Pascual vs. Universal Motors Corporation

Where a vendor has foreclosed a chattel mortgage on personal property sold on installments, Article 1484 of the Civil Code bars not only any further action against the purchaser for the unpaid balance but also any recourse against additional security furnished by a third-party guarantor, because compelling the guarantor to pay would entitle the guarantor to reimbursement from the purchaser, thereby indirectly subverting the statute's protection.

Spouses Lorenzo Pascual and Leonila Torres owned two parcels of land in Quezon City covered by Transfer Certificates of Title Nos. 77639 and 3005. PDP Transit, Inc. purchased five Mercedes Benz trucks from Universal Motors Corporation under invoices Nos. 2836 through 2840, with a total purchase price of ₱152,506.50, payable in installments and bearing interest at 1% per month from December 14, 1960. The spouses executed a real estate mortgage over their Quezon City properties on December 14, 1960 to guarantee PDP Transit's obligation, but their guarantee was capped at ₱50,000, the value of the mortgaged properties. The same obligation was additionally secured by separate deeds of chattel mortgage on the five trucks in favor of Universal Motors.

On December 14, 1960, spouses Lorenzo Pascual and Leonila Torres executed a real estate mortgage over two parcels of land in Quezon City, covered by Transfer Certificates of Title Nos. 77639 and 3005, in favor of Universal Motors Corporation. The mortgage secured the indebtedness of PDP Transit, Inc. arising from the latter's purchase of five Mercedes Benz trucks under invoices Nos. 2836 through 2840, with a total purchase price of ₱152,506.50. The spouses' guarantee, however, was not to exceed ₱50,000, which was the value of the mortgaged properties. The principal obligation bore interest at 1% per month from December 14, 1960. The same obligation was further secured by separate deeds of chattel mortgage on the five trucks, also in favor of Universal Motors.

PDP Transit made partial payments totaling ₱92,964.91 — as of April 5, 1961 for two of the units and as of May 22, 1961 for the remaining three — leaving an unpaid balance of ₱68,641.69, inclusive of interest due as of February 8, 1965. On March 19, 1965, Universal Motors filed a complaint against PDP Transit before the Court of First Instance of Manila, docketed as Civil Case No. 60201, with a petition for a writ of replevin to collect the balance due under the chattel mortgages and to repossess all the units sold to PDP Transit, including the five units guaranteed by the subject real estate mortgage.

Universal Motors admitted during the hearing that in Civil Case No. 60201 it was able to repossess all the units sold to PDP Transit, including the five units covered by the real estate mortgage, and to foreclose all the chattel mortgages constituted thereon, resulting in the sale of the trucks at public auction. Thereafter, the spouses Pascual and Torres filed an action in the Court of First Instance of Quezon City, docketed as Civil Case No. 8189, for the cancellation of the real estate mortgage they had constituted on their properties. The lower court found that the sale to PDP Transit was on an installment basis and that the purchaser had failed to pay two or more installments, rendering Article 1484 of the Civil Code applicable. The court rendered judgment for the plaintiffs, ordered the cancellation of the mortgage, and directed Universal Motors to pay ₱500.00 in attorney's fees. Universal Motors appealed.

• Applicability of Article 1484: Whether Article 1484 of the Civil Code applies to the case, given the appellant's contention that there is no evidence on record that the purchase by PDP Transit was payable in installments and that the purchaser had failed to pay two or more installments.
• Scope of the Prohibition Against Further Action: Whether the prohibition in Article 1484 against recovering any unpaid balance after foreclosure of the chattel mortgage extends to recourse against additional security (a real estate mortgage) put up by a third-party guarantor, as distinguished from the purchaser itself.

• Applicability of Article 1484: Yes. The lower court found that the sale was on installments and that there was failure to pay two or more installments, and this factual finding is not subject to review by the Supreme Court.
• Scope of the Prohibition Against Further Action: Yes, the prohibition extends to recourse against a third-party guarantor's security. To compel the guarantor to pay the balance would entitle the guarantor to reimbursement from the purchaser under Article 2066, thereby indirectly making the purchaser bear the payment despite the earlier foreclosure, thus subverting the protection of Article 1484 and overturning public policy.

