Bricktown Development Corporation vs.
Amor Tierra days from receipt of the notice "otherwise the actual cancellation of
Development Corporation
FACTS:
Bricktown Development Corporation (herein petitioner corporation)
executed two Contracts to Sell (Exhs. "A" and "B") in favor of Amor
Tierra Development Corporation (herein private respondent)
covering a total of 96 residential lots
The total price of P21,639,875.00 was stipulated to be paid by
private respondent in such amounts and maturity dates, as follows:
P2,200,000.00 on 31 March 1981; P3,209,968.75 on 30 June 1981;
P4,729,906.25 on 31 December 1981; and the balance of
P11,500,000.00 to be paid by means of an assumption by private
respondent of petitioner corporation's mortgage liability to the
Philippine Savings Bank or, alternatively, to be made payable in
cash.
On even date, the parties executed a Supplemental Agreement
providing that private respondent would additionally pay to petitioner
corporation the amounts of P55,364.68, or 21% interest on the
balance of downpayment for the period from 31 March to 30 June
1981, and of P390,369.37 representing interest paid by petitioner
corporation to the Philippine Savings Bank in updating the bank loan
for the period from 01 February to 31 March 1981.
Private respondent was only able to pay petitioner corporation the
sum of P1,334,443.21. In the meanwhile, however, the parties
continued to negotiate for a possible modification of their agreement,
although nothing conclusive would appear to have ultimately been
arrived at.
Petitioner corporation, through its legal counsel, sent private
respondent a "Notice of Cancellation of Contract" on account of the
latter's continued failure to pay the installment due 30 June 1981 and
the interest on the unpaid balance of the stipulated initial payment.
Petitioner corporation advised private respondent, however, that it
(private respondent) still had the right to pay its arrearages within 30
the contract (would) take place."
Several months later, or on 26 September 1983, private respondent,
through counsel, demanded the refund of private respondent's
various payments to petitioner corporation, allegedly "amounting to
P2,455,497.71," with interest within fifteen days from receipt of said
letter, or, in lieu of a cash payment, to assign to private respondent
an equivalent number of unencumbered lots at the same price fixed
in the contracts. The demand, not having been heeded, private
respondent commenced, on 18 November 1983, its action with the
court a quo.
the trial court rendered its decision:
1. Declaring the Contracts to Sell and the Supplemental Agreement
(Exhibits "A", "B" and "C") rescinded;
2. Ordering the [petitioner] corporation, Bricktown Development
Corporation, also known as Multinational Realty Development
Corporation, to return to the [private respondent] the amount of One
Million Three Hundred Thirty-Four Thousand Four Hundred Forty-
Three Pesos and Twenty-One Centavos (P1,334,443.21) with
interest at the rate of Twelve (12%) percent per annum, starting
November 18, 1983, the date when the complaint was filed, until the
amount is fully paid.
On appeal, the appellate court affirmed in toto the trial court's
findings and judgment.
ISSUE:
a) whether or not the contracts to sell were validly rescinded or
cancelled by petitioner corporation and, in the affirmative, (b)
whether or not the amounts already remitted by private respondent
under said contracts were rightly forfeited by petitioner corporation.
RULING:
Admittedly, the terms of payment agreed upon by the parties were
not met by private respondent. Of a total selling price of
P21,639,875.00, private respondent was only able to remit the sum
of P1,334,443.21 which was even short of the stipulated initial
payment of P2,200,000.00. No additional payments, it would seem,
were made. A notice of cancellation was ultimately made months
after the lapse of the contracted grace period. Paragraph 15 of the
Contracts to Sell provided thusly:
15. Should the PURCHASER fail to pay when due
any of the installments mentioned in stipulation No.
1 above, the OWNER shall grant the purchaser a
sixty (60)-day grace period within which to pay the
amount/s due, and should the PURCHASER still fail
to pay the due amount/s within the 60-day grace
period, the PURCHASER shall have the right to ex-
parte cancel or rescind this contract, provided,
however, that the actual cancellation or rescission
shall take effect only after the lapse of thirty (30)
days from the date of receipt by the PURCHASER of
the notice of cancellation of this contract or the
demand for its rescission by a notarial act, and
thereafter, the OWNER shall have the right to resell
the lot/s subject hereof to another buyer and all
payments made, together with all improvements
introduced on the aforementioned lot/s shall be
forfeited in favor of the OWNER as liquidated
damages, and in this connection, the PURCHASER
obligates itself to peacefully vacate the aforesaid
lot/s without necessity of notice or demand by the
OWNER.3
A grace period is a right, not an obligation, of the debtor. When
unconditionally conferred, such as in this case, the grace period is
effective without further need of demand either calling for the
payment of the obligation or for honoring the right. The grace period
must not be likened to an obligation, the non-payment of which,
under Article 1169 of the Civil Code, would generally still require
judicial or extrajudicial demand before "default" can be said to arise.4
Verily, in the case at bench, the sixty-day grace period under the
terms of the contracts to sell became ipso facto operative from the
moment the due payments were not met at their stated maturities.
On this score, the provisions of Article 1169 of the Civil Code would
find no relevance whatsoever.
The cancellation of the contracts to sell by petitioner corporation
accords with the contractual covenants of the parties, and such
cancellation must be respected. It may be noteworthy to add that in a
contract to sell, the
non-payment of the purchase price (which is normally the condition
for the final sale) can prevent the obligation to convey title from
acquiring any obligatory force (Roque vs. Lapuz, 96 SCRA 741;
Agustin vs. Court of Appeals, 186 SCRA 375).
The forfeiture of the payments thus far remitted under the cancelled
contracts in question, given the factual findings of both the trial court
and the appellate court, must be viewed differently. While clearly
insufficient to justify a foreclosure of the right of petitioner corporation
to rescind or cancel its contracts with private respondent, the series
of events and circumstances described by said courts to have
prevailed in the interim between the parties, however, warrant some
favorable consideration by this Court.
Petitioners do not deny the fact that there has indeed been a
constant dialogue between the parties during the period of their
juridical relation. Concededly, the negotiations that they have
pursued strictly did not result in the novation, either extinctive or
modificatory, of the contracts to sell; nevertheless, this Court is
unable to completely disregard the following findings of both the trial
court and the appellate court. Said the trial court:
It has been duly established through the testimony
of plaintiff's witnesses Marcosa Sanchez and
Vicente Casas that there were negotiations to enter
into another agreement between the parties, after
March 31, 1981. The first negotiation took place
before June 30, 1981, when Moises Petilla and
Renato Dragon, Vice-President and president,
respectively, of the plaintiff corporation, together with
Marcosa Sanchez, went to the office of the
 defendant corporation and made some proposals to
the latter, thru its president, the defendant Mariano
Velarde. They told the defendant Velarde of the
plaintiff's request for the division of the lots to be
purchased into smaller lots and the building of town
houses or smaller houses therein as these kinds of
houses can be sold easily than big ones. Velarde
replied that subdivision owners would not consent to
the building of small houses. He, however, made
two counter-proposals, to wit: that the defendant
corporation would assign to the plaintiff a number of
lots corresponding to the amounts the latter had
already paid, or that the defendant corporation may
sell the corporation itself, together with the
Multinational Village Subdivision, and its other
properties, to the plaintiff and the latter's sister
companies engaged in the real estate business. The
negotiations between the parties went on for
sometime but nothing definite was accomplished.5
For its part, the Court of Appeals observed:
We agree with the court a quo that there is,
therefore, reasonable ground to believe that
because of the negotiations between the parties,
coupled with the fact that the plaintiff never took
actual possession of the properties and the
defendants did not also dispose of the same during
the pendency of said negotiations, the plaintiff was
led to believe that the parties may ultimately enter
into another agreement in place of the "contracts to
sell." There was, evidently, no malice or bad faith on
the part of the plaintiff in suspending payments. On
the contrary, the defendants not only contributed,
but had consented to the delay or suspension of
payments. They did not give the plaintiff a
categorical answer that their counter-proposals will
not materialize.6
In fine, while we must conclude that petitioner corporation still acted
within its legal right to declare the contracts to sell rescinded or
cancelled, considering, nevertheless, the peculiar circumstances
found to be extant by the trial court, confirmed by the Court of
Appeals, it would be unconscionable, in our view, to likewise
sanction the forfeiture by petitioner corporation of payments made to
it by private respondent. Indeed, in the opening statement of this
ponencia, we have intimated that the relationship between parties in
any contract must always be characterized and punctuated by good
faith and fair dealing. Judging from what the courts below have said,
petitioners did fall well behind that standard. We do not find it
equitable, however, to adjudge any interest payment by petitioners
on the amount to be thus refunded, computed from judicial demand,
for, indeed, private respondent should not be allowed to totally free
itself from its own breach.
WHEREFORE, the appealed decision is AFFIRMED insofar as it
declares valid the cancellation of the contracts in question but
MODIFIED by ordering the refund by petitioner corporation of
P1,334,443.21 with 12% interest per annum to commence only,
however, from the date of finality of this decision until such refund is
effected. No costs.
EDCA PUBLISHING & DISTRIBUTING CORP vs. SANTOS
FACTS:
The case before us calls for the interpretation of Article 559 of the
Civil Code and raises the particular question of when a person may
be deemed to have been "unlawfully deprived" of movable property
in the hands of another.
The movable property in this case consists of books, which were
bought from the petitioner by an impostor who sold it to the private
respondents.
A person identifying himself as Professor Jose Cruz placed an order
by telephone with the petitioner company for 406 books, payable on
delivery. EDCA prepared the corresponding invoice and delivered
the books as ordered, for which Cruz issued a personal check
covering the purchase price of P8,995.65.
Cruz sold 120 of the books to private respondent Leonor Santos
who, after verifying the seller's ownership from the invoice he
showed her, paid him P1,700.00.
Meanwhile, EDCA having become suspicious over a second order
placed by Cruz even before clearing of his first check, made inquiries
with the De la Salle College where he had claimed to be a dean and
was informed that there was no such person in its employ. Further
verification revealed that Cruz had no more account or deposit with
the Philippine Amanah Bank, against which he had drawn the
payment check. EDCA then went to the police, which set a trap and
arrested Cruz
Investigation disclosed his real name as Tomas de la Peña and his
sale of 120 of the books he had ordered from EDCA to the private
respondents.
On the night of the same date, EDCA sought the assistance of the
police in Precinct 5 at the UN Avenue, which forced their way into the
store of the private respondents and threatened Leonor Santos with
prosecution for buying stolen property. They seized the 120 books
without warrant, loading them in a van belonging to EDCA, and
thereafter turned them over to the petitioner.
The private respondents sued for recovery of the books after
demand for their return was rejected by EDCA. A writ of preliminary
attachment was issued and the petitioner, after initial refusal, finally
surrendered the books to the private respondents.
Ownership of the books was recognized in the private respondents
by the Municipal Trial Court, which was sustained by the Regional
Trial Court, which was in turn sustained by the Court of Appeals.
ISSUE:
Whether the petitioner has been unlawfully deprived of the books
