You are on page 1of 23

It covers:

1. Contracts of Sale of personal property


by installments.
2. Contracts purporting to be leases of
personal property with option to buy,
when the lessor has deprived the lessee of
the possession or enjoyment of the thing
(PCI Leasing and Finance Inc. v. Giraffe-X
Creative Imaging, Inc., G.R. No. 142618,
July 12, 2007).
The Recto Law
The Recto Law comprises Articles 1484 to 1486 of the
Civil Code. It was added to the Civil Code to prevent
abuses in the foreclosure of chattel mortgages, such as
when mortgagee-creditors foreclosed mortgaged
property, bought them at a low price (on purpose,)
then prosecuted the mortgagor-debtors to recover the
deficiencies.

In the event a buyer of personal property defaults by


failing to pay two or more of the agreed installments,
the seller can do any of the following:
1.) Demand that the buyer pay (a.k.a. specific
performance)

The seller shall file specific performance in court to


exact payment from the vendee. As a general rule,
the seller cannot avail other remedy if he opted
this. However, if after choosing, it has become
impossible for the vendee to pay the seller, the latter
may file for the rescission of the contract.

2.) Cancel
This is rescission of the contract that can be exercised
by the seller. But the vendee must have failed to pay
2 or more installments as a condition thereto.

The requirements for rescission are:

a. A notarized notice of rescission must have been


sent to the buyer.
b. The seller takes possession of the property subject
to the sale.
c. The seller files action for rescission.or rescind the
sale
3.) Foreclose the mortgage on the property
bought (if there ever was a chattel mortgage)
Regarding no. 3, this happens when a person takes a loan to buy
something and he mortgages the thing he bought to ensure the
creditor that he will pay the loan.

Remember: If you choose one remedy, you can't choose the others.
These remedies, believe it or not, are also available to the buyer. You
also can't use all or any of them at the same time.
The Recto Law also won't apply to a straight sale (i.e. a sale where
there is a downpayment and the balance is payable in the future in a
single payment only.) The seller can also assign his credit to another
person, making that person the new creditor.

If the buyer refuses to surrender the items to the seller, he becomes a


perverse buyer-mortgagor. When that happens, the seller can
recover expenses and attorney's fees.

The Recto Law also covers leases with the option to purchase.

CASE TITLE :
MAGNA FINANCIAL SERVICES GROUP, INC. VS. ELIAS COLARINA
CITATION :
G.R. NO. 158635 (DECEMBER 9, 2005)
TOPIC :
RECTO LAW
FACTS OF THE CASE:

Private respondent Elias Colarina bought on instalment from Petitioner Magna


Financial ServicesGroup, Inc., one (1) unit Suzuki Multicab.

To secure payment thereof, Colarina executed an integrated promissory note and


deed of chattelmortgage over the motor vehicle.

Colarina failed to pay the complete monthly amortization and despite repeated
demands from Magna,the former failed to make the necessary payment.

Magna then instituted a complaint for foreclosure of chattel mortgage with replevin
before the MTCCof Legaspi City. In its complaint, Magna prayed for both 1.)
the payment of the principal sum with penalty charges plus liquidated damages,
and 2.)
for Colarina to surrender possession of the Multicab
.
Ruling of the MTCC

The MTCC granted the prayer for the issuance a writ replevin and upon
service of a copy of the sameto respondent by the sheriff, the respondent
voluntarily surrendered possession of the motor vehicleto said sheriff.

The MTCC then rendered its decision in favour of Magna, ordering Colarina
to pay, among others,the principal amount plus penalty charges.

The MTCC also declared that should Colarina default in paying the money
judgment, the subjectmotor vehicle shall be sold at a public auction to satisfy
said judgment.
Ruling of the RTC

Colarina appealed to the RTC of Legaspi City. During the pendency of his
appeal before the RTC,Colarina died and was substituted in the case by his
heirs.

The RTC rendered its judgment affirming in toto the decision of the MTCC.
Ruling of the CA

Colarinas heirs filed a Petition for Review before the Court of Appeal, which
reversed and set aside
the decision of both the MTCC and the RTC.

Applying Article 1484 of the Civil Code of the Philippines, the CA ordered the
foreclosure of thechattel mortgage over the subject vehicle without any right on the
part of Magna to seek the paymentof unpaid balance of the purchase price.

