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Bank applied for extrajudicial foreclosure of chattel mortgage. Acme

filed action for injunction however RTC ultimately dismissed
complaint and ordered foreclosure saying Acme was bound by

CA dismissed appeal and affirmed RTC.


27 June 1978 - Chua Pac (general manager) of Acme Shoe, Rubber

& Plastic Corporation executed in behalf of Acme, a chattel mortgage
in favour of Producers Bank of the Philippines. This is to secure a
corporate loan of P3M.

ISSUE: WON it is valid and effective to have a clause in a chattel

Chattel mortgage had a provision

HELD: No. RTC and CA decisions set aside.

(c) If the MORTGAGOR, his heirs, executors or administrators shall

well and truly perform the full obligation or obligations above-stated
according to the terms thereof, then this mortgage shall be null and
void. . . .
In case the MORTGAGOR executes subsequent promissory note
or notes either as a renewal of the former note, as an extension
thereof, or as a new loan, or is given any other kind of
accommodations such as overdrafts, letters of credit, acceptances
and bills of exchange, releases of import shipments on Trust
Receipts, etc., this mortgage shall also stand as security for the
payment of the said promissory note or notes and/or
accommodations without the necessity of executing a new contract
and this mortgage shall have the same force and effect as if the
said promissory note or notes and/or accommodations were
existing on the date thereof. This mortgage shall also stand as
security for said obligations 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.

Loan of P3M paid. Obtained another loan in 1981 P2.7M and was
also paid.

10 and 11 January 1984, bank again obtained loan of P1M in 4

promissory notes of 250K each. Due to financial constraints, the loan
was not settled at maturity.

mortgage that extends its coverage to obligations yet to be contracted or


Chattel mortgage can cover only obligations existing at the time mortgage is
constituted [Act 1508 Chattel Mortgage Law]

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.

Refusal on the part of the borrower to execute the agreement so as

to cover the after-incurred obligation can constitute an act of default
on the part of the borrower of the financing agreement whereon the
promise is written but, of course, the remedy of foreclosure can only
cover the debts extant at the time of constitution and during the life of
the chattel mortgage sought to be foreclosed.

Affidavit of Good Faith requirement makes it obvious that the obligation is


Makati Leasing and Finance Corp., vs Wearever Textile Mills,


Wearever Textile Mills, Inc. executed a chattel mortgage
contract in favor of Makati Leasing and Finance Corporation
covering certain raw materials and machinery.
Upon default, Makati Leasing fi led a petition for judicial
foreclosure of the properties mortgaged. Acting on Makati
Leasings application for replevin, the lower court issued a
writ of seizure.
Pursuant thereto, the sheriff enforcing the seizure order
seized the machinery subject matter of the mortgage. In a
petition for certiorari and prohibition, the Court of Appeals
ordered the return of the machinery on the ground that the
same can-not be the subject of replevin because it is a real
property pursuant to Article415 of the new Civil Code, the
same being attached to the ground by means of bolts and
the only way to remove it from Wearever textiles plant
would be to drill out or destroy the concrete floor.
When the motion for reconsideration of Makati Leasing was
denied by the Court of Appeals, Makati Leasing elevated
the matter to the Supreme Court.

A chattel mortgage, as hereinbefore so intimated, must comply

substantially with the form prescribed by the Chattel Mortgage Law
itself. Sec 5 thereof requires an affidavit of good faith. If this is
not appended to the agreement chattel mortgage would still be valid
between the parties (not against third persons acting in good faith ),
The fact, however, that the statute has provided that the parties to
the contract must execute an oath that
. . . (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. In the chattel
mortgage here involved, the only obligation specified in the chattel
mortgage contract was the P3,000,000.00 loan which petitioner
corporation later fully paid.

Sec 3 of the Chattel Mortgage Law, the payment of the

obligation automatically rendered the chattel mortgage void or
terminated. 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., et al.] Payment of the
P3M loan caused the extinguishment of chattel mortgage.

Other notes:
Damages: Acme cannot claim moral damages. Artifical person. No feelings

LegProf: Lawyers have to observe and maintain the respect due to the courts
of justice and judicial officers. Lawyer for Acme admonished by the court for
calling magistrates of CA incompetent and dishonest.

