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Rationale of Recto Law

The passage of the Recto Law was meant to remedy the
abuses committed in connection with the foreclosure of chattel
mortgages and 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. The Recto Law aims
to correct a social and economic evil,the inordinate love for luxury of those who,
without sufficient
means, purchase personal effects, and the ruinous practice of
some commercial houses of purchasing back the goods sold
for a nominal price besides keeping a part of the price already
paid and collecting the balance, with stipulated interest, cost
and attorneys fees.
b. When Is Sale on Installments?
1.) the seller sold a car
whereby the buyer paid an initial payment, and issued a promissory note for the
balance payable on or before a specified date, with stipulated interest. The Court
held that the provisions of the Recto Law
cannot apply to a sale where there is an initial payment, and the
balance payable in the future, because the same is not a sale on
installment but actually a straight sale. Since such a sale is not
covered by the Recto Law, the barring effects of the law cannot
be made to apply, and the seller may recover the unpaid balance
of the purchase price against the buyer even when the latter shall
have lost by foreclosure the subject matter of the sale. The Court held that when
there is only one payment to be
paid in the future, there is no basis to apply the Recto Law, since
under the language of then Article 1454-A, the buyer needs to
have defaulted in the payment of two or more installments to
allow the seller to rescind or foreclose on the chattel mortgage.
c. Loans and Financing Transactions
Zayas, Jr. v. Luneta Motor Company,61 affi rmed that Article
1484 would apply to a person or entity which has fi nanced the
purchase on installments of a motor vehicle, where the seller
subsequently assigns the loan documents to the fi nancing
person or entity. In that case, the Court held that the nature of
the transaction as a sale of personal property on installment basis
remains. When, therefore, Escao Enterprises, assigned its rights
vis--vis the sale to respondent Luneta Motor Company, the nature
of the transaction ... did not change at all. As assignee, respondent
Luneta Motor Company had no better rights than assignor Escao
Enterprises under the same transaction. The transaction would still
be a sale of personal property in installments covered by Article
1484 of the New Civil Code.
In all other cases, where the fi nancing transaction is not

derived from a sale, the provisions of the Recto Law do not apply. Thus, in PAMECA
Wood Treatment Plant, Inc. v. Court of
Appeals,63 the Court held that a mortgagee-bank is not prevented
from recovering on a defi ciency caused by the foreclosure and
sale at public auction of the mortgage movable which security
arose from a loan given to the mortgagor. The provisions of
Article 1484 cannot be applied by analogy or by equity since the
provisions apply to a sale on installments.
d. Contracts to Sell Movables Not Covered
When the contract governing the sale of movables is a
contract to sell, then the rules on rescission and substantial
breach are not applicable, since when the suspensive condition
upon which the contract is based fails to materialize, it would
extinguish the contract, and consequently there is no contract
to rescind.
2. Remedies Provided Under Article 1484
a. Nature of Remedies under Article 1484
Should the buyer 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:
(a) Exact fulfi llment by the purchaser of the
(b) Rescind or cancel the sale; or
(c) Foreclose the mortgage on the purchased
personal property, if one was constituted.
The remedies under Article 1484 have been recognized as
alternative, not cumulative, in that the exercise of one would bar
the exercise of the others.
b. Two Groups of Barring Effects of Remedies
Article 1484 of the Civil Code actually has two (2) levels of
barring effects: the fi rst level on the choice of remedies (vertical);
and the second level, on the non-recovery of any unpaid balance
when it comes to the remedies of rescission and foreclosure
(horizontal). There can be no mixing of the effects of the remedies
provided in Article 1484.
In Tajanlangit v. Southern Motors, Inc.,71 the Court held
that although the subject matter of the sale on installment was
mortgaged to secure the note issued to the seller for the balance
of the purchase price, where the seller actually chose to collect
on the note and did not seek foreclosure of the mortgage, and
although the execution of the judgment resulted in the levy on
execution and eventual sale at public auction of the very subject
matter of the sale, nevertheless, the barring effect of foreclosure
cannot be applied, and the seller had every right to recover on
the unpaid balance of the purchase price from the buyer.

