Acme Shoe, Rubber & Plastic Corp. vs. Court of Appeals

A chattel mortgage is effective to secure only obligations existing at the time of its execution; a stipulation that the mortgage shall also cover future debts is merely a binding personal commitment to execute a new mortgage, and the security interest does not attach to after‑incurred obligations until a fresh chattel mortgage agreement or an amendment compliant with Act No. 1508 is concluded. Upon full payment of the original secured obligation, the mortgage is automatically extinguished and cannot be foreclosed for subsequently contracted debts.

On 27 June 1978, petitioner Chua Pac, as president and general manager of petitioner Acme Shoe, Rubber & Plastic Corporation, executed a chattel mortgage in favor of respondent Producers Bank of the Philippines to secure a ₱3,000,000.00 corporate loan. The mortgage instrument contained a clause providing that it would “also stand as security” for any subsequent promissory notes, renewals, extensions, new loans, and other accommodations such as overdrafts, letters of credit, acceptances, bills of exchange, and trust receipts, whether contracted before, during, or after the mortgage, without need for a new contract. The ₱3,000,000.00 loan was fully paid. In 1981, the bank extended additional accommodations totalling ₱2,700,000.00, which were also fully paid on due date. On 10 and 11 January 1984, the bank granted another loan of ₱1,000,000.00, covered by four promissory notes of ₱250,000.00 each; this loan was not settled at maturity due to financial constraints. The bank applied for extrajudicial foreclosure of the 1978 chattel mortgage, prompting petitioners’ action for injunction.

• The 1978 Chattel Mortgage: On 27 June 1978, petitioner Chua Pac, as president and general manager of petitioner Acme Shoe, Rubber & Plastic Corporation, executed a chattel mortgage in favor of respondent Producers Bank of the Philippines to secure a ₱3,000,000.00 corporate loan. The mortgage deed contained a clause stating that it would also “stand as security” for any subsequent promissory notes, renewals, extensions, new loans, overdrafts, letters of credit, acceptances, bills of exchange, trust receipts, 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,” without need for a new contract.
• Payment and Subsequent Accommodations: The ₱3,000,000.00 loan was fully paid in due time. In 1981, the bank extended additional accommodations totalling ₱2,700,000.00, which were likewise fully paid on maturity.
• The 1984 Loan and Default: On 10 and 11 January 1984, the bank granted a further loan of ₱1,000,000.00, covered by four promissory notes of ₱250,000.00 each. Petitioners failed to settle this loan at maturity due to financial constraints.
• Foreclosure and Suit: The bank applied for extrajudicial foreclosure of the 1978 chattel mortgage with the Sheriff of Caloocan City. Petitioners filed a complaint for injunction with damages and a prayer for a preliminary injunction before the Regional Trial Court of Caloocan City. The trial court dismissed the complaint and ordered foreclosure of the chattel mortgage, ruling that petitioners were bound by the mortgage’s stipulations.

• Extinction of the Chattel Mortgage: Petitioner corporation maintained that the chattel mortgage was constituted solely to secure the ₱3,000,000.00 loan and, that loan having been fully paid, the mortgage was ipso facto extinguished under Section 3 of Act No. 1508; it could not be revived to cover subsequent loans.
• Invalidity of the Dragnet Clause: Petitioners argued that a chattel mortgage under the Chattel Mortgage Law must specify an existing obligation and be accompanied by an affidavit of good faith; thus, a clause purporting to cover future debts without a new contract contravened the law and was ineffective.
• Claim for Damages: Petitioner corporation asserted that it sustained damages from the unlawful foreclosure and sought a remand to the trial court for a determination of the amount, having prayed for ₱3,000,000.00 in moral damages in its complaint.

• Validity of the Contractual Stipulation: Respondent bank contended that petitioners were bound by the express terms of the chattel mortgage, which clearly provided that the security would extend to all subsequent obligations regardless of when contracted; the dragnet clause was a valid contractual undertaking that should be enforced according to its plain language.

• Coverage of Future Obligations: Whether a clause in a chattel mortgage that purports to extend its coverage to obligations yet to be contracted or incurred is valid and effective to secure such after‑incurred debts.
• Extinguishment of the Mortgage: Whether the full payment of the original ₱3,000,000.00 loan extinguished the chattel mortgage, precluding its foreclosure for the later ₱1,000,000.00 loan.
• Moral Damages: Whether petitioner corporation was entitled to moral damages and a remand for their determination.

