Filinvest Credit vs. CA [G.R. No. 82508.  September 29, 1989.]
Second Division, Sarmiento (J): 3 concur, 1 on leave

Facts: The spouses Jose Sy Bang and Iluminada Tan were engaged in the sale of gravel produced from crushed rocks and used for construction purposes. In order to increase their production, they engaged the services of Mr. Ruben Mercurio, the proprietor of Gemini Motor Sales in Lucena City, to look for a rock crusher which they could buy. Mr. Mercurio referred the spouses to the Rizal Consolidated Corporation which then had for sale one such machinery (Lippman portable crushing plant, reconditioned; Jaw crusher, 10 x 16, Double roll crusher, 16 x 16; 3 units product conveyor, 75 HP electric motor, 8 pcs. Brand new tires; Chassis 19696, Good running condition). Oscar Sy Bang, a brother of Jose Sy Bang, went to inspect the machine at the Rizal Consolidated’s plant site. Apparently satisfied with the machine, Sy Bang signified their intent to purchase the same. They were confronted with a problem, the rock crusher carried a cash price tag of P550,000.00. Bent on acquiring the machinery, the spouses applied for financial assistance from Filinvest Credit Corporation. Filinvest agreed to extend to the spouses financial aid on the following conditions: that the machinery be purchased in Filinvest’s name; that it be leased (with option to purchase upon the termination of the lease period) to the spouses; and that the spouses execute a real estate mortgage in favor of Filinvest as security for the amount advanced by the latter. Accordingly, on 18 May 1981, a contract of lease of machinery (with option to purchase) was entered into by the parties whereby the spouses agreed to lease from the petitioner the rock crusher for two years starting from 5 July 1981 payable at P10,000.00 for first 3 months, P23,000.00 for the next 6 months, and P24,800.00 for the next 15 months. The contract likewise stipulated that at the end of the two-year period, the machine would be owned by the spouses. Thus, the spouses issued in favor of Filinvest a check for P150,550.00, as initial rental (or guaranty deposit), and 24 postdated checks corresponding to the 24 monthly rentals. In addition, to guarantee their compliance with the lease contract, the spouses executed a real estate mortgage over two parcels of land in favor of Filinvest. The rock crusher was delivered to the spouses on 9 June 1981. Three months from the date of delivery, or on 7 September 1981, however, the spouses, claiming that they had only tested the machine that month, sent a letter-complaint to Filinvest, alleging that contrary to the 20 to 40 tons per hour capacity of the machine as stated in the lease contract, the machine could only process 5 tons of rocks and stones per hour. They then demanded that Filinvest make good the stipulation in the lease contract. They followed that up with similar written complaints to Filinvest, but the latter did not, however, act on them. Subsequently, the spouses stopped payment on the remaining checks they had issued to Filinvest. As a consequence of the non-payment by the spouses of the rentals on the rock crusher as they fell due despite the repeated written demands, Filinvest extrajudicially foreclosed the real estate mortgage. On 18 April 1983, the spouses received a Sheriff a Notice of Auction Sale informing them that their mortgaged properties were going to be sold at a public auction on 25 May 1983, 10:00 a.m., at the Office of the Provincial Sheriff in Lucena City to satisfy their indebtedness to Filinvest.

To thwart the impending auction of their properties, the spouses filed before the RTC Quezon (Branch LIX, Lucena City), on 4 May 1983, a complaint against Filinvest for the rescission of the contract of lease, annullment of the real estate mortgage, and for injunction and damages, with prayer for the issuance of a writ of preliminary injunction. On 23 May 1983, 3 days before the scheduled auction sale, the trial court issued a temporary restraining order commanding the Provincial Sheriff of Quezon, and Filinvest, to refrain and desist from proceeding with the public auction. Two years later, on 4 September 1985, the trial court rendered a decision in favor of the spouses, making the injunction permanent, rescinding the contract of lease of the machinery and equipment and ordering the spouses to return to the Filinvest the machinery subject of the lease contract, and Filinvest to return to the spouses the sum of P470,950.00 it received from the latter as guaranty deposit and rentals with legal interest thereon until the amount is fully restituted; annulling the real estate mortgage constituted over the properties of the spouses covered by TCTs T-32480 and T-5779 of the Registry of Deeds of Lucena City; and ordering the Filinvest to pay the spouses P30,000.00 as attorney’s fees and the costs of the suit.

Dissatisfied with the trial court’s decision, Filinvest elevated the case to the Court of Appeals. On 17 March 1988, the appellate court, finding no error in the appealed judgment, affirmed the same in toto.  Hence, the petition for review on certiorari by Filinvest.

The Supreme Court granted the petition, reversed and set aside the 17 March 1988 Decision of the Court of Appeals, and rendered another one dismissing the complaint; with costs against the spouses.

1.    Financial institution not immune from recourse of the spouses; Filinvest owns crusher
While it is accepted that Filinvest Credit Corporation is a financing institution, it is not, however, immune from any recourse by the private respondents. Notwithstanding the testimony of Jose Sy Bang that he did not purchase the rock crusher from Filinvest, the fact that the rock crusher was purchased from Rizal Consolidated Corporation in the name and with the funds of Filinvest proves beyond doubt that the ownership thereof was effectively transferred to it. It is precisely this ownership which enabled Filinvest to enter into the “Contract of Lease of Machinery and Equipment” with the spouses

2.    Nomenclature of agreement cannot change its true essence; sale on installment
The real intention of the parties should prevail. The nomenclature of the agreement cannot change its true essence, i.e., a sale on installments. It is basic that a contract is what the law defines it and the parties intend it to be, not what it is called by the parties. It is apparent that the intent of the parties to the subject contract is for the so-called rentals to be the installment payments. Upon the completion of the payments, then the rock crusher, subject matter of the contract, would become the property of the spouses. This form of agreement has been criticized as a lease only in name.

3.    Payment in contract of lease with option to buy are installment payments
In Vda. de Jose v. Barrueco,  it was stated that “Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a bargain in that form, for one reason or another, have frequently resorted to the device of making contracts in the form of leases either with options to the buyer to purchase for a small consideration at the end of term, provided the so-called rent has been duly paid, or with stipulations that if the rent throughout the term is paid, title shall thereupon vest in the lessee. It is obvious that such transactions are leases only in name. The so-called rent must necessarily be regarded as payment of the price in installments since the due payment of the agreed amount results, by the terms of bargain, in the transfer of title to the lessee.”

4.    Article 1484
Article 1484 of the new Civil Code, which provides for the remedies of an unpaid seller of movables in installment basis, states “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, should the vendee fail to pay; (2) Cancel the sale, should the vendee’s failure to pay cover two or more installments; (3) Foreclose the chattel mortgage or the thing sold, if one has been constituted, should the vendee’s failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.”

5.    Remedies under Article 1484 alternative and not cumulative
Under Article 1484, the seller of movables in installments, in case the buyer fails to pay two or more installments, may elect to pursue either of the following remedies: (1) exact fulfillment by the purchaser of the obligation; (2) cancel the sale; or (3) foreclose the mortgage on the purchased property if one was constituted thereon. It is now settled that the said remedies are alternative and not cumulative and therefore, the exercise of one bars the exercise of the others.

6.    Contract of lease with option to buy a device to circumvent Article 1484
The device — contract of lease with option to buy — is at times resorted to as a means to circumvent Article 1484, particularly paragraph (3) thereof. Through the set-up, the vendor, by retaining ownership over the property in the guise of being the lessor, retains, likewise, the right to repossess the same, without going through the process of foreclosure, in the event the vendee-lessee defaults in the payment of the installments. There arises therefore no need to constitute a chattel mortgage over the movable sold. More important, the vendor, after repossessing the property and, in effect, canceling the contract of sale, gets to keep all the installments-cum-rentals already paid.

7.    Article 1485 places contract of lease with option to buy within the applicability of Article 1484
Article 1485 of the new Civil Code provides that “The preceding article shall be applied to contracts purporting to be leases of personal property with option to buy, when the lessor has deprived the lessee of possession or enjoyment of the thing.”

8.    No reason to hold Filinvest liable for failure of rock crusher to produce in accordance with its capacity
The Court failed to find any reason to hold the petitioner liable for the rock crusher’s failure to produce in accordance with its described capacity. It was the spouses who chose, inspected, and tested the subject machinery. It was only after they had inspected and tested the machine, and found it to their satisfaction, that the spouses sought financial aid from Filinvest. These allegations of the petitioner had never been rebutted by the spouses, but in fact, even  been admitted in the contract they signed (“LESSEE’S SELECTION, INSPECTION AND VERIFICATION. — The LESSEE hereby confirms and acknowledges that he has independently inspected and verified the leased property and has selected and received the same from the Dealer of his own choosing in good order and excellent running and operating condition and on the basis of such verification, etc. the LESSEE has agreed to enter into this Contract.”)

9.    Spouses presumed knowledgeable on machinery subject of the contract; Spouses negligent
Considering that between the parties, it is the spouses, by reason of their business, who are presumed to be more knowledgeable, if not experts, on the machinery subject of the contract, they should not therefore be heard now to complain of any alleged deficiency of the said machinery. It is their failure or neglect to exercise the caution and prudence of an expert, or, at least, of a prudent man, in the selection, testing, and inspection of the rock crusher that gave rise to their difficulty and to this conflict. A well-established principle in law is that between two parties, he, who by his negligence caused the loss, shall bear the same.