According to the appellate court, the MTC and the RTC erred in ordering the
defendant to pay theunpaid balance of the purchase price of the subject vehicle
irrespective of the fact that the complaintfiled by petitioner was for the foreclosure of
its chattel mortgage.

The judgment of the lower court in effect allowed Mana to retain the possession and
ownership of thesubject vehicle and at the same time claim against the defendant for
the unpaid balance of itspurchase price.ISSUE(S):1. Whether petitioner availed of
avail itself of the first and third remedies under Article 1484; and,2. Whether
there was actual foreclosure of the subject motor vehicle
HELD:
As to the First IssueThe Supreme Court says YES.
It is unmistakable that petitioner preferred to avail itself of thefirst
and third remedies under Article 1484, at the same time suing for
replevin. For this reason, the Courtof Appeals justifiably set aside
the decision of the RTC. Perusing the Complaint, the petitioner, under
itsprayer number 1, sought for the payment of the unpaid
amortizations which is a remedy that is providedunder Article 1484
of the Civil Code, allowing an unpaid vendee to exact fulfillment of
the obligation. Atthe same time, petitioner prayed that Colarina be
ordered to surrender possession of the vehicle so thatit may
ultimately be sold at public auction, which remedy is contained
under Article 1484. Such a schemeis not only irregular but is a
flagrant circumvention of the prohibition of the law. By praying for
theforeclosure of the chattel, Magna Financial Services Group, Inc.
renounced whatever claim it may haveunder the promissory note.
Article 1484, paragraph 3, provides that if the vendor has availed hi
mself of the right to foreclose the chattel mortgage, he shall have no
further action against the purchaser to recover any unpaid
balance of the purchase price.
Any agreement to the contrary shall be void.
In other words, in allproceedings for the foreclosure of chattel
mortgages executed on chattels which have been sold on
theinstallment plan, the mortgagee is limited to the property included
in the mortgage.In sum, since the petitioner has undeniably elected a
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 for more. On this point, the
Court of Appeals correctly set aside the trial courts decision and
instead rendered a judgment of foreclosure as prayed for by the
petitioner.
As to the Second IssueThe Supreme Court says NO.
In the case at bar, there is no dispute that the subject vehicle
isalready in the possession of the petitioner, Magna Financial
Services Group, Inc. However, actualforeclosure has not been
pursued, commenced or concluded by it.Where the mortgagee
elects a remedy of foreclosure, the law requires the actual
foreclosure of themortgaged chattel. As held in the case
Manila Motor Co. v. Fernandez
, it is actual sale of the mortgagedchattel in accordance with
Sec. 14 of Act No. 1508 that would bar the creditor (who
chooses to foreclose)from recovering any unpaid balance. And
it is deemed that there has been foreclosure of the
mortgagewhen all the proceedings of the foreclosure, including
the sale of the property at public auction, havebeen
accomplished
Pascual vs. Universal Motors Corp.
61 SCRA 121
November 1974
FACTS:

Plaintiff-appellee spouses Lorenzo Pascual and Leonila Torres


(spouses Pasqual) executed the real estate mortgage subject
matter of this complaint on December 14, 1960 to secure the
payment of the indebtedness of PDP Transit, Inc. (PDP Trans.) for
the purchase of 5 units of Mercedes Benz trucks, with a total
purchase price or principal obligation of P152,506.50 which
was to bear interest at 1% per month starting that day, but the
plaintiffs' guarantee is not to exceed P50,000.00 which is the
value of the mortgage. The PDP Trans., as the spouses Pasqual's
principal, paid to defendant-appellant Universal Motors
Corporation (Universal Motors) the sum of P92,964.91 on April
5, 1961 for two of the five Mercedes Benz trucks and on May
22, 1961 for the remaining three, thus leaving a balance of
P68,641.69 including interest due on February 8, 1965.
On March 19, 1965, Universal Motors filed this complaint with
the CFI of Manila against the PDP Trans. to collect the balance
due under the Chattel Mortgages and to repossess all the units
sold to PDP Trans. as the spouse Pascuals principal, including
the 5 units guaranteed under the subject Real (Estate)
Mortgage. During the hearinbg, Universal Motors admitted that
it was able to repossess all the units sold to the latter, including
the 5 units guaranteed by the subject real estate mortgage, and
to foreclose all the chattel mortgages constituted thereon,
resulting in the sale of the trucks at public auction. As the real
estate mortgagors, the spouses Pascual filed an action with the
CFI of Quezon City for the cancellation of the mortgage they
constituted on 2 parcels of land in favor of the Universal Motors
to guarantee the obligation of PDP Trans. to the amount of
P50,000. The said CFI rendered judgment in favor of the
spouses Pascual and ordered the cancellation of the mortgage.
ISSUE:

