GAVINO A. TUMALAD and GENEROSA R. TUMALAD, plaintiffs-appellees, vs. ALBERTA VICENCIO and EMILIANO SIMEON, defendants-appellants.

Castillo & Suck for plaintiffs-appellees. Jose Q. Calingo for defendants-appellants.

REYES, J.B.L., J.: Case certified to this Court by the Court of Appeals (CA-G.R. No. 27824-R) for the reason that only questions of law are involved. This case was originally commenced by defendants-appellants in the municipal court of Manila in Civil Case No. 43073, for ejectment. Having lost therein, defendants-appellants appealed to the court a quo (Civil Case No. 30993) which also rendered a decision against them, the dispositive portion of which follows: WHEREFORE, the court hereby renders judgment in favor of the plaintiffs and against the defendants, ordering the latter to pay jointly and severally the former a monthly rent of P200.00 on the house, subject-matter of this action, from March 27, 1956, to January 14, 1967, with interest at the legal rate from April 18, 1956, the filing of the complaint, until fully paid, plus attorney's fees in the sum of P300.00 and to pay the costs. It appears on the records that on 1 September 1955 defendants-appellants executed a chattel mortgage in favor of plaintiffs-appellees over their house of strong materials located at No. 550 Int. 3, Quezon Boulevard, Quiapo, Manila, over Lot Nos. 6-B and 7-B, Block No. 2554, which were being rented from Madrigal & Company, Inc. The mortgage was registered in the Registry of Deeds of Manila on 2 September 1955. The herein mortgage was executed to guarantee a loan of P4,800.00 received from plaintiffs-appellees, payable within one year at 12% per annum. The mode of payment was P150.00 monthly, starting September, 1955, up to July 1956, and the lump sum of P3,150 was payable on or before August, 1956. It was also agreed that default in the payment of any of the amortizations, would cause the remaining unpaid balance to becomeimmediately due and Payable and the Chattel Mortgage will be enforceable in accordance with the provisions of Special Act No. 3135, and for this purpose, the Sheriff of the City of Manila or any of his deputies is hereby empowered and authorized to sell all the Mortgagor's property after the necessary publication in order to settle 2 the financial debts of P4,800.00, plus 12% yearly interest, and attorney's fees... When defendants-appellants defaulted in paying, the mortgage was extrajudicially foreclosed, and on 27 March 1956, the house was sold at public auction pursuant to the said contract. As highest bidder, plaintiffs-appellees were issued 3 the corresponding certificate of sale. Thereafter, on 18 April 1956, plaintiffs-appellant commenced Civil Case No. 43073 in the municipal court of Manila, praying, among other things, that the house be vacated and its possession surrendered to them, and for defendants-appellants to pay rent of P200.00 monthly from 27 March 1956 up to the 4 time the possession is surrendered. On 21 September 1956, the municipal court rendered its decision ... ordering the defendants to vacate the premises described in the complaint; ordering further to pay monthly the amount of P200.00 from March 27, 1956, until such (time that) the premises is 5 (sic) completely vacated; plus attorney's fees of P100.00 and the costs of the suit. Defendants-appellants, in their answers in both the municipal court and court a quo impugned the legality of the chattel mortgage, claiming that they are still the owners of the house; but they waived the right to introduce evidence, oