Borbon vs. Servicewide Specialists, Inc.

The remedies under Article 1484 of the Civil Code are alternative and exclusive, not cumulative; once the vendor-mortgagee or its assignee forecloses the chattel mortgage, it shall have no further action against the purchaser to recover any unpaid balance of the price, and any agreement to the contrary is void. However, the protection given to the buyer-mortgagor is not without circumscription, and attorney's fees may be awarded where the mortgagor unjustifiably refused to surrender the chattel, thereby constraining the mortgagee to seek court relief.

Petitioners Daniel L. Borbon II and Francisco L. Borbon purchased a motor vehicle from Pangasinan Auto Mart, Inc. on an installment basis, executing a promissory note and chattel mortgage to secure the obligation. The rights of Pangasinan Auto Mart, Inc. were subsequently assigned to Filinvest Credit Corporation, which in turn assigned all its rights, interest, and title over the promissory note and chattel mortgage to private respondent Servicewide Specialists, Inc. The promissory note contained stipulations for liquidated damages and attorney's fees equivalent to twenty-five percent (25%) of the total sum due, which shall not be less than five hundred pesos each, in case of default and if attorney's services are availed of.

On December 7, 1984, petitioners Daniel L. Borbon II and Francisco L. Borbon signed a promissory note (Exh. A) for the installment price of a chattel purchased from Pangasinan Auto Mart, Inc., jointly and severally promising to pay the sum of P122,856.00, payable in twelve (12) monthly installments of P10,238.00 each, due on the 7th day of each month starting January 1985, with a late payment charge of 3% per month on each unpaid installment. The promissory note stipulated that if upon default attorney's services are availed of, an additional sum equal to twenty-five percent (25%) of the total sum due, which shall not be less than five hundred pesos, shall be paid for attorney's fees, plus an additional sum equivalent to twenty-five percent (25%) of the total sum due, likewise not less than five hundred pesos, for liquidated damages, aside from expenses of collection and legal costs. To secure the promissory note, petitioners executed a chattel mortgage (Exh. B) on one brand new 1984 Isuzu KCD 20 Crew Cab (Conv.) with Serial No. KCD20D0F 207685.

The rights of Pangasinan Auto Mart, Inc. were assigned to Filinvest Credit Corporation on December 10, 1984, with notice to petitioners. On March 21, 1985, Filinvest Credit Corporation assigned all its rights, interest, and title over the promissory note and chattel mortgage to private respondent Servicewide Specialists, Inc. Petitioners failed to comply with their obligation to pay the monthly installments. Filinvest demanded payment of the installments due on January 29, 1985 by telegram (Exh. E). After the accounts were assigned to private respondent, it attempted to collect by sending a demand letter for payment of the entire obligation, which as of March 12, 1985, totaled P185,257.80 (Exh. H).

For their defense, petitioners claimed that what they intended to buy from Pangasinan Auto Mart was a jeepney type Isuzu K.C. Cab, and that the vehicle they bought was not delivered. Instead, through misinterpretation and machination, Pangasinan Motor Inc. delivered an Isuzu crew cab, as this was the unit available at their warehouse. Later, the representative of Pangasinan Auto Mart, Inc. told petitioners that their available stock was an Isuzu Cab but minus the rear body, which petitioners agreed to accept with the understanding that Pangasinan Auto Mart, Inc. would refund them the amount of P10,000.00 to have the rear body completed. Despite communications with Pangasinan Auto Mart, Inc., the latter was not able to replace the vehicle until the vehicle delivered was seized by order of the court. Petitioners argued that an assignee stands in the place of an assignor, and that they were not in default because Pangasinan Auto Mart was first guilty of not fulfilling its obligation in the contract, citing Article 1169 of the Civil Code.

The parties conceded that the action for replevin was instituted for the foreclosure of the vehicle in question, which was then in the possession of private respondent. In their appeal to the Supreme Court, petitioners merely sought a modification of the appellate court's decision insofar as it upheld the award of liquidated damages and attorney's fees in favor of private respondent, invoking Article 1484 of the Civil Code.

