Ridad vs. Filipinas Investment and Finance Corporation

Where a vendor of personal property sold on installment elects to foreclose the chattel mortgage on the thing sold, it is precluded from foreclosing on additional security put up by the vendees themselves, as such further foreclosure constitutes a further action prohibited by Article 1484 of the Civil Code.

Luis and Lourdes Ridad were purchasers of two brand-new Ford Consul sedans from Supreme Sales and Development Corporation, payable in 24 monthly installments. The vendor assigned its rights under the promissory note and chattel mortgage to defendant Filipinas Investment and Finance Corporation with the plaintiffs' conformity. To secure payment, the plaintiffs mortgaged not only the two purchased vehicles but also a used Chevrolet car and their certificate of public convenience (taxicab franchise) granted by the defunct Public Service Commission. The dispute arose when, upon the plaintiffs' default, the defendant corporation foreclosed the chattel mortgage and proceeded to sell not only the purchased vehicles but also the franchise and other mortgaged properties at public auction.

On April 14, 1964, Luis and Lourdes Ridad purchased two brand-new Ford Consul sedans, complete with accessories, from Supreme Sales and Development Corporation for ₱26,887, payable in 24 monthly installments. To secure payment of the purchase price, the plaintiffs executed a promissory note and a deed of chattel mortgage on the same date. The chattel mortgage covered not only the two newly purchased vehicles but also a used Chevrolet car and the plaintiffs' certificate of public convenience — a franchise granted by the defunct Public Service Commission for the operation of a taxi fleet. With the plaintiffs' conformity, the vendor assigned its rights, title, and interest in the promissory note and chattel mortgage to defendant Filipinas Investment and Finance Corporation.

The plaintiffs subsequently defaulted on their monthly installments. Defendant corporation foreclosed the chattel mortgage extra-judicially and held a public auction sale of the two Ford Consul cars, at which the defendant corporation was the highest bidder and purchaser. The plaintiffs were not notified of this auction sale. Because the plaintiffs' obligation was not fully satisfied by the proceeds from the sale of the two vehicles, a second auction sale was held on November 16, 1965, involving the remaining mortgaged properties. At this sale, the plaintiffs' franchise to operate five units of taxicab service was sold for ₱8,000 to the defendant corporation as the highest bidder.

Defendant corporation subsequently sold and conveyed the franchise to defendant Jose D. Sebastian, who then filed an application with the Public Service Commission for approval of the sale in his favor. On February 21, 1966, plaintiffs filed an action for annulment of contract before the Court of First Instance of Rizal, Branch I, naming Filipinas Investment and Finance Corporation, Jose D. Sebastian, and Sheriff Jose San Agustin as party-defendants. By agreement of the parties, the case was submitted for decision on the basis of documentary evidence adduced during the pre-trial conference. The lower court declared the chattel mortgage null and void insofar as it covered the taxicab franchise and the used Chevrolet car, nullified the auction sale of the franchise, cancelled the certificate of sale issued in favor of defendant corporation, and declared void the assignment of the franchise from defendant corporation to defendant Sebastian.

• Validity of Chattel Mortgage on Additional Security: Whether the chattel mortgage is valid insofar as it covers the taxicab franchise and the used Chevrolet car, which are properties separate and distinct from the personal property sold on installment.
• Validity of Auction Sale of the Franchise: Whether the auction sale of the plaintiffs' taxicab franchise, admittedly conducted without notice to the plaintiffs, is of legal effect.
• Validity of Assignment of the Franchise: Whether the assignment of the franchise from defendant corporation to defendant Sebastian is valid.

• Validity of Chattel Mortgage on Additional Security: No. The chattel mortgage is null and void insofar as it covers the taxicab franchise and the used Chevrolet car, the vendor having elected foreclosure under Article 1484 of the Civil Code and thereby precluded from foreclosing on additional security put up by the vendees.
• Validity of Auction Sale of the Franchise: No. The auction sale of the franchise is of no legal effect, being a further action prohibited by Article 1484 after the vendor had already elected to foreclose the chattel mortgage on the thing sold.
• Validity of Assignment of the Franchise: No. The assignment of the franchise from defendant corporation to defendant Sebastian is void and of no legal effect, as it derives from an invalid auction sale.

