CHATTEL MORTGAGE
Dy v. CA
Doctrine: Mortgagor retains ownership over the
property given as security, and has the right to sell
it with the obligation to secure written consent of
the mortgagee; Validity of the sale not affected if
no consent was obtained from the mortgagee.
Facts
Perfecto Dy and Wilfredo Dy are brothers.
Wilfredo purchased a truck and a farm tractor
through financing extended by Libra Finance and
Investment Corporation (Libra)
Both truck and tractor were mortgaged to Libra as
security for the loan.
Perfecto wanted to buy the tractor from his
brother so he wrote a letter to Libra requesting
that he be allowed to purchase it from Wilfredo
and assume the mortgage debt of the latter.
Libra approved the request.
Wilfredo executed a deed of absolute sale in favor
of the Perfecto over the tractor. It was under the
possession of Libra due to Wilfredo’s failure to pay
the amortizations.
Despite the offer of full payment by Perfecto to
Libra for the tractor, the immediate release could
not be effected because Wilfredo had obtained
financing for both the tractor and the truck and
Libra insisted on full payment for both.
Their sister, Carol, purchased the truck so that full
payment could be made for both. Payment having
been effected through an out-of-town check, Libra
insisted that it be cleared first before it could
release the chattels.
A collection case was pending in another court
against Wilfredo Dy, filed by Gelac Trading. The
provincial sheriff was able to seize and levy on the
tractor which was in the premises of Libra.
The tractor was subsequently sold at public auction
where Gelac Trading was the lone bidder. Gelac
sold it to Gonzalez, a stockholder.
It was only when the check was cleared when
Perfecto learned about GELAC having already taken
custody of the subject tractor. Consequently, the
petitioner filed an action to recover it.
Gelac Trading and Gonzalez claim that at the time
of the execution of the deed of sale, no
constructive delivery was effected since the
consummation of the sale depended upon the
clearance and encashment of the check.
RTC: ruled in favor of Perfecto
CA: reversed
ISSUE: W/N the mortgagor has the right to alienate
the mortgaged property. And what is the effect to
the validity of the sale if the written consent of the
mortgagee was not obtained.
In the case of Servicewide Specialists Inc. v.
Intermediate Appellate Court. (174 SCRA 80
[1989]), we stated that:
The chattel mortgagor continues to be the
owner of the property, and therefore, has
the power to alienate the same; however,
he is obliged under pain of penal liability, to
secure the written consent of the
mortgagee.
The absence of the written consent of the
 mortgagee to the sale of the mortgaged
property in favor of a third person affects
not the validity of the sale but only the
penal liability of the mortgagor (RPC Article
319 par. 2)1and the binding effect of the
sale on the mortgagee under the Deed of
Chattel Mortgage.”
W/N ownership was transferred to Perfecto.
YES.
No reason why Wilfredo Dy, as the chattel
mortgagor cannot sell the subject tractor since the
consent of Libra was obtained. The sale between
the brothers was therefore valid and binding as
between them and to the mortgagee, as well.
While it is true that Wilfredo Dy was not in actual
possession and control of the subject tractor, his
right of ownership was not divested from him upon
his default. Neither could it be said that Libra was
the owner of the subject tractor because the
mortgagee cannot become the owner of or convert
and appropriate to himself the property
mortgaged. (Article 2088, Civil Code) Said property
continues to belong to the mortgagor, Wilfredo.
Contention that the ownership was not transferred
because of the check:
The payment of the check was actually intended to
extinguish the mortgage obligation so that the
tractor could be released to the petitioner. It was
never intended nor could it be considered as
payment of the purchase price because the
relationship between Libra and the petitioner is not
one of sale but still a mortgage.
W/N Gelac has right to the property.
NO.
Actuations of GELAC Trading were violative of the
provisions on human relations.
GELAC knew very well of the transfer of the
property to Perfecto when it received summons
based on the complaint for replevin filed with the
RTC by the petitioner. Notwithstanding said
summons, it continued to sell the subject tractor to
one of its stockholders on August 2, 1980.

