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Acme Shoe, Rubber and


Plastic Corp.
V.
Court of Appeals
G.R. No. 103576. August 22, 1996
Ponente: Vitug, J.
Digest Maker: J. Ragragio

SUMMARY: Acme Shoe, Rubber and Plastic Corp.


(Acme Shoe) entered into a loan agreement with
Producers Bank of the Philippines (Producers Bank)
for P3M, secured by chattel mortgage. The chattel
mortgage document included a provision on afterincurred obligations. Acme Shoe fully paid the P3M
loan, and subsequently took out several other loans.
Acme Shoe defaulted in a later loan, thus Producers
Bank filed for extrajudicial foreclosure on the chattel
mortgage. Acme Shoe filed a petition for injunction,
which was dismissed by the RTC and whose dismissal
was upheld by the Court of Appeals. Supreme Court
set aside both lower court decisions and declared
the chattel mortgage to have ceased to exist upon
full payment of the original P3M loan.
DOCTRINE: A chattel mortgage can only secure
current obligations, and cannot be made to secure
future obligations not yet existing at the time the
chattel mortgage can be entered into. At best, the
borrower may make a promise to secure future
obligations under the same chattel mortgage, and
this promise will be a binding commitment that can
be compelled upon.

FACTS:
Acme Shoe entered into a loan agreement with
Producers Bank for P3M. This loan was secured by chattel
mortgage (the subject property of the chattel mortgage is never
mentioned),
with
a
provision
as
follows:
"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."

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Acme Shoe eventually paid the P3M loan. Acme Shoe later took
out another loan for P2.7M, which was also eventually fully paid.
Some time later, Acme Shoe took out another loan, this time for
P1M. However, due to financial constraints, they were unable to
settle the loan.
Producers Bank applied for extrajudicial foreclosure of the
chattel mortgage. In response, Acme Shoe filed a petition for
injunction at the RTC. The RTC dismissed Acme Shoes petition,
and ordered the foreclosure of the chattel mortgage. On appeal,
the Court of Appeals upheld the RTC in toto.
ISSUES/HELD: Is the foreclosure valid? (No)
RATIO: The Supreme Court discussed real securities (pledge,
mortgage or antichresis), and gave the general rule that real
securities may secure after-incurred obligations, or future
obligations not yet existing at the time the security agreement is
entered into. However, the Court pointed out that chattel
mortgage is the exception to this rule, being covered by a special
law (Act No. 1508) that provides in the prescribed form:
"x x x (the) mortgage is made for the purpose of securing the obligation specified
in the conditions thereof, and for no other purpose, and that the same is a just
and valid obligation, and one not entered into for the purpose of fraud."

The Court interpreted this provision in the prescribed form of a


chattel mortgage to refer to an existing obligation, and not a
future obligation. As applied in this case, the chattel mortgage
only applied to the P3M loan and was terminated when that loan
was fully paid. Being merely accessory in nature, the chattel
mortgage could not have existed independently of the principal
obligation of P3M. Therefore, at the time that Producers Bank
applied for extrajudicial foreclosure, there was no longer anything
to foreclose, since the chattel mortgage already ceased to exist.
As to future obligations, the Court ruled that a chattel mortgage
may, at best, include a promise to include debts that are yet to

be contracted, and this promise can be a binding commitment


that can be compelled upon. To implement this, once a new debt
is contracted, the parties must either execute a new chattel
mortgage agreement including the new debt, or must amend the
old contract according to the form provided by law. Refusal on
the part of the borrower to do so under such a promise may be
considered an act of default. Nevertheless, a foreclosure can only
cover the debts extant at the time of constitution and during the
life of the chattel mortgage sought to be foreclosed.
DISPOSITIVE: Appealed decisions set aside, without
prejudice to to the appropriate legal recourse by private
respondent as may still be warranted as an unsecured
creditor.