10.    Spouses precluded from imputing liability on Filinvest; Express waiver of warranties
Even if the spouses could not be adjudged as negligent, they still are precluded from imputing any liability on Filinvest. One of the stipulations in the contract they entered into with Filinvest is an express waiver of warranties in favor of the latter. By so signing the agreement, the spouses absolved Filinvest from any liability arising from any defect or deficiency of the machinery they bought. The stipulation on the machine’s production capacity being “typewritten” and that of the waiver being “printed” does not militate against the latter’s effectivity. As such, whether “a capacity of 20 to 40 tons per hour” is a condition or a description is of no moment. What stands is that the spouses had expressly exemptd Filinvest from any warranty whatsoever. Their Contract of Lease Of Machinery And Equipment states “WARRANTY — LESSEE absolutely releases the lessor from any liability whatsoever as to any and all matters in relation to warranty in accordance with the provisions hereinafter stipulated.”

11.    Common sense dictates buyer inspects product before purchasing it; Caveat emptor
Common sense dictates that a buyer inspects a product before purchasing it (under the principle of caveat emptor or “buyer beware”) and does not return it for defects discovered later on, particularly if the return of the product is not covered by or stipulated in a contract or warranty.

12.    Declaration of waiver as non-effective would impair obligations of contracts
Taking into account that due to the nature of its business and its mode of providing financial assistance to clients, Filinvest deals in goods over which it has no sufficient know-how or expertise, and the selection of a particular item is left to the client concerned, the latter, therefore, shoulders the responsibility of protecting himself against product defects. This is where the waiver of warranties is of paramount importance. In the present case, to declare the waiver as non-effective would impair the obligation of contracts. Certainly, the waiver in question could not be considered a mere surplusage in the contract between the parties. Moreover, nowhere is it shown in the records of the case that the spouses has argued for its nullity or illegality.

13.    No ambiguity in the language of the waiver
In any event, there is no ambiguity in the language of the waiver or the release of warranty. There is therefore no room for any interpretation as to its effect or applicability vis-a-vis the deficient output of the rock crusher. Suffice it to say that the spouses have validly excused Filinvest from any warranty on the rock crusher. Hence, they should bear the loss for any defect found therein.

Filipinas Investment vs. Ridad [G.R. No. L-27645.  November 28, 1969.]
En Banc, Castro (J): 9 concur

Facts: The spouses Ridad (Lourdes V. Ridad and Luis Ridad) bought from the Supreme Sales & Development Corporation, Filipinas Investment and Finance Corporation (FIFC)’s assignor-in-interest, a Ford Consul sedan for the total price of P13,371.40. The sum of P1,160 was paid on delivery, the balance of P12,211.50 being payable in 24 equal monthly installments, with interest at 12% per annum, secured by a promissory note and a chattel mortgage on the car executed on 19 March  1964. The spouses thereafter failed to pay 5 consecutive installments on a remaining balance of P5,274.53. On 13 October 1965, FIFC instituted a replevin suit in the city court of Manila for the seizure of the car, or the recovery of the unpaid balance in case delivery could not be effected. The car was then seized by the sheriff of Manila and possession thereof was awarded to FIFC. During the progress of the case, FIFC instituted extrajudicial foreclosure proceedings, as a result of which, on 22 December 1965, the car was sold at public auction with FIFC as the highest bidder and purchaser.

Meanwhile, in view of the failure of the spouses to appear at the scheduled hearing of the case, allegedly due to non-receipt of the summons, they were declared in default. The default judgment ordered them to pay to FIFC the sum of P500 as attorney’s fees, and P163,65 representing actual expenses relative to the seizure of the car, plus costs. Their motion to set aside the order of default and the decision having been denied, they appealed to the Court of First Instance of Manila.

The CFI advanced the opinion (during pre-trial) that there was no need for the parties to adduce evidence and that the case could be decided on the basis of the pleadings submitted by the parties. On 5 September 1966, the trial court rendered judgment holding that FIFC is entitled to recover the amout of P163.65 which represents the expenses incurred by FIFC in the seizure of the car involved. The court also reduced the attorney’s fees granted to the plaintiff to P300.00 considering that FIFC recovered the car while still in the lower court and that the Ridads did not resist the case. The spouses Ridads appealed.

The Supreme Court affirmed the judgment; without costs.

1.    Decision complies with requirements of law by referring to pre-trial order as part of its conclusion
The disputed decision of the lower court complies substantially with the requirements of law because it referred to the pre-trial order it issued on 27 May 1966 which contains substantial findings of facts. For although settled is the doctrine that a decree with absolutely nothing to support it is a nullity, the law, however, merely requires that a decision state the “essential ultimate facts upon which the court’s conclusion is drawn.” There being an express reference to the pre-trial order, the latter must be considered and taken as forming part of the decision. The claim, therefore, that the judgment clearly transgresses the legal precept because it does not state the facts of the case and the law on which it is based and hence, is a nullity, finds no justification here.

2.    Article 1484 applies even if case is one for replevin as it culminated in the foreclosure of chattel mortgage
It is true that the present action is one for replevin, but because it culminated in the foreclosure of the chattel mortgage and the sale of the car at public auction, it is our view that the provisions of art. 1484 of the Civil Code (Recto Law) must govern the resolution of the issue presented.

3.     Article 1484
“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, should the vendee fail to pay; (2) Cancel the sale, should the vendee’s failure to pay cover two or more installments; (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. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.”

4.    Source of Article 1454
Article 1454 was reproduced from the old Article 1454-A, which in turn was inserted by Act 4122 (Recto Law). “Three remedies are available to the vendor who has sold personal property on the installment plan: (1) He may elect to exact the fulfillment of the obligation. (Bachrach Motor Co. vs. Millan, 61 Phil. 409) (2) If the vendee shall have failed to pay two or more installments, the vendor may cancel the sale. (3) If the vendee shall have failed to pay two or more installments, the vendor may foreclose the mortgage, if one has been given on the property. The basis of the first option is the Civil Code. The basis of the last two options is Act 4122 (inserted in the Spanish Civil Code as art. 4154-A and now reproduced in arts. 1485 and 1485), amendatory of the Civil Code. And the proviso to the right to foreclose is that if the vendor has chosen this remedy, he shall have no further action against the purchaser for the recovery of any unpaid balance owing by the same. In other words, as we see it, the Act does no more than qualify the remedy.”

5.    Macondray & Co. vs. Eustaquio; Mortgage limited to property mortgage and not entitled to attorney;s fees and cost of suit
Under the amendment, in all proceedings for the foreclosure of a chattel mortgage, executed on chattels which have been sold on the installment plan, the mortgagee is limited to the property mortgaged and is not entitled to attorney’s fees and costs of suit.

6.    Luneta Motor vs. Salvador; Cancellation of attorney’s fees and cost of suit when chattel mortgage was foreclosed during progress of action to recover unpaid balance of purchase price
In a subsequent case, where the vendor in a sale of personal property in installments, upon failure of the vendee to pay his obligations, the vendor commenced, through court action, to recover the unpaid balance of the purchase price, but later, during the progress of the action, foreclosed the chattel mortgage constituted on the property, attorney’s fees and costs of suit were denied to the vendor.

7.    Luneta Motor vs. Salvador; Remedies alternative not pursued conjunctively
Paragraph 3 of Article 1484, New Civil Code, is clear that foreclosure of the chattel mortgage and recovery of the unpaid balance of the price are alternative remedies and may not be pursued conjunctively. It appearing that the vendor had already foreclosed the chattel mortgage constituted on the property and had taken possession thereof, the lower court acted rightly in dismissing the complaint filed for the purpose of recovering the unpaid balance of the purchase price. Thus, in that case, by seizing the truck and foreclosing the mortgage at the progress of the suit, the plaintiff renounced whatever claim it may have had under the promissory note, and consequently, he has no more cause of action against the promisor and the guarantor. And he has no more right either to the costs and the attorney’s fees that would go with the suit. This might be considered a reiteration of the ruling in Macondray.

8.    Purpose of the doctrine as to Article 1484 (3)
The doctrine’s ultimate and salutary purpose is to prevent the vendor from circumventing the Recto Law. Congress sought to protect the buyers on installment who more often than not have been victimized by sellers who, before the enactment of this law, succeeded in unjustly enriching themselves at the expense of the buyers, because aside from recovering the goods sold, upon default of the buyer in the payment of two installments, still retained for themselves all amounts already paid, and, in addition, were adjudged entitled to damages, such as attorney’s fees, expenses of litigation and costs. Congress could not have intended to impair much less do away with, the right of the seller to make commercial use of his credit against the buyer, provided the buyer is not burdened beyond what this law allows.

9.    Philosophy of the Recto Law
The emphasis and precision of the language employed in the decisions already adverted to that in no instance whatsoever may the mortgagee re cover from the mortgagor any amount or sum after the foreclosure of the mortgage, for, as we understand it, the philosophy of the Recto Law is that the underprivileged mortgagors must be afforded full protection against the rapacity of the mortgagees.

10.    Action for replevin; Necessary expenses borne by mortgagor
It is part of conventional wisdom and the rule of law that no man can take the law into his own hands; so it is not to be supposed that the Legislature intended that the mortgagee should wrest or seize the chattel forcibly from the control and possession of the mortgagor, even to the extent of using violence which is unwarranted in law. Since the mortgagee would enforce his rights through the means and within the limits delineated by law, the next step in such situations being the filing of an action for replevin to the end that he may recover immediate possession of the chattel and, thereafter, enforce his rights in accordance with the contractual relationship between him and the mortgagor as embodied in their agreement, then it logically follows as a matter of common sense, that the necessary expenses incurred in the prosecution by the mortgagee of the action for replevin so that he can regain possession of the chattel, should be borne by the mortgagor. Recoverable expenses would include expenses properly incurred in effecting seizure of the chattel and reasonable attorney’s fees in prosecuting the action for replevin. The amounts awarded by the lower court to the mortgagee are reasonable.