• Applicability of Article 1484: The appellant's first argument raised an issue of fact — whether the sale was on installments and whether the purchaser failed to pay two or more installments. The lower court had already found both elements present. That finding is not reviewable by the Supreme Court, and the appellant's bare allegation to the contrary cannot be entertained at this stage of the proceedings. Accordingly, Article 1484 is applicable.

• Scope of the Prohibition Against Further Action: The appellant contended that Article 1484 withholds only the vendor's right to recover any deficiency from the purchaser after foreclosure of the chattel mortgage, not the vendor's recourse against additional security furnished by a third party. The Court rejected this argument by reasoning that if the guarantor were compelled to pay the balance of the purchase price, the guarantor would in turn be entitled to recover what it had paid from the purchaser-debtor under Article 2066 of the Civil Code. The purchaser would ultimately bear the payment of the balance despite the earlier foreclosure of the chattel mortgage it had given. The protection afforded by Article 1484 would thus be indirectly subverted and public policy overturned. This reasoning followed the precedent established in Cruz vs. Filipinas Investment & Finance Corporation (L-24752, May 27, 1968; 23 SCRA 791).

• Recto Law (Article 1484, Civil Code) — Election of Remedies and Prohibition on Deficiency Recovery — In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of three 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; or (3) foreclose the chattel mortgage on the thing sold, should the vendee's failure to pay cover two or more installments. Under the third remedy, the vendor shall have no further action against the purchaser to recover any unpaid balance of the price, and any agreement to the contrary is void. The Court applied this doctrine to hold that once the vendor elects to foreclose the chattel mortgage, all further recovery of the deficiency is barred — not only against the purchaser but also against a third-party guarantor whose security would, if enforced, ultimately shift the deficiency back to the purchaser through the guarantor's right of reimbursement under Article 2066.

• Prohibition Extends to Third-Party Guarantors — The protection of Article 1484 against deficiency recovery after chattel mortgage foreclosure extends to additional security furnished by a third-party guarantor. The rationale is that compelling the guarantor to pay would trigger the guarantor's right of reimbursement against the purchaser under Article 2066, thereby indirectly making the purchaser liable for the very deficiency that Article 1484 prohibits the vendor from collecting. To allow recourse against the guarantor would thus subvert the statute's protective policy.

• "(T)o sustain appellant's argument is to overlook the fact that if the guarantor should be compelled to pay the balance of the purchase price, the guarantor will in turn be entitled to recover what she has paid from the debtor vendee (Art. 2066, Civil Code); so that ultimately, it will be the vendee who will be made to bear the payment of the balance of the price, despite the earlier foreclosure of the chattel mortgage given by him. Thus, the protection given by Article 1484 would be indirectly subverted, and public policy overturned." — This passage, quoted from Cruz vs. Filipinas Investment & Finance Corporation, articulates the ratio decidendi: the prohibition in Article 1484 against deficiency recovery after chattel mortgage foreclosure extends to third-party guarantors because recourse against the guarantor would indirectly defeat the statute's protection of the installment buyer.

• Cruz vs. Filipinas Investment & Finance Corporation, L-24752, May 27, 1968; 23 SCRA 791 — Controlling precedent directly relied upon. The Court quoted its holding that compelling a guarantor to pay the deficiency after chattel mortgage foreclosure would entitle the guarantor to reimbursement from the purchaser under Article 2066, thereby indirectly subverting the protection of Article 1484. The present case applied the same reasoning to a real estate mortgage furnished by third-party mortgagors.

• Article 1484, Civil Code of the Philippines — Provides that in a sale of personal property payable in installments, the vendor may foreclose the chattel mortgage on the thing sold if the vendee fails to pay two or more installments, but in such case "shall have no further action against the purchaser to recover any unpaid balance of the price," and any agreement to the contrary is void. Applied to bar Universal Motors from recovering the deficiency after foreclosing the chattel mortgages on the trucks, and extended to bar recourse against the spouses' real estate mortgage.
• Article 2066, Civil Code of the Philippines — Provides that a guarantor who pays is entitled to recover from the debtor what it has paid. Cited as the mechanism by which recourse against the guarantor would ultimately shift the deficiency back to the purchaser, thereby subverting Article 1484's protection.

Castro, Makasiar, Esguerra, and Muñoz Palma, JJ., concurred. Teehankee, J., took no part.