because the check issued by the impostor in payment therefor was
dishonored.
RULING:
EDCA cites numerous cases holding that the owner who has been
unlawfully deprived of personal property is entitled to its recovery
except only where the property was purchased at a public sale, in
which event its return is subject to reimbursement of the purchase
price. The petitioner is begging the question. It is putting the cart
before the horse. Unlike in the cases invoked, it has yet to be
established in the case at bar that EDCA has been unlawfully
deprived of the books.
The petitioner argues that it was, because the impostor acquired no
title to the books that he could have validly transferred to the private
respondents. Its reason is that as the payment check bounced for
lack of funds, there was a failure of consideration that nullified the
contract of sale between it and Cruz.
The contract of sale is consensual and is perfected once agreement
is reached between the parties on the subject matter and the
consideration. According to the Civil Code:
 Art. 1475. The contract of sale is perfected at the moment
there is a meeting of minds upon the thing which is the
object of the contract and upon the price.
From that moment, the parties may reciprocally demand
performance, subject to the provisions of the law governing
the form of contracts.
xxx xxx xxx
Art. 1477. The ownership of the thing sold shall be
transferred to the vendee upon the actual or constructive
delivery thereof.
Art. 1478. The parties may stipulate that ownership in the
thing shall not pass to the purchaser until he has fully paid
the price.
It is clear from the above provisions, particularly the last one quoted,
that ownership in the thing sold shall not pass to the buyer until full
payment of the purchase only if there is a stipulation to that effect.
Otherwise, the rule is that such ownership shall pass from the vendor
to the vendee upon the actual or constructive delivery of the thing
sold even if the purchase price has not yet been paid.
Non-payment only creates a right to demand payment or to rescind
the contract, or to criminal prosecution in the case of bouncing
checks. But absent the stipulation above noted, delivery of the thing
sold will effectively transfer ownership to the buyer who can in turn
transfer it to another.
In Asiatic Commercial Corporation v. Ang, the plaintiff sold some
cosmetics to Francisco Ang, who in turn sold them to Tan Sit Bin.
Asiatic not having been paid by Ang, it sued for the recovery of the
articles from Tan, who claimed he had validly bought them from Ang,
paying for the same in cash. Finding that there was no conspiracy
between Tan and Ang to deceive Asiatic the Court of Appeals
declared:
Yet the defendant invoked Article 464 of the Civil Code
providing, among other things that "one who has been
unlawfully deprived of personal property may recover it from
any person possessing it." We do not believe that the plaintiff
has been unlawfully deprived of the cartons of Gloco Tonic
within the scope of this legal provision. It has voluntarily
parted with them pursuant to a contract of purchase and
sale. The circumstance that the price was not subsequently
paid did not render illegal a transaction which was valid and
legal at the beginning.
In Tagatac v. Jimenez, the plaintiff sold her car to Feist, who sold it
to Sanchez, who sold it to Jimenez. When the payment check issued
to Tagatac by Feist was dishonored, the plaintiff sued to recover the
vehicle from Jimenez on the ground that she had been unlawfully
deprived of it by reason of Feist's deception. In ruling for Jimenez,
the Court of Appeals held:
The point of inquiry is whether plaintiff-appellant Trinidad C.
Tagatac has been unlawfully deprived of her car. At first
blush, it would seem that she was unlawfully deprived
thereof, considering that she was induced to part with it by
reason of the chicanery practiced on her by Warner L. Feist.
Certainly, swindling, like robbery, is an illegal method of
deprivation of property. In a manner of speaking, plaintiff-
appellant was "illegally deprived" of her car, for the way by
which Warner L. Feist induced her to part with it is illegal and
is punished by law. But does this "unlawful deprivation"
come within the scope of Article 559 of the New Civil Code?
xxx xxx xxx
. . . The fraud and deceit practiced by Warner L. Feist
earmarks this sale as a voidable contract (Article 1390
N.C.C.). Being a voidable contract, it is susceptible of either
ratification or annulment. If the contract is ratified, the action
to annul it is extinguished (Article 1392, N.C.C.) and the
contract is cleansed from all its defects (Article 1396,
N.C.C.); if the contract is annulled, the contracting parties
 are restored to their respective situations before the contract
and mutual restitution follows as a consequence (Article
1398, N.C.C.).
However, as long as no action is taken by the party entitled,
either that of annulment or of ratification, the contract of sale
remains valid and binding. When plaintiff-appellant Trinidad
C. Tagatac delivered the car to Feist by virtue of said
voidable contract of sale, the title to the car passed to Feist.
Of course, the title that Feist acquired was defective and
voidable. Nevertheless, at the time he sold the car to Felix
Sanchez, his title thereto had not been avoided and he
therefore conferred a good title on the latter, provided he
bought the car in good faith, for value and without notice of
the defect in Feist's title (Article 1506, N.C.C.). There being
no proof on record that Felix Sanchez acted in bad faith, it is
safe to assume that he acted in good faith.
The above rulings are sound doctrine and reflect our own
interpretation of Article 559 as applied to the case before us.
Actual delivery of the books having been made, Cruz acquired
ownership over the books which he could then validly transfer to the
private respondents. The fact that he had not yet paid for them to
EDCA was a matter between him and EDCA and did not impair the
title acquired by the private respondents to the books.
One may well imagine the adverse consequences if the phrase
"unlawfully deprived" were to be interpreted in the manner suggested
by the petitioner. A person relying on the seller's title who buys a
movable property from him would have to surrender it to another
person claiming to be the original owner who had not yet been paid
the purchase price therefor. The buyer in the second sale would be
left holding the bag, so to speak, and would be compelled to return
the thing bought by him in good faith without even the right to
reimbursement of the amount he had paid for it.
It bears repeating that in the case before us, Leonor Santos took
care to ascertain first that the books belonged to Cruz before she
agreed to purchase them. The EDCA invoice Cruz showed her
assured her that the books had been paid for on delivery. By
contrast, EDCA was less than cautious — in fact, too trusting in
dealing with the impostor. Although it had never transacted with him
before, it readily delivered the books he had ordered (by telephone)
and as readily accepted his personal check in payment. It did not
verify his identity although it was easy enough to do this. It did not
wait to clear the check of this unknown drawer. Worse, it indicated in
the sales invoice issued to him, by the printed terms thereon, that the
books had been paid for on delivery, thereby vesting ownership in
the buyer.
Surely, the private respondent did not have to go beyond that invoice
to satisfy herself that the books being offered for sale by Cruz
belonged to him; yet she did. Although the title of Cruz was
presumed under Article 559 by his mere possession of the books,
these being movable property, Leonor Santos nevertheless
demanded more proof before deciding to buy them.
It would certainly be unfair now to make the private respondents bear
the prejudice sustained by EDCA as a result of its own
negligence.1âwphi1 We cannot see the justice in transferring
EDCA's loss to the Santoses who had acted in good faith, and with
proper care, when they bought the books from Cruz.
While we sympathize with the petitioner for its plight, it is clear that
its remedy is not against the private respondents but against Tomas
de la Peña, who has apparently caused all this trouble. The private
respondents have themselves been unduly inconvenienced, and for
merely transacting a customary deal not really unusual in their kind
of business. It is they and not EDCA who have a right to complain.
SOUTHERN MOTORS, INC. vs. ANGELO MOSCOSO
FACTS:
plaintiff-appellee Southern Motors, Inc. 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
promissory 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 the plaintiff.
Of said account of P4,915.00, the defendant had paid a total of
P550.00, of which P110.00 was applied to the interest up to August
15, 1957, and P400.00 to the principal, thus leaving an unpaid
balance of P4,475.00. The defendant failed to pay 3 installments on
the balance of the purchase price.
The plaintiff filed a complaint against the defendant, to recover the
unpaid balance of the promissory note. Upon plaintiff's petition,
embodied in the complaint, a writ of attachment was issued by the
lower court on the properties of the defendant. Pursuant thereto, the
said Chevrolet truck, and a house and lot belonging to defendant,
were attached.
After attachment and before the trial of the case on the merits, the
Provincial Sheriff sold the truck at public auction in which plaintiff
itself was the only bidder for P1,000.00. The case had not been set
for hearing, then.
The trial court condemned the defendant to pay the plaintiff the
amount of P4,475.00 with interest at the rate of 12% per annum from
August 16, 1957, until fully paid, plus 10% thereof as attorneys fees
and costs against which defendant interposed the present appeal,
contending that the trial court erred —
(1) In not finding that the attachment caused to be levied on
the truck and its immediate sale at public auction, was
tantamount to the foreclosure of the chattel mortgage on
said truck; and
(2) In rendering judgment in favor of the plaintiff-appellee.
Both parties agreed that the case is governed by Article 1484 of the
new Civil Code.
While the appellee 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 said article i.e. to exact fulfillment of
the obligation (specific performance); the appellant, on the other
hand, contends that appellee had availed itself of the third remedy
viz, the foreclosure of the chattel mortgage on the truck.
The appellant argues that considering history of the law, the
circumstances leading to its enactment, the evil that the law was
intended to correct and the remedy afforded (Art. 1454-A of the old
Civil Code; Act No. 4122; Bachrach Motor Co. vs. Reyes, 62 Phil.
461, 466-469); that the appellee did not content itself by waiting for
the judgment on the complaint and then executed the judgment
which might be rendered in its favor, against the properties of the
appellant; that the appellee obtained a preliminary attachment on the
subject of the chattel mortgage itself and caused said truck to be
sold at public auction petition, in which he was bidder for P1,000.00;
the result of which, was similar to what would have happened, had it
foreclosed the mortgage pursuant to the provisions of Sec. 14 of Act
No. 1508 (Chattel Mortgage Law) the said appellee had availed itself
of the third remedy aforequoted.
In other words, appellant submits that the matter should be looked
at, not by the allegations in the complaint, but by the very effect and
result of the procedural steps taken and that appellee tried to
camouflage its acts by filing a complaint purportedly to exact the
fulfillment of an obligation petition, in an attempt to circumvent the
provisions of Article 1484 of the new Civil Code. Appellant concludes
that under his theory, a deficiency judgment would be without legal
basis.
RULING:
We do not share the views of the appellant on this matter. Manifestly,
the appellee had chosen the first remedy. The complaint is an
ordinary civil action for recovery of the remaining unpaid balance due
on the promissory note. The plaintiff had not adopted the procedure
or methods outlined by Sec. 14 of the Chattel Mortgage Law but
those prescribed for ordinary civil actions, under the Rules of Court.
Had appellee elected the foreclosure, it would not have instituted this
case in court; it would not have caused the chattel to be attached
under Rule 59, and had it sold at public auction, in the manner
prescribed by Rule 39. That the herein appellee did not intend to
foreclose the mortgage truck, is further evinced by the fact that it had
also attached the house and lot of the appellant at San Jose,
Antique. In the case of Southern Motors, Inc. vs. Magbanua, G.R.
No. L-8578, Oct. 29, 1956, we held:
from execution sufficient to satisfy such judgment. It should be noted
that a house and lot at San Jose, Antique were also attached. No
one can successfully contest that the attachment was merely an
incident to an 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 (Tizon vs. Valdez, 48 Phil.
910-911).

