Acme Shoe Rubber vs. CA 260 SCRA 714

Acme Shoe Rubber vs.
CA, 260 SCRA 714
Principle: a chattel mortgage can only cover obligations existing at the time the mortgage is constituted.
The remedy of foreclosure can only cover the debts extent at the time of constitution and during the life
of the chattel mortgage sought to be foreclosed.
FACTS: Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber &
Plastic Corporation," executed on 27 June 1978, for and in behalf of the company, a chattel mortgage in
favor of private respondent Producers Bank of the Philippines. The mortgage stood by way of security
for petitioner’s corporate loan P3,000,000.00.
A provision in the chattel mortgage agreement was to this effect:
"(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform the
full obligation or obligations above-stated according to the terms thereof, then this mortgage
shall be null and void,
"In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of
the former note, as an extension thereof, or as a new loan, or is given any other kind of
accommodations such as overdrafts, letters of credit, acceptances and bills of exchange, releases
of import shipments on Trust Receipts, etc., this mortgage shall also stand as security for the
payment of the said promissory note or notes and/or accommodations without the necessity of
executing a new contract and this mortgage shall have the same force and effect as if the said
promissory note or notes and/or accommodations were existing on the date thereof. This
mortgage shall also stand as security for said obligations and any and all other obligations of the
MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations have
been contracted before, during or after the constitution of this mortgage."
In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it
obtained from respondent bank additional financial accommodations totaling P2,700,000.00. These
borrowings were on due date also fully paid.
On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of
P1,000,000.00 but because financial constraints, the loan was not settled at maturity. Respondent bank
consequently applied for an extrajudicial foreclosure of the chattel mortgage which then the RTC
ordered the foreclosure of the chattel mortgage. It held petitioner corporation bound by the stipulations
of the chattel mortgage. Upon appeal to the Court of Appeals, it affirmed the decision of the RTC. Thus,
this present petition.
ISSUE: Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise
extend its coverage to obligations yet to be contracted or incurred?
RULING:
NO. Contracts of security are either personal or real. [OPTIONAL] In contracts of personal security, such
as a guaranty or a suretyship, the faithful performance of the obligation by the principal debtor is
secured by the personal commitment of another (the guarantor or surety). In contracts of real security,
such as a pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of
property in pledge, the placing of movable property in the possession of the creditor; in chattel
mortgage, by the execution of the corresponding deed substantially in the form prescribed by law; in
real estate mortgage, by the execution of a public instrument encumbering the real property covered
thereby; and in antichresis, by a written instrument granting to the creditor the right to receive the fruits
of an immovable property with the obligation to apply such fruits to the payment of interest, if owing,
and thereafter to the principal of his credit upon the essential condition that if the principal obligation
becomes due and the debtor defaults, then the property encumbered can be alienated for the payment
of the obligation, but that should the obligation be duly paid, then the contract is automatically
extinguished proceeding from the accessory character of the agreement. As the law so puts it, once the
obligation is complied with, then the contract of security becomes, ipso facto, null and void.
While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred
obligations so long as these future debts are accurately described, a chattel mortgage, however, can
only cover obligations existing at the time the mortgage is constituted. Although a promise expressed
in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that
can be compelled upon, the security itself, however, does not come into existence or arise until after a
chattel mortgage agreement covering the newly contracted debt is executed either by concluding a
fresh chattel mortgage or by amending the old contract conformably with the form prescribed by the
Chattel Mortgage Law. Refusal on the part of the borrower to execute the agreement so as to cover the
after-incurred obligation can constitute an at of default on the part of the borrower of the financing
agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the
debts extant at the time of constitution and during the life of the chattel mortgage sought to be
foreclosed.
A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form prescribed
by the Chattel Mortgage Law itself. The debt referred to in the law is a current, not an obligation that is
yet merely contemplated. In the chattel mortgage here involved, the only obligation specified in the
chattel mortgage contract was the P3,000,000.00 loan which petitioner corporation later fully paid. By
virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically rendered
the chattel mortgage void or terminated.
In Belgian Catholic Missionaries, Inc., v. Magallanes Press, Inc., the Court said that a mortgage that
contains a stipulation in regard to future advances in the credit will take effect only from the date the
same are made and not from the date of the mortgage. The significance of the ruling to the instant
problem would be that since the 1978 chattel mortgage had ceased to exist coincidentally with the full
payment of the P3,000,000.00 loan, there no longer was any chattel mortgage that could cover the
new loans that were concluded thereafter.

Acme Shoe Rubber vs. CA 260 SCRA 714

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Acme Shoe Rubber vs. CA 260 SCRA 714

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Acme Shoe Rubber vs.

CA, 260 SCRA 714

A provision in the chattel mortgage agreement was to this effect:

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