11.    Note as to potential matters which may be obiter dictum
To the extent that the pronouncement in the present case conflicts with the ruling announced and followed in the cases discussed, the latter must be considered pro tanto qualified.

Rillo vs. CA [G.R. No. 125347.  June 19, 1997.]
Second Division, Puno (J): 4 concur

Facts: On 18 June 1985, Emiliano Rillo signed a “Contract To Sell of Condominium Unit” with Corb Realty Investment Corporation. Under the contract, Corb Realty agreed to sell to Rillo a 61.5 sq. m. condominium unit located in Mandaluyong, Metro Manila. The contract price was P150,000.00, ½ of which was paid upon its execution, while the balance of P75,000.00 was to be paid in 12 equal monthly installments of P7,092.00 beginning 18 July 1985. It was also stipulated that all outstanding balance would bear an interest of 24% per annum; the installment in arrears would be subject to liquidated penalty of 1.5% for every month of default from due date. It was further agreed that should the buyer default in the payment of 3 or 4 monthly installments, forfeiture proceedings would be governed by existing laws, particularly the Condominium Act.  On 18 July 1985, Rillo failed to pay the initial monthly amortization. On 18 August 1985, he again defaulted in his payment. On 20 September 1985, he paid the first monthly installment of P7,092.00. On 2 October 1985, he paid the second monthly installment of P7,092.00. His third payment was on 2 February 1986 but he paid only P5,000.00 instead of the stipulated P7,092.00. On 20 July 1987 or 17 months after Rillo’s last payment, Corb Realty informed him by letter that it is cancelling their contract due to his failure to settle his accounts on time. Corb Realty also expressed its willingness to refund Rillo’s money. Corb Realty, however, did not cancel the contract for on 28 September 1987, it received P60,000.00 from Rillo. Rillo defaulted again in his monthly installment payment. Consequently, Corb Realty informed Rillo through letter that it was proceeding to rescind their contract. In a letter dated 29 August 1988, it requested Rillo to come to its office and withdraw P102,459.35 less the rentals of the unit from 1 July 1985 to 28 February 1989. Again the threatened rescission did not materialize. A “compromise” was entered into by the parties on 12 March 1989 (Restructure Outstanding Balance Down to P50,000.00; Payment @ P2,000.00/Month @ 18% -Monthly- To Compute No. of Installments; To Pay Titling Plus Any Real Estate Tax Due; Installments to start 15 April 1989). Rillo once more failed to honor their agreement. Rillo was able to pay P2,000.00 on 25 April 1989 and P2,000.00 on 15 May 1989. On 3 April 1990, Corb Realty sent Rillo a statement of accounts which fixed his total arrears, including interests and penalties, to P155,129.00.

When Rillo failed to pay the amount, Corb Realty filed a complaint for cancellation of the contract to sell with the RTC Pasig. In his answer to the complaint, Rillo averred, among others, that while he had already paid a total of P149,000.00, Corb Realty could not deliver to him his individual title to the subject property; that Corb Realty could not claim any right under their previous agreement as the same was already novated by their new agreement for him to pay P50,000.00 representing interest charges and other penalties spread through 25 months beginning April 1989; and that Corb Realty’s claim of P155,129.99 over and above the amount he already paid has no legal basis. After trial, the RTC held that Corb Realty cannot rescind the “Contract to Sell” because Rillo did not commit a substantial breach of its terms. It found that Rillo substantially complied with the “Contract to Sell” by paying a total of P154,184.00. It ruled that the remedy of Corb Realty is to file a case for specific performance to collect the outstanding balance of the purchase price.

Corb Realty appealed the decision to the Court of Appeals (CA GR CV 39108), which reversed the decision. It ruled that rescission does not apply as the contract between the parties is not an absolute conveyance of real property but is a contract to sell; that the Condominium Act (RA 4726, as amended by RA 7899) does not provide anything on forfeiture proceedings in cases involving installment sales of condominium units, hence, it is PD 957 (Subdivision and Condominium Buyers Protective Decree) which should be applied to the present case. Under PD 957, the rights of a buyer in the event of failure to pay installment due, other than the failure of the owner or developer to develop the project, shall be governed by RA 6552 or the Realty Installment Buyer Protection Act also known as the Maceda Law (enacted on 14 September 1972). The Court thus declared the contract to sell cancelled and rendered ineffective and ordered Corb Realty to return 50% of P158,184.00 (or P79,092.00) to Rillo who was ordered to vacate the subject premises. Rillo appealed pursuant to Rule 45 of the Rules of Court.

The Supreme Court affirmed with modification the decision appealed from, in the sense that the refund of 50% P158,184.00 or P79,092.00 made in favor of Rillo is deleted; without costs.

1.    Article 1191 and 1592 do not apply as contract is not an absolute conveyance of real property but a contract to sell; Payment is a positive suspensive condition and not a breach; No rescission of an obligation which is still not existent
The appellate court did not err when it did not apply Articles 1191 and 1592 of the Civil Code on rescission to the present case. The contract between the parties is not an absolute conveyance of real property but a contract to sell. In a contract to sell real property on installments, the full payment of the purchase price is a positive suspensive condition, the failure of which is not considered a breach, casual or serious, but simply an event which prevented the obligation of the vendor to convey title from acquiring any obligatory force.” The transfer of ownership and title would occur after full payment of the purchase price. It was held in Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc. that there can be no rescission of an obligation that is still non-existent, the suspensive condition not having happened.

2.    RA 6552, or Maceda Law, applies
Given the nature of the contract of the parties, the appellate court correctly applied RA 6552, also known as the Maceda Law. TA 6552 recognizes in conditional sales of all kinds of real estate (industrial, commercial, residential) the right of the seller to cancel the contract upon non-payment of an installment by the buyer, which is simply an event that prevents the obligation of the vendor to convey title from acquiring binding force. It also provides the right of the buyer on installments in case he defaults in the payment of succeeding installments, i.e. “(1) Where he has paid at least 2 years of installments, (a) To pay, without additional interest, the unpaid installments due within the total grace period earned by him, which is hereby fixed at the rate of 1 month grace period for every year of installment payments made: Provided, That this right shall be exercised by the buyer only once in every 5 years of the life of the contract and its extensions, if any; or (b) If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of the payments on the property equivalent to 50% of the total payments made and, after 5 years of installments, an additional 5% every year but not to exceed 90% of the total payments made: Provided, That the actual cancellation of the contract shall take place after cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash surrender value to the buyer. Down payments, deposits or options on the contract shall be included in the computation of the total number of installments made”; “(2) Where he has paid less than two years in installments, (Sec. 4) the seller shall give the buyer a grace period of not less than 60 days from the date the installment became due. If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after 30 days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act.”

3.    Rillo not entitled to grace period of 60 days; Corb Realty has right to cancel contract after 30 days of Rillo’s receipt of cancellation
Rillo paid less than two years in installment payments, hence, he is only entitled to a grace period of not less than 60 days from the due date within which to make his installment payment. Corb Realty, on the other hand, has the right to cancel the contract after 30 days from receipt by Rillo of the notice of cancellation. The appellate court did not err when it upheld Corb Realty’s right to cancel the subject contract upon repeated defaults in payment by Rillo.

4.    Novation not presumed; In absence of express agreement, novation occurs when old and new obligations are incompatible on every point; Contract in present case not novated
Article 1292 of the Civil Code provides that “In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other.” Novation is never presumed. Parties to a contract must expressly agree that they are abrogating their old contract in favor of a new one. In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point. In the present case, the parties executed their 12 May 1989 “compromise agreement” precisely to give life to their “Contract to Sell”. It merely clarified the total sum owed by Rillo to Corb Realty with the view that the former would find it easier to comply with his obligations under the Contract to Sell. In fine, the “compromise agreement” can stand together with the Contract to Sell.

5.    Rillo not entitled to refund of 50% of payments
Under RA 6552, the right of the buyer to a refund accrues only when he has paid at least 2 years of installments. In the present case, Rillo has paid less than 2 years in installments, hence, he is not entitled to a refund.

Macondray vs. Eustaquio [G.R. No. 43683.  July 16, 1937.]
First Division, Imperial (J): 6 concur

Facts: Macondray & Co. Inc. sold Urbano Eustaquio a De Soto car, Sedan, for the price of which, P595, he executed in its favor the note of 22 May 1934. Under the note, Eustaquio undertook to pay the car in 12 monthly installments with 12% interest per annum, likewise agreed that, should he fail to pay any monthly installment together with interest, the remaining installments would become due and payable, and Eustaquio shall pay 20% upon the principal owing as attorney’s fees, expenses of collection which the plaintiff might incur, and the costs. To guarantee the performance of his obligations under the note, Eustaquio on the same date mortgaged the purchased car in favor of Macondray, and bound himself under the same condition stipulated in the note relative to the monthly installments, interest, attorney’s fees, expenses of collection, and costs. The mortgaged deed was registered on 11 June 1934, in the office of the register of deeds of the Province of Rizal. On the 22nd of the same month, Eustaquio paid P43.75 upon the first installment, and thereafter failed to pay any of the remaining installments. In accordance with the terms of the mortgage, Macondray called upon the sheriff to take possession of the car, but Eustaquio refused to yield possession thereof. Whereupon, Macondray brought the replevin sought and thereby succeeded in getting possession of the car. The car was sold at public auction to Macondray for P250, the latter incurring legal expenses in the amount of P10.68.