By praying that the defendant be ordered to pay it the sum of

P4,690.00 together with the stipulated interest of 12% per
annum from 17 March 1954 until fully paid, plus 10% of the
total amount due as attorney's fees and cost of collection,
the plaintiff elected to exact the fulfillment of the obligation,
and not to foreclose the mortgage on the truck. Otherwise, it
would not have gone to court to collect the amount as
prayed for in the complaint. Had it elected to foreclose the
mortgage on the truck, all the plaintiff had to do was to cause
the truck to be sold at public auction pursuant to section 14
of the Chattel Mortgage Law. The fact that aside from the
mortgaged truck, another Chevrolet truck and two parcels of
land belonging to the defendant were attached, shows that
the plaintiff did not intend to foreclose the mortgage.

As the plaintiff has chosen to exact the fulfillment of the

defendant's obligation, the former may enforce execution of
the judgment rendered in its favor on the personal and real
property of the latter not exempt from execution sufficient to
satisfy the judgment. That part of the judgment against the
properties of the defendant except the mortgaged truck and
discharging the writ of attachment on his other properties is
erroneous.

We perceive nothing unlawful or irregular in appellee's act of

attaching the mortgaged truck itself. Since herein appellee has
chosen to exact the fulfillment of the appellant's obligation, it may
enforce execution of the judgment that may be favorably rendered
hereon, on all personal and real properties of the latter not exempt
NONATO vs. IAC
FACTS:
The pertinent facts are summarized by the respondent appellate
court as follows:
On June 28, 1976, defendant spouses Restituto
Nonato and Ester Nonato purchased one (1) unit of
Volkswagen Sakbayan from the People's Car, Inc.,
on installment basis. To secure complete payment,
the defendants executed a promissory note (Exh. A
or 1) and a chattel mortgage in favor of People's
Car, Inc, (Exh. B or 2). People's Car, Inc., assigned
its rights and interests over the note and mortgage in
favor of plaintiff Investor's Finance Corporation
(FNCB) Finance). For failure of defendants to pay
two or more installments, despite demands, the car
was repossessed by plaintiff on March 20, 1978
(Exh. E or 4).
Despite repossession, plaintiff demanded from
defendants that they pay the balance of the price of
the car (Exhs. F and C). Finally, on June 9, 1978,
plaintiff filed before the Court of First Instance of
Negros Occidental the present complaint against
defendants for the latter to pay the balance of the
price of the car, with damages and attorney's fees.
(Records, pp. 36-37)
In their answer, the spouses Nonato alleged by way of defense that
when the company repossessed the vehicle, it had, by that act,
effectively cancelled the sale of the vehicle. It is therefore barred
from exacting recovery of the unpaid balance of the purchase price,
as mandated by the provisions of Article 1484 of the Civil Code.
After due hearing, the trial court rendered a decision in favor of the
IFC and against the Nonatos, as follows:
PREMISES CONSIDERED, the Court hereby
renders judgment ordering the defendant to pay to
the plaintiff the amount of P 17,537.60 with interest
at the rate of 14% per annum from July 28, 1976
until fully paid, 10% of the amount due as attorney's
fees, litigation expenses in the amount of P 133.05
plus the costs of this suit. No pronouncement as to
other charges and damages, the same not having
been proven to the satisfaction of the Court. 1
On appeal, the respondent appellate court affirmed the j judgment.
ISSUE:
whether a vendor, or his assignee, who had cancelled the sale of a
motor vehicle for failure of the buyer to pay two or more of the
stipulated installments, may also demand payment of the balance of
the purchase price.
RULING:
The applicable law in the case at bar, involving as it does a sale of
personal property on installment, is Article 1484 of the Civil Code
which provides:
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.
The meaning of the aforequoted provision has been repeatedly WITNESS: Yes, sir.
enunciated in a long line of cases. Thus: "Should the vendee or
purchaser of a personal property default in the payment of two or Respondent corporation further asserts that it repossessed the
more of the agreed installments, the vendor or seller has the option vehicle merely for the purpose of appraising its current value. The
to avail of any of these three remedies-either to exact fulfillment by allegation is untenable, for even after it had notified the Nonatos that
the purchaser of the obligation, or to cancel the sale, or to foreclose the value of the car was not sufficient to cover the balance of the
the mortgage on the purchased personal property, if one was purchase price, there was no attempt at all on the part of the
constituted. These remedies have been recognized as alternative, company to return the repossessed car,
not cumulative, that the exercise of one would bar the exercise of the
others.
Indeed, the acts performed by the corporation are wholly consistent
with the conclusion that it had opted to cancel the contract of sale of
It is not disputed that the respondent company had taken possession the vehicle. It is thus barred from exacting payment from petitioners
of the car purchased by the Nonatos on installments. But while the of the balance of the price of the vehicle which it had already
Nonatos maintain that the company had, by that act, exercised its repossessed. It cannot have its cake and eat it too.
option to cancel the contract of sale, the company contends that the
repossession of the vehicle was only for the purpose of appraising its
value and for storage and safekeeping pending full payment by the
Nonatos of the purchasing price. The company thus denies having
exercised its right to cancel the sale of the repossessed car. The
records show otherwise.