• Validity of Chattel Mortgage on Additional Security: Article 1484 of the Civil Code provides three alternative remedies to a vendor of personal property the price of which is payable in installments: (1) exact fulfillment of the obligation, (2) cancel the sale, or (3) foreclose the chattel mortgage on the thing sold. These remedies are alternative, not cumulative; whichever remedy the vendor elects, it cannot avail of the others. Furthermore, if the vendor elects foreclosure, the law prohibits it from bringing any further action against the purchaser to recover the unpaid balance. The precise purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price, and then suing for a deficiency judgment, which would leave the mortgagor-buyer without the property and still owing practically the full amount of the original indebtedness. In the instant case, defendant corporation elected to foreclose its mortgage upon the plaintiffs' default and purchased the two Ford vehicles at the public auction as the highest bidder. Having chosen foreclosure, it submitted itself to the consequences of the law, including the renunciation of any further rights under the promissory note and chattel mortgage. The Court applied the ruling in Levy Hermanos, Inc. vs. Pacific Commercial Co., where a similar chattel mortgage covering both the motor vehicles sold on installment and a residential lot and house was declared null insofar as it included the house and lot, because the vendor's right to foreclose is limited only to the thing sold. The Court further relied on Cruz vs. Filipinos Investment & Finance Corporation, which precluded a vendor from having recourse against additional security put up by a third party after foreclosure, and reasoned that there is no distinction between additional security put up by a third party and that put up by the vendee himself, since the burden would ultimately fall on the vendee in either case, thereby indirectly subverting the protection afforded by Article 1484.

• Validity of Auction Sale of the Franchise: The auction sale of the franchise was a further extrajudicial foreclosure of the additional security put up by the vendees themselves, which is tantamount to a further action that violates Article 1484. The Court noted that the sale was admittedly held without notice to the plaintiffs, but rendered superfluous any determination of that separate issue, as the invalidity of the foreclosure on the additional security was already dispositive.

• Validity of Assignment of the Franchise: Because the auction sale of the franchise was of no legal effect, the certificate of sale issued in favor of defendant corporation was cancelled and set aside, and consequently the assignment of the franchise from defendant corporation to defendant Sebastian — deriving from that void sale — was likewise declared void and of no legal effect.

• Article 1484 (Recto Law) — Alternative Remedies in Installment Sales — In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of three remedies upon the vendee's default: (1) exact fulfillment of the obligation, (2) cancel the sale if the vendee's failure to pay covers two or more installments, or (3) foreclose the chattel mortgage on the thing sold if one has been constituted, should the vendee's failure to pay cover two or more installments. These remedies are alternative, not cumulative; the vendor's election of one bars resort to the others. If the vendor avails of foreclosure, it is prohibited from bringing any further action against the vendee to recover any unpaid balance. Any agreement to the contrary is void. The purpose is to prevent mortgagees from seizing the mortgaged property, buying it at foreclosure for a low price, and then suing for a deficiency judgment, which would leave the buyer without the property and still indebted for practically the full original amount.

• Limitation of Foreclosure to the Thing Sold — When a vendor elects to foreclose the chattel mortgage under Article 1484, it must content itself with the proceeds of the auction sale of the chattels sold on installment and mortgaged to it. It cannot insist on the sale of other properties of the vendee that are separate and distinct from those sold on installment, even if those properties were included in the chattel mortgage as additional security. To allow otherwise would be equivalent to obtaining a writ of execution against the vendee concerning other properties, contrary to public policy and the spirit and purpose of the law.

• Prohibition on Foreclosing Additional Security After Election of Foreclosure — After a vendor has elected to foreclose the chattel mortgage on the thing sold, it is precluded from foreclosing on additional security put up by the vendees themselves, just as it is precluded from recourse against additional security put up by a third party. There is no distinction between the two situations insofar as the ultimate burden on the vendee is concerned; allowing further foreclosure on additional security would indirectly subvert the protection Article 1484 affords the installment buyer.

