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SECOND DIVISION

MAGNA FINANCIAL SERVICES GROUP, INC., P e t i t i o n e r ,         - versus -         ELIAS COLARINA, R e s p o n d e n t.

G.R. No. 158635   Present:   PUNO, Chairman, AUSTRIA-MARTINEZ, CALLEJO, SR., TINGA, and CHICO-NAZARIO, JJ .   Promulgated:   December 9, 2005

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D E C I S I O N

 

 

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 attorney's 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 respondent's 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 3^RD 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 court's 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 vendee's failure to pay cover two or more installments;

 

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

 

 

 

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 attorney's 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 petitioner's 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 court's 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 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 appellant's 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]; 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.

 

 

 

 

WE CONCUR:

 

 

 

REYNATO S. PUNO

Associate Justice

Chairman

 

 

 

MA. ALICIA AUSTRIA-MARTINEZ Associate Justice	ROMEO J. CALLEJO, SR. Associate Justice
DANTE O. TINGA Associate Justice

 

 

 

A T T E S T A T I O N

 

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 Court's Division.

 

 

REYNATO S. PUNO Associate Justice Chairman, Second Division

 

 

 

 

 

 

 

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

 

Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairman's 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 Court's Division.

 

 

 

HILARIO G. DAVIDE, JR. Chief Justice

 

Endnotes:

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[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 seller's 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. 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.