The receipt issued by the respondent company to the Nonatos when

it took possession of the vehicle states that the vehicle could be
redeemed within fifteen 15 days. This could only mean that should
petitioners fail to redeem the car within the aforesaid period by
paying the balance of the purchase price, the company would retain
permanent possession of the vehicle, as it did in fact. This was
confirmed by Mr. Ernesto Carmona, the company's witness, who
testified, to wit:

ATTY. PAMPLONA:

So that Mr. Witness, it is clear now

that, per your receipt and your
answer, the company will not return
the unit without paying a sum of
money, more particularly the
balance of the account?
RIDAD vs. FILIPINAS INVESTMENT and FINANCE
CORPORATION
FACTS:
Plaintiffs purchased from the Supreme Sales arid Development
Corporation two (2) brand new Ford Consul Sedans complete with
accessories, for P26,887 payable in 24 monthly installments. To
secure payment thereof, plaintiffs executed on the same date a
promissory note covering the purchase price and a deed of chattel
mortgage not only on the two vehicles purchased but also on another
car (Chevrolet) and plaintiffs' 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 plaintiffs,
the vendor assigned its rights, title and interest to the above-
mentioned promissory note and chattel mortgage to defendant
Filipinas Investment and Finance Corporation.
Due to the failure of the plaintiffs to pay their monthly installments as
per promissory note, the defendant corporation foreclosed the chattel
mortgage extra-judicially, and at the public auction sale of the two
Ford Consul cars, of which the plaintiffs were not notified, the
defendant corporation was the highest bidder and purchaser.
Another auction sale was held on November 16, 1965, involving the
remaining properties subject of the deed of chattel mortgage since
plaintiffs' obligation was not fully satisfied by the sale of the aforesaid
vehicles, and at the public auction sale, the franchise of plaintiffs to
operate five units of taxicab service was sold for P8,000 to the
highest bidder, herein defendant corporation, which subsequently
sold and conveyed the same to herein defendant Jose D. Sebastian,
who then filed with the Public Service Commission an application for
approval of said sale in his favor.
On February 21, 1966, plaintiffs filed an action for annulment of
contract before the Court of First Instance of Rizal, Branch I, 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.
The lower court rendered judgment as follows:
IN VIEW OF THE ABOVE CONSIDERATIONS, this
Court declares the chattel mortgage, Exhibit "C", to
be null and void in so far as the taxicab franchise
and the used Chevrolet car of plaintiffs are
concerned, and the sale at public auction conducted
by the City Sheriff of Manila concerning said taxicab
franchise, to be of no legal effect. The certificate of
sale issued by the City Sheriff of Manila in favor of
Filipinas Investment and Finance Corporation
concerning plaintiffs' taxicab franchise for P8,000 is
accordingly cancelled and set aside, and the
assignment thereof made by Filipinas Investment in
favor of defendant Jose Sebastian is declared void
and of no legal effect.
ISSUE:
The validity of the chattel mortgage in so far as the franchise and the
subsequent sale thereof are concerned.
RULING:
The resolution of said issue is unquestionably governed by the
provisions of Article 1484 of the Civil Code.
Under the above-quoted article 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. 1 Whichever right the vendor elects, he cannot avail of
the other, these remedies being alternative, not cumulative. 2
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. 3 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. 4
In the instant case, defendant corporation 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.
Consequently, the lower court rightly declared the nullity of the
chattel mortgage in question in so far as the taxicab franchise and
the used Chevrolet car of plaintiffs 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 case at bar. There, we have the same situation 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.
In the case of Cruz v. Filipinos Investment & Finance Corporation, 23
SCRA 791, this 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 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. Said ruling 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, as in the instant case, it
being tantamount to a further action 5 that would violate Article 1484
of the Civil Code, for then is actually no 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.
Reliance on the ruling in Southern Motors, inc. v. Moscoso, 2 SCRA
168, that in sales on installments, where the action instituted is for
and the mortgaged property is subsequently attached and sold, the
sales thereof does not amount to a foreclosure of the mortgage,
hence, the seller creditor is entitled to a deficiency judgment, does
not for the stand of the appellants for that case is entirely different
from the case at bar. 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.
The foregoing disposition renders superfluous a determination of the
other issue raised by the parties as to the validity of the auction sale,
in so far as the franchise of plaintiffs is concerned, which sale had
been admittedly held without any notice to the plaintiffs.
BORBON II vs. SERVICEWIDE SPECIALISTS, INC.
FACTS:
The plaintiff's evidence shows among others that on December 7,
1984, defendants Daniel L. Borbon and Francisco Borbon signed a
promissory note (Exh. A) which states among others as follows:
PROMISSORY NOTE
Acct. No. 115008276
Makati, Metro Manila,
Philippines
December 7, 1984
"P122,856.00
"For value received (installment price of the chattel/s purchased),
I/We jointly and severally promised to pay Pangasinan Auto Mart,
Inc. or order, at its office at NMI Bldg., Buendia Avenue, Makati, MM
the sum of One Hundred Twenty Two Thousand Eight Hundred Fifty
Six only (P122,856.00), Philippine Currency, to be payable without
need or notice or demand, in installments of the amounts following
and at the dates hereinafter set forth, to wit: P10,238.00 monthly for
Twelve (12) months due and payable on the 7th day of each month
starting January, 1985, provided that at a late payment charge of 3%
per month shall be added on each unpaid installment from due date
thereof until fully paid.
xxx xxx xxx
"It is further agreed that if upon such default, attorney's services are
availed of, an additional sum, equal to twenty five percent (25%) of
the total sum due thereon, which shall not be less than five hundred
pesos, shall be paid to the holder hereof for attorney's fees plus an
additional sum equivalent to twenty five percent (25%) of the total
sum due which likewise shall not be less than five hundred pesos for
liquidated damages, aside from expenses of collection and the legal
costs provided for in the Rules of Court.
"It is expressly agreed that all legal actions arising out of this note or
in connection with the chattel(s) subject hereof shall only be brought
in or submitted to the jurisdiction of the proper court either in the City
of Manila or in the province, municipality or city where the branch of
the holder hereof is located.
"Acceptance by the holder thereof of payment of any installment or
any part hereof of payment of any installment or any part thereof
after due dated (sic) shall not be considered as extending the time
for the payment or any of the conditions hereof. Nor shall the failure
of the holder hereof to exercise any of its right under this note
constitute or be deemed as a waiver of such rights.
The rights of Pangasinan Auto mart, Inc. was later assigned
to Filinvest Credit Corporation on December 10, 1984, with
notice to the defendants (Exh. C, p. 10, Record).
On March 21, 1985, Filinvest Credit Corporation assigned all
its rights, interest and title over the Promissory Note and the
chattel mortgage to the plaintiff (Exh. D; p. 3, tsn, Sept. 30,