There is no showing that Libra Finance has already

foreclosed the mortgage and that it was the new
owner of the tractor. Undeniably, Libra gave its Pameca Wood Treatment Plant v. CA
consent to the sale of the subject tractor to the
Perfecto. Doctrine:

1
Art. 319. Removal, sale or pledge of mortgaged property. — 2. Any mortgagor who shall sell or pledge personal property
The penalty or arresto mayor or a fine amounting to twice the already pledged, or any part thereof, under the terms of the
value of the property shall be imposed upon: Chattel Mortgage Law, without the consent of the mortgagee
1. Any person who shall knowingly remove any personal written on the back of the mortgage and noted on the record
property mortgaged under the Chattel Mortgage Law to any
hereof in the office of the Register of Deeds of the province
province or city other than the one in which it was located at
the time of the execution of the mortgage, without the written where such property is located.
consent of the mortgagee, or his executors, administrators or
assigns.
Whereas, in pledge, the sale of the thing pledged
extinguishes the entire principal obligation, such
that the pledgor may no longer recover proceeds of
the sale in excess of the amount of the principal
obligation, Section 14 of the Chattel Mortgage Law
expressly entitles the mortgagor to the balance of
the proceeds, upon satisfaction of the principal
obligation and costs.
Article 1484 of the Civil Code applies clearly and
solely to the sale of personal property the price of
which is payable in installments.
FACTS
PAMECA obtained a loan of 2 million from DBP.
Pameca executed a promissory note for the loan,
promising to sell it by installment.
As security for the said loan, a chattel mortgage
was also executed over PAMECA’s properties in
Dumaguete City, consisting of inventories, furniture
and equipment.
Upon PAMECA’s failure to pay, respondent DBP
extrajudicially foreclosed the chattel mortgage,
and, as sole bidder in the public auction, purchased
the foreclosed properties.
Respondent bank filed a complaint for the
collection of the balance of P4,366,332 (4million)
against petitioner PAMECA under the promissory
2
Art. 1484. In a contract of sale of personal property the price
of which is payable in installments, the vendor may exercise
the following remedies:
. (1) Exact fulfillment of the obligation, should the vendee
fail to pay; 
 agreement to the contrary shall be void.”
. (2) Cancel the sale, should the vendee’s failure to pay
cover two or more installments; 
 3
note.
RTC – ruled in favor of DBP
CA – affirmed
ISSUE:
1. W/N the public auction sale was null and void for
being tainted with fraud.
[chattels were bought by the bank as sole bidder in
only 1/6 of the market value of the property]
NO.
PAMECA contends that the amount of P322,350.00
at which the bank bid for and purchased the
mortgaged properties was unconscionable and
inequitable considering that, at the time of the
public sale, the mortgaged properties had a total
value of more than P2,000,000.00.
The terms of the chattel mortgage contract
required that the inventories “be maintained at a
level no less than P2 million.”
ISSUES:
W/N recovery of the deficiency is precluded by
Articles 1484 and 2115 of the Civil Code.
YES. Petitioners submit that Articles 14842 and
21153 of the Civil Code be applied in analogy to the
. (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