• Article 1484 Limitation: Petitioners argued that under Article 1484 of the Civil Code, the vendor-mortgagee or its assignee loses any right "to recover any unpaid balance of the price" once foreclosure of the chattel mortgage is undertaken, and any "agreement to the contrary (would be) void."
• Scope of the Appeal: Petitioners sought only a modification of the decision of the appellate court insofar as it upheld the court a quo's award of liquidated damages and attorney's fees in favor of private respondent.

• Failure to Raise Issue: Private respondent bewailed the petition, arguing that petitioners failed to specifically raise the issue on liquidated damages and attorney's fees stipulated in the actionable documents.
• Good Faith Assignee: Private respondent maintained that petitioners could not avoid liability under the promissory note and chattel mortgage since private respondent took the note for value and in good faith.

• Liquidated Damages and Attorney's Fees: Whether the Court of Appeals erred in affirming the award of liquidated damages and attorney's fees in favor of private respondent, given that the action for replevin constituted a foreclosure of the chattel mortgage under Article 1484 of the Civil Code.

• Liquidated Damages and Attorney's Fees: The award for liquidated damages was deleted, but the grant of attorney's fees was upheld. Under Article 1484 of the Civil Code, once the vendor-mortgagee or its assignee forecloses the chattel mortgage, it shall have no further action against the purchaser to recover any unpaid balance of the price, which includes all other claims such as liquidated damages. However, attorney's fees may be awarded where the mortgagor unjustifiably refused to surrender the chattel, constraining the mortgagee to seek court relief.

• Liquidated Damages and Attorney's Fees: The Court held that the remedies under Article 1484 of the Civil Code are not cumulative but alternative and exclusive. Citing Nonato vs. Intermediate Appellate Court and Investor's Finance Corporation, the Court explained that when a vendee defaults in the payment of two or more installments, the vendor has the option to avail of any of three remedies — exact fulfillment, cancellation, or foreclosure of the mortgage — and the exercise of one bars the exercise of the others. When the seller assigns his credit to another person, the latter is likewise bound by the same law. Accordingly, when the assignee forecloses on the mortgage, there can be no further recovery of the deficiency, and the seller-mortgagee is deemed to have renounced any right thereto.

The Court distinguished between alternative obligations and alternative remedies. In ordinary alternative obligations, a mere choice categorically and unequivocally made and communicated concludes the parties. In alternative remedies, however, the choice generally becomes conclusive only upon the exercise of the remedy. Thus, it is only when there has been a foreclosure of the chattel mortgage that the vendee-mortgagor would be permitted to escape from a deficiency liability. A mere demand to surrender the object which is not heeded by the mortgagor will not amount to a foreclosure, but the repossession thereof by the vendor-mortgagee would have the effect of a foreclosure.

The parties conceded that the action for replevin was instituted for the foreclosure of the vehicle in question. Citing Macondray & Co. vs. Eustaquio, the Court noted that the phrase "any unpaid balance" can only mean the deficiency judgment to which the mortgagee may be entitled when the proceeds from the auction sale are insufficient to cover the full amount of the secured obligations, which include interest on the principal, attorney's fees, expenses of collection, and the costs. The legislative intent is not to merely limit the proscription to the "unpaid balance of the principal" but, as ruled in Luneta Motor Co. vs. Salvador, to all other claims that may likewise be called in for in the accompanying promissory note against the buyer-mortgagor or his guarantor, including costs and attorney's fees.

However, citing Filipinas Investment & Finance Corporation vs. Ridad, the Court stressed that the protection given to the buyer-mortgagor should not be considered to be without circumscription or as being preclusive of all other laws or legal principles. Where the mortgagor unjustifiably refused to surrender the chattel subject of the mortgage upon failure of two or more installments, or if he concealed the chattel to place it beyond the reach of the mortgagee, thereby constraining the latter to seek court relief, the expenses incurred for the prosecution of the case, such as attorney's fees, could rightly be awarded.

On the procedural objection raised by private respondent, the Court ruled that as long as the questioned items bear relevance and close relation to those specifically raised, the interest of justice would dictate that they, too, must be considered and resolved. The rule that only theories raised in the initial proceedings may be taken up on appeal should only refer to independent, not concomitant matters, to support or oppose the cause of action. The Court struck down the award for liquidated damages but upheld the grant of attorney's fees, which it found to be reasonable. The Court also noted that while the promissory note may appear to have been a negotiable instrument, private respondent clearly cannot claim unawareness of its accompanying documents so as to thereby gain a right greater than that of the assignor.

• Alternative and Exclusive Remedies under Article 1484 of the Civil Code — The remedies available to a vendor in a contract of sale of personal property payable in installments — exact fulfillment, cancellation, and foreclosure of the chattel mortgage — are alternative, not cumulative. The exercise of one bars the exercise of the others. When the assignee forecloses on the mortgage, there can be no further recovery of the deficiency, and the seller-mortgagee is deemed to have renounced any right thereto. The Court applied this doctrine to hold that the award of liquidated damages must be deleted since the replevin action constituted a foreclosure of the chattel mortgage.

• Distinction Between Alternative Obligations and Alternative Remedies — In ordinary alternative obligations, a mere choice categorically and unequivocally made and then communicated by the person entitled to exercise the option concludes the parties. In alternative remedies, however, the choice generally becomes conclusive only upon the exercise of the remedy. Thus, it is only when there has been a foreclosure of the chattel mortgage that the vendee-mortgagor would be permitted to escape from a deficiency liability. A mere demand to surrender the object which is not heeded by the mortgagor will not amount to a foreclosure, but the repossession thereof by the vendor-mortgagee would have the effect of a foreclosure.

• Scope of "Any Unpaid Balance" — The phrase "any unpaid balance" in Article 1484(3) means the deficiency judgment to which the mortgagee may be entitled when the proceeds from the auction sale are insufficient to cover the full amount of the secured obligations, which include interest on the principal, attorney's fees, expenses of collection, and the costs. The proscription extends not merely to the unpaid balance of the principal but to all other claims that may likewise be called in for in the accompanying promissory note against the buyer-mortgagor or his guarantor, including costs and attorney's fees.

• Limits on the Protection to the Buyer-Mortgagor — The protection given to the buyer-mortgagor under Article 1484 should not be considered to be without circumscription or as being preclusive of all other laws or legal principles. Where the mortgagor unjustifiably refused to surrender the chattel subject of the mortgage upon failure of two or more installments, or if he concealed the chattel to place it beyond the reach of the mortgagee, thereby constraining the latter to seek court relief, the expenses incurred for the prosecution of the case, such as attorney's fees, could rightly be awarded.

• "Should the vendee or purchaser of a personal property default in the payment of two or more of the agreed installments, the vendor or seller has the option to avail of any of these three remedies — either to exact fulfillment by the purchaser of the obligation, or to cancel the sale, or to foreclose the mortgage on the purchased personal property, if one was constituted. These remedies have been recognized as alternative, not cumulative, that the exercise of one would bar the exercise of the others." — This passage from Nonato vs. Intermediate Appellate Court and Investor's Finance Corporation articulates the canonical formulation of the alternative and exclusive nature of the remedies under Article 1484 of the Civil Code.

• "In ordinary alternative obligations, a mere choice categorically and unequivocally made and then communicated by the person entitled to exercise the option concludes the parties. The creditor may not thereafter exercise any other option, unless the chosen alternative proves to be ineffectual or unavailing due to no fault on his part. This rule, in essence, is the difference between alternative obligations, on the one hand, and alternative remedies, upon the other hand, where, in the latter case, the choice generally becomes conclusive only upon the exercise of the remedy." — This passage distinguishes between alternative obligations and alternative remedies, explaining that in the latter, the choice becomes conclusive only upon the exercise of the remedy, such as actual foreclosure.

