and
invalidity of the foreclosure sale averring among others that the
second loan is an unsecured loan and that, Maybank’s right to
foreclose had already prescribed.
Issue: Whether or not the foreclosure is valid?
Ruling: Yes. An action to enforce a right arising from a mortgage
should be enforced within ten (10) years from the time the right of
action accrues, i.e., when the mortgagor defaults in the payment
of his obligation to the mortgagee; otherwise, it will be barred by
prescription and the mortgagee will lose his rights under the
mortgage. However, mere delinquency in payment does not
necessarily mean delay in the legal concept.
In order that the debtor may be in default, it is necessary that: (a)
the obligation be demandable and already liquidated; (b) the
debtor delays performance; and (c) the creditor requires the
performance judicially or extrajudicially, unless demand is not
necessary. – i.e., when there is an express stipulation to that
effect; where the law so provides; when the period is the
controlling motive or the principal inducement for the creation of
the obligation; and where demand would be useless. Moreover, it
is not sufficient that the law or obligation fixes a date for
performance; it must further state expressly that after the period
lapses, default will commence. Thus, it is only when demand to
pay is unnecessary in case of the aforementioned circumstances,
or when required, such demand is made and subsequently
refused that the mortgagor can be considered in default and the
mortgagee obtains the right to file an action to collect the debt or
foreclose the mortgage.
In this case, the provision in the Real Estate Mortgage between
the parties merely articulated Maybank's right to elect foreclosure
upon Sps. Tarrosa's failure or refusal to comply with the obligation
secured, which is one of the rights duly accorded to mortgagees
in a similar situation. In no way did it affect the general parameters
of default, particularly the need of prior demand under Article
116941 of the Civil Code, considering that it did not expressly
declare: (a) that demand shall not be necessary in order that the
mortgagor may be in default; or (b) that default shall commence
upon mere failure to pay on the maturity date of the loan.
Therefore, Maybank's right to foreclose the real estate mortgage
accrued only after the lapse of the period indicated in its final
demand letter for Sps. Tarrosa to pay, i.e., after the lapse of five
(5) days from receipt of the final demand letter dated March 4,
1998.
4. Serfino vs. CA
A land was patented in the name of Casamayor. Later it was sold
to Baltazar. During the war the OCT was lost and reconstitution
thereof was made in the name of Casamayor. In 1946 Baltazar
was issued TCT. Later the land was sold to Lopez Sugar but the
latter did not register until Dec. 1964. The office refused
registration upon its discovery that the same property was
covered by another certificate of title, int he name of Serfino. An
inquiry into this discrpancy reveals that the Provincial Treasurer
had conducted an auction sale of this land for tax delinquency
starting 1950. Notice was send only to Casamayor. Serfino was
issed a Certificate of Repurchase of REal Properpety after
payment on May 14, 1964.
In May 28, 1964 Serfino filed a petition of Reonstitution of OCT in
the name of Casamayor. In Oct. 1964 the ourt granted the petition
of Serfino for confirmation of his titled of the land as purchases in
auction sale. TCT was issued to Serfino in NOv. 2, 1964. TO
secure a loan Serfino mortgaged the land to PNB. Hence, this was
the situation of the land when the office of the Register of Deeds
refused registration of tha praty in question by Lopez.
Issue: Whether the PNB is a mortgagee in good faith?
Yes. PNB relied on the TCT of Serfino, the genuiness of which is
not issue as it was really issued by the Register of Deeds. PNB
had every right to rely on TCT as it was sufficient evidence of
ownership of the mortgagor. The PNB at the time had no way of
knowing of the existence of another genuine title covering the
same land in question.