Was Article 1484 of the New Civil Code applicable in the case
at bar?
COURT RULING:

The Supreme Court affirmed the lower courts decision. Appellant


Universal Motors argues that Article 1484 is not applicable to the
case at bar because there is no evidence on record that the purchase
by PDP Trans. of the 5 trucks was payable in installments and that the
PDP Trans. had failed to pay two or more installments. Universal
Motors also contends that what Article 1484 prohibits is for the
vendor to recover from the purchaser the unpaid balance of the price
after he has foreclosed the chattel mortgage on the thing sold, but
not a recourse against the security put up by a third party.

The Supreme Court concluded to the contrary, saying that the first
issue was whether or not the sale was one on installments. The lower
court found that it was, and that there was failure to pay two or more
installments, a finding which is not subject to review by the Supreme
Court.
The next contention is that what article 1484 withholds from the
vendor is the right to recover any deficiency from the
purchaser after the foreclosure of the chattel mortgage, and
not a recourse to the additional security put up by a third
party to guarantee the purchaser's performance of his
obligation. But the Supreme Court to sustain this argument of
the appellant would be to indirectly subvert and public policy
overturn the protection given by Article 1484.
Southern Motors Inc vs. Moscoso
2 SCRA 168
May 1961
FACTS:

In June 1957, plaintiff-appellee, Southern Motors, Inc. (Southern


Motors) sold to defendant-appellant Angel Moscoso one
Chevrolet truck, on installment basis, for P6,445.00. Upon
making a down payment, the defendant executed a promisory
note for the sum of P4,915,00, representing the unpaid balance
of the purchase price to secure the payment of which, a chattel
mortgage was constituted on the truck in favor of Southern
Motors. Of the P4,915,00, defendant was only able to pay a
total of P550.00, which P110.00 was applied to the interest up
to August 15, and P400.00 to the principal, thus leaving an
unpaid balance of P4,475.00. The defendant failed to pay 3
more installments on the balance of the purchase price.

In November 1957, the Southern Motors filed a complaint against the
Moscoso to recover the unpaid balance of the promissory note, and
the lower court issued a writ of attachment on Moscosos properties.
The Sheriff of San Jose, Antique, attach the Chevrolet truck, as well
as a house and lot belonging to Moscoso, and said truck was brought
to the Southern Motors compound in Iloilo City for safe keeping. The
Provincial Sheriff of Iloilo sold the said truck on January 2, 1958 at a
public auction in which Southern Motors itself was the only bidder for
P1,000.00. In March 1958, the trial court condemned the defendant
Moscoso to pay the plaintiff Southern Motors the unpaid balance of
P4,475.00 with interest at the rate of 12% per annum from August
16, 1957, until fully paid. While Southern Motors claims that in filing
the complaint, demanding payment of the unpaid balance of the
purchase price, it has availed of the first remedy provided in Article
1484 of the new Civil Code i.e. to exact fulfillment of the obligation
(specific performance), Mosocoso, on the other hand, contends that
Southern Motors had availed itself of the third remedy viz, the
foreclosure of the chattel mortgage on the truck.
ISSUE:

Which remedy under the Civil Code did the vendor Southern
Motors avail?
COURT RULING:

The Supreme Court, in affirming the decision of the lower court, found
that there is nothing unlawful or irregular in appellee Southern
Motors's act of attaching the mortgaged truck itself.

Since it has chosen to exact the fulfillment of the appellant Moscoso's


obligation, Southern Motors may enforce execution of the judgment
that may be favorable to it, on all personal and real properties of
the latter not exempt from execution sufficient to satisfy such
judgment. No one can successfully contest that the attachment of a
house and lot at San Jose, Antique was merelly an incident to all
ordinary civil action. (Sections 1 & 11, Rule 59; sec. 16 Rule 39.) The
mortgage creditor may recover judgment on the mortgage debt and
cause an execution on the mortgaged property and may cause an
attachment to be issued and levied on such property, upon beginning
his civil action.