• "Whichever right the vendor elects, he cannot avail of the other, these remedies being alternative, not cumulative." — This passage states the fundamental principle that the three remedies under Article 1484 are mutually exclusive, forming the basis for precluding the vendor from pursuing additional foreclosure after electing the remedy of foreclosure.

• "The precise purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment, otherwise, the mortgagor-buyer would find himself without the property and still owing practically the full amount of his original indebtedness." — This articulates the protective policy underlying Article 1484, explaining why the law bars further action after foreclosure and why foreclosure cannot be extended to additional security.

• "If the vendor under such circumstance is prohibited from having a recourse against the additional security for reasons therein stated, there is no ground why such vendor should not likewise be precluded from further extrajudicially foreclosing the additional security put up by the vendees themselves, as in the instant case, it being tantamount to a further action that would violate Article 1484 of the Civil Code, for then is actually no between an additional security put up by the vendee himself and such security put up by a third party insofar as how the burden would ultimately fall on the vendee himself is concerned." — This is the ratio decidendi extending the prohibition on recourse against third-party additional security to additional security put up by the vendee, establishing that both situations are equivalent in their ultimate effect on the buyer.

• Levy Hermanos, Inc. vs. Pacific Commercial Co., et al., 71 Phil. 587 — Controlling precedent with substantially similar facts. There, vendees offered as security not only the motor vehicles bought on installment but also a residential lot and house. The Court sustained the lower court's declaration of nullity of the mortgage insofar as it included the house and lot, holding that the vendor's right to foreclose is limited to the thing sold and cannot extend to other properties of the vendee.

• Cruz vs. Filipinos Investment & Finance Corporation, 23 SCRA 791 — Followed and extended. The Court ruled that a vendor who forecloses the chattel mortgage on the thing sold is precluded from recourse against additional security put up by a third party, because compelling the guarantor to pay would ultimately shift the burden back to the vendee, indirectly subverting the protection of Article 1484. The present case extends this reasoning to additional security put up by the vendee himself.

• Pascual vs. Universal Motors Corporation, 61 SCRA 121 — Cited as reiterating the ruling in Cruz.

• Southern Motors, Inc. vs. Moscoso, 2 SCRA 168 — Distinguished. There, the vendor availed of the first remedy under Article 1484 (exact fulfillment), and the mortgaged property was subsequently attached and sold; the sale did not amount to a foreclosure, so the seller was entitled to a deficiency judgment. In the present case, the remedy elected was foreclosure, making that ruling inapplicable.

• Luneta Motor Co. vs. Dimagiba, 3 SCRA 884 — Cited for the proposition that the vendor's remedies under Article 1484 are alternative.

• Industrial Finance Corporation vs. Tobias, 78 SCRA 28 — Cited for the proposition that the remedies under Article 1484 are alternative, not cumulative, and that foreclosure bars further action for the unpaid balance.

• Bachrach Motor Co. vs. Millan, 61 Phil. 409 — Cited for the policy rationale behind the prohibition on deficiency judgments after foreclosure under Article 1484.

• Article 1484, Civil Code of the Philippines — Governs remedies available to a vendor of personal property sold on installment. Provides three alternative remedies: (1) exact fulfillment, (2) cancel the sale upon default of two or more installments, or (3) foreclose the chattel mortgage on the thing sold upon default of two or more installments. If the vendor elects foreclosure, it has no further action against the purchaser to recover any unpaid balance; any agreement to the contrary is void. Applied to bar the defendant corporation from foreclosing on the taxicab franchise and used Chevrolet car — additional security separate from the thing sold — after it had already elected to foreclose the chattel mortgage on the two Ford vehicles.

Makasiar (Chairman), Aquino, Concepcion, Jr., Guerrero, Abad Santos, and Escolin, JJ., concurred.