The fact that the public auction sale of the disputed property was
not valid (for lack of notice of the auction of sale tot he actual
owner) cannot in any way be attributed to the mortgagee's (PNB's)
fault. The fact remains that inspite of the lack of notice to the
actual registered owner at that time (who was Nemisia Baltazar)
the Registered of Deeds issued a TCT in the name of Serfenio
which title was relied by PNB. Be it noted that the inabilit of the
Registry of Deeds to notify the actual owner or Lopez Sugar
Central to declare the land in its name for a number of years and
to pay the complete taxes thereon. PNB is therefore entitled to the
payment of the mortgage loan as ruled by the trial court and
exempt
5. GE MONEY BANK, INC. (FORMERLY KEPPEL BANK
PHILIPPINES, INC.), v. SPOUSES VICTORINO M. DIZON AND
ROSALINA L. DIZON,
Facts: Spouses Dizon obtained a loan from Monte de Pieda and
Savings Banks, the predecessor in interest of Keppel Monte
Bank, Inc. now GE Money Bank. By way of security for the loan,
they executed a real estate mortgage over their two (2) lots
covered by TCT. They defaulted and the mortgaged properties
were extra-judicially foreclosed. The Bank was the highest bidder
and he Certificate of Sale was registered with the Register of
Deeds for Manila on October 18, 1993. Hence, the Spouses Dizon
had one (1) year therefrom, or until October 18, 1994, within which
to redeem the subject properties. Within the redemption period,
the Spouses Dizon were not able to redeem it. However, Spouses
Dizon manifested their desire to re-acquire the subject property,
but the Bank declined to entertain the same as they still failed to
tender the full amount of the redemption price.
Issue: Whether or not spouses Dizon may still redeem the
property
Ruling: No. To be valid and effective, the offer to redeem must
be accompanied by an actual tender of the redemption price.
Redemption price should either be fully offered in legal tender or
validly consigned in court. Only by such means can the auction
winner be assured that the offer to redeem is being made in good
faith.
The right to redeem becomes functus officio on the date
of its expiry, and its exercise after the period is not really one of
redemption but a repurchase. Distinction must be made because
redemption is by force of law; the purchaser at public auction is
bound to accept redemption. Repurchase, however, of foreclosed
property, after redemption period, imposes no such obligation.
After expiry, the purchaser may or may not re-sell the property but
no law will compel him to do so. And, he is not bound by the bid
price; it is entirely within his discretion to set a higher price, for
after all, the property already belongs to him as owner.
All told, the Spouses Dizon cannot, therefore, argue that
equity should prevail. “Equity has been defined as justice outside
law, being ethical rather than jural and belonging to the sphere of
morals than of law. It is grounded on the precepts of conscience
and not on any sanction of positive law.” Yet equity applies only in
the absence of, and never against, statutory law or judicial rules
of procedure.
7. Dimasacat vs. CA, PNB
Facts: Lagdameo mortgaged four (4) continous parcels of land
covered by TCT to PNB, which mortgaged was duly annotated on
the title. More than a year later, Lagdameo sold to Dimasacat a
portion of the same land. The sale was not registered. Another
TCT was issued to PNB in view of the failure of Lagdameo to
redeem the property within one (1) year after foreclosure. Prior to
expiration of the said period, Dimasacat offered to purchase the
property from PNB who rejected the offer. Dimasacat maintains
that as successor in interest of the mortgage debtor, in part of the
property and therefore qualified to repurchase the entirety of the
said property.
Issue: Whether Dimasacat has the right to redeem all the parcels
of land?
Ruling: No. Dimasacat has at best, a personal right to demand
from Lagdameo (who had repurchased the land from PNB while
the case is pending) a status of co-ownership over said property
because the deed of sale in his favor had not been registered and
the portion covered by said deed of sale had not been surveyed
so that the precise boundaries thereof had not been delimited by
metes and bounds much less segregated from the mass of
Lagdameo's property covered by the TCT's aforementioned. In as
much as, even if Dimasacat had managed to redeem the whole
property, so much thereof as exceeded the portion sold to him by
Lagdameo could have been repurchased by Lagdameo and the
title to said property has meanwhile reverted fully to the latter, it
follows that Dimasacat is entitled to more than the consummation
of the sale made in his favor.
Dimasacat is declared co-owner of the land in question to the
extent of the interest conveyed to him, subject to his right to
partition said property.
