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Deficiency claim in CM; exception Suzuki Multicab, subject of the writ of

Magna Financial Services Group, Inc. v. Colarina replevin and chattel mortgage, shall be sold
December 9, 2005 at public auction to satisfy the said judgment.
MAGNA FINANCIAL SERVICES GROUP, INC., Petitioner, vs. During the pendency of his appeal before the RTC,
ELIAS COLARINA, Respondent. Colarina died and was substituted in the case by his
RTC (30 January 2002): affirmed in toto MTCC.
SUMMARY: As a result of Colarinas failure to pay monthly
CA (21 January 2003): reversed and set aside RTC.
amortization, Magna Financial filed a complaint for foreclosure
of CM over the motor vehicle Colarina bought from Magna Foreclosure of the chattel mortgage over the subject
Financial. MTCC and RTC ruled in favor of Magna and ordered vehicle as prayed for by Magna Financial in its
Colarina not only to pay the unpaid balance but also allowed complaint without any right to seek the payment of the
Magna to sell the vehicle in case of default in payment. CA unpaid balance of the purchase price or any
reversed and ruled that the foreclosure of the CM without right deficiency judgment against the petitioners pursuant
to seek payment of deficiency. SC affirmed CA. Since Magna to Article 1484 of the Civil Code of the Philippines, is
Financial has undeniably elected a remedy of foreclosure ORDERED
o The MTC and the RTC erred in ordering
under Article 1484(3) of the Civil Code, it is bound by its
election and thus may not be allowed to change what it has Colarina to pay the unpaid balance of the
opted for nor to ask for more. purchase price of the subject vehicle
DOCTRINE: In all proceedings for the foreclosure of chattel irrespective of the fact that the complaint
mortgages executed on chattels which have been sold on the was for the foreclosure of its chattel
installment plan, the mortgagee is limited to the property mortgage. The principal error committed by
included in the mortgage. the said courts was their immediate grant,
FACTS: however erroneous, of relief in favor of
11 June 1997: Elias Colarina bought on installment Magna FInancial for the payment of the
from Magna Financial Services Group, Inc., 1 unit of unpaid balance without considering the fact
Suzuki Multicab that the very prayer it had sought was
After making a down payment, Colarina executed a inconsistent with its allegation in the
promissory note for the balance of P229,284.00 complaint.
o The complaint seeks the judicial foreclosure
payable in 36 equal monthly installments at P6,369.00
monthly, beginning 18 July 1997. of the chattel mortgage. The fact that the
o To secure payment thereof, Colarina Magna Financial had unconscionably sought
executed an integrated promissory note the payment of the unpaid balance
and deed of chattel mortgage over the regardless of its complaint for the foreclosure
motor vehicle. of the said mortgage is glaring proof that it
Colarina failed to pay the monthly amortization intentionally devised the same to deprive
Colarina of his rights. A judgment in its favor
beginning January 1999, accumulating an unpaid
will in effect allow it to retain the possession
balance ofP131,607.00.
and ownership of the subject vehicle and at
Despite repeated demands, he failed to make the
the same time claim against Colarina for the
necessary payment.
unpaid balance of its purchase price. In such
31 October 2000: Magna Financial Services Group,
a case, Magna Financial would luckily have
Inc. filed a Complaint for Foreclosure of Chattel
its cake and eat it too. Unfortunately for the
Mortgage with Replevin before the Municipal Trial
Colarina, the lower courts had readily,
Court in Cities (MTCC), Br.2, Legaspi City
probably unwittingly, made themselves
Writ of Replevin was issued upon filing of bond
abettors to respondents devise to the
27 December 2000: Aummons, together with a copy detriment of the defendant.
of the Writ of Replevin, was served on Colarina who o (May 22, 2003): MR denied
voluntarily surrendered physical possession of Hence, this Petition for Review on Certiorari
the vehicle to the Sheriff, Mr. Antonio Lozano. ISSUE: What is the true nature of a foreclosure of CM,
02 January 2001: the motor vehicle was turned over extrajudicial or judicial, as an exercise of the 3 rd option under
by the sheriff to Magna Financial Services Group, Inc. Article 1484, paragraph 3 of the Civil Code?
12 July 2001: Colarina was declared in default for RATIO:
having filed his answer after more than 6 months from Magna Financial: A mortgage is only an accessory
the service of summons upon him. obligation, the principal one being the undertaking to
TC (23 July 2001): in favor of Magna Financial and pay the amounts scheduled in the promissory note. To
against Colarina, ordering the latter to pay (a) the secure the payment of the note, a chattel mortgage is
principal sum of P131,607 plus penalty charges at constituted on the thing sold. An action for foreclosure
4.5% per month computed from January, 1999 until of mortgage is actually in the nature of an action for
fully paid; (b) P10,000 for attorneys fees; and (c) sum of money instituted to enforce the payment of the
costs. promissory note, with execution of the security. In
o The foregoing money judgment shall be paid case of an extrajudicial foreclosure of chattel
within 90 days from the entry of judgment. In mortgage, the petition must state the amount due on
case of default in such payment, the 1 unit of the obligation and the sheriff, after the sale, shall
apply the proceeds to the unpaid debt. This is the true provided under Article 1484(3) of the Civil Code,17 that
nature of a foreclosure proceeding as provided under is, to foreclose the chattel mortgage.
Rule 68, Section 2 of the Rules of Court. It is, however, unmistakable from the Complaint that
Colarina: The Court of Appeals correctly set aside the Magna Financial preferred to avail itself of the first
trial courts decision due to the inconsistency of the and third remedies under Article 1484, at the same
remedies or reliefs sought by Magna Financial in its time suing for replevin.
