ACME SHOE RUBBER & PLASTIC CORPORATION and CHUA PAC vs. HON.

COURT OF APPEALS,
PRODUCERS BANK OF THE PHILIPPINES AND REGIONAL SHERIFF OF CALOOCAN CITY
GR NO. 103576 AUGUST 22, 1996

Facts:

Chua Pac (petitioner) executed, for and in behalf of ACME Shoe Rubber & Plastic Corporation, a chattel
mortgage in favor of Producers Bank of the Philippines (private respondent). The mortgage stood by way
of security for Chua Pac’s corporate loan of PHP 3M. A provision in the chattel mortgage agreement stated
that such mortgage shall also stand as a security for said obligation and any all other obligations of the
mortgagor to the mortgagee whether such obligations have been contracted before, during or after the
constitution of this mortgage. In due time, the loan was paid by the company. Subsequently, the company
obtained from respondent bank additional financial accommodations. Another loan was again extended
covered by promissory notes but went unsettled. The respondent bank applied for an extrajudicial
foreclosure of the chattel mortgage prompting petitioner to file a case in court. The trial court dismissed
the case and ordered the foreclosure. In their appeal, the Court of Appeals affirmed the decision of the
court a quo.

Issue:

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

Ruling:

No, it is not valid. While a pledge, real estate mortgage, or antichresis may exceptionally secure after-
incurred obligations so long as these future debts are accurately described, a chattel mortgage, however,
can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed
in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that
can be compelled upon, the security itself, however, does not come into existence or arise until after a
chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh
chattel mortgage or by amending the old contract conformably with the form prescribed by the Chattel
Mortgage Law. Refusal on the part of the borrower to execute the agreement so as to cover the after-
incurred obligation can constitute an act of default on the part of the borrower of the financing agreement
whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts extant
at the time of constitution and during the life of the chattel mortgage sought to be foreclosed.