Macondray brought the action against Eustaquio to obtain the possession of an automobile mortgaged by the latter, and to recover the balance owing upon a note executed by him, the interest thereon, attorney’s fees, expenses of collection, and the costs (According to the liquidation filed by Macondray, Eustaquio was still indebted in the amount of P342.20, interest at 12% from 20 November 1934, P110.25 as attorney’s fees, and the costs.). Eustaquio was duly summoned, but he failed to appear or file his answer, wherefore, he was declared in default. Still, the CFI Manila dismissed the complaint, without costs. Hence, the appeal by Macondray.

The Supreme Court affirmed the appealed judgment, with the costs against Macondray and Co.

1.    Non-appearance  by defendant does not imply a waiver of rights excepts those of being heard and of presenting evidence in his favor; Court did not err in applying Act 4122
Under section 128 of the Code of Civil Procedure, the judgment by default against a defendant who has neither appeared nor filed his answer does not imply a waiver of rights except that of being heard and of presenting evidence in his favor. It does not imply admission by the defendant of the facts and causes of action of the plaintiff, because the codal section requires the latter to adduce his evidence in support of his allegations as an indispensable condition before final judgment could be given in his favor. Nor could it be interpreted as an admission by the defendant that the plaintiff’s causes of action find support in the law or that the latter is entitled to the relief prayed for. (Chaffin vs. McFadden, 41 Ark., 42; Johnson vs. Pierce, 12 Ark., 599; Mayden vs. Johnson, 59 Ga., 105; Peo. vs. Rust, 292 Ill., 412; Madison County vs. Smith, 95 Ill., 328; Keen vs. Leipold, 211 Ill. A., 163; Chicago etc. Electric R. Co. vs. Krempel, 116 Ill. A., 253.) Thus, the defendant did not waive the application by the court of Act 4122.

2.    Act 4122 valid; Conclusion in Manila Trading vs. Reyes sustained
In Manila Trading & Supply Co. vs. Reyes (62 Phil., 461), the validity of the Act 4122 was already passed upon when it was questioned for the same reasons advanced, i.e. that it takes property without due process of law, denies the equal protection of the laws, and impairs the obligations of contract, thereby violating the provisions of section 3 of the Act of The United States Congress of 29 August 1916, known as the Jones Law. As Macondray, through counsel, advanced no new arguments which have not already been considered in the Reyes case, there is no reason for reaching a different conclusion. The law seeks to remedy an evil which the Legislature wished to suppress; this legislative body has power to promulgate the law. The law does not completely deprive vendors on the installment basis of a remedy, but requires them to elect among three alternative remedies. The law, on the other hand, does not completely exonerate the purchasers, but only limits their liabilities. Finally, there is no vested right when a procedural law is involved, wherefore the Legislature could enact Act 4122 without violating the organic law.

3.    Manila Trading vs. Reyes; Validity of act solely one of constitutional power; Motive or results irrelevant
The question of the validity of an act is solely one of constitutional power. Questions of expediency, of motive, or of results are irrelevant. Nevertheless it is not improper to inquire as to the occasion for the enactment of a law. The legislative purpose thus disclosed can then serve as a fit background for constitutional inquiry.

4.    Manila Trading vs. Reyes; Purpose of Act 4122
Act 4122 aims to correct a social and economic evil, the inordinate love for luxury of those who, without sufficient means, purchase personal effects, and the ruinous practice of some commercial houses of purchasing back the goods sold for a nominal price besides keeping a part of the price already paid and collecting the balance, with stipulated interest, costs, and attorney’s fees.  As a consequence, the vendor does not only recover the goods sold, used hardly 2 months perhaps with only slight wear and tear, but also collects the entire stipulated purchase price, probably swelled up 50% including interest, costs, and attorney’s fees. This practice is worse than usurious in many instances. And although, of course, the purchaser must suffer the consequences of his imprudence and lack of foresight, the chastisement must not be to the extent of ruining him completely and, on the other hand, enriching the vendor in a manner which shocks the conscience. The object of the law is highly commendable.

5.    Manila Trading vs. Reyes, citing Bachrach Motor vs. Millan; Purpose of amendment
The principal object of the amendment was to remedy the abuses committed in connection with the foreclosure of chattel mortgages. The amendment prevents 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. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing practically the full amount of his original indebtedness. Under this amendment the vendor of personal property, the purchase price of which is payable in installments, has the right to cancel the sale or foreclose the mortgage if one has been given on the property. Whichever right the vendor elects he need not return to the purchaser the amount of the installments already paid, “if there be an agreement to that effect.” Furthermore, if the vendor avails himself of the right to foreclose the mortgage this amendment prohibits him from bringing an action against the purchaser for the unpaid balance. Under the amendment, in, all proceedings for the foreclosure of chattel mortgages, executed on chattels which have been sold on the installment plan, the mortgagee is limited to the property included in the mortgage. (Bachrach Motor Co. vs. Millan [1935], 61 Phil., 409.)

6.    Manila Trading vs. Reyes; US Jurisprudence, 1897 Act passed in State of Washington not controlling
In 1897, an Act was passed in the State of Washington which provided “that in all proceedings for the foreclosure of mortgages hereafter executed, or on judgments rendered upon the debt thereby secured, the mortgagee or assignee shall be limited to the property included in the mortgage.” It was held by a divided court of three to two that the statute since limiting the right to enforce a debt secured by mortgage to the property mortgaged, whether realty or chattels, was an undue restraint upon the liberty of a citizen to contract with respect to his property rights. But as is readily apparent, the Washington law and the Philippine law are radically different in phraseology and in effect. (Dennis vs. Moses [1898], 40 L. R. A., 302.)

7.    Manila Trading vs. Reyes; US Jurisprudence, Act passed in State of Oregon not controlling
In Oregon, in a decision of a later date, an Act abolishing deficiency judgments upon the foreclosure of mortgages to secure the unpaid balance of the purchase price of real property was unanimously sustained by the Supreme Court of that State. The importance of the subject matter in that jurisdiction was revealed by the fact that four separate opinions were prepared by the justices participating, in one of which Mr. Justice Johns, shortly thereafter to become a member of this court, concurred. However, it is but fair to state that one of the reasons prompting the court to uphold the law was the financial depression which had prevailed in that State. While in the Philippines, the court can take judicial notice of the stringency of finances that presses upon the people, there is no reason to believe that this was the reason which motivated the enactment of Act 4122. (Wright vs. Wimberley [1919], 184 Pac., 740).

8.    Manila Trading vs. Reyes; US Jurisprudence, Bronzon vs. Kinzie
In the case of Bronzon vs. Kinzie [1843], 1 How., 311), decided by the Supreme Court of the United States, the Court had under consideration a law passed in the State of Illinois, which provided that the equitable estate of the mortgagor should not be extinguished for 12 months after sale on decree, and which prevented any sale of the mortgaged property unless 2/3 of the amount at which the property had been valued by appraisers should be bid therefor. The court declared that “Mortgages made since the passage of these laws must undoubtedly be governed by them; for every State has the power to describe the legal and equitable obligations of a contract to be made and executed within its jurisdiction. It may exempt any property it thinks proper from sale for the payment of a debt; and may impose such conditions and restrictions upon the creditor as its judgment and policy may dictate. And all future contracts would be subject to such provisions; and they would be obligatory upon the parties in the courts of the United States, as well as in those of the State.”

9.    Manila Trading vs. Reyes; US Jurisprudence, Parties have no vested right in particular remedies or modes of procedure
Parties have no vested right in particular remedies or modes of procedure, and the legislature may change existing remedies or modes of procedure without impairing the obligation of contracts, provided an efficacious remedy remains for enforcement. But changes in the remedies available for the enforcement of a mortgage may not, even when public policy is invoked as an excuse, be pressed so far as to cut down the security of a mortgage without moderation or reason or in a spirit of oppression. (Brotherhood of American Yeoman vs. Manz [1922], 206 Pac., 403; Oshkosh Waterworks Co. vs. Oshkosh [1908], 187 U. S., 437; W. B. Worthen Co. vs. Kavanaugh [1935], 79 U. S. Supreme Court Advance Opinions, 638.)

10.    Manila Trading vs. Reyes; Chattel Mortgage Law does not provide for deficiency judgment upon foreclosure of mortgage
In the Philippines, the Chattel Mortgage Law did not expressly provide for a deficiency judgment upon the foreclosure of a mortgage. Indeed, it required decisions of the Court to authorize such a procedure. (Bank of the Philippine Islands vs. Olutanga Lumber Co. [1924], 47 Phil., 20; Manila Trading & Supply Co. vs. Tamaraw Plantation Co., supra.) But the practice became universal enough to acquire the force of direct legislative enactment regarding procedure. To a certain extent the Legislature has now disauthorized the practice, but has left a sufficient remedy remaining.

11.    Manila Trading vs. Reyes; Remedies available to vendor who has sold personal property on installment plan; Basis of remedies
Three remedies are available to the vendor who has sold personal property on the installment plan. (1) He may elect to exact the fulfillment of the obligation. (Bachrach Motor Co. vs. Millan, supra.) (2) If the vendee shall have failed to pay two or more installments, the vendor may cancel the sale. (3) If the vendee shall have failed to pay two or more installments, the vendor may foreclose the mortgage, if one has been given on the property. The basis of the first option is the Civil Code. The basis of the last two options is Act 4122, amendatory of the Civil Code. And the proviso to the right to foreclose is, that if the vendor has chosen this remedy, he shall have no further action against the purchaser for the recovery of any unpaid balance owing by the same. In other words, as we see it, the Act does no more than qualify the remedy.

12.    Manila Trading vs. Reyes; Determination of constitutional issues, all doubts resolve in the presumption to their validity
Most constitutional issues are determined by the court’s approach to them. The proper approach in cases of this character should be to resolve all presumptions in favor of the validity of an act in the absence of a clear conflict between it and the constitution. All doubts should be resolved in its favor.