Complaint where it prayed for the custody of the For this reason, the Court of Appeals justifiably set
chattel mortgage and at the same time asked for the aside the decision of the RTC.
payment of the unpaid balance on the motor vehicle. Perusing the Complaint, Magna Financial, under its
ART. 1484. In a contract of sale of personal property prayer number 1, sought for the payment of the
the price of which is payable in installments, the unpaid amortizations which is a remedy that is
vendor may exercise any of the following remedies: provided under Article 1484(1) of the Civil Code,
o (1) Exact fulfillment of the obligation, should allowing an unpaid vendee to exact fulfillment of the
the vendee fail to pay; obligation. At the same time, Magna Financial prayed
o (2) Cancel the sale, should the vendees that Colarina be ordered to surrender possession of
failure to pay cover two or more installments; the vehicle so that it may ultimately be sold at public
o (3) Foreclose the chattel mortgage or the auction, which remedy is contained under Article
thing sold, if one has been constituted, 1484(3).
should the vendees failure to pay cover two Such a scheme is not only irregular but is a flagrant
or more installments. In this case, he shall circumvention of the prohibition of the law.
have no further action against the purchaser By praying for the foreclosure of the chattel, Magna
to recover any unpaid balance of the price. Financial Services Group, Inc. renounced whatever
Any agreement to the contrary shall be void. claim it may have under the promissory note.
Bachrach Motor Co., Inc. v. Millan: "Undoubtedly the Article 1484, paragraph 3, provides that if the vendor
principal object of the above amendment (referring to has availed himself of the right to foreclose the chattel
Act 4122 amending Art. 1454, Civil Code of 1889) mortgage, "he shall have no further action against the
was to remedy the abuses committed in connection purchaser to recover any unpaid balance of the
with the foreclosure of chattel mortgages. This purchase price. Any agreement to the contrary shall
amendment prevents mortgagees from seizing the be void." In other words, in all proceedings for the
mortgaged property, buying it at foreclosure sale for a foreclosure of chattel mortgages executed on
low price and then bringing the suit against the chattels which have been sold on the installment
mortgagor for a deficiency judgment. The almost plan, the mortgagee is limited to the property
invariable result of this procedure was that the included in the mortgage.
mortgagor found himself minus the property and still A contract of chattel mortgage, which is the
owing practically the full amount of his original transaction involved in the present case, is in the
indebtedness." nature of a conditional sale of personal property given
In its Complaint, Magna Financial Services Group, as a security for the payment of a debt, or the
Inc. made the following prayer: performance of some other obligation specified
o WHEREFORE, it is respectfully prayed that therein, the condition being that the sale shall be void
judgment render ordering defendant: upon the seller paying to the purchaser a sum of
o 1. To pay the principal sum of P131,607.00 money or doing some other act named.
with penalty charges at 4.5% per month from If the condition is performed according to its terms,
January 1999 until paid plus liquidated the mortgage and sale immediately become void, and
damages. the mortgagee is thereby divested of his title.
o 2. Ordering defendant to reimburse the On the other hand, in case of non payment,
plaintiff for attorneys fee at 25% of the foreclosure is one of the remedies available to a
amount due plus expenses of litigation at not mortgagee by which he subjects the mortgaged
less than P10,000.00. property to the satisfaction of the obligation to secure
o 3. Ordering defendant to surrender to the that for which the mortgage was given.
plaintiff the possession of the Multicab Foreclosure may be effected either judicially or
described in paragraph 2 of the complaint. extrajudicially, that is, by ordinary action or by
o 4. Plaintiff prays for other reliefs just and foreclosure under power of sale contained in the
equitable in the premises. mortgage. It may be effected by the usual methods,
o It is further prayed that pendent lite, an Order including sale of goods at public auction. Extrajudicial
of Replevin issue commanding the Provincial foreclosure, as chosen by the petitioner, is attained by
Sheriff at Legazpi City or any of his deputies causing the mortgaged property to be seized by the
to take such multicab into his custody and, sheriff, as agent of the mortgagee, and have it sold at
after judgment, upon default in the payment public auction in the manner prescribed by Section 14
of the amount adjudged due to the plaintiff, of Act No. 1508, or the Chattel Mortgage Law. This
to sell said chattel at public auction in rule governs extrajudicial foreclosure of chattel
accordance with the chattel mortgage law. mortgage.
In its Memorandum before us, Magna Financial Since Magna Financial has undeniably elected a
resolutely declared that it has opted for the remedy remedy of foreclosure under Article 1484(3) of the
Civil Code, it is bound by its election and thus may not
be allowed to change what it has opted for nor to ask including the sale of the property at public auction,
for more. have been accomplished.
ISSUE: W/N there has been an actual foreclosure of the Under the law, the delivery of possession of the
subject vehicle? mortgaged property to the mortgagee, the herein
RATIO: appellee, can only operate to extinguish appellants
The vehicle is already in the possession of the Magna liability if the appellee had actually caused the
Financial. However, actual foreclosure has not been foreclosure sale of the mortgaged property when it
pursued, commenced or concluded by it. recovered possession thereof
Where the mortgagee elects a remedy of foreclosure, Although no actual foreclosure as contemplated under
the law requires the actual foreclosure of the the law has taken place in this case, since the vehicle
mortgaged chattel. is already in the possession of Magna Financial
Manila Motor Co. v. Fernandez: It is actual sale of the Services Group, Inc. and it has persistently and
mortgaged chattel in accordance with Sec. 14 of Act consistently avowed that it elects the remedy of
No. 1508 that would bar the creditor (who chooses to foreclosure, the Court of Appeals, thus, ruled correctly
foreclose) from recovering any unpaid balance. And it in directing the foreclosure of the said vehicle without
is deemed that there has been foreclosure of the more.
mortgage when all the proceedings of the foreclosure, .