ACME SHOE, RUBBER & PLASTIC CORPORATION AND CHUA PAC, petitioners vs.

HON. COURT OF APPEALS, PRODUCERS BANK OF THE PHILIPPINES AND REGIONAL

SHERIFF OF CALOOCAN CITY, respondents (2008)

Vitug, J

NATURE: Petition for Review on Certiorari

SUMMARY:

A chattel mortgage in favor of PBP was executed in behalf of Acme this mortgage secured a
corporate loan of P3M. The chattel mortgage contained a clause that there was an intention for
the chattel mortgage to cover not just the existing obligation but also obligations yet to be
contracted/incurred. Eventually, PBP was able to pay the P3M loan. In the years that followed,
PBP extended several other loans to Acme, which Acme was able to settle promptly. However,
due to financial constraints, Acme was unable to pay back a P1M loan that PBP had extended to
it. Seeking to enforce the chattel mortgage, PBP applied for an extrajudicial foreclosure with the
Sheriff of Caloocan City. Thus, Acme filed an action for injunction, with damages and a prayer for
the issuance of a writ of preliminary injunction, before the RTC of Caloocan City. The RTC decided
in favor of PBP and ordered that the foreclosure push through. The CA affirmed the decision of
the RTC in toto. Thus, Acme filed a petition for review with the SC.
The SC set aside the decision of the CA. The SC held that the full payment of the P3M loan had
automatically rendered the chattel mortgage paid or terminated. Thus, the chattel mortgage
could not have covered the P1M loan which Acme had been unable to pay and for which the
foreclosure had been sought.
DOCTRINE:

A chattel mortgage MUST comply substantially with the form prescribed by the Chattel Mortgage
Law itself. One of the requisites is the execution of an affidavit in good faith [sec. 5] the parties
to a contract MUST execute an oath, (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. Thus, the debt
referred to in the law is a CURRENT obligation NOT one that is merely contemplated.

In accordance with Sec. 3 of the Chattel Mortgage Law, the payment of the obligation
automatically renders the chattel mortgage void or terminated. A chattel mortgage can only

cover obligations existing at the time the mortgage is constituted upon payment of the existing
obligations covered, there no longer is any chattel mortgage that can cover new loans thereafter
concluded.

FACTS:

Antecedents
Chua Pac is the President and GM of Acme. On 27 June 1978 for and in behalf of Acme he
executed a chattel mortgage in favor of Producers Bank of the Philippines (PBP).
This mortgage secured a corporate loan of P3M.
The mortgage included a provision to the following effect: "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.
o Thus, the mortgage provision intended to cover not just existing
obligations but also OBLIGATIONS YET TO BE CONTRACTED/INCURRED.
The P3M corporate loan was paid by Acme (SPOILER ALERT: the payment of the loan
extinguished the chattel mortgage see the ratio); in 1981, Acme obtained from PBP additional
financial accommodations totaling P2.7M there were also duly paid.
10 and 11 Jan 1984: PBP again extended to Acme a corporate loan of P1M, covered by 4
equally denominated promissory notes.

Due to financial constraints, the loan was NOT settled at maturity.

o Thus, PBP applied for an extrajudicial foreclosure of the chattel mortgage
with the Sheriff of Caloocan City.

The Case
Acme filed an action for injunction, with damages and a prayer for the issuance of a
writ of preliminary injunction, before the RTC of Caloocan City.
The RTC dismissed the complaint and ordered the foreclosure of the chattel
mortgage.
The RTC held that Acme was bound by the stipulations of the chattel mortgage.
On Appeal, the CA affirmed in all respects the decision of the RTC.

The CA denied the motion for reconsideration filed by Acme.

Acme thus filed a petition for review on certiorari with the SC.

4 Mar 1992: The SC initially denied the petition for having been insufficient in form and
substance.
o

Eventually, the SC granted a 2nd motion for reconsideration thereby reinstating the
petition and requiring PBP to comment thereon.

ISSUE # 1: Is the clause purporting to extend the coverage of a chattel mortgage to obligations
YET to be contracted/incurred valid? (NO.)

RATIO # 1:

On contracts of security

Contracts of security are either PERSONAL or REAL

PERSONAL: performance of the obligation is secured by the personal commitment of

another (ex. guaranty, suretyship).

