G.R. No. L-48359. March 30, 1993.

MANOLO P. CERNA, petitioner, vs. THE HONORABLE COURT OF APPEALS and CONRAD C.
LEVISTE, respondents.

CAMPOS, JR., J :

DOCTRINE

the filing of collection suit barred the foreclosure of the mortgage. A mortgage who files a suit for
collection abandons the remedy of foreclosure of the chattel mortgage constituted over the personal
property as security for the debt or value of the promissory note which he seeks to recover in the
said collection suit.

FACTS

Debtor Celerino Delgado entered into a loan agreement with creditor Conrad Leviste (P) covered by a
promissory note. In addition to mortgaging his vehicle, Delgado also mortgaged another vehicle owned by
Manolo Cerna (D) to secure his loan.

The period lapsed without Delgado paying the loan. Leviste (P) filed a collection suit against Delgado and
Cerna (D) as solidary debtors. Cerna (D) filed a motion to dismiss case alleging lack of cause of action
against him because he was not a debtor under the promissory note and secondly, that the case did not
survive Delgado's death. However, Cerna's (D) motion was dismissed.

On appeal, the court ruled that Cerna (D) and Delgado were solidary debtors and that the mortgage
created a joint and solidary obligation against Leviste (P).

Issues: Whether or not the mortgage of a property owned by a third party to secure the debt of the
debtor make this third party solidarily liable with the debtor?

HELD

No. Only Delgado signed the promissory note and accordingly, he was the only one bound by the
contract of loan. Nowhere did it appear in the promissory note that petitioner was a co-debtor. The
law is clear that contracts take effect only between the parties

the contract of loan, as evidenced by the promissory note, was signed by Delgado only. Petitioner
had no part in the said contract. Thus, nowhere could it be seen from the agreement that petitioner
was solidarily bound with Delgado for the payment of the loan.

There is also no legal provision nor jurisprudence in our jurisdiction which makes a third person who
secures the fulfillment of another's obligation by mortgaging his own property to be solidarily bound
with the principal obligor. A chattel mortgage may be "an accessory contract" to a contract of loan,
but that fact alone does not make a third-party mortgagor solidarily bound with the principal debtor in
fulfilling the principal obligation that is, to pay the loan. The signatory to the principal contract — loan
— remains to be primarily bound. It is only upon the default of the latter that the creditor may have
been recourse on the mortgagors by foreclosing the mortgaged properties in lieu of an action for the
recovery of the amount of the loan. And the liability of the third-party mortgagors extends only to the
property mortgaged. Should there be any deficiency, the creditors has recourse on the principal
debtor.

In this case, however, the mortgage contract was also signed only by Delgado as mortgagor. But
this alone does not make petitioner a co-mortgagor especially so since only Delgado signed the
chattel mortgage as mortgagor. The Special Power of Attorney did not make petitioner a mortgagor.
All it did was to authorized Delgado to mortgage certain properties belonging to petitioner.

Granting, however, that petitioner was obligated under the mortgage contract to answer for
Delgado's indebtedness, under the circumstances, petitioner could not be held liable because the
complaint was for recovery of a sum of money, and not for the foreclosure of the security. The filing
of collection suit barred the foreclosure of the mortgage.

"A mortgage who files a suit for collection abandons the remedy of foreclosure of the chattel
mortgage constituted over the personal property as security for the debt or value of the promissory
note which he seeks to recover in the said collection suit."

The reason for this rule is that when , however, the mortgage elects to file a suit for collection, not
foreclosure, thereby abandoning the chattel as basis for relief, he clearly manifest his lack of desire
and interest to go after the mortgaged property as security for the promissory note.

Hence, Leviste, having chosen to file the collection suit, could not now run after petitioner for the
satisfaction of the debt. This is even more true in this case because of the death of the principal
debtor, Delgado. Leviste was pursuing a money claim against a deceased person.