1985).
The promissory note stipulates that the installment of
P10,238.00 monthly should be paid on the 7th day of each
month starting January 1985, but the defendants failed to
comply with their obligation (p. 3, tsn, Sept. 30, 1985).
Because the defendants did not pay their monthly
installments, Filinvest demanded from the defendants the
payment of their installments due in January 29, 1985 by
telegram (Exh. E; pp. 3-4, tsn, Sept. 30, 1985).
After the accounts were assigned to the plaintiff, the plaintiff
attempted to collect by sending a demand letter to the
defendants for them to pay their entire obligation which, as
of March 12, 1985, totaled P185,257.80 (Exh. H; pp. 3-4,
tsn, Sept. 30, 1985).
 For their defense, the defendants claim that what they
intended to buy from Pangasinan Auto mart was a jeepney
type Isuzu K. C. Cab. The vehicle they bought was not
delivered (pp. 11-12, tsn, Oct. 17, 1985). Instead, through
misinterpretation and machination, the Pangasinan Motor
Inc. delivered an Isuzu crew cab, as this is the unit available
at their warehouse. Later the representative of Pangasinan
Auto mart, Inc. (assignor) told the defendants that their
available stock is an Isuzu Cab but minus the rear body,
which the defendants agreed to deliver with the
understanding that the Pangasinan Auto Mart, Inc. will
refund the defendants the amount of P10,000.00 to have the
rear body completed (pp. 12-34, Exhs. 2 to 3-3A).
Despite communications with the Pangasinan Auto Mart, Inc.
the latter was not able to replace the vehicle until the vehicle
delivered was seized by order of this court. the defendants
argue that an asignee stands in the place of an assignor
which, to the mind of the court, is correct. The asignee
exercise all the rights of the assignor (Gonzales vs. Rama
Plantation Co., C.V. 08630, Dec. 2, 1986).
The defendants further claim that they are not in default of
their obligation because the Pangasinan Auto Mart was first
guilty of not fulfilling its obligation in the contract. the
defendants claim that neither party incurs delay if the other
does not comply with his obligation. (citing Art. 1169,
N.C.C.)1
In sustaining the decision of the court a quo, the appellate court ruled
that the petitioners could avoid liability under the promissory note
and the chattel mortgage that secured it since private respondent
took the note for value and in good faith.
In their appeal to this Court, petitioners merely seek a modification of
the decision of the appellate court insofar as it has upheld the court a
quo in the award of liquidated damages and attorney's fees in favor
of private respondent. Petitioners invoke the provisions of Article
1484 of the Civil Code
RULING:
The remedies under Article 1484 of the Civil Code are not cumulative
but alternative and exclusive,2 which means, as so held in Nonato
vs. Intermediate Appellate Court and Investor's Finance
Corporation,3 that —
. . . 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 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 on e would bar the exercise of the others.4
When the seller assigns his credit to another person, the latter is
likewise bound by the same law. Accordingly, when the assignee
forecloses on the mortgage, there can be no further recovery of the
deficiency,5 and the seller-mortgagee is deemed to have renounced
any right thereto.6 A contrario, in the event of the seller-mortgagee
first seeks, instead, the enforcement of the additional mortgages,
guarantees or other security arrangements, he must be then be held
to have lost by waiver or non-choice his lien on the chattel mortgage
of the personal property sold by and mortgaged back to him,
although, similar to an action for specific performance, he may still
levy on it.
In ordinary alternative obligations, a mere choice categorically an
unequivocally made and then communicated by the person entitled
to exercise the option concludes the parties. The creditor may not
thereafter exercise any other option, unless the chosen alternative
proves to be innefectual or unavailing due to no fault on his part. This
rule, in essence, is the difference between alternative obligations, on
the one hand, and alternative remedies, upon the other hand, where,
in the latter case, the choice generally becomes conclusive only
upon the exercise of the remedy. For instance, in one of the
remedies expressed in Article 1484 of the Civil Code, it is only when
there has been a foreclosure of the chattel mortgage that the
vendee-mortgagor would be permitted to escape from a deficiency
liability. Thus, if the case is one for specific performance, even when
this action is selected after the vendee has refused to surrender the
mortgaged property to permit an extrajudicial foreclosure, that
property may still be levied on execution and an alias writ may be
issued if the proceeds thereof are insufficient to satisfy the judgment
credit.7 So, also, a mere demand to surrender the object which is not
heeded by the mortgagor will not amount to a foreclosure,8 but the
repossession thereof by the vendor-mortgagee would have the effect
of a foreclosure.
The parties here concede that the action for replevin has been
instituted for the foreclosure of the vehicle in question (now in the
possession of private respondent). The sole issue raised before us in
this appeal is focused on the legal propriety of the affirmance by the
appellate court of the awards made by the court a quo of liquidated
damages and attorney's fees to private respondent. Petitioners hold
that under Article 1484 of the Civil Code, aforequoted, the vendor-
mortgagee or its assignees loses any right "to recover any unpaid
balance of the price" and any "agreement to the contrary (would be)
void.
The argument is aptly made. In Macondray & Co. vs. Eustaquio,9 we
have said that the phrase "any unpaid balance" can only mean the
deficiency judgment to which the mortgagee may be entitled to when
the proceeds from the auction sale are insufficient to cover the "full
amount of the secured obligations which . . . include interest on the
principal, attorney's fees, expenses of collection, and the costs." In
sum, we have observed that the legislative intent is not to merely
limit the proscription of any further action to the "unpaid balance of
the principal" but, as so later ruled in Luneta Motor Co. vs. Salvador,
10 to all other claims that may be likewise be called in for in the
accompanying promissory note against the buyer-mortgagor or his
guarantor, including costs and attorney's fees.
Investment, where the mortgagor unjustifiably refused to surrender
the chattel subject of the mortgage upon failure of two or more
installments, or if he concealed the chattel to place it beyond the
reach of the mortgagee, that thereby constrained the latter to seek
court relief, the expenses incurred for the prosecution of the case,
such as attorney's fees, could rightly be awarded.
Private respondent bewails the instant petition in that petitioners
have failed to specifically raise the issue on liquidated damages and
attorney's fees stipulated in the actionable documents. In several
cases, we have ruled that as long as the questioned items bear
relevance and close relation to those specifically raised, the interest
of justice would dictate that they, too, must be considered and
resolved and that the rule that only theories raised in the initial
proceedings may be taken up by a party thereto on appeal should
only refer to independent, not concomitant matters, to support or
oppose the cause of action.12
Given the circumstances, we must strike down the award for
liquidated damages made by the court a quo but we uphold the grant
of attorney's fees which we, like the appellate court, find it to be
reasonable. Parenthetically, while the promissory note may appear
to have been a negotiable instrument, private respondent, however,
clearly cannot claim unawareness of its accompanying documents
so as to thereby gain a right greater than that of the assignor.