Art. 2115. The sale of the thing pledged shall extinguish the
principal obligation, whether or not the proceeds of the sale
instant case to preclude the recovery of a
deficiency claim.
The provisions of the Chattel Mortgage Law
regarding the effects of foreclosure of chattel
mortgage, being contrary to the provisions of
Article 2115, Article 2115 in relation to Article
2141, may not be applied to the case.
Section 14 of Act No. 1508, as amended, or the
Chattel Mortgage Law, states:
The proceeds of such sale shall be applied to the
payment, first, of the costs and expenses of
keeping and sale, and then to the payment of the
demand or obligation secured by such mortgage,
and the residue shall be paid to persons holding
subsequent mortgages in their order, and the
balance, after paying the mortgage, shall be paid to
the mortgagor or persons holding under him on
demand.”
Whereas, in pledge, the sale of the thing pledged
extinguishes the entire principal obligation, such
that the pledgor may no longer recover proceeds of
the sale in excess of the amount of the principal
obligation, Section 14 of the Chattel Mortgage Law
expressly entitles the mortgagor to the balance of
the proceeds, upon satisfaction of the principal
obligation and costs.
The Chattel Mortgage Law bars the creditor-
mortgagee from retaining the excess of the sale
proceeds. There is also a corollary obligation on the
part of the debtor- mortgagee to pay the deficiency
in case of a reduction in the price at public auction.
Rationale for the rule:
The value of the chattels changes greatly from time
to time, and sometimes very rapidly. If, for
example, the chattels should greatly increase in
value and a sale under that condition should result
in largely overpaying the indebtedness, and if the
creditor is not permitted to retain the excess, then
the same token would require the debtor to pay
the deficiency in case of a reduction in the price of
the chattels between the date of the contract and a
breach of the condition.
W/N Article 1484 of the Civil Code should be
applied by analogy to the instant case.
No. This provision is specifically applicable to a sale
on installments.
Equity, which has been aptly described as “justice
outside legality,” is applied only in the absence of,
and never against, statutory law or judicial rules of
procedure.
As to the issue of fraud:
We are not convinced that they effectively prove
that the mortgaged properties had a market value
of at least P2,000,000.00 on January 18, 1984, the
date of the foreclosure sale.
The chattel mortgage contract only indicates the
obligation of the mortgagor to maintain the
inventory at a value of at least P2,000,000.00, but