G.R. No. L-4637             June 30, 1952

JOSE A. LUNA, petitioner,
vs.
DEMETRIO B. ENCARNACION, Judge of First Instance of Rizal, TRINIDAD REYES and THE
PROVINCIAL SHERIFF OF RIZAL, respondents.

DOCTRINE

Act No. 3135, as amended, only covers real estate mortgages and is intended merely to regulate the
extra-judicial sale of the property mortgaged if and when the mortgagee is given a special power or
express authority to do so in the deed itself, or in a document annexed thereto.

FACTS

A deed designated as chattel mortgage was executed by Jose A. Luna in favor of Trinidad Reyes
whereby the former conveyed by way of first mortgage to the latter a certain house of mixed
materials to secure the payment of a promissory note.

The document was registered in the office of the register of deeds for the Province of Rizal. The
mortgagor having filed to pay the promissory note when it fell due, the mortgage requested the
sheriff of said province to sell the house at public auction so that with its proceeds the amount
indebted may be paid notifying the mortgagor in writing of the time and place of the sale as required
by law. The sheriff acceded to the request and sold the property to the mortgagee for the amount
covering the whole indebtedness with interest and costs. The certificate of sale was issued by the
sheriff. After the period for the redemption of the property had expired without the mortgagor having
exercised his right to repurchase, the mortgagee demanded from the mortgagor the surrender of the
possession of the property, but the later refused and so she filed a petition praying that the provincial
sheriff be authorized to place her in possession of the property invoking in her favor the provisions of
Act No. 3135, as amended by Act No. 4118.

The trial court overruled the opposition and granted the petition ordering the provincial sheriff of
Rizal, or any of this disputives, to immediately place petitioner in possession of the property in
question while at the same time directing the mortgagor Jose A. Luna to vacate it and relinquish it in
favor of petitioner.

ISSUE

Whether or not the the extra-judicial is valid

HELD

The said extra-judicial sale having been conducted under the provisions of Act No. 3135, as
amended by Act No. 4118, is invalid because the mortgage in question is not a real estate mortgage
and, besides, it does not contain an express stipulation authorizing the mortgagee to foreclose the
mortgage extra-judicially.

As may be gleaned from a perusal of the deed signed by the parties the understanding executed by
them is a chattel mortgage, as the parties have so expressly designated, and not a real estate
mortgage, specially when it is considered that the property given as security is a house of mixed
materials which by its very nature is considered as personal property. Such being the case, it is
indeed a mistake for the mortgagee to consider this transaction in the light of Act No. 3135, as
amended by Act No. 4118, as was so considered by her when she requested to provincial sheriff to
sell it extra-judicially in order to secure full satisfaction of the indebtedness still owed her by the
mortgagor. It is clear that Act No. 3135, as amended, only covers real estate mortgages and is
intended merely to regulate the extra-judicial sale of the property mortgaged if and when the
mortgagee is given a special power or express authority to do so in the deed itself, or in a document
annexed thereto. These conditions do not here obtain. The mortgage before us is not a real estate
mortgage nor does it contain an express authority or power to sell the property extra-judicially.

But regardless, the validity of the sale in question may be maintained, it appearing that the mortgage
in question is a chattel mortgage and as such it is covered and regulated by the Chattel Mortgage
Law, Act No. 1508. Section 14 of this Act allows the mortgagee through a public officer in almost the
same manner as that allowed by Act No. 3135, as amended by Act No. 4118, provided that the
requirements of the law relative to notice and registration are complied with.
 [G.R. No. L-21720. January 30, 1967.]

IFC SERVICE LEASING AND ACCEPTANCE CORPORATION, Petitioner-Appellee,

v. VENANCIO NERA, Movant-Appellant.