In Southern Motors, Inc. v. Moscoso The Court refused the view that the substance
of the
proceedings should be looked into and that the barring effects of
foreclosure should also be applied to specifi c performance when
the effect was the same as foreclosure. The Court held: The
complaint is an ordinary civil action for recovery of the remaining
unpaid balance due on the promissory note. The [seller] 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.75 The Court found nothing
unlawful or irregular in sellers act of attaching the mortgaged
subject matter of the sale itself, since a 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. In his concurring opinion, Justice J.B.L. Reyes wrote that the
argument of the buyer ignores a substantial difference between
the effect of foregoing the chattel mortgage and attaching the
mortgaged chattel. The variance lies in the ability of the debtor to
retain possession of the property attached by giving a counterbond
and thereby discharging the attachment. This remedy the debtor
does not have in the event of foreclosure.
3. Remedy of Specific Performance.
The seller is deemed to have chosen specific performance
to foreclose the resort to the other two remedies under Article
1484, when he fi les an action in court for recovery. Generally, the
mere sending of demand letters to the buyer to pay the balance
of the purchase price should not be considered as having barred
the resort to either the remedies of rescission or foreclosure.
A judgment in an action for specific performance may be
executed on all personal and real properties of the buyer which
are not exempt from execution and which are sufficient to satisfy
such judgment, which would include the subject matter of the sale
upon which payment is being sought. It has been held therefore
that the mere fact that the seller secured possession of the
property subject of the sale by installments did not necessarily
mean that the seller would resort to a foreclosure of the mortgage
constituted thereon.
4. Remedy of Rescission
When a seller chooses the remedy of rescission, then
generally he is under obligation to make restitution, which would include the return
of any amount of the purchase price
that the buyer may have paid. However, under the terms of
Article 1486 of the Civil Code which provides that a stipulation
that the installments or rents paid shall not be returned to the

vendee or lessee shall be valid insofar as the same may not be

unconscionable under the circumstances. A stipulation for the forfeiture of the
amounts paid by the
buyer even when the contract is rescinded is not really contrary to
the mutual restitution characteristic of the remedy of rescission,
since to a great extent it offers a means of restitution to the
obligee for the loss in value or deterioration of the thing subject
of the sale, or recompense for the lost opportunity suffered by the
seller due to the default of the buyer.
a. When Rescission Deemed Chosen
The general rule is that the seller is deemed to have chosen
the remedy of rescission, and can no longer avail of the other two
(2) remedies under Article 1484, when he has clearly indicated to
end the contract, such as when he sends a notice of rescission,
or takes possession of the subject matter of the sale, or when he
fi les an action for rescission.
Nonato v. Intermediate Appellate Court,83 held that when
the sellers assignee, a fi nancing company, is able to take back
possession of the motor vehicle with a condition that the vehicle
could be redeemed by the buyers within fi fteen (15) days, then
such taking of possession is clearly with the intent to cancel the
Vda. de Quiambao v. Manila Motor Co., Inc.,84 the
Court held that only the taking back of the property coupled with
an unequivocal desire on its part to rescind its contract or for
the purpose of appropriating the same, would suffi ce to bar the
seller from proceeding with specifi c performance.
b. Barring Effect of Rescission
Although no barring effect is expressly provided for the
remedy of rescission under the present language of Article
1484 of the Civil Code, the same is implicit from the nature
of the remedy of rescission, which requires mutual restitution.
Under Article 1385 of the Civil Code, even a non-defaulting
party cannot seek rescission unless he is in a position to return
what he has received under the contract. In other words, when
the unpaid seller shall have chosen the remedy of rescission,
then generally he cannot seek further action on the purchase
price against the buyer, and in fact, where there is no stipulation
to the contrary, the seller is even obliged to return any portion
of the purchase price he received from the buyer, although he
can recover damages.
The complete barring effect on the remedy of foreclosure
under the Recto Law which covers any and all further claims
against the buyer, even for attorneys fees and stipulated