In Filipinas Investment & Finance Corporation vs. Ridad 11 while we

reiterated and expressed our agreement on the basic philosophy
behind Article 1484, we stressed, nevertheless, that the protection
given to the buyer-mortgagor should not be considered to be without
circumscription or as being preclusive of all other laws or legal
principles. Hence, borrowing from the examples made in Filipinas
PASCUAL vs. UNIVERSAL MOTORS CORPORATION
FACTS:
That the plaintiffs 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. for the purchase of five (5) units of Mercedez Benz
trucks under invoices Nos. 2836, 2837, 2838, 2839 and 2840 with a total
purchase price or principal obligation of P152,506.50 but plaintiffs' guarantee
is not to exceed P50,000.00 which is the value of the mortgage.
That the principal obligation of P152,506.50 was to bear interest at 1% a
month from December 14, 1960.
That the aforementioned obligation guaranteed by the plaintiffs under the
Real Estate Mortgage, subject of this action, is further secured by separate
deeds of chattel mortgages on the Mercedez Benz units covered by the
aforementioned invoices in favor of the defendant Universal Motors
Corporation.
That on March 19, 1965, the defendant Universal Motors Corporation filed a
complaint against PDP Transit, Inc. before, the Court of First Instance of
Manila docketed as Civil Case No. 60201 with a petition for a writ of
Replevin, to collect the balance due under the Chattel Mortgages and to
repossess all the units to sold to plaintiffs' principal PDP Transit, Inc.
including the five (5) units guaranteed under the subject Real (Estate)
Mortgage.
Universal Motors Corporation admitted during the hearing that in its suit
(C.C. No. 60201) against the PDP Transit, Inc. it was able to repossess all
the units sold to the latter, including the five (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.
With the foregoing background, the spouses Lorenzo Pascual and Leonila
Torres, the real estate mortgagors, filed an action in the Court of First
Instance of Quezon City (Civil Case No. 8189) for the cancellation of the
mortgage they constituted on two (2) parcels of land1 in favor of the
Universal Motors Corporation to guarantee the obligation of PDP Transit,
Inc. to the extent of P50,000. The court rendered judgment for the plaintiffs,
ordered the cancellation of the mortgage, and directed the defendant
Universal Motors Corporation to pay attorney's fees to the plaintiffs in the
sum of P500.00. Unsatisfied with the decision, defendant interposed the
present appeal.
In rendering judgment for the plaintiffs the lower court said in part: "... there
does not seem to be any doubt that Art. 14842 of the New Civil Code may
be applied in relation to a chattel mortgage constituted upon personal
property on the installment basis (as in the present case) precluding the
mortgagee to maintain any further action against the debtor for the purpose
of recovering whatever balance of the debt secured, and even adding that
any agreement to the contrary shall be null and void."
The appellant now disputes the applicability of Article 1484 of the Civil Code
to the case at bar on the ground that there is no evidence on record that the
purchase by PDP Transit, Inc. of the five (5) trucks, the payment of the price
of which was partly guaranteed by the real estate mortgage in question, was
payable in installments and that the purchaser had failed to pay two or more
installments. The appellant also contends that in any event 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.
ISSUE:
Whether 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.
RULING:
A similar argument has been answered by this Court in this wise: "(T)o
sustain appellant's argument is to overlook the fact that if the guarantor
should be compelled to pay the balance of the purchase price, the guarantor
will in turn be entitled to recover what she has paid from the debtor vendee
(Art. 2066, Civil Code); so that 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."
(Cruz vs. Filipinas Investment & Finance Corporation, L-24772, May 27,
1968; 23 SCRA 791).
MAGNA FINANCIAL SERVICES GROUP, INC. vs. ELIAS COLARINA
FACTS:
on 11 June 1997, Elias Colarina bought on installment from Magna Financial
Services Group, Inc., one (1) unit of Suzuki Multicab, more particularly
described as follows:
MAKE - SUZUKI MULTICAB
MODEL - ER HT
ENGINE NO. – 834963
FRAME NO. - LTO -067886-RO7-C
COLOR - WHITE
After making a down payment, Colarina executed a promissory note for the
balance of ₱229,284.00 payable in thirty-six (36) equal monthly installments
at ₱6,369.00 monthly, beginning 18 July 1997. To secure payment thereof,
Colarina executed an integrated promissory note and deed of chattel
mortgage over the motor vehicle.
Colarina failed to pay the monthly amortization beginning January 1999,
accumulating an unpaid balance of ₱131,607.00. Despite repeated
demands, he failed to make the necessary payment. On 31 October 2000
Magna Financial Services Group, Inc. filed a Complaint for Foreclosure of
Chattel Mortgage with Replevin2 before the Municipal Trial Court in Cities
(MTCC), Branch 2, Legaspi City, docketed as Civil Case No. 4822.3 Upon
the filing of a Replevin Bond, a Writ of Replevin was issued by the MTCC.
On 27 December 2000, summons, together with a copy of the Writ of
Replevin, was served on Colarina who voluntarily surrendered physical
possession of the vehicle to the Sheriff, Mr. Antonio Lozano. On 02 January
2001, the aforesaid motor vehicle was turned over by the sheriff to Magna
Financial Services Group, Inc
On 12 July 2001, Colarina was declared in default for having filed his answer
after more than six (6) months from the service of summons upon him.
Thereupon, the trial court rendered judgment based on the facts alleged in
the Complaint. In a decision dated 23 July 2001, it held:
WHEREFORE, judgment is hereby rendered in favor of plaintiff Magna
Financial Services Group, Inc. and against the defendant Elias Colarina,
ordering the latter to pay plaintiff the principal sum of one hundred thirty one
thousand six hundred seven (₱131,607.00) pesos plus penalty charges at
4.5% per month computed from January, 1999 until fully paid.
The foregoing money judgment shall be paid within ninety (90) days from the
entry of judgment. In case of default in such payment, the one (1) unit of
Suzuki Multicab, subject of the writ of replevin and chattel mortgage, shall be
sold at public auction to satisfy the said judgment.
Colarina appealed to the Regional Trial Court (RTC). During the pendency of
his appeal before the RTC, Colarina died and was substituted in the case by
his heirs.7 In a decision dated 30 January 2002, the RTC affirmed in toto the
decision of the MTCC.8
Colarina filed a Petition for Review before the Court of Appeals: We find
merit in petitioners’ assertion that the MTC and the RTC erred in ordering
the defendant to pay the unpaid balance of the purchase price of the subject
vehicle irrespective of the fact that the instant complaint was for the
foreclosure of its chattel mortgage. The principal error committed by the said
courts was their immediate grant, however erroneous, of relief in favor of the
respondent for the payment of the unpaid balance without considering the
fact that the very prayer it had sought was inconsistent with its allegation in
the complaint.
Verily, it is beyond cavil that the complaint seeks the judicial foreclosure of
the chattel mortgage. The fact that the respondent had unconscionably
sought the payment of the unpaid balance regardless of its complaint for the
foreclosure of the said mortgage is glaring proof that it intentionally devised
the same to deprive the defendant of his rights. A judgment in its favor will in
effect allow it to retain the possession and ownership of the subject vehicle
and at the same time claim against the defendant for the unpaid balance of
its purchase price. In such a case, the respondent would luckily have its
cake and eat it too. Unfortunately for the defendant, the lower courts had
readily, probably unwittingly, made themselves abettors to respondent’s
devise to the detriment of the defendant.
ISSUE:
What is the true nature of a foreclosure of chattel mortgage, extrajudicial or
judicial, as an exercise of the 3rd option under article 1484, paragraph 3 of
the civil code.
RULING:
In its Memorandum, petitioner assails the decision of the Court of Appeals
and asserts that a mortgage is only an accessory obligation, the principal
one being the undertaking to pay the amounts scheduled in the promissory
note. To secure the payment of the note, a chattel mortgage is constituted
on the thing sold. It argues that an action for foreclosure of mortgage is
actually in the nature of an action for sum of money instituted to enforce the
payment of the promissory note, with execution of the security. In case of an
extrajudicial foreclosure of chattel mortgage, the petition must state the
amount due on the obligation and the sheriff, after the sale, shall apply the
proceeds to the unpaid debt. This, according to petitioner, is the true nature
of a foreclosure proceeding as provided under Rule 68, Section 2 of the
Rules of Court.13
On the other hand, respondent countered that the Court of Appeals correctly
set aside the trial court’s decision due to the inconsistency of the remedies
or reliefs sought by the petitioner in its Complaint where it prayed for the
custody of the chattel mortgage and at the same time asked for the payment
of the unpaid balance on the motor vehicle.
Our Supreme Court in Bachrach Motor Co., Inc. v. Millan held: "Undoubtedly
the principal object of the above amendment (referring to Act 4122
amending Art. 1454, Civil Code of 1889) 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 the 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."
In its Complaint, Magna Financial Services Group, Inc. made the following
prayer:
WHEREFORE, it is respectfully prayed that judgment render ordering
defendant:
1. To pay the principal sum of ₱131,607.00 with penalty charges at 4.5% per
month from January 1999 until paid plus liquidated damages.
2. Ordering defendant to reimburse the plaintiff for attorney’s fee at 25% of
the amount due plus expenses of litigation at not less than ₱10,000.00.
3. Ordering defendant to surrender to the plaintiff the possession of the
Multicab described in paragraph 2 of the complaint.
4. Plaintiff prays for other reliefs just and equitable in the premises.
It is further prayed that pendent lite, an Order of Replevin issue commanding
the Provincial Sheriff at Legazpi City or any of his deputies to take such
multicab into his custody and, after judgment, upon default in the payment of
the amount adjudged due to the plaintiff, to sell said chattel at public auction
in accordance with the chattel mortgage law.16
In its Memorandum before us, petitioner resolutely declared that it has opted
for the remedy provided under Article 1484(3) of the Civil Code,17 that is, to
foreclose the chattel mortgage.
It is, however, unmistakable from the Complaint that petitioner preferred to
avail itself of the first and third remedies under Article 1484, at the same time
suing for replevin. For this reason, the Court of Appeals justifiably set aside
the decision of the RTC. Perusing the Complaint, the petitioner, under its
prayer number 1, sought for the payment of the unpaid amortizations which
is a remedy that is provided under Article 1484(1) of the Civil Code, allowing
an unpaid vendee to exact fulfillment of the obligation. At the same time,
petitioner prayed that Colarina be ordered to surrender possession of the
vehicle so that it may ultimately be sold at public auction, which remedy is
contained under Article 1484(3). Such a scheme is not only irregular but is a
flagrant circumvention of the prohibition of the law. By praying for the
foreclosure of the chattel, Magna Financial Services Group, Inc. renounced
whatever claim it may have under the promissory note.18
Article 1484, paragraph 3, provides that if the vendor has availed himself 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 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.19
Contrary to petitioner’s claim, a contract of chattel mortgage, which is the
transaction involved in the present case, is in the nature of a conditional sale
of personal property given as a security for the payment of a debt, or the
performance of some other obligation specified therein, the condition being
that the sale shall be void upon the seller paying to the purchaser a sum of
money or doing some other act named.20 If the condition is performed
according to its terms, the mortgage and sale immediately become void, and
the mortgagee is thereby divested of his title.21 On the other hand, in case
of non payment, foreclosure is one of the remedies available to a mortgagee
by which he subjects the mortgaged property to the satisfaction of the
obligation to secure that for which the mortgage was given. Foreclosure may
be effected either judicially or extrajudicially, that is, by ordinary action or by
foreclosure under power of sale contained in the mortgage. It may be
effected by the usual methods, including sale of goods at public auction.22
Extrajudicial foreclosure, as chosen by the petitioner, is attained by causing
the mortgaged property to be seized by the sheriff, as agent of the
mortgagee, and have it sold at public auction in the manner prescribed by
Section 14 of Act No. 1508, or the Chattel Mortgage Law.23 This rule
governs extrajudicial foreclosure of chattel 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 court’s decision
and instead rendered a judgment of foreclosure as prayed for by the
petitioner.
The next issue of consequence is whether or not there has been an actual
foreclosure of the subject vehicle.
Under the law, the delivery of possession of the mortgaged property to the
mortgagee, the herein appellee, can only operate to extinguish appellant’s
liability if the appellee had actually caused the foreclosure sale of the
mortgaged property when it recovered possession thereof (Northern Motors,
Inc. v. Sapinoso, 33 SCRA 356 [1970]; Universal Motors Corp. v. Dy Hian
Tat, 28 SCRA 161 [1969]; Manila Motors Co., Inc. v. Fernandez, 99 Phil. 782
[1956]).
Be that as it may, although no actual foreclosure as contemplated under the
law has taken place in this case, since the vehicle is already in the
possession of Magna Financial Services Group, Inc. and it has persistently
and consistently avowed that it elects the remedy of foreclosure, the Court of
Appeals, thus, ruled correctly in directing the foreclosure of the said vehicle
without more.
WHEREFORE, premises considered, the instant petition is DENIED for lack
of merit and the decision of the Court of Appeals dated 21 January 2003 is
AFFIRMED. Costs against petitioner.