DOCTRINE

FACTS

The writ of possession was issued by the lower court, on the ex parte application of the
appellee. The petition recited that, as mortgagee of the property of the spouses
Venancio Nera and Rosa F. Nera, appellee filed with the sheriff’s office a verified
petition for the extrajudicial foreclosure of the mortgage; that after notice and
publication, the property was sold to appellee as the highest bidder; that the period of
redemption expired without the property being redeemed, for which reason the
property was consolidated in the name of appellee to whom a new title was issued.

Appellant asked for a reconsideration of the order on the ground that his failure to
redeem the property was due to appellee’s misrepresentation. The court denied the
motion.

ISSUE

whether in cases of extrajudicial foreclosure of real estate mortgages, a regular action

must be instituted in order to secure possession of the property sold.

HELD

There is no law in this jurisdiction whereby the purchaser at a sheriff’s sale of real
property is obliged to bring a separate and independent suit for possession after the
one-year period for redemption has expired and after he has obtained the sheriff’s final
certificate of sale. There is neither legal ground nor reason of public policy precluding
the court from ordering the sheriff in this case to yield possession of the property
purchased at public auction where it appears that the judgment debtor is the one in
possession thereof and no rights of third persons are involved

Section 35 of Rule 39 of the Revised Rules of Court expressly states that "If no
redemption be made within twelve (12) months after the sale, the purchaser, or his
assignee, is entitled to a conveyance and possession of the property . . . The
possession of the property shall be given to the purchaser or last redemptioner by the
same officer unless a third party is actually holding the property adversely to the
judgment debtor." cralaw virtua1aw library
Moreover, if under Section 7 of Act No. 3135 the court has the power, on the ex parte
application of the purchaser, to issue a writ of possession during the period of
redemption, there is no reason why it should not also have the same power after the
expiration of that period, especially where, as in this case, a new title has already been
issued in the name of the purchaser.

In view of the foregoing, the order appealed from is hereby affirmed, without
pronouncement as to costs.

[G.R. No. 103576. August 22, 1996.]

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, Petitioners, v.

HON. COURT OF APPEALS, PRODUCERS BANK OF THE PHILIPPINES and
REGIONAL SHERIFF OF CALOOCAN CITY, Respondents.

VITUG, J.:

DOCTRINE

Refusal on the part of the borrower to execute the chattel mortgage 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.

FACTS

Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe,
Rubber & Plastic Corporation," executed for and in behalf of the company, a chattel
mortgage in favor of private respondent Producers Bank of the Philippines. The
mortgage stood by way of security for petitioner’s corporate loan.

In due time, the loan was paid by petitioner corporation. Subsequently, it obtained from
respondent bank additional financial accommodations. These borrowings were on due
date also fully paid.

the bank yet again extended to petitioner corporation a loan covered by four
promissory notes. Due to financial constraints, the loan was not settled at maturity.
Respondent bank thereupon applied for an extrajudicial foreclosure of the chattel
mortgage, prompting petitioner corporation to forthwith file an action for injunction,
with damages and a prayer for a writ of preliminary injunction, before the RTC.
Ultimately, the court dismissed the complaint and ordered the foreclosure of the chattel
mortgage. It held petitioner corporation bound by the stipulations, aforequoted, of the
chattel mortgage.

The CA affirmed the decision of the RTC.

ISSUE

Would it be valid and effective to have a clause in a chattel mortgage that purports to
likewise extend its coverage to obligations yet to be contracted or incurred?

HELD

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
at 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.

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. By virtue of Section 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."

Since the 1978 chattel mortgage had ceased to exist coincidentally with the full
payment of the P3,000,000.00 loan, there no longer was any chattel mortgage that
could cover the new loans that were concluded thereafter.
PEOPLE'S BANK AND TRUST COMPANY vs. DAHICAN LUMBER COMPANY (G.R. No. L-17500
May 16, 1967)

DOCTRINE

A stipulation subjecting to the mortgage lien, properties

(improvements) which the mortgagor may subsequently
acquire, install, or use in connection with real property already
mortgaged belonging to the mortgagor is valid.