13.    Manila Trading vs. Reyes; Public policy defined and established by legislature, courts to perpetuate policy
The controlling purpose of Act 4122 is revealed to be to close the door to abuses committed in connection with the foreclosure of chattel mortgages when sales were payable in installments. That public policy, obvious from the statute, was defined and established by legislative authority. It is for the courts to perpetuate it.

14.    Manila Trading vs. Reyes; Legislature may change judicial methods and remedies for the enforcement of contracts
The Legislature may change judicial methods and remedies for the enforcement of contracts, as it has done by the enactment of Act 4122, without unduly interfering with the obligation of the contract, without sanctioning class legislation, and without a denial of the equal protection of the laws.

15.    Interpretation of laws, Intent of legislature; Restriction of meaning of “unpaid balance” should be expressly stated
The provision “However, if the vendor has chosen to foreclose the mortgage he shall have no further action against the purchaser for the recovery of any unpaid balance owing by the same, and any agreement to the contrary shall be null and void,” is the subject of the interpretation. The paragraph, as its language shows, refers to the mortgage contract executed by the parties, whereby the purchaser mortgages the chattel sold to him on the installment basis in order to guarantee the payment of its price, and the words “any unpaid balance” should be interpreted as having reference to the deficiency judgment to which the mortgagee may be entitled where, after the mortgaged chattel is sold at public auction, the proceeds obtained therefrom are insufficient to cover the full amount of the secured obligations which, in the case at bar as shown by the note and by the mortgage deed, include interest on the principal, attorney’s fees, expenses of collection, and the costs. The fundamental rule which should govern the interpretation of laws is to ascertain the intention and meaning of the Legislature and to give effect thereto. (Sec. 288, Code of Civil Procedure; U. S. vs. Toribio, 15 Phil., 85; U. S. vs. Navarro, 19 Phil., 134; De Jesus vs. City of Manila, 29 Phil., 73; Borromeo vs. Mariano, 41 Phil., 322; People vs. Concepcion, 44 Phil., 126.) Were it the intention of the Legislature to limit its meaning to the unpaid balance of the principal, it would have so stated.

Northern Motors vs. Sapinoso [G.R. No. L-28074.  May 29, 1970.]
En Banc, Villamor (J): 7 concur, 1 concur in result, 1 on leave of absence

Facts: On 4 June 1965, Casiano Sapinoso purchased from Northern Motors, Inc. an Opel Kadett car for the price of P12,171.00, making a down payment and executing a promissory note for the balance of P10,540.00 payable in installments with interest at 12% per annum, as follows: P361.00 on 5 July 1965, and P351.00 on the 5th day of each month beginning August 1965, up to and including December, 1967. To secure the payment of the promissory note, Sapinoso executed in favor of Northern Motors, Inc. a chattel mortgage on the car. The mortgage contract provided, among others, that upon default by the mortgagor in the payment of any part of the principal or interest due, the mortgagee may elect any of the following remedies: (a) sale of the car by the mortgagee; (b) cancellation of the contract of sale; (c) extrajudicial foreclosure; (d) judicial foreclosure; (e) ordinary civil action to exact fulfillment of the mortgage contract. It was further stipulated that “[w]hichever remedy is elected by the mortgagee, the mortgagor expressly waives his right to reimbursement by the mortgagee of any and all amounts on the principal and interest already paid by him.” Sapinoso failed to pay the first installment of P361.00 due on 5 July 1965, and the second, third, fourth and fifth installments of P351.00 each due on the 5th day of August, September, October and November, 1965, respectively. Several payments were, however, made by Sapinoso, to wit: P530.52 on 21 November 1965, P480.00 on 21 December 1965, and P400.00 on 30 April 1966. The first and third payments aforesaid were applied to accrued interest up to 17 April 1966, while the second payment was applied partly (P158.10) to interest, and partly (P321.90) to the principal, thereby reducing the balance unpaid to P10,218.10.

Sapinoso having failed to make further payments, Northern Motors, Inc. filed a complaint on 22 July 1966, against Sapinoso and a certain person whose name, identity and address were still unknown to Northern Motors, hence denominated in the complaint as “John Doe.” In its complaint, Northern Motors, Inc. stated that it was availing itself of the option given it under the mortgage contract of extrajudicially foreclosing the mortgage, and prayed that a writ of replevin be issued upon its filing of a bond for the seizure of the car and for its delivery to it; that after hearing, it be adjudged to have the rightful possession and ownership of the car; that in default of delivery, Sapinoso and “Doe” be ordered to pay Northern Motors the sum of P10,218.10 with interest at 12% per annum from 18 April 1966, until full payment of the said sum, as well as an amount equivalent to 25% of the sum due as and for attorney’s fees and expenses of collection, and the costs of the suit. Northern Motors also prayed for such other remedy as might be deemed just and equitable in the premises. Subsequent to the commencement of the action, but before the filing of his answer, Sapinoso made 2 payments on the promissory note, the first on 22 August 1966, for P500.00, and the second on 27 September 1966, for P750.00. In the meantime, on 9 August 1966, upon Northern Motor’s filing of a bond, a writ of replevin was issued by the court. On 20 October 1966, copies of the summons, complaint and annexes thereto were served on Sapinoso by the sheriff who executed the seizure warrant by seizing the car from Sapinoso on the same date, and turning over its possession to the plaintiff on 25 October 1966. After trial and on 4 April 1967, the trial court held that Sapinoso having failed to pay more than 2 installments, Northern Motors acquired the right to foreclose the chattel mortgage, which it could avail of by filing an action of replevin to secure possession of the mortgaged car as a preliminary step to the foreclosure sale contemplated in the Chattel Mortgage Law; and that the foreclosure of the chattel mortgage and the recovery of the unpaid balance of the price are alternative remedies which may not be pursued conjunctively, so that in availing itself of its right to foreclose the chattel mortgage, Northern Mortors thereby renounced whatever claim it may have had on the promissory note, and, therefore, it has no more right to the collection of the attorney’s fees stipulated in the promissory note, and should return to Sapinoso the sum of P1,250.00 which Northern Motors had received from the latter after having filed the present case on 22 July 1966, and elected to foreclose the chattel mortgage.

Direct appeal was made by Northern Motors on questions of law from the portion of the judgment of the CFI Manila, Branch XXII (Civil Case 66199), ordering Northern Motors to pay Sapinoso the sum of P1,250.00.

The Supreme Court modified the judgment appealed from by setting aside the portion thereof which orders Northern Motors to pay Sapinoso the sum of P1,250.00, with costs in this instance against Sapinoso.

1.    Replevin as a preliminary step to the foreclosure sale
In issuing a writ of replevin, and, after trial, in upholding Northern Motors’ right to the possession of the car, and ratifying and confirming its delivery to the aforementioned, the trial court correctly considered the action as one of replevin to secure possession of the mortgaged vehicle as a preliminary step to the foreclosure sale contemplated in Section 14 of Act 1508 (Bachrach Motor Co. vs. Summers, 42 Phil., 3; Seño vs. Pestolante, G.R. No. L-11755, April 23, 1958).

2.    Replevin does not bar seller from accepting further payments on the promissory note
The trial court erred in concluding that the legal effect of the filing of the action was to bar Northern Motors from accepting further payments on the promissory note.

3.    Fact of foreclosure and actual sale of mortgage chattel one that bars recovery of outstanding balance
That the ultimate object of the action is the foreclosure of the chattel mortgage, is of no moment, for it is the fact of foreclosure and actual sale of the mortgaged chattel that bar further recovery by the vendor of any balance on the purchaser’s outstanding obligation not satisfied by the sale (Manila Motor Co., Inc. vs. Fernandez, 99 Phil., 782, 786; Bachrach Motor Co. vs. Millan, 61 Phil., 409; Manila Trading & Suppy Co. vs. Reyes, 62 Phil. 461, 471; Cruz et al. vs. Filipinas Investment & Finance Corporation, G.R. No. L-24772, May 27, 1968 [23 SCRA 791, 796].)

4.    Article 1484 (3); “Further action” to recover unpaid balance prohibited; Prohibition does not preclude voluntary payments
What Article 1484(3) prohibits is “further action against the purchaser to recover any unpaid balance of the price.” Although the Court has construed the word “action” in said Article 1484 to mean “any judicial or extrajudicial proceeding by virtue of which the vendor may lawfully be enabled to exact recovery of the supposed unsatisfied balance of the purchase price from the purchaser or his privy” (Cruz, et al. vs. Filipinas Investment & Finance Corporation, supra), there is no occasion at this stage to apply the restrictive provision of the said article, because there has not yet been a foreclosure sale resulting in a deficiency. The payment of the sum of P1,250.00 by Sapinoso was a voluntary act on his part and did not result from a “further action” instituted by Northern Motors. If the mortgage creditor, before the actual foreclosure sale, is not precluded from recovering the unpaid balance of the price although he has filed an action of replevin for the purpose of extra-judicial foreclosure, or if a mortgage creditor who has elected to foreclose but who subsequently desists from proceeding with the auction sale, without gaining any advantage or benefit, and without causing any disadvantage or harm to the vendee-mortgagor, is not barred from suing on the unpaid account (Radiowealth, Inc. vs. Lavin, et al., G.R. No. L-18563, April 27, 1963 [7 SCRA 804, 807]), there is no reason why a mortgage creditor should be barred from accepting, before a foreclosure sale, payments voluntarily tendered by the debtor-mortgagor who admits a subsisting indebtedness.