In the case at bar, there is no dispute that the subject vehicle is already in SO ORDERED.
the possession of the petitioner, Magna Financial Services Group, Inc.
However, actual foreclosure has not been pursued, commenced or
concluded by it.

Where the mortgagee elects a remedy of foreclosure, the law requires the
actual foreclosure of the mortgaged chattel. Thus, in Manila Motor Co. v.
Fernandez,24 our Supreme Court said that it is actual sale of the mortgaged
chattel in accordance with Sec. 14 of Act No. 1508 that would bar the
creditor (who chooses to foreclose) from recovering any unpaid balance.25
And it is deemed that there has been foreclosure of the mortgage when all
the proceedings of the foreclosure, including the sale of the property at
public auction, have been accomplished.26

That there should be actual foreclosure of the mortgaged vehicle was

reiterated in the case of De la Cruz v. Asian Consumer and Industrial
Finance Corporation:27

It is thus clear that while ASIAN eventually succeeded in taking possession

of the mortgaged vehicle, it did not pursue the foreclosure of the mortgage
as shown by the fact that no auction sale of the vehicle was ever conducted.
As we ruled in Filinvest Credit Corp. v. Phil. Acetylene Co., Inc. (G.R. No.
50449, 30 January 1982, 111 SCRA 421) –
FILIPINAS INVESTMENT & FINANCE CORPORATION vs. JULIAN R.
VITUG, JR. and SUPREME SALES & DEVELOPMENT CORPORATION
FACTS:
The defendant, Julian R. Vitug, executed and delivered to appellee a
promissory note in the amount of P14,605.00 payable in monthly
installments according to a schedule of payments; the payment of the
aforesaid amount which was the purchase price of a motor vehicle, a 4-door
Consul sedan, bought by said defendant from appellee, was secured by a
chattel mortgage over such automobile; on the same day, appellee
negotiated the above-mentioned promissory note in favor of appellant
Filipinas Investment & Finance Corporation, assigning thereto all its rights,
title and interests to the same, the assignment including the right of recourse
against appellee; defendant Vitug defaulted in the payment of part of the
installment which fell due on January 6, 1965, as well as the subsequent
three consecutive monthly installments which he was supposed to have paid
on February 6, March 6 and April 6, 1965; there being a provision in the
aforesaid promissory note and chattel mortgage that failure to pay the
installments due would result in the entire obligation becoming due and
demandable, appellant demanded from appellee the payment of such
outstanding balance; in turn, appellee "authorized (appellant) to take such
action as may be necessary to enable (it) to take possession of the ... motor
vehicle." Pursuant to such authority, appellant secured possession of the
mortgaged vehicle by means of a writ of replevin duly obtained from the
court, preparatory to the foreclosure of the mortgage, but said writ became
unnecessary because upon learning of the same, defendant Vitug voluntarily
surrendered the car to appellant; thereafter, the said car was sold at public
auction, but the proceeds still left a deficiency of P8,349.35, plus interest of
12% per annum from April 21, 1965; and appellant, the above foreclosure
and sale notwithstanding, would hold appellee liable for the payment of such
outstanding balance, plus attorney's fees and costs.
On August 4, 1965, appellee filed an urgent motion to dismiss on the
ground, inter alia, that under Article 1484 of the Civil Code of the Philippines,
which particular provision is otherwise known as the Recto Law, appellant
has no cause of action against appellee.
The lower court found the aforesaid ground to be meritorious and, as already
stated, the amended complaint was dismissed as to appellee Supreme
Sales & Development Corporation.
The specific allegations in the amended complaint which have material
bearing on the issue herein are:
4. On November 4, 1964, defendant Supreme Sales &
Development Corporation, with notice to defendant Julian R. Vitug,
Jr. negotiated in favor of (endorsed and delivered to) plaintiff the
above-mentioned promissory note, Annex "A", on a with recourse
basis whereby in case of the failure and/or refusal of the maker
thereof, defendant Julian R. Vitug, Jr. to pay the obligation under
the said promissory note, plaintiff shall have the right to recourse
against the said defendant corporation.
On the same date, the said defendant corporation, with notice to
defendant Julian R. Vitug, Jr., assigned to plaintiff its rights, title,
and interests to the aforesaid promissory note and chattel
mortgage, Annexes "A" and "B" hereof, as shown by the Deed of
Assignment executed by defendant Supreme Sales & Development
Corporation in favor of plaintiff, a copy of which is hereto attached
as Annex "C" and made an integral part hereof, which assignment
is also subject to the right of recourse above-mentioned.
13. The defendant corporation is liable to plaintiff for the entire
balance of the obligation covered by the promissory note, Annex
"A", and secured by the chattel mortgage, Annex "B", as a general
endorser of the promissory note, Annex "A", and assignor of the
chattel mortgage on a with- recourse basis. But should plaintiff be
able to sell the above-described motor vehicle, then the said
defendant corporation is liable to the plaintiff for the payment of the
balance of the obligation after applying thereto the proceeds of the
sale of the said vehicle. (Record on Appeal, pp. 12 and 15.)
Thus it can be seen that the assignment made by appellee to appellant of
the promissory note and mortgage of defendant Vitug was on a with-
recourse basis. In other words, there was a definite and clear agreement
between appellant and appellee that should appellant fail to secure full
recovery from defendant Vitug, the right was reserved to appellant to seek
recourse for the deficiency against appellee.
ISSUE:
Whether or not this provision regarding recourse contained in the agreement
between appellant and appellee violates the Recto Law which declares null
and void any agreement in contravention thereof.
RULING:
No. As pointed out in appellant's brief, the transaction between appellant
and appellee was purely an ordinary discounting transaction whereby the
promissory note executed by defendant Vitug was negotiated by appellee in There is no merit in this contention. To sustain appellants argument
favor of appellant for a valuable consideration at a certain discount, is to overlook the fact that if the guarantor should be compelled to
accompanied by an assignment also of the chattel mortgage executed by pay the balance of the purchase price, the guarantor will in turn be
said defendant to secure the payment of his promissory note and with the entitled to recover what she had paid from the debtor vendee (Art.
express stipulation that should there be any deficiency, recourse could be 2066, Civil Code); so that ultimately, it will be the vendee who will
had against appellee. Stated otherwise, the remedy presently being sought be made to bear the payment of the balance of the price, despite
is not against the buyer of the car or the defendant Vitug but against the the earlier foreclosure of the chattel mortgage given by him. Thus,
seller, independent of whether or not such seller may have a right of the protection given by Article 1484 would be indirectly subverted,
recovery against the buyer, which, in this case, he does not have under the and public policy overturned.
Recto Law. It is clear to Us, on the other hand, that under said law, what
Congress seeks to protect are only the buyers on installment who more As can be seen, that ease of Cruz was entirely different from this one at bar.
often than not have been victimized by sellers who, before the enactment of In that case, herein appellant Filipinas Investment & Finance Corporation
this law, succeeded in unjustly enriching themselves at the expense of the was trying to recover from the guarantor of the buyer, whereas in the present
buyers because aside from recovering the goods sold, upon default of the case, it is precisely stipulated in effect, that the Filipinas Investment &
buyer in the payment of two installments, still retained for themselves all Finance Corporation had a right of recourse against the seller should the
amounts already paid, in addition, furthermore, to other damages, such as buyer fail to pay the assigned credit in full.
attorney's fees, and costs. Surely, Congress could not have intended to
impair and much less do away with the right of the seller to make
commercial use of his credit against the buyer, provided said buyer is not It is the contention of appellee that since what were assigned to appellant
burdened beyond what this law allows. were only whatever rights it had against the buyer, it should follow that
inasmuch as appellee has no right to recover from the defendant beyond the
proceeds of the foreclosure sale, the appellant, as assignee, should also
We are not unmindful that in the case of Cruz, et al. vs. the same Filipinas have no right to recover any deficiency. We do not view the matter that way.
Investment & Finance Corporation, L-24772, May 27, 1968, 23 SCRA 791, The very fact that the assignee was given the stipulated right of recourse
this Court broadened the scope of the Recto Law beyond its letter and held against the assignor negates the idea that the parties contemplated to limit
that within its spirit, a seller of goods on installment does not have any right the recovery of the assignee to only the proceeds of the mortgage sale.
of action against a third party who, in addition to the buyer's mortgage of the
goods sold, furnishes additional security for the payment of said installments
or the purchase price of said goods. In that case, it was held:. ACCORDINGLY, the order of dismissal of the lower court is reversed and
this case is ordered remanded to the lower court for further proceedings,
with costs against appellee Supreme Sales & Development Corporation.
It is here agreed that plaintiff Cruz failed to pay several installments
as provided in the contract; that there was extrajudicial foreclosure
of the chattel mortgage on the said motor vehicle; and that
defendant-appellant itself bought it at the public auction duly held
thereafter, for a sum less than the purchaser's outstanding
obligation. Defendant-appellant, however, sought to collect the
supposed deficiency by going against the real estate mortgage
which was admittedly constituted on the land of plaintiff Reyes as
additional security to guarantee the performance of Cruz' obligation,
claiming 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.
OLYMPIA HOUSING, INC vs. PANASIATIC TRAVEL
CORPORATION
FACTS:
On August 8, 1984, plaintiff and defendant Ma. Nelida Galvez-
Ycasiano entered into a Contract to Sell, whereby the former agreed
to sell to the latter condominium unit no. D-12, comprising an area of
160.50 square meters, more or less, situated on the ground floor of
Olympia Condominium located at Makati, Metro Manila, covered by
Condominium Certificate of Title No. 6711, for the agreed price of
P2,340,000.00 payable in installments of P33,657.40 per month.
"The schedule of payments [were] as follows:
Date Particulars Amount
July 17, Reservation/Deposit P100,000.00
1984
July 19, 50% Down payment P1,070,000.00
1984
"Balance of 50% payable in sixty (60) monthly installments at 24%
per annum base on diminishing balance.
"Monthly amortization to commence on Sept. 17 1984 ....................
P33,657.40/month
"Interest of 2% is included in regular monthly amortization, past due
amortization shall bear interest of 2% per month plus penalty charge
of 2% per month.
"Pursuant to the Contract to Sell, defendant Ma. Nelida Galvez-
Ycasiano made a reservation/deposit in the amount of P100,000.00
on July 17, 1984 and 50% down payment in the amount of
P1,070,000.00 on July 19, 1984.
"Defendants made several payments in cash and thru credit memos
issued by plaintiff representing plane tickets bought by plaintiff from
defendant Panasiatic Travel Corp., which is owned by defendant Ma.
Nelida Galvez-Ycasiano, who credited/offset the amount of the said
plane tickets to defendant's account due to plaintiff.
"Plaintiff alleged that far from complying with the terms and
conditions of said Contract to Sell, defendants failed to pay the
corresponding monthly installments which as of June 2, 1988
amounted to P1,924,345.52. Demand to pay the same was sent to
defendant Ma. Nelida Galvez-Ycasiano, but the latter failed to settle
her obligation.
"For failure of defendant to pay her obligation plaintiff allegedly
rescinded the contract by a Notarial Act of Rescission.
"At present, the subject condominium unit is being occupied by
defendant Panasiatic Travel Corp., hence the suit for Recovery of
Possession (Accion Publiciana) with prayer for attorney's fees,
exemplary damages and reasonable rentals for the unit from July 28,
1988 at the rate of P32,100.00 per month until the condominium unit
is finally vacated.
"Defendant Ma. Nelida Galvez-Ycasiano, while admitting the
existence of the contract to sell, interposed the defense that she has