8. Bank of the Philippine Islands Vs. Sps. Johnson & Evelyn
Co & Jupiter Real Estate Ventures, Inc./Sps. Johnson &
Evelyn Co Vs. Bank of the Philippine Islands
FACTS:
Jupiter Real Estate Ventures, Inc. (“Jupiter”) and
Spouses Co obtained a loan from Far East Bank and Trust
Company (“FEBTC”). Jupiter and Spouses Co mortgaged in favor
of FEBTC parcels of land including their improvements covered
by Transfer Certificates of Title. Meanwhile, BPI and FEBTC
merged, with BPI as the surviving corporation. Jupiter and
Spouses Co defaulted on the payment of the loan. BPI, as
successor-in-interest of FEBTC, foreclosed the real estate
mortgage pursuant to Act No. 3135, as amended. An auction sale
was held where the mortgaged properties were sold to BPI as the
highest bidder. The Certificate of Sale was registered and
annotated at the back of the certificates of title on. After the
expiration of the period of redemption, BPI consolidated its
ownership over the real properties, and new titles were issued in
its name. Spouses Co and Jupiter filed a complaint for the
nullification of foreclosure proceedings and damages and BPI
also filed a petition for the issuance of a writ of possession. Jupiter
filed a petition for corporate rehabilitation and moved for the
suspension of the proceedings since among the properties
covered were those subject of the real estate mortgage. BPI
opposed alleging that as registered owner of the properties
subject of the foreclosure, it has the right to the immediate
possession of the property and its right to immediate possession
is impaired by the grant of the appeal.
ISSUE:
Whether or not a purchaser in a foreclosure sale may
apply for a writ of possession even during the redemption
period.
RULING:
In the affirmative.
Under Section 752 of Act No. 3135, as amended by Act
No. 4118, the purchaser in a foreclosure sale may apply for a writ
of possession during the redemption period. and well settled is the
rule that a writ of possession will issue as a matter of course, even
without the filing and approval of a bond, after consolidation of
ownership and the issuance of a new TCT in the name of the
purchaser. Upon expiration of the redemption period, the right of
the purchaser to the possession of the foreclosed property
becomes absolute. This right to possession is based on the
purchaser’s ownership of the property. In like manner, the mere
filing of an ex parte motion for the issuance of the writ of
possession would suffice and the filing of a bond is no longer
necessary. This is because possession has become the absolute
right of the purchaser as the confirmed owner.
Thus, as the new registered owner, BPI is even more
entitled to the possession of the properties and has the
unmistakable right to file an ex parte motion for the issuance of a
writ of possession.
CHATTEL MORTGAGE
1. Marquez vs Elisan Credit Corporation
Facts:
Marquez obtained from Elisan Credit Corporation a loan payable
in weekly installments and subject to annual interest with monthly
penalties and attorney’s in case of nonpayment. A chattel
mortgage was also executed stipulating that “the motor vehicle
shall stand as a security for all other obligations of every kind
already incurred or which hereafter may be incurred”. The
payment of that loan was acknowledged by both parties.
Subsequently, Marquez obtained another loan evidenced by a
promissory note with the same terms and conditions as the first
loan. When the second loan matured, there still remained an
unpaid balance. Marquez requested the creditor to pay the unpaid
balance by daily installments until the loan is paid; the creditor
agreed. Thus, several months after the maturity of the loan,
Marquez had already paid a total amount which is greater than
the amount of the principal.
Despite such, the creditor filed a complaint for foreclosure of the
CM on the ground that Marquez allegedly failed to pay the
principal of the second loan despite demand. It was also prayed
that the unpaid balance plus accrued penalties and interests be
paid because, allegedly, Marquez’ failure to pay upon maturity
triggered the imposition of monthly penalties and attorney’s fees.
Marquez, citing Art 1176 and 1235 of the Civil Code, insists that
his daily payments should be deemed to have been credited
against the principal, as the official receipts issued by the creditor
were silent with respect to the payment of interest and penalties.
Issue W/N an order for foreclosure is proper
No. Foreclosure in this case is without legal and factual basis
because the chattel mortgage was already extinguished when
the obligation under the first loan was duly paid.