FACTS

Atlantic Gulf & Pacific Company of Manila, a West Virginia corporation licensed to do business in the
Philippines sold and assigned all its rights in the Dahican Lumber concession to Dahican Lumber
Company - hereinafter referred to as DALCO - for the total sum of $500,000.00, of which only the amount
of $50,000.00 was paid. Thereafter, to develop the concession, DALCO obtained various loans from the
People's Bank & Trust Company. In addition, DALCO obtained, through the BANK, a loan from the
Export-Import Bank of Washington D.C., evidenced by five promissory notes maturing on different dates,
executed by both DALCO and the Dahican America Lumber Corporation, a foreign corporation and a
stockholder of DALCO,

As security for the payment of the abovementioned loans, DALCO executed in favor of the BANK a deed
of mortgage covering five parcels of land together with all the buildings and other improvements existing
thereon and all the personal properties of the mortgagor located in its place of business. DALCO
executed a second mortgage on the same properties in favor of ATLANTIC to secure payment of the
unpaid balance of the sale price of the lumber concession. Both deeds contained a provision extending
the mortgage lien to properties to be subsequently acquired by the mortgagor.

Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its maturity, the BANK paid the
same to the Export-Import Bank of Washington D.C., and the latter assigned to the former its credit and
the first mortgage securing it. Subsequently, the BANK gave DALCO and DAMCO time to pay the
overdue promissory note.c

After the date of execution of the mortgages mentioned above - DALCO purchased various machineries,
equipment, spare parts and supplies in addition to, or in replacement of some of those already owned and
used by it on the date aforesaid. Pursuant to the provision of the mortgage deeds quoted theretofore
regarding "after acquired properties," the BANK requested DALCO to submit complete lists of said
properties but the latter failed to do so.

the Board of Directors of DALCO, passed a resolution agreeing to rescind the alleged sales of equipment,
spare parts and supplies by CONNELL and DAMCO to it.

the BANK, in its own behalf and that of ATLANTIC, demanded that said agreements be cancelled but
CONNELL and DAMCO refused to do so. As a result,; ATLANTIC and the BANK, commenced
foreclosure proceedings.

the Court ordered the sale of all the machineries, equipment and supplies of DALCO, and the same were
subsequently sold for. The amount was deposited in court pending final determination of the action. By a
similar agreement one-half (P87,500.00) of this amount was considered as representing the proceeds
obtained from the sale of the "undebated properties" (those not claimed by DAMCO and CONNELL), and
the other half as representing those obtained from the sale of the "after acquired properties".
ISSUE:

WON the "after acquired properties" were subject to the deeds of mortgage.

HELD:

Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property of every
nature and description taken in exchange or replacement, as well as all buildings, machineries,
fixtures, tools, equipments, and other property that the mortgagor may acquire, construct, install,
attach; or use in, to upon, or in connection with the premises - that is, its lumber concession - "shall
immediately be and become subject to the lien" of both mortgages in the same manner and to the
same extent as if already included therein at the time of their execution. Such stipulation is neither
unlawful nor immoral, its obvious purpose being to maintain, to the extent allowed by circumstances,
the original value of the properties given as security.

Article 415 does not define real property but enumerates what are considered as such, among them
being machinery, receptacles, instruments or replacements intended by owner of the tenement for
an industry or works which may be carried on in a building or on a piece of land, and shall tend
directly to meet the needs of the said industry or works. On the strength of the above-quoted legal
provisions, the lower court held that inasmuch as "the chattels were placed in the real properties
mortgaged to plaintiffs, they came within the operation of Art. 415, paragraph 5 and Art. 2127 of the
New Civil Code". In the present case, the characterization of the "after acquired properties" as real
property was made not only by one but by both interested parties. There is, therefore, more reason
to hold that such consensus impresses upon the properties the character determined by the parties
who must now be held in estoppel to question it.