are equal to the amount of the obligation, interest and neither shall the creditor be entitled to recover the deficiency
expenses in a proper case. If the price of the sale is more than notwithstanding any stipulation to the contrary.”
said amount, the debtor shall not be entitled to the excess,
unless otherwise agreed. If the price of the sale is less,
does not evidence compliance therewith.
Furthermore, the mere fact that respondent bank
was the sole bidder for the mortgaged properties in
the public sale does not warrant the conclusion
that the transaction was attended with fraud.
Superline v. ICC
Doctrine: If in an extra-judicial foreclosure of a
chattel mortgage a deficiency exists, an
independent civil action may be instituted for the
recovery of said deficiency.
There is a corollary obligation on the part of the
debtor-mortgagor to pay the deficiency in case of a
reduction in the price at public auction.
FACTS
Superlines decided to acquire five new buses from
the Diamond Motors Corporation for the price of
P10,873,582.
Superlines lacked financial resources for the
purpose. Superlines authorized its President and
General Manager, Manolet Lavides, to negotiate
with ICC Leasing & Financing Corporation,
financing corporation for a loan for the purchase
of said buses.
ICC agreed to finance the purchase of the new
buses via a loan and proposed a three-year term
for the payment thereof at a fixed interest rate of
22% per annum.
The new buses to be purchased were to be used by
Superlines as security for the loan. Superlines
executed two documents, namely: a deed of
chattel mortgage over the said buses as security for
the purchase price of the buses and a promissory
note in favor of ICC binding and obliging itself to
pay to the latter the amount of P10,873,582.00
through monthly installments.
Under the contract, The MORTGAGEE shall have
the option of selling the property/ies either at
public or private sale.
Superlines and Lavides executed a Continuing
Guaranty to pay jointly and severally in favor of
ICC. After paying only seven monthly amortizations,
Superlines defaulted in the payment of its
obligation to ICC. ICC wrote Superlines demanding
full payment of its outstanding obligation.
ICC filed a complaint for collection of sum of money
with prayer for a writ of replevin.
The sheriff took possession of the five buses in
compliance with the writ of seizure issued by the
trial court.
ICC instituted extra-judicial fore-closure
proceedings over the subject buses. An auction sale
was held and ICC offered a bid of P7,200,000.00 for
the motor vehicles and was declared the winning
bidder, resulting in a deficiency of P5,406,029.55.
Superlines and Lavides claimed that since the
chattel mortgage on subject buses was already
foreclosed by ICC, the latter had no further action
against them for the unpaid balance of the price.
Trial court: dismissed the complaint of ICC
The trial court found that, as testified to by Lavides,
ICC and Superlines forged a consumer loan
agreement and not an amortized commercial loan.
It further declared that, as testified to by Lavides,
there was a special arrangement for the purchase
by ICC of said buses from Diamond Motors.
Superlines purchased the buses from ICC, the
purchase price therefor payable in monthly
installments.
CA: reversed the judgement and declared that ICC
is entitled to a deficiency claim.
ICC and Superlines entered into an amortized
commercial loan agreement with ICC as creditor-
mortgagee and Superlines as debtor- mortgagor,
and ordered Superlines and Lavides to pay to ICC
jointly and severally the deficiency. No evidence
had been presented by Superlines to show that ICC
bought the said buses from Diamond Motors
The appellate court also ruled that Article 1484(3)
is applicable only where there is vendor-vendee
relationship between the parties and since ICC did
not sell the buses to Superlines, the latter cannot
invoke said law.
Superlines argues that the Promissory Note and
Chattel Mortgage executed by petitioner
Superlines and the Continuing Guaranty executed
by both petitioners are not conclusive of the nature
of the transaction concluded by Superlines, ICC and
Diamond Motors.
ISSUE: W/N Art. 1484 (3)4 of the New Civil Code is
applicable to the instant case.
NO.
DIAMOND is the seller of the five units of buses
and not ICC. No convincing evidence, except the
self-serving testimony of defendant Manolet
Lavides, was presented to prove that there was an
4
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:
(3) Foreclose the chattel mortgage on the thing sold, if one
has been constituted, should the vendee's failure to pay
internal arrangement between ICC, as financing
agent, and Diamond, as seller of the buses.
The conclusion of the lower court that the parties
entered into a financing scheme covered by Article
1484 (3) of the New Civil Code is therefore
unsubstantiated.
The evidence shows that the transaction between
the parties was an “amortized commercial loan” to
be paid in installments and not another “special
agreement”. The net proceeds of the loan were
remitted by ICC to Superlines and the latter
remitted the same to Diamond Motors Corporation
in payment of the purchase price of the buses.
The evidence on record shows that under the
Promissory Note, Chattel Mortgage and Continuing
Guaranty, respondent was the creditor-mortgagee
of petitioner Superlines and not the vendor of the
new buses. Hence, petitioners cannot find refuge in
Article 1484(3) of the New Civil Code. As correctly
held by the Court of Appeals, what should apply
was the Chattel Mortgage executed by petitioner
Superlines and respondent in relation to the
Chattel Mortgage Law:
if in an extra-judicial foreclosure of a chattel
mortgage a deficiency exists, an independent
civil action may be instituted for the recovery
of said deficiency.
The chattel mortgage is only given as security and
not as payment for the debt in case of failure of
payment.
Both the Chattel Mortgage Law and Act 3135
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.
governing extra-judicial foreclosure of real estate
mortgage, do not contain any provision, expressly
or impliedly, precluding the mortgagee from
recovering deficiency of the principal obligation.
CALIFORNIA BUS LINES v. STATE INVESTMENT
HOUSE
Delta Motors Corporation applied for financial
assistance from respondent State Investment
House (a domestic corporation engaged in the
business of quasi-banking).
SIHI agreed to extend a credit line to Delta for
P25,000,000.00 in three separate credit
agreements. Delta availed of the credit line by
discounting with SIHI some of its receivables, which
evidence actual sales of Delta's vehicles.
Delta eventually became indebted to SIHI to the
tune of P24,010,269.
California Bus Lines, Inc. (hereafter CBLI),
purchased on installment basis 35 units of M.A.N.
Diesel Buses and two (2) units of M.A.N. Diesel
Conversion Engines from Delta.
To secure the payment of the purchase price of the
35 buses, CBLI executed sixteen (16) promissory
notes and Chattel mortgages over the buses in
favor of Delta.
When CBLI defaulted on all payments due, it
entered into a restructuring agreement with Delta
to cover its overdue obligations under the
promissory notes.
Restructuring: extending the period to pay,
and stipulating daily remittance instead of
the previously agreed monthly remittance
of payments. In case of default, Delta would
have the authority to take over the
management and operations of CBLI until
CBLI remitted its past due account.
Delta executed a Continuing Deed of Assignment of
Receivables in favor of SIHI as security for the
payment of its obligations to SIHI per the credit
agreements. In view of Delta's failure to pay, the
loan agreements were restructured under a
Memorandum of Agreement.
Pursuant to the Memorandum of Agreement, Delta
executed a Deed of Sale assigning to SIHI five (5) of
the sixteen (16) promissory notes of CBLI.
As regards to the remaining obligation, Delta
offered its available bus units to SIHI. When SIHI
was unable to take possession of the buses, SIHI
filed a petition for recovery of possession with
prayer for issuance of a writ of replevin.
SIHI applied the proceeds from the sale of the said
17 buses to Delta’s obligation.
Delta and CBLI entered into a compromise
agreement where CBLI agreed that Delta would
exercise its right to extrajudicially foreclose on the
chattel mortgages over the 35 bus units.
Following this, CBLI vehemently refused to pay
SIHI the value of the five promissory notes,
contending that the compromise agreement was in
full settlement of all its obligations to Delta
including its obligations under the promissory
notes.
CBLI cites paragraph 5 of the compromise
agreement which states that the agreement
between it and CBLI was in "full and final
settlement, adjudication and termination of all
their rights and obligations as of the date of (the)
agreement, and of the issues in (the) case."
Delta filed a petition for extrajudicial foreclosure of
chattel mortgages pursuant to its compromise
agreement with CBLI.
Trial Court: discharged CBLI from liability on the
five promissory notes and ordered SIHI to return
the 16 buses or to pay CBLI P4,000,000
representing the value of the seized buses.
CA: reversed
ISSUES:
(1) whether the Restructuring Agreement between
CBLI and Delta Motors novated the five promissory
notes that Delta assigned to SIHI.
NO. the attendant facts do not make out a case of
novation. The restructuring agreement between
Delta and CBLI executed on October 7, 1981, shows
that the parties did not expressly stipulate that the
restructuring agreement novated the promissory
notes. Absent an unequivocal declaration of
extinguishment of the pre-existing obligation, only
a showing of complete incompatibility between the
old and the new obligation would sustain a finding
of novation by implication.
The restructuring agreement merely provided for a
new schedule of payments and additional security
in paragraph 6 (c) giving Delta authority to take
over the management and operations of CBLI in
case CBLI fails to pay installments equivalent to 60
days. Where the parties to the new obligation
expressly recognize the continuing existence and
validity of the old one, there can be no novation.
(2) whether the compromise agreement
superseded and/or discharged the subject five
promissory notes.
NO.
Having previously assigned the five promissory
notes to SIHI, Delta had no more right to
compromise the same.
the compromise agreement itself provided that it
covered the rights and obligations only of Delta and
CBLI and that it did not refer to, nor cover the
rights of, SIHI as the new creditor of CBLI in the
subject promissory notes. CBLI and Delta stipulated
in paragraph 5 of the agreement that:
5. This COMPROMISE AGREEMENT
constitutes the entire understanding by
and between the plaintiffs and the
defendants as well as their lawyers,
and operates as full and final
settlement, adjudication and
termination of all their rights and
obligations as of the date of this
agreement, and of the issues in this
case.