• "In sum, we have observed that the legislative intent is not to merely limit the proscription of any further action to the 'unpaid balance of the principal' but, as so later ruled in Luneta Motor Co. vs. Salvador, to all other claims that may be likewise be called in for in the accompanying promissory note against the buyer-mortgagor or his guarantor, including costs and attorney's fees." — This passage defines the scope of the proscription under Article 1484(3), extending it beyond the principal balance to all other claims, including costs and attorney's fees.

• "Given the circumstances, we must strike down the award for liquidated damages made by the court a quo but we uphold the grant of attorney's fees which we, like the appellate court, find it to be reasonable." — This passage states the Court's resolution of the sole issue raised in the appeal, deleting the liquidated damages award while affirming the attorney's fees.

• Nonato vs. Intermediate Appellate Court and Investor's Finance Corporation, 140 SCRA 255 — Controlling precedent establishing that the remedies under Article 1484 of the Civil Code are alternative, not cumulative, and that the exercise of one bars the exercise of the others. The Court quoted this case extensively in its reasoning.

• Macondray & Co. vs. Eustaquio, 64 Phil. 446 — Followed for the proposition that the phrase "any unpaid balance" in Article 1484 means the deficiency judgment to which the mortgagee may be entitled when the proceeds from the auction sale are insufficient to cover the full amount of the secured obligations, which include interest on the principal, attorney's fees, expenses of collection, and the costs.

• Luneta Motor Co. vs. Salvador, 108 Phil. 1037 — Followed for the ruling that the legislative intent is not to merely limit the proscription to the "unpaid balance of the principal" but to all other claims that may likewise be called in for in the accompanying promissory note against the buyer-mortgagor or his guarantor, including costs and attorney's fees.

• Filipinas Investment & Finance Corporation vs. Ridad, 141 Phil. 237 — Followed for the proposition that the protection given to the buyer-mortgagor under Article 1484 should not be considered to be without circumscription or as being preclusive of all other laws or legal principles, and that attorney's fees could rightly be awarded where the mortgagor unjustifiably refused to surrender the chattel.

• Industrial Finance Corp. vs. Ramirez, 77 SCRA 152 — Cited for the proposition that in a case for specific performance, even when this action is selected after the vendee has refused to surrender the mortgaged property to permit an extrajudicial foreclosure, that property may still be levied on execution and an alias writ may be issued if the proceeds thereof are insufficient to satisfy the judgment credit.

• Industrial Finance Corporation vs. Tobias, 78 SCRA 28 — Cited for the proposition that a mere demand to surrender the object which is not heeded by the mortgagor will not amount to a foreclosure.

• Bank of America vs. Court of Appeals, 228 SCRA 357 — Cited for the rule that as long as the questioned items bear relevance and close relation to those specifically raised, the interest of justice would dictate that they, too, must be considered and resolved, and that the rule that only theories raised in the initial proceedings may be taken up on appeal should only refer to independent, not concomitant matters.

• Article 1484, Civil Code — Provides that 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; (2) cancel the sale, should the vendee's failure to pay cover two or more installments; or (3) foreclose the chattel mortgage on the thing sold, should the vendee's failure to pay cover two or more installments, in which case he shall have no further action against the purchaser to recover any unpaid balance of the price, and any agreement to the contrary shall be void. The Court applied this provision to delete the award of liquidated damages since the replevin action constituted a foreclosure of the chattel mortgage.

• Article 1169, Civil Code — Cited by petitioners for the proposition that neither party incurs delay if the other does not comply with his obligation. The Court did not directly address this argument in its resolution of the sole issue raised on appeal.

• Article 1485, Civil Code — Referenced in the footnotes for the proposition that the rule on alternative and exclusive remedies applies to lease-purchase contracts of personal property.

• Justice Padilla
• Justice Bellosillo
• Justice Kapunan
• Justice Hermosisima, Jr.