Zayas vs. Luneta Motor Company [G.R. No. L-30583.  October 23, 1982.]
First Division, Gutierrez Jr. (J): 5 concur

Facts: Eutropio Zayas, Jr. purchased on installment basis a Ford Thames Freighter with PUH Body (Engine 400E-127738 and Chassis 400E-127738) from Mr. Roque Escaño of the Escaño Enterprises in Cagayan de Oro City, dealer of Luneta Motor Company (Conditions: Selling price, P 7,500.00; Financing charge, 1,426.82; Total Selling Price, 8,926.82; Payable on Delivery, 1,006.82; Payable in 24 months at 12 % interest per annum, 7,920.00) The motor vehicle was delivered to the Zayas who paid the initial payment in the amount of P1,006.82, and executed a promissory note in the amount of P7,920.00, the balance of the total selling price, in favor of Luneta Motor Company. The promissory note stated the amounts and dates of payment of 26 installments covering the P7,920.00 debt. Simultaneously with the execution of the promissory note and to secure its payment, Zayas executed a chattel mortgage on the subject motor vehicle in favor of Luneta Motors. After paying a total amount of P3,148.00, Zayas was unable to pay further monthly installments prompting the Luneta Motors to extrajudicially foreclose the chattel mortgage. The motor vehicle was sold at public auction with the Luneta Motors represented by Atty. Leandro B. Fernandez as the highest bidder in the amount of P5,000.00.

Since the payments made by Zayas plus the P5,000.00, realized from the foreclosure of the chattel mortgage could not cover the total amount of the promissory note executed by Zayas in favor of the respondent Luneta Motors, the latter filed Civil Case 165263 with the City Court of Manila for the recovery of the balance of P1,551.74 plus interests. After several postponements, the case was set for hearing. As a result of Luneta Motor’s and its counsel’s non-appearance on the date set for hearing, Zayas, Jr. moved to have the case dismissed for lack of interest on the part of Luneta Motors. He also asked the court to allow him to discuss the merits of his affirmative defense as if a motion to dismiss had been filed. The issue raised and argued by Zayas was whether or not a deficiency amount after the motor vehicle, subject of the chattel mortgage, has been sold at public auction could still be recovered. Zayas cited the case of Ruperto Cruz v. Filipinas Investment (23 SCRA 791). Acting on the motion, the case was dismissed without pronouncement as to costs. Luneta Motor Company filed an “Urgent Motion for Reconsideration,” which the court denied for lack of merit.

Luneta Motor Company appealed the case to the CFI Manila (Branch XXXI, presided by Judge Juan O. Reyes; Civil Case 74381). After various incidents, the CFI issued an order remanding the case to the court of origin for further proceedings at it is in the opinion that the City Court should have not decided the case merely on the question of law since the presentation of evidence is necessary to adjudicate the questions involved. Hence, the petition for review by certiorari filed by Zayas.

The Supreme Court granted the petition, annulled the orders remanding the case to the court of origin and denying the motion for reconsideration of the CFI Manila, directed the CFI to dismiss the appeal in Civil Case 74381, and affirmed the order of the City Court of Manila dismissing the complaint in Civil Case 165263.

1.    Escano Enterprises an agent of Luneta Motor Company
The Escaño Enterprises of Cagayan de Oro City was an agent of Luneta Motor Company. A very significant evidence which proves the nature of the relationship between Luneta Motor Company and Escaño Enterprises is a certification from the cashier of Escaño Enterprises on the monthly installments paid by Mr. Eutropio Zayas, Jr. In the certification, the promissory note in favor of Luneta Motor Company was specifically mentioned. There was only one promissory note executed by Eutropio Zayas, Jr. in connection with the purchase of the motor vehicle. The promissory note mentioned in the certification refers to the promissory note executed by Eutropio Zayas, Jr. in favor of Luneta Motor Company. Thus, Escaño Enterprises, a dealer of Luneta Motor Company, was merely a collecting-agent as far as the purchase of the subject motor vehicle was concerned. The principal and agent relationship is clear. Luneta Motors’ argument that Escano Enterprises is a distinct and different entity, that its role in the said transaction was only to finance the purchase price of the motor vehicle; that in order to protect its interest as regards the promissory note executed in its favor, a chattel mortgage covering the same motor vehicle was executed by Zayas; and thus that the contract between the parties was only an ordinary loan removed from the coverage of Article 1484 of the New Civil Code; is without merit.

2.    Nature of transaction remains to be a sale of personal property in installment covered by Article 1484
Even assuming that the “distinct and independent entity” theory of Luneta Motors is valid, the nature of the transaction as a sale of personal property on installment basis remains. When, therefore, Escaño Enterprises, assigned its rights vis-a-vis the sale to Luneta Motors, the nature of the transaction involving Escaño Enterprises and Eutropio Zayas, Jr. did not change at all. As assignee, Luneta Motors had no better rights than assignor Escaño Enterprises under the same transaction. The transaction would still be a sale of personal property in installments covered by Article 1484 of the New Civil Code.

3.    Article 1484 of the Civil Code
Article 1484 of the New Civil Code, on the foreclosure of chattel mortgages over personal property sold on installment basis, 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: (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. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.”

4.    Foreclosure and actual sale of a mortgaged chattel bars further recovery of balance by vendor
The foreclosure and actual sale of a mortgaged chattel bars further recovery by the vendor of any balance on the purchaser’s outstanding obligation not so satisfied by the sale. The reason for the doctrine was aptly stated in the case of Bachrach Motor Co. vs. Millan, thus ” the principal object of the amendment was to remedy the abuses committed in connection with the foreclosure of chattel mortgages. This amendment prevents 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. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing practically the full amount of his original indebtedness. Under this amendment the vendor of personal property, the purchase price of which is payable in installments, has the right to cancel the sale or foreclose the mortgage if one has been given on the property. Whichever right the vendor elects he need not return to the purchaser the amount of the installments already paid, ‘if there be an agreement to that effect’. Furthermore, if the vendor avails himself of the right to foreclose the mortgage this amendment prohibits him from bringing an action against the purchaser for the unpaid balance.’” (Cruz v. Filipinas Investment & Finance Corporation 23 SCRA 791)

5.    No need for remand of records to city court
The Court’s findings and conclusions are borne out by the records available to the appellate court. There was no necessity for the remand of records to the city court for the presentation of evidence on the issue raised in the case.

Ridad vs. Filipinas Investment [G.R. No. L-39806.  January 27, 1983.]
Second Division, de Castro (J): 6 concur

Facts: On 14 April 1964, Luis and Lourdes Ridad purchased from the Supreme Sales and Development Corporation 2 brand new Ford Consul Sedans complete with accessories, for P26,887 payable in 24 monthly installments. To secure payment thereof, the Ridads executed on the same date a promissory note covering the purchase price and a deed of chattel mortgage not only on the 2 vehicles purchased but also on another car (Chevrolet) and their franchise or certificate of public convenience granted by the defunct Public Service Commission for the operation of a taxi fleet. Then, with the conformity of the Ridads, the vendor assigned its rights, title and interest to the promissory note and chattel mortgage to Filipinas Investment and Finance Corporation. Due to the failure of the Ridads to pay their monthly installments as per promissory note, the corporation foreclosed the chattel mortgage extrajudicially, and at the public auction sale of the 2 Ford Consul cars, of which the Ridads were not notified, the corporation was the highest bidder and purchaser. Another auction sale was held on 16 November 1965, involving the remaining properties subject of the deed of chattel mortgage since the Ridads’ obligation was not fully satisfied by the sale of the aforesaid vehicles, and at the public auction sale, the franchise of the Ridads to operate 5 units of taxicab service was sold for P8,000 to the highest bidder, the corporation, which subsequently sold and conveyed the same to Jose D. Sebastian, who then filed with the Public Service Commission an application for approval of said sale in his favor.

On 21 February 1966, plaintiffs filed an action for annulment of contract before the CFI Rizal (Branch I, Civil Case 9140) with 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 in the lower court on the basis of the documentary evidence adduced by the parties during the pre-trial conference. Thereafter, the lower court rendered judgment declaring the chattel mortgage null and void insofar as the taxicab franchise and the used Chevrolet car of the plaintiffs are concerned, that the public auction conducted concerning said franchise to be of no legal effect, that the certificate of sale issued by the sheriff concerning the franchise is cancelled and set aside, and that the assignment made by Filipinas Investment in favor of Sebastian was declared void and of no legal effect.

Appeal was filed with the Court of Appeals but was subsequently certified to the Supreme Court pursuant to Section 3 of Rule 50 of the Rules of Court, there being no issue of fact involved in the appeal.

The Supreme Court affirmed the judgment appealed from, with costs against Filipinas Investment, et. al.

1.    Article 1484 of the Civil Code
Article 1484 of the 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, should the vendee fail to pay; (2) Cancel the sale, should the vendee’s failure to pay cover two or more installments; (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. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.”

2.    Remedies of vendor alternative, not cumulative; If vendor elects tight to foreclose mortgage, law prohibits him from bringing further action to recover balance of debt
Under Article 1484 of the Civil Code, the vendor of personal property the purchase price of which is payable in installments, has the right, should the vendee default in the payment of two or more of the agreed installments, 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.  Whichever right the vendor elects, he cannot avail of the other, these remedies being alternative, not cumulative.  Furthermore, if the vendor avails himself of the right to foreclose his mortgage, the law prohibits him from further bringing an action against the vendee for the purpose of recovering whatever balance of the debt secured not satisfied by the foreclosure sale. 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.

3.    FIFC barred from further action as to payment of unpaid balance
FIFC elected to foreclose its mortgage upon default by the plaintiffs in the payment of the agreed installments. Having chosen to foreclose the chattel mortgage, and bought the purchased vehicles at the public auction as the highest bidder, it submitted itself to the consequences of the law as specifically mentioned, by which it is deemed to have renounced any and all rights which it might otherwise have under the promissory note and the chattel mortgage as well as the payment of the unpaid balance.