made substantial payments of the purchase price of the subject
condominium unit amounting to P1,964,452.82 in accordance with
the provisions of the contract to sell; that she decided to stop
payment of the purchase price in the meantime because of
substantial differences between her and the plaintiff in the
computation of the balance of the purchase price.
"xxx xxx xxx
"Evidence adduced by plaintiff such as the statement of account of
defendant Ma. Nelida Galvez-Ycasiano (Exh. 'C') has been
established by plaintiff's witness, Mrs. Isabelita Rivera, which indeed
shows that on several occasions defendant either failed to pay on
time or was completely in default in the payment of the monthly
installment of the subject condominium unit.
"It can be deduced from said documentary evidence that defendant
should start paying the installment on September 17, 1984, but
defendant paid on September 21, 1984 the amount of P51,238.00
thru credit memo. Witness claimed that a credit memo is a document
issued by Olympia Housing Inc. to Panasiatic Travel Corp. for the
amount of ticket purchased instead of paying in cash they just issued
credit memo in order that it would be offset on the monthly
amortization due to Olympia Housing Corp. She claimed that they
based it on the invoice that they [were] sending them.
"Witness further claimed that since the amount due was only
P33,657.40 what she did to the excess of P51,238.00 was to apply it
to the next installment. The next installment was due on October 12,
1984 in the amount of P26,158.00 representing the excess. It was
paid thru credit memo no. 031 on October 17, 1984. In fact, there
was still an excess of P10,081.20. The third installment was due on
November 17, 1984. Defendant made partial payment because the
excess payment of P10,081.20 was applied to the third installment.
The 4th installment was due on December 17, 1984; the defendant
did not pay instead she paid on January 9, 1985 the amount of
P51,619.08 in cash per O.R. No. 295. Before this payment on
January 9, 1985 defendant owed plaintiff P59,931.81 based on the
amortization. The basis [was] the unpaid amortization due and
payable plus 2% interest and 2% penalty charges per month. After
payment, the amount due was P8,312.73. The 5th installment was
due on January 17, 1985. No payment was made on the 6th, 7th, 8th
installments which were due on January, February, March, April 17,
1985 respectively. The 9th installment was due on May 17, 1985, it
was not paid. Defendant made a payment on June 1985 for
P33,231.90 in cash per O.R. No. 439. The next payment was made
on June 8, 1985 for P25,574.59. After these two payments, there
was still an outstanding amount due of P32,552.44. No payment was
made on the 10th and 11th installments. The next payment was
made on July 24, 1985 for P60,000.00. After this payment the
outstanding amount due was P43,881.76. She made payment on
August 16, 1985 for P30,067.00 thru credit memo no. 045. After this
payment the outstanding amount due was P15,160.46. She did not
on the 12th installment, instead she paid on August 28, 1985 for
P26,043.00 thru credit memo no. 046. After this payment the
outstanding amount due was P23,511.07. She did not pay on the
13th installment, instead she paid on October 10, 1985 for
P20,830.00 thru credit memo no. 006. After this payment the
outstanding amount due was P38,728.61. She did not pay on the
14th installment, instead payment was made on November 10, 1985
for P16,212.00 thru credit memo no. 010. After this payment the
outstanding amount due was P58,851.83. No payments were made
on the 15th, 16th and 17th installments. She paid on January 30,
1986 for P33,657.40 in cash per O.R. No. 842. After this payment
the outstanding balance was P138,233.23. No payment was made
on the 18th and 19th installment which fell due on February 17 and
March 17, 1986. The next payment was made on April 15, 1986 for
P25,263.23. After this payment the outstanding balance was
P198,425.88. She did not pay for six (6) consecutive months from
April 17 to September 17, 1986 corresponding to the 20th up to the
25th installment. The next payment was made on October 14, 1986
for P82,780.33 in cash per O.R. No. 1628. After this payment the
outstanding amount due was P350,712.73. The 26th and 27th
installments were not paid. She paid on November 24, 1986 for
P134,629.60. After this payment the outstanding balance was
P306,306.66. Witness claimed that the basis for the computation
was the unpaid amortization due payable for the particular period
plus 2% interest and 2% penalty charge per month. In computing the
interest she used the simple method. The 28th up to the 31st
installments were not paid. The next payment was made on April 30,
1987 for P22,213.00 thru credit memo no. 134. After this payment
the outstanding balance was P471,317.60. The basis for this
computation is the unpaid amortization due plus 2% interest and 2%
penalty charge per month. The 33rd, 34th and 35th installments were
not paid. The next payment was made on July 22, 1987 for
P19,752.00 thru credit memo no. 146. After this payment the
outstanding balance was P664,822.78. The 36th and 37th
installments were not paid."
Regional Trial Court judgment is hereby rendered as follows:
"1. As the complaint has been prematurely filed without
complying with the mandate of Republic Act No. 6552, the
complaint is hereby dismissed;
 "2. That the obligation of defendant Maria Nelida Galvez
Ycasiano has now become due and demandable, said
defendant is hereby ordered to pay the sum of
P4,007,473.49 as of November 30, 1994 plus 18% interest
per annum, computed from 1 December 1994, but within
sixty days from receipt of a copy of this decision;
"3. Upon payment thereof, for plaintiff to issue the
corresponding certificate of title in favor of defendant;
"4. In the event that said amount in full is not paid including
the current amount due including the interest sans penalties,
then immediately thereafter, without necessity of demand,
the defendants must vacate the premises and all payments
will be charged as rentals to the property.
Thereupon, respondents tendered the amount of P4,304,026.53 to
petitioner via Metrobank Cashier's Check No. CC008857. Petitioner
refused to accept the payment, constraining respondents to consign
at the disposal of the court a quo the check on 26 April 1995. In an
order, dated 05 June 1996, the check was allowed to be substituted
by another cashier's check payable to the Clerk of Court of the
Makati Regional Trial Court. Complying with yet another court order
of 04 January 1996, respondents deposited the amount of
P4,304,026.53 with the Land Bank of the Philippines and
subsequently submitted to the court the corresponding bank book as
well as the bank's verification.
Meanwhile, both parties appealed the judgment of the trial court. In
its now questioned decision of 11 June 1999, the appellate court
sustained the trial court.
RULING:
The action for reconveyance filed by petitioner was predicated on an
assumption that its contract to sell executed in favor of respondent
buyer had been validly cancelled or rescinded. The records would
show that, indeed, no such cancellation took place at any time prior
to the institution of the action for reconveyance.
As so aptly observed by the courts below, the foregoing
communication to the buyer merely demanded payment within thirty
(30) days from receipt thereof with the threat that if the demand were
not heeded, the contract would forthwith be cancelled or rescinded.
Nor did the appellate court erroneously ignore the "notarial
rescission" attached to the complaint for reconveyance. Apparently,
the so-called "notarial rescission" was not sent to respondents prior
to the institution of the case for reconveyance but merely served on
respondents by way of an attachment to the complaint. In any case,
a notarial rescission, standing alone, could not have invalidly
effected, in this case, the cancellation of the contract.
As the trial court elaborated in this case:
"A careful study of the evidence presented does not show a
notice of cancellation or the demand for rescission of the
contract by a notarial act. The plaintiff appears to be claiming
that the June 2, 1988 letter is a notice of cancellation or a
demand for rescission of the contract by a notarial act. This
could not be what the law contemplates. It should be a
notice of cancellation or demand for rescission of the
contract by notarial act.
"Further, the law requires also full payment of the cash
surrender value to the buyer but there is no evidence
adduced by the plaintiff that they delivered to the defendant
the cash surrender value. Admittedly, no such full payment
of the cash surrender value to the defendant was made. A
mere promise to return is not what the law contemplates."9
The governing law is Republic Act No. 6552, otherwise known as the
"Realty Installment Buyer Protection Act," which has become
effective since 16 September 1972. Republic Act No. 6552 is a
special law governing transactions that involve, subject to certain
exceptions, the sale on installment basis of real property. 10 The law
has been enacted mainly "to protect buyers of real estate on
installment payments against onerous and oppressive conditions." 11
Section 3 of the statute provides:
 "Sec. 3. In all transactions or contracts involving the sale or
financing of real estate on installment payments, including
residential condominium apartments but excluding industrial
lots, commercial buildings and sales to tenants under
Republic Act Number Thirty-eight hundred forty-four as
amended by Republic Act Numbered Sixty three hundred
eighty-nine, where the buyer has paid at least two years of
installments, the buyer is entitled to the following rights in
case he defaults in the payment of succeeding 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 one
month grace period for every one year of installment
payments made: Provided, That this right shall be
exercised by the buyer only once in every five years
of the life of the contract and its extensions, if any.
"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 fifty per cent
of the total payments made and, after five years of
installments, an additional five per cent every year
but not to exceed ninety per cent of the total
payments made: Provided, That the actual
cancellation of the contract shall take place after
thirty days from receipt by the buyer of the notice of
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."
The enactment recognizes the right of the seller to cancel the
contract but any such cancellation must be done in conformity with
the requirements therein prescribed. 12 In addition to the notarial act
of rescission, the seller is required to refund to the buyer the cash
surrender value of the payments on the property. 13 The actual
cancellation of the contract can only be deemed to take place upon
the expiry of a 30-day period following the receipt by the buyer of the
notice of cancellation or demand for rescission by a notarial act and
the full payment of the cash surrender value.
The Court agrees with petitioner that it is not precluded from going to
the court to demand judicial rescission in lieu of a notarial act of
rescission. This much must be recognized. Thus, in Layug vs.
Intermediate Appellate Court 14 the Court has ruled that a demand
for rescission by notarial act would appear to be merely circuitous,
consequently superfluous, with the filing by the seller of an action for
annulment of contract and for recovery of damages. Unfortunately for
petitioner, it would be incorrect to apply Layug to the instant case.
Layug is basically an action for annulment of contract, a kindred
concept of rescission, whereas the instant case before the Court is
one for recovery of possession on the thesis of a prior rescission of
the contract covering the property. 15 Not only is an action for
reconveyance conceptually different from an action for rescission but
that, also, the effects that flow from an affirmative judgment in either
case would be materially dissimilar in various respects. The judicial
resolution of a contract gives rise to mutual restitution which is not
necessarily the situation that can arise in an action for reconveyance.
Additionally, in an action for rescission (also often termed as
resolution), unlike in an action for reconveyance predicated on an
extrajudicial rescission (rescission by notarial act), the Court, instead
of decreeing rescission, may authorize for a just cause the fixing of a
period. 16
Nor should a party in litigation be permitted to freely and substantially
change the theory or the cause of action of his case 17 that,
otherwise, can put to undue disadvantage the other party by not
being accurately and timely apprised of what he is up against. The
character of an action is determined from the issues raised by the
complaint, from the nature of the right or grievance asserted, and
from the relief sought in the complaint. 18 A change of theory can
result in grave alteration of the stand theretofore taken by the parties,
and a court must not thereafter take it upon itself to assume its own
position on, or the factual and legal considerations of, the case.