A CM can only cover obligations existing at the time the
mortgage is constituted. For a CM to cover debts yet to be
contracted, a fresh chattel mortgage may be executed or the old
contract be amended conformably to the form prescribed by the
CM Law. Here, since there was no showing that a new
agreement was executed, the security can no longer apply to the
second loan. The chattel mortgage was already extinguished
because being merely an accessory in nature, it cannot exist
independently of the principal obligation.
Although a promise expressed in a chattel mortgage to include
debts that are yet to be contracted can be a binding commitment
that can be compelled upon, the security itself, however, does
not come into existence or arise until after a chattel mortgage
agreement covering the newly contracted debt is executed either
by concluding a fresh chattel mortgage or by amending the old
contract conformably with the form prescribed by the Chattel
Mortgage Law.
Refusal on the part of the borrower to execute the agreement so
as to cover the after-incurred obligation can constitute an act of
default on the part of the borrower of the financing agreement
whereon the promise is written, but the remedy of foreclosure
can only cover the debts extant at the time of constitution and
during the life of the chattel mortgage sought to be foreclosed.
The Chattel Mortgage Law requires the parties to the contract to
attach an affidavit of good faith and execute an oath that –
“… the mortgage is made for the purpose of securing the
obligation specified in the conditions thereof, and for no other
purposes, and that the same is a just and valid obligation, and
one not entered into for the purposes of fraud.”
It is obvious therefore that the debt referred in the law is a
current, not an obligation that is yet merely contemplated.
The only obligation specified in the chattel mortgage contract
was the first loan which the petitioner later fully paid. By virtue of
Section 3 of the Chattel Mortgage Law, the payment of the
obligation automatically rendered the chattel mortgage
terminated; the chattel mortgage had ceased to exist upon full
payment of the first loan. Being merely an accessory in nature,
it cannot exist independently of the principal obligation.
The parties did not execute a fresh chattel mortgage nor did they
amend the chattel mortgage to comply with the Chattel Mortgage
Law which requires that the obligation must be specified in the
affidavit of good faith. Simply put, there no longer was any
chattel mortgage that could cover the second loan upon full
payment of the first loan. The order to foreclose the motor
vehicle therefore had no legal basis.
Relevant Laws
Article 1176, Civil Code:
The receipt of the principal by the creditor, without reservation
with respect to the interest, shall give rise to the presumption
that said interest has been paid.
Article 1235, Civil Code:
When the obligee accepts the performance of an obligation,
knowing its incompleteness or irregularity, and without
expressing any protest or objection, the obligation is deemed
fully complied with.
Article 1253, Civil Code:
If the debt produces interest, payment of the principal shall not
be deemed to have been made until the interests have been
covered.
2. Northern Motors vs. Coquia
Facts:
Taxicabs have been levied upon and sold at public auction to
satisfy the judgement credit. it was held that the lien of a chattel
mortgage over certain claims over certain taxicabs is superior to
the levy made on the said cabs by the assignee of the
unsecured judgement creditor of the chattel mortgagor. So this
motion of reconsideration is filed.
Issue: Whether the assignee, Ong of the unsecured judgement
creditor has the right to levy upon the mortgage taxicab.
Whether the lien of a chattel mortgagee is superior to the levy
made by the same by assignee of the unjudgement creditor of
the chattel mortgage?

Ruling:

No. Chattel mortgage should answer for the mortgage credit and
not for the judgement credit of the mortgagor's unsecured
creditor.

Yes. The lien of a chattel mortgage over the mortgaged property

is superior to the levy made on the same by the assignee of the
unsecured judgement creditor of the chattel mortgagor. The
theory that the breach by the mortgagor of the chattel mortgage
should not affect the assignee because he is not a privy to such
contract is untenable. A judgement creditor can only attach the
equity or right of redemption of the mortgagor. The mortgagee is
not obliged to file an independent action for the enforcement of
his credit chattel mortgage's purpose is to give mortgagee the
preference over the mortgage chattels for satisfaction of his
credit. The mortgage creates a real right or lien which being
recorded, follows the chattel wherever it goes.