• Coverage of Future Obligations: A chattel mortgage may secure only obligations existing at the time the mortgage is constituted. While a promise in a chattel mortgage to cover future debts is a binding commitment that may be enforced, the security itself does not arise until a new chattel mortgage agreement or an amendment conforming to the Chattel Mortgage Law is executed. The affidavit of good faith required by Section 5 of Act No. 1508—stating that the mortgage is made to secure the “obligation specified in the conditions thereof, and for no other purpose”—makes it evident that the debt referred to is a current, not a merely contemplated, obligation. Refusal to execute a new mortgage could constitute default on the financing agreement, but foreclosure may only cover debts extant at the time of constitution and during the life of the chattel mortgage.
• Extinguishment of the Mortgage: The only obligation specified in the 1978 chattel mortgage was the ₱3,000,000.00 loan, which was fully paid. Pursuant to Section 3 of the Chattel Mortgage Law, full payment automatically rendered the mortgage void. Because the mortgage ceased to exist, there was no longer any security to cover the 1984 loans. The ruling in Belgian Catholic Missionaries, Inc. vs. Magallanes Press, Inc.—that a mortgage with a stipulation for future advances takes effect only from the date those advances are made—was applied; since no new chattel mortgage was executed, the 1978 instrument could not be given effect for the later loans.
• Moral Damages: A corporation, as an artificial person, cannot experience physical suffering, mental anguish, or similar injury and is therefore not entitled to moral damages, as established in LBC Express, Inc. vs. Court of Appeals. Although petitioner Chua Pac was named a party, the complaint explicitly stated that he was joined merely in his representative capacity for the corporation. No basis existed for an award of moral damages or for remanding the case for their determination.

• Chattel Mortgage and Future Obligations — A chattel mortgage can secure only obligations existing at the time the mortgage is constituted. A so‑called “dragnet clause” that purports to cover future debts is a valid personal undertaking but does not create a real security interest over after‑incurred obligations. The security attaches only when a new chattel mortgage or an amendment that complies with Act No. 1508 is executed. The affidavit of good faith requirement (Section 5) necessitates that the obligation secured be a current, specified debt.
• Accessory Character of Security Contracts — Contracts of security (pledge, chattel mortgage, real estate mortgage, antichresis) are accessory to the principal obligation; once the principal obligation is extinguished, the security contract is ipso facto null and void. Section 3 of the Chattel Mortgage Law codifies this rule: full payment terminates the mortgage.
• Moral Damages and Artificial Persons — A corporation, as an artificial being without a nervous system or emotions, cannot recover moral damages for mental anguish, wounded feelings, or similar injuries. Recovery is limited to natural persons who actually suffer such injuries.

• “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, 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.”
• “. . . (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.”
• “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.” (Belgian Catholic Missionaries, Inc. vs. Magallanes Press, Inc.)
• “Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish.” (LBC Express, Inc. vs. Court of Appeals)

• Belgian Catholic Missionaries, Inc. vs. Magallanes Press, Inc., et al., 49 Phil. 647 — Followed; established that a mortgage covering future advances takes effect only from the date the advances are made, not retroactively from the date of the mortgage.
• Jaca vs. Davao Lumber Company, 113 SCRA 107 — Reiterated the Belgian Catholic Missionaries doctrine in the context of chattel mortgages.
• LBC Express, Inc. vs. Court of Appeals, 236 SCRA 602 — Applied; held that a corporation is not entitled to moral damages because it is incapable of experiencing mental suffering.
• Philippine Refining Co. vs. Jarque, 61 Phil. 229 — Cited for the rule that a chattel mortgage lacking an affidavit of good faith is still valid between the parties, but the affidavit requirement illuminates the law’s intent that the secured obligation be a current, specified debt.
• Manila Surety & Fidelity Co. vs. Velayo, 21 SCRA 515 — Cited for the principle that contracts of security are accessory in nature and extinguished upon extinction of the principal obligation.

• Section 3, Act No. 1508 (Chattel Mortgage Law) — Provides that upon full payment of the secured obligation, the chattel mortgage is automatically rendered void. Applied to hold that the 1978 mortgage was extinguished upon payment of the ₱3,000,000.00 loan.
• Section 5, Act No. 1508 — Requires an affidavit of good faith stating that the mortgage secures the “obligation specified in the conditions thereof, and for no other purpose.” Interpreted to mean the law contemplates a current, existing obligation, not future or contingent debts.
• Civil Code provisions on Accessory Contracts (Arts. 2085, 2087, 2093, 2125, 2126, 2132, 2139, 2140) — Invoked to reinforce that securities are accessory and extinguished upon extinction of the principal obligation.

Kapunan and Hermosisima, Jr., JJ., concurred. Padilla, J., took no part. Bellosillo, J., was on leave.