damages and interests,89 is contrary to the nature of the

remedy of rescission that allows the non-defaulting party in a
reciprocal obligation to recover damages, precisely to make
him again whole resulting from the breach of the defaulting
The two remedies are not the same,
and in fact seek to achieve opposite results: rescission seeks to
cancel the contract and to waive further claim on the purchase
price; whereas, foreclosure seeks to pursue and realize on the
purchase price of the sale.
5. Foreclosure of Chattel Mortgage Constituted on
Subject Property
a. When Remedy of Foreclosure Deemed Chosen
an action for foreclosure seeks the same
objective as an action for specifi c performance: to recover from
the buyer the price agreed upon in the sale
Universal Motors Corp. v. Sy Hian Tat,91 held that the fi ling
by the seller of an action for the issuance of a writ of replevin,
and the actual recovery of possession of the subject property,
would not amount to a foreclosure, even with the attachment of
the mortgage contract on the complaint itself, since no actual
foreclosure pursuant to the relevant provisions of the Rules of
Court have been pursued.
Industrial Finance Corp. v. Ramirez,93 held that even with
the fi ling of an action denominated as replevin with damages
where the allegations of the complaint sought the repossession
of the movable to allow extrajudicial foreclosure and sale of the
same, and in the alternative should the movable not be recovered
sought for the recovery of the unpaid balance of the price, the
fi ling of such complaint does not amount to having chosen the
remedy of foreclosure.
b. Barring Effect of Foreclosure
It is the foreclosure and actual sale at public action of the
mortgaged chattel that shall bar further recovery by the seller
of any balance on the purchasers outstanding obligation not
satisfi ed by the sale; prior to that point in time, the seller has
every right to receive payments on the unpaid balance of the
price from the buyer. In Northern Motors, Inc. v. Sapinoso,95 although the seller
had already fi led an action for foreclosure, if prior to the actual
sale of the subject property at public auction, the seller had
received further payments from the buyer, the seller was not
obliged to refund said payments after foreclosure to the buyer.
c. Barring Effect on Other Securities Given

for Payment of Price

In Cruz v. Filipinas Investment & Finance Corp.,97 where the
seller had already foreclosed on the chattel mortgage constituted
on the subject property of the sale, it sought to recover the
defi ciency judgment by foreclosing on the real estate mortgage
constituted by third-party mortgagors, on the ground that Article
1484 prohibited further action against the purchaser only.
In holding that the seller could no longer proceed to
foreclose on the real estate mortgage pursuant to the barring
effect provided under Article 1484 of the Civil Code, the Court
held that [T]o sustain [sellers] 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 buyer 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 also held that the further action being barred under
Article 1484 is not limited to judicial proceedings, but should
include extrajudicial proceedings by virtue of which the seller
may be enabled to exact recovery of the supposed unsatisfi ed
balance of the purchase price from the purchaser or his privy.
Ridad v. Filipinas Investment and Finance Corp.,100 held that
if under the Cruz doctrine a seller is prohibited from having a
recourse against the additional security put up by a third party
insofar as how the burden would ultimately fall on the buyer
himself is concerned, there is no ground why such seller should
not likewise be precluded from further extrajudicially foreclosing
the additional security put up by the buyer himself.
II v. Servicewide Specialists, Inc.,101 where it held that when the
assignee forecloses on the chattel mortgage, there can be no
further recovery of the defi ciency, and the seller-mortgagee is
deemed to have renounced any right thereto. A contrario, the
Court held that in the event the seller-mortgagee fi rst seeks
the enforcement of the additional mortgages, guarantees or
other security arrangement, he must 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 specifi c performance, he may still levy on
it. The implication is that the remedy of foreclosing the chattel
mortgage is no longer available, but the barring effect as to
prevent recovery of defi ciency judgment does not come into
play since the Court confi rmed that the seller may still levy on