4.    Vendor’s right to foreclose chattel mortgage only of the thing sold; not other mortgages; Levy Hermanos case applies
The chattel mortgage in question is a nullity insofar as the taxicab franchise and the used Chevrolet car of the Ridads are concerned, under the authority of the ruling in the case of Levy Hermanos, Inc. vs. Pacific Commercial Co., et al., 71 Phil. 587, the facts of which are similar to those in the present case. There, the same situation occurred wherein the vendees offered as security for the payment of the purchase price not only the motor vehicles which were bought on installment, but also a residential lot and a house of strong materials. This Court sustained the pronouncement made by the lower court on the nullity of the mortgage in so far as it included the house and lot of the vendees, holding that under the law, should the vendor choose to foreclose the mortgage, he has to content himself with the proceeds of the sale at the public auction of the chattels which were sold on installment and mortgaged to him, and having chosen the remedy of foreclosure, he cannot nor should he be allowed to insist on the sale of the house and lot of the vendees, for to do so would be equivalent to obtaining a writ of execution against them concerning other properties which are separate and distinct from those which were sold on installment. This would indeed be contrary to public policy and the very spirit and purpose of the law, limiting the vendor’s right to foreclose the chattel mortgage only on the thing sold.

5.    Cruz vs. FIFC; Additional mortgaged cancelled as it indirectly subverts protection given by Article 1484
In the case of Cruz v. Filipinas Investment & Finance Corporation, 23 SCRA 791, the Court ruled that the vendor of personal property sold on the installment basis is precluded, after foreclosing the chattel mortgage on the thing sold, from having a recourse against the additional security put up by a third party to guarantee the purchaser’s performance of his obligation on the theory that to sustain the same would overlook the fact that if the guarantor should be compelled to pay the balance of the purchase price, said guarantor will in turn be entitled to recover what he has paid from the debtor-vendee, and ultimately it will be the latter 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, thereby indirectly subverting the protection given the latter. Consequently, the additional mortgage was ordered cancelled.

6.    Ruling in Cruz vs. FIFC reiterated in Pascual vs. United Motors; Vendor precluded from further extrajudicial foreclose of additional security
The ruling in Cruz vs. FIFC was reiterated in the case of Pascual v. Universal Motors Corporation, 61 SCRA 121. 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, it being tantamount to a further action that would violate Article 1484 of the Civil Code, for there is actually no difference 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.

7.    Southern Motors vs. Moscoso does not apply as remedy availed of if that case is the fulfillment of the obligation and not the foreclosure of the chattel mortgage
The ruling in Southern Motors, Inc. v. Moscoso, 2 SCRA 168 – that in sales on installments, where the action instituted is for specific performance and the mortgaged property is subsequently attached and sold, the sale thereof does not amount to a foreclosure of the mortgage, hence, the seller-creditor is entitled to a deficiency judgment – does not fortify the stand of the appellants for that case is entirely different from the present case. In that case, the vendor has availed of the first remedy provided by Article 1484 of the Civil Code, i.e., to exact fulfillment of the obligation; whereas in the present case, the remedy availed of was foreclosure of the chattel mortgage.

8.    Issue on the validity of auction sale superfluous
The disposition of the Court renders superfluous a determination of the other issue raised by the parties as to the validity of the auction sale, insofar as the Ridads’ franchise is concerned, which sale had been admittedly held without any notice to them.

Cruz vs. Filipinas Investment [G.R. No. L-24772.  May 27, 1968.]
En Banc, Reyes JBL (J): 7 concur, 1 on leave

Facts: On 15 July 1963, Ruperto G. Cruz purchased on installments, from the Far East Motor Corporation, 1 unit of Isuzu Diesel Bus for P44,616.24, payable in installments of P1,487.20 per month for 30 months, beginning 22 October 1963, with 12% interest per annum, until fully paid. As evidence of said indebtedness, Cruz executed and delivered to the Far East Motor Corporation a negotiable promissory in the sum of P44,616.24. To secure the payment of the promissory note, Cruz executed in favor of the seller Far East Motor Corporation, a chattel mortgage over the motor vehicle. As no down payment was made by Cruz, the seller, Far East Motor Corporation, on the very same date, 15 July 1963, required and Cruz agreed to give, additional security for his obligation besides the chattel mortgage. Additional security was given by Felicidad Vda. de Reyes in the form of Second Mortgage on a parcel of land owned by her (68,902 sq. ms., TCT T-36480 of the Registry of Deeds of Bulacan, mortgaged to the DBP to secure loan of P2,600), together with the building and improvements thereon, in San Miguel, Bulacan. On 15 July 1963, the Far East Motors for value received indorsed the promissory note and assigned all its rights and interest in the Deeds of Chattel Mortgage and in the Deed of Real Estate Mortgage to Filipinas Investment & Finance Corporation (FIFC), with due notice of such assignment to Cruz, et.al. Cruz defaulted in the payment of the promissory note and  that the only sum ever paid was P500 on 2 October 1963, which was applied as partial payment of interests on his principal obligation. Notwithstanding FIFC’s demands, Cruz made no payment on any of the installments stipulated in the promissory note.  By reason of Cruz’s default, FIFC took steps to foreclose the chattel mortgage on the bus. However, said vehicle had been damaged in an accident while in the possession of Cruz. At the foreclosure sale held on 31 January 1964 by the Sheriff of Manila, FIFC was the highest bidder (for P15,000.00). The proceeds of the sale of the bus were not sufficient to cover the expenses of sale, the principal obligation, interests, and attorney’s fees, i.e., they were not sufficient to discharge fully the indebtedness of Cruz to FIFC. On 12 February 1964, preparatory to foreclosing its real estate mortgage on Mrs. Reyes’ land, FIFC paid the mortgage indebtedness of Mrs. Reyes to the DBP, in the sum of P2,148.07, the unpaid balance of said obligation. Pursuant to a provision of the real estate mortgage contract, authorizing the mortgagee to foreclose the mortgage judicially or extra-judicially, FIFC on 29 February 1964 requested the Provincial Sheriff of Bulacan to take possession of, and sell, the land subject of the Real Estate Mortgage to satisfy the sum of P43,318.92, the total outstanding obligation of Cruz, et. al. to FIFC. Notices of sale were duly posted and served to the Mortgagor, Mrs. Reyes, pursuant to and in compliance with the requirements of Act 3135. On 20 March 1964, Reyes through counsel, wrote a letter to FIFC asking for the cancellation of the real estate mortgage on her land, but FIFC did not comply with such demand as it was of the belief that Reyes’ request was without any legal basis.

An action was commenced by Cruz and Reyes in the CFI Rizal (Civil Case Q- 7949), for cancellation of the real estate mortgage constituted on Reyes’ land in favor of FIFC (as assignee of the Far East Motor Corporation). The provincial Sheriff of Bulacan held in abeyance the sale of the mortgaged real estate pending the resolution of the case. The trial court in its decision of 21 April 1965, sustained Cruz, et.al.’s stand and declared that the extrajudicial foreclosure of the chattel mortgage on the bus barred further action against the additional security put up by Reyes. Consequently, the real estate mortgage constituted on Reyes’ land was ordered cancelled and FIFC was directed to pay Reyes attorney’s fees in the sum of P200.00. Hence, the appeal by FIFC.

The Supreme Court modified the decision appealed from, by ordering Reyes to reimburse to FIFC the sum of P2,148.07, with legal interest thereon from the finality of this decision until it is fully paid. In all other respects, the judgment of the trial court was affirmed, with costs against FIFC.

1.    Article 1484
Article 1484 of the Civil Code of the Philippines is the pertinent legal provision on sale of personal property on installments. It 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, should the vendee fail to pay; (2) Cancel the sale, should the vendee’s failure to pay cover two or more installments; (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. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.”

2.    Provision clear as to available remedies; Remedies alternative not cumulative
The provision is clear and simple: 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 one 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 orders.

3.    Foreclosure and actual sale of mortgage chattel bars recovery of any balance by vendor; Reason for the doctrine
The foreclosure and actual sale of a mortgage chattel bars further recovery by the vendor of any balance on the purchaser’s outstanding obligation not so satisfied by the sale. The reason for the doctrine was aptly stated in the case of Bachrach Motor Co. vs. Millan, thus “the principal object of the amendment was to remedy the abuses committed in connection with the foreclosure of chattel mortgages. This amendment prevents 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. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing practically the full amount of his original indebtedness. Under this amendment the vendor of personal property, the purchase price of which is payable in installments, has the right to cancel the sale or foreclose the mortgage if one has been given on the property. Whichever right the vendor elects he need not return to the purchaser the amount of the installments already paid, ‘if there be an agreement to that effect. Furthermore, if the vendor avails himself of the right to foreclose the mortgage this amendment prohibits him from bringing an action against the purchaser for the unpaid balance.”

4.    Further action against guarantor would indirectly subvert protection given by Article 1484 to purchaser
To sustain FIFC’s argument (that what is being withheld from the vendor, by the proviso of Article 1484 of the Civil Code, is only the right to recover “against the purchaser” and not a recourse to the additional security put up, not by the purchaser himself, but by a third person) is to overlook the fact that if the guarantor should be compelled to pay the balance of the purchaser price, the guarantor will in turn be entitled to recover what she has paid from the debtor vendee (Article 2066, Civil Code). Thus,  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.