ISSUE: W/N the machinery in suit is real or personal property from

the point of view of the parties.
There is no logical justification to exclude the rule out the
present case from the application of the pronouncement
in Tumalad v Vicencio, 41 SCRA 143. If a house of strong
materials, like what was involved in the Tumalad case, may
be considered as personal property for purposes of
executing a chattel mortgage thereon as long as
the parties to the contract so agree and no innocent third
party will be prejudiced thereby, there is absolutely no
reason why a machinery, which is movable in its nature and
becomes immobilized only by destination or purpose, may
not be likewise treated as such. This is really because one

who has so agreed is estopped from the denying the

existence of the chattel mortgage.
In rejecting petitioners assertion on the applicability of
the Tumalad doctrine, the CA lays stress on the fact that the
house involved therein was built on a land that did not
belong to the owner of such house. But the law makes no
distinction with respect to the ownership of the land on
which the house is built and We should not lay down
distinctions not contemplated by law.
It must be pointed out that the characterization by the
intention and impresses upon the property the character
determined by the parties. As stated in Standard Oil Co. of
New York v. Jaramillo, 44 Phil. 630, it is undeniable that the
parties to a contract may, by agreement, treat as personal
property that which by nature would be a real property as
long as no interest of third parties would be prejudiced
The status of the subject matter as movable or immovable
property was not raised as an issue before the lower court
and the CA, except in a supplemental memorandum in
support of the petition filed in the appellate court. There is
no record showing that the mortgage has been annulled, or
that steps were taken to nullify the same. On the other
hand, respondent has benefited from the said contract.
Equity dictates that one should not benefit at the
expense of another.
As such, private respondent could no longer be allowed to
impugn the efficacy of the chattel mortgage after it has
benefited therefrom.
Therefore, the questioned machinery should be considered
as personal property.


Wilfredo Dy bought a truck and tractor from Libra Finance
Corporation. Both truck and tractor was also mortgage to Libra as
security for a loan and as such, they took possession of it. Brother
of Wilfredo, Perfecto Dy and sister Carol Dy-Seno requested Libra
that they be allowed to buy the property and assume the mortgage
debt. Libra agreed to the request.

Meanwhile, a collection suit was filed against Wilfredo Dy by Gelac

Trading Inc. On the strength of a writ of execution, the sheriff was
able to obtain the tractor on the premises of Libra. It was sold in a
public auction in which Gelac Trading was the lone bidder. Gelac
subsequently sold it to one of their stockholders.

The respondents claim that at the time of the execution of the deed
of sale, no constructive delivery was effected since the
consummation of the sale depended upon the clearance and
encashment of the check which was issued in payment of the
subject tractor
WON the William Dy is still the owner of the tractor when it was
obtained through the writ of execution.
The tractor was not anymore in possession of William Dy when it
was obtained by the sheriff because he already sold it to his
William Dy has the right to sell his property even though it was
mortgage because in a mortgage, the mortgagor doesnt part with
the ownership over the property. He is allowed to sell the property
as long as there is consent from the mortgagee such as in this
case. But even if there is no consent given, the sale would still be
valid without prejudice to the criminal action against the mortgagor.

When William Dy sold the tractor, he already transferred the

ownership of it because NCC states that the ownership of the thing
sold is acquired by the vendee from the moment it is delivered to
him or in any other manner signing an agreement that the
possession is transferred from the vendor to the vendee. In the
instant case, actual delivery of the subject tractor could not be
made but there was constructive delivery already upon the
execution of a public instrument which in this case is a deed of
The payment of the check was actually intended to extinguish the
mortgage obligation.

WON there was a consummated sale between Petitioner and

The payment of the check was actually intended to extinguish the

mortgage obligation so that the tractor could be released to the
petitioner. It was never intended nor could it be considered as
payment of the purchase price because the relationship between
Libra and the petitioner is not one of sale but still a mortgage. The
clearing or encashment of the check which produced the effect of
payment determined the full payment of the money obligation and
the release of the chattel mortgage. It was not determinative of the
consummation of the sale. The transaction between the brothers is
distinct and apart from the transaction between Libra and the
petitioner. The contention, therefore, that the consummation of the
sale depended upon the encashment of the check is untenable.