SUPREME COURT

SECOND DIVISION

G.R. No. 158635 December 9, 2005

MAGNA FINANCIAL SERVICES GROUP, INC., Petitioner,

DECISION

CHICO-NAZARIO, J.:

The undisputed facts of this case show that 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 1

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 Replevin before the Municipal Trial Court in Cities (MTCC), Branch 2, Legaspi City,
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docketed as Civil Case No. 4822. Upon the filing of a Replevin Bond, a Writ of Replevin was issued
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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
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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:
5

WHEREFORE, judgment is hereby rendered in favor of plaintiff Magna Financial Services Group,
Inc. and against the defendant Elias Colarina, ordering the latter:
a) 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;

b) to pay plaintiff ₱10,000.00 for attorney’s fees; and

c) to pay the costs.

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. 6

Colarina appealed to the Regional Trial Court (RTC) of Legazpi City, Branch 4, where the case was
docketed as Civil Case No. 10013. During the pendency of his appeal before the RTC, Colarina died
and was substituted in the case by his heirs. In a decision dated 30 January 2002, the RTC
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affirmed in toto the decision of the MTCC. 8

Colarina filed a Petition for Review before the Court of Appeals, docketed as CA-G.R. SP No.
69481. On 21 January 2003, the Court of Appeals rendered its decision holding:
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. . . 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.

...

WHEREFORE, finding error in the assailed decision, the instant petition is hereby GRANTED and
the assailed decision is hereby REVERSED AND SET ASIDE. Let the records be remanded to the
court of origin. Accordingly, the foreclosure of the chattel mortgage over the subject vehicle as
prayed for by the respondent in its complaint without any right to seek the payment of the unpaid
balance of the purchase price or any deficiency judgment against the petitioners pursuant to Article
1484 of the Civil Code of the Philippines, is hereby ORDERED. 10

A Motion for Reconsideration dated 11 February 2003 filed by Magna Financial Services Group,
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Inc., was denied by the Court of Appeals in a resolution dated 22 May 2003. Hence, this Petition for
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Review on Certiorari based on the sole issue:

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. 14

Article 1484 of the Civil Code explicitly provides:

ART. 1484. In a contract of sale of personal property the price of which is payable in installments,
the vendor may exercise any of the following remedies:

(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 or 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.

Our Supreme Court in Bachrach Motor Co., Inc. v. Millan held: "Undoubtedly the principal object of
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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, that is, to foreclose the chattel mortgage.
17 

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. If the condition is performed according to its terms, the mortgage and sale
20 

immediately become void, and the mortgagee is thereby divested of his title. On the other hand, in
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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. Extrajudicial foreclosure, as chosen
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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. This rule governs extrajudicial foreclosure of chattel
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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.

In the case at bar, there is no dispute that the subject vehicle is already in 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, our Supreme Court said that it is actual
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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. And it is deemed that there has
25 

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) –

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.

SO ORDERED.

MINITA V. CHICO-NAZARIO

Associate Justice

WE CONCUR:

REYNATO S. PUNO

Associate Justice

Chairman

MA. ALICIA AUSTRIA-MARTINEZ ROMEO J. CALLEJO, SR.

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was
assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO

Associate Justice

Chairman, Second Division

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairman’s Attestation, it is
hereby certified that the conclusions in the above Decision were reached in consultation before the
case was assigned to the writer of the opinion of the Court’s Division.

HILARIO G. DAVIDE, JR.

Chief Justice