5.    “Action” without a definitive or exclusive meaning; Action referred to in Article 1484 thus may be judicial or extrajudicial
The word “action” is without a definite or exclusive meaning. It has been invariably defined as “the legal demand of one’s right, or rights; the lawful demand of one’s rights in the form given by law; a demand of a right in a court of justice; the lawful demand of one’s right in a court of justice; the legal and formal demand of one’s rights from another person or party, made and insisted on in a court of justice; a claim made before a tribunal; an assertion in a court of justice of a right given by law; a demand or legal proceeding in a court of justice to secure one’s rights; the prosecution of some demand in a court of justice; the means by which men litigate with each other; the means that the law has provided to put the cause of action into effect” (Gutierrez Hermanos vs. De la Riva, 46 Phil. 827, 834-835). Considering the purpose for which the prohibition contained in Article 1484 was intended, the word “action” used therein may be construed as referring to any judicial or extrajudicial proceeding by virtue of which the vendor may lawfully be enabled to exact recovery of the supposed unsatisfied balance of the purchase price from the purchaser or his privy. Certainly, an extrajudicial foreclosure of a real estate mortgage is one such proceeding.

6.    Award of attorney’s fees; Litigation was avoidable as law and jurisprudence are explicit
The provision of law and jurisprudence on the matter being explicit so that this litigation could have been avoided, the award by the lower court of attorney’s fees to Cruz, et.al. in the sum of P200.00 is reasonable and in order.

7.    Reimbursement for FIFC payment of Reyes’ outstanding balance on loan with DBP
To the extent that she was benefited by the payment of FIFC to DBP, for the release of the first mortgage of Reyes’ land, Reyes should have been required to reimburse FIFC.

Vda. De Quiambao vs. Manila Motor Company [G.R. No. L-17384.  October 31, 1961.]
En Banc, Reyes JBL (J): 8 concur, 1 took no part

Facts: On 7 March 1940, Gaudencio R. Quiambao, deceased husband of Nestora Rigor Vda. de Quiambao and father of the other petitioners, bought from Manila Motor Company, Inc. 1 Studebaker car on the installment plan. Upon default in the payment of a number of installments, the company sued Gaudencio Quiambao in Civil Case 58043 of the CFI Manila. On 4 December 1940, judgment was entered in said case, awarding in favor of the company the sum of P3,054.32, with interest thereon at 12% per annum, and P300.00 attorneys’ fees. On 14 July 1941, the court issued a writ of execution directed to the Provincial Sheriff of Tarlac, who thereupon levied on and attached two parcels of land covered by TCT 18390 of the Office of the Register of Deeds for Tarlac. On 27 August 1941, Attorney Felix P. David, then counsel for the Manila Motor Company, accompanied by the sheriff, personally apprised Gaudencio Quiambao of the levy. The latter pleaded to have the execution sale suspended and begged for time within which to satisfy the judgment debt, proposing that in the meanwhile, he would surrender to the company the Studebaker car. This proposition was accepted; accordingly, Gaudencio Quiambao delivered the car to the company, and Attorney David issued a receipt therefore. On 16 October 1941, Gaudencio Quiambao remitted to the company, on account of the judgment, the sum of P500.00; he, however, failed to make further payments, thus leaving a balance still unsettled of P1,952.47, with interest thereon at 12% per annum from 6 March 1940.

In the meantime, the Pacific war broke out, and when the Japanese forces occupied the country shortly thereafter, the invaders seized all the assets of the Manila Motor Company, Inc. as enemy property. After the war, the company filed with the Philippine War Damage Commission, among other things, a claim for its mortgage lien on the car of Gaudencio Quiambao and was awarded the sum of P780.47, P409.75 of which amount had already been paid. On 12 October 1949, the company addressed a letter to Gaudencio Quiambao asking him to fill a blank form relative to the lost car. Quiambao having since died, his widow, Nestora Rigor Vda. de Quiambao, returned the form with the statement that the questioned car was surrendered to the company for storage. On 18 May 1953, a demand was made on the widow to settle the deceased’s unpaid accounts, but in view of her refusal, the company urged the Provincial Sheriff of Tarlac to carry out the pre-war writ of execution issued in Civil Case 58043. Although the records of that case had been lost during the war, and have not been reconstituted, a copy of said writ of execution kept on file by the provincial sheriff was saved. Accordingly, the latter advertised for sale at public auction the properties levied upon.

Notified of the sheriff’s action, the heirs of the deceased Quiambao filed the suit to annul and set aside the writ of execution and to recover damages. Judgment was rendered by the CFI in favor of the Quiambaos, but on appeal to the Court of Appeals (CA-GR 17031-R), the decision was reversed and another entered dismissing the complaint. Hence, the appeal by writ of certiorari.

The Supreme Court affirmed the judgment of the Court of Appeals appealed from, with costs against the Quiambaos.

1.    Heacock case does not apply; Delivery of car to company did not produce effect of rescinding or annulling the contract of sale; Buyer surrendered car to postpone satisfaction of the judgment amount
Unlike the situation that arose in the H. E. Heacock Company case (66 PHIL 245-246) wherein the vendor demanded the return of the thing sold, and thereby indicated an unequivocal desire on its part to rescind its contract with the vendee, here it was the buyer (deceased Gaudencio Quiambao) who offered indeed pleaded, to surrender his car only in order that he might be given more time within which to satisfy the judgment debt, and suspend the impending execution sale of the properties levied upon. The very receipt issued then by the company, and accepted without objection by the deceased (Gaudencio Quiambao), indicated that the car was received “pending settlement of the judgment in Civil Case 58043.” Other circumstances that militate against the Quiambaos’ theory of rescission or annulment of the contract of sale and waiver of the judgment debt and, conversely, strengthen the proposition that the delivery of the car to the company was merely to postpone the satisfaction of the judgment amount, are that the deceased still paid the further sum of P500.00 on account of his indebtedness about two months after the car was surrendered, and that despite the company’s acceptance of the car, the company made repeated demands against the petitioners to settle the deceased’s unpaid accounts.

2.    Receipt of car not for appropriation but as security to satisfaction of judgment credit; Does not amount to foreclosure of chattel mortgage
Since the company did not receive the car for the purpose of appropriating the same, but merely as security for the ultimate satisfaction of its judgment credit, the situation under consideration could not have amounted to a foreclosure of the chattel mortgage.

3.    Payment of war damage compensation does not produce same and equal legal effect as formal foreclosure
Having been the party who was last in possession of the lost car, the company was well within its rights, or better still, under obligation, to protect the interest of the car owner, as well as its own, by claiming, as it did, the corresponding war damage compensation for the car. Such action of the company cannot reasonably be construed as a constriction of its rights under the pre-war judgment.

4.    Scenario barring recovery of any unpaid balance
In Manila Motor Company, Inc., vs. Fernandez (52 OG 16, 6883, 6885), it was held that “it is the actual sale of the mortgaged chattel in accordance with section 14 of Act 1508 that would bar the creditor (who chooses to foreclose) from recovering any unpaid balance (Pacific Commercial Company vs. De la Rama, 72 Phil, 380).”

5.    Suit filed was for specific performance and not for rescission or cancellation of contract of sale
The best reason why respondent company may not be construed as having rescinded or cancelled the contract of sale or foreclosed the mortgage on the automobile is precisely because it brought suit for specific performance, and won, in the pre-war Civil Case 58043.

6.    Pre-war judgment has not prescribed; Period covered by moratorium law and closure of regular courts at the outbreak of war deducted
The pre-war judgment was entered on 4 December 1940, and on 14 July 1941, a writ of execution was issued. The company took no further step to enforce the judgment until 19 May 1954, on which date, Manila Motors scheduled 2 parcels of land owned by the Quiambaos for sale at public auction pursuant to the writ of 14 July 1941. From the entry of the judgment to 19 May 1954, a period of 13 years, 5 months and 15 days had elapsed.
From this term, the period covered by the debt moratorium under Executive Order 32 (which applied to all debts payable within the Philippines), from the time the order took effect on 10 March 1945, until it was partially lifted by RA 342 on 26 July 1948 must be deducted. Deducting the period during which EO 32 was in force, which is 3 years, 4 months and 16 days, from 13 years, 5 months and 15 days, the period covered from the entry of the pre-war judgment to the time the company attempted to sell the levied properties at auction, there is still left a period of 10 years and 29 days.
But as held in Talens vs. Chuakay & Co., G.R. No. L-10127, June 30, 1958, the Court took judicial notice of the fact that regular courts in Luzon were closed for months during the early part of the Japanese occupation until they were reconstituted by order of the Chairman of the Executive Commission on 30 January 1942. This interruption in the functions of the courts has also been held to interrupt the running of the prescriptive period (see also Palma vs. Celda, 81 Phil. 416). That being the case, respondent company could not be barred by prescription from proceeding with the execution sale pursuant to the levy and writ of execution issued under the pre-war judgment, considering that even the minimum period of from 8 December 1941, the outbreak of the Pacific War, to 30 January 1942 is already a term of 1 month and 23 days.

7.    Pre-war writ of execution and levy may still be enforced by sale of the levied property after the lapse of the 5-year period within which a judgment may be executed by motion
A valid execution issued and levy made within the period provided by law may be enforced by a sale thereafter. The sale of the property by the sheriff and the application of the proceeds are simply the carrying out of the writ of execution and levy which when issued were valid. This rests upon the principle that the levy is the essential act by which the property is set apart for the satisfaction of the judgment and taken into custody of the law, and that after it has been taken from the defendant, his interest is limited to its application to the judgment, irrespective of the time when it may be sold (Southern Cal. L. Co. vs. Hotel Co., 94 Cal. 217, 222; Government of P.I. vs. Echaus, 71 Phil. 318). Thus, a valid judgment