REAL: fulfillment is secured by an ENCUMBRANCE OF PROPERTY. (Upon the

essential condition that if the principal obligation becomes due and the debtor defaults,
the property encumbered can be alienated for the payment of the obligation But, should
the obligation be duly paid, then the contract is automatically extinguished proceeding
from the accessory character of the agreement..
o

Pledge: placing of MOVABLE property in the possession of the creditor;

Chattel Mortgage: execution of corresponding deed substantially in the form

prescribed by law;

Real Estate Mortgage: execution of public instrument encumbering the real

property.

Antichresis: 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, and thereafter to the principal of his credit.

Real Contracts of Security: validity vis--vis obligations yet to be contracted

While a pledge, real estate mortgage, or antichresis may exceptionally secure afterincurred 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.

Promise to include debts yet to be contractedwhen expressed in a chattel mortgage

can be a binding commitment that can be compelled upon. BUT, the security itself does
NOT come into existence or arise until AFTER a chattel mortgage agreement
covering the newly contracted debt is executed
o

By concluding a fresh chattel mortgage; or,

Amending the old contract (conformably with the form prescribed by the Chattel
Mortgage Law).

THUS, the remedy of foreclosure can only cover the DEBTS EXTANT at the time of
the constitution and during the life of the chattel mortgage sought to be
foreclosed.

Requisites: chattel mortgage

A chattel mortgage MUST comply substantially with the form prescribed by the
Chattel Mortgage Law itself.

Affidavit in good faith [sec. 5];

o

Parties to a contract MUST execute an oath:

(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.

Obvious that the debt referred to in the law is a CURRENT obligation NOT
one that is merely contemplated.

Application to the case at bar

The only obligation specified I the chattel mortgage contract was the P3M loan one that had
eventually been fully paid. In accordance with sec. 3 of the Chattel Mortgage Law, the payment
of the obligation AUTOMATICALLY RENDERED the chattel mortgage VOID or
TERMINATED.

Since the 1978 chattel mortgage had CEASED TO EXIST (with the full payment of the P3M
loan) there was no longer any chattel mortgage that could cover the new loans
thereafter concluded.

OTHER ISSUES/NOTES

ISSUE A: Should the (procedural) rules be relaxed? (YES.)

RATIO A: An appeal from judgments of lower courts is NOT a matter of right but of sound judicial
discretion. Technical and other procedural requirements are meant to weed out unmeritorious
petitions that can unnecessarily clog the docket and needlessly consume the time of the court.
But such rules are intended to help secure not suppress substantial justice. A deviation from
the rigid enforcement of the rules may be allowed to attain the prime objective for the
dispensation of justice is the core reason for the existence of courts.

ISSUE B: Should the case be remanded to the trial court for a specific finding on the amount of
damages sustained, allegedly as a result of the unlawful action taken by PBP against Acme?
(NO.)

RATIO B: This prayer was NOT reflected in the complaint. The complaint merely asked for P3M
by way of MORAL DAMAGES a corporation, being an artificial person, has no feelings, no
emptions, no senses, therefore, it cannot experience physical suffering and mental anguish.
Mental suffering can be experienced only by one having a nervous system and it flows from the
real ills, sorrows, and griefs of life. (Chua Pac is included in the case but the complaint clearly
states that he has been so named only as a party in representation of Acme.)

ISSUE C: Should Acmes counsel be admonished for his statement regarding the CA Justices 1?
(YES.)

RATIO C: The statement is not called for. "(L)awyers x x x should bear in mind their basic duty
`to observe and maintain the respect due to the courts of justice and judicial officers and x x x
(to) insist on similar conduct by others. (Guerrero v. Villamor)
DISPOSITION: WHEREFORE, the questioned decisions of the appellate court and the lower court
are set aside without prejudice to the appropriate legal recourse by private respondent as may
still be warranted as an unsecured creditor. No costs.
Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealing with
the courts.

1 In simply quoting in toto the patently erroneous decision of the trial court, respondent Court of
Appeals should be required to justify its decision which completely disregarded the basic laws on
obligations and contracts, as well as the clear provisions of the Chattel Mortgage Law and wellsettled jurisprudence of this Honorable Court; that in the event that its explanation is wholly
unacceptable, this Honorable Court should impose appropriate sanctions on the erring justices.
This is one positive step in ridding our courts of law of incompetent and dishonest
magistrates especially members of a superior court of appellate jurisdiction.