The compromise agreement cannot bind SIHI under
the settled rule that a compromise agreement
determines the rights and obligations of only the
parties to it.
RELEVANT ISSUE: W/N SIHI can sue for deficiency
after Delta had foreclosed on the chattel
mortgages.
YES.
CBLI maintains that recovery under the subject
promissory notes is no longer allowed by Article
1484(3) of the Civil Code, which prohibits a creditor
from suing for the deficiency after it has foreclosed
on the chattel mortgages.
It argues that SIHI, being the successor-in-interest
of Delta, is no longer allowed to recover on the
promissory notes given as security for the purchase
price of the 35 buses because Delta had already
extrajudicially foreclosed on the chattel mortgages
over the said buses.
Article 1484(3) finds no application in the present
case.
The extrajudicial foreclosure of the chattel
mortgages Delta effected cannot prejudice SIHI's
rights. The assignment of the five notes operated
to create a separate and independent obligation
on the part of CBLI to SIHI, distinct and separate
from CBLI's obligations to Delta.
CBLI knew of the assignment and Delta's lack of
authority to compromise the subject notes, yet it
readily agreed to the foreclosure. To sanction
CBLI's argument and to apply Article 1484 (3) to
this case would work injustice to SIHI by depriving
it of its right to collect against CBLI who has not
paid its obligations.
ANTICHRESIS
PANDO vs. GIMENEZ
The action was instituted for the purpose of
foreclosing a mortgage executed by defendant
Antonio Gimenez.
 In order to secure the payment of P8,000
which the defendant Gimenez owed Pando,
he mortgaged the house and the leasehold
right on the lot upon which it stands.
 It was agreed between them that the Pando
would collect the rents of said house, in
order to apply them to the payment of
interest on the amount of the
indebtedness.
 This was payable on October 27, 1925, but,
in spite of nonpayment, the creditor Pando
did not foreclose the mortgage.
 For default in the payment of taxes, the
house was sold at public auction.
 For failure to exercise the right of legal
redemption, the City of Manila executed a
final deed of sale in favor of the purchaser,
Massy Teague.
 For default in the payment of the rents due,
the lessor of said land, cancelled the lease.
Gimenez argued: Pando was responsible for the
delinquency in the payment of both the tax on the
house and the rent of the lot because Pando was at
that time in charge of the administration of the
premises with the obligation to attend to the
payment of the tax and the rents.
Pando replied: he had no such obligation, alleging
that his duties were confined to the collection of
the rents of the house in order to apply them to
the payment of the interest on the mortgage.
The court:
By preponderance of evidence, even though at first
Pando had only undertaken to collect the rents of
the house, later on, he assumed the obligation to
pay both the tax on the house, and the rent of the
lot.
It follows that the administration of the property in
question assumed by the plaintiff toward the end
of October, 1925 is antichretic in character, and
therefore the Civil Code provisions touching the
obligations of the antichretic creditor applies, to
wit:

"The creditor is obliged to pay the taxes and
charges which burden the estate, in the absence of
an agreement to the contrary. "He shall also be
obliged to pay any expenses necessary for its
preservation and repair.
 "Any sums he may
expend for such purposes shall be chargeable
against the fruits." (Art. 1882, Civil Code.)
MANRESA:
The right which the creditor acquires by virtue of
antichresis, to enjoy the fruits of the property
delivered to him, carries two obligations (taxes and
expenses for preservation and repair) which are a
necessary consequence of the contract, because
they arise from its very nature.
Pando failed in his obligation to pay the tax on the
house and the rent of the lot, he is by law required
to pay indemnity for damages (article 1101, Civil
Code).
Allegations of the Gimenez in more detail:
of the said building and the property leased from the
Hacienda Tuason
2. attend to the payment of the premium on the
insurance of this building, the payment of the taxes, the
payment to the lessor Hacienda Tuason of the rents of
the leased property, and
3. to collect the rents from the tenants of the said
building. 

The rents that would be collected from the said
building, Pando would apply the same to the payment
of all the expenses necessary for the preservation and
maintenance of the building, the rents of the leased
property, and the balance of Gimenez under the
Mortgage. 

By reason of this failure, neglect and abandonment by
the Pando to pay the taxes due on the said building, the
City of Manila sold the building at a public auction to
satisfy the taxes due. The building was bought by Massy
Teague.
By reason of the failure, neglect and abandonment of
Pando to pay the Hacienda Tuason the rents due for
several years on the leased property on which the
building was erected, the said lessor cancelled the
contract of lease.

Gimenez was indebted to the Pando in the sum of 


P8,000, and to secure the payment, he executed and
delivered a real estate mortgage over the properties
and leasehold rights mentioned in paragraph VIII of the
plaintiff's complaint, 


Gimenez gave to Pando the full control, and complete

and absolute administration of the building and the
parcel of land which was mortgaged.

Conditions:

Pando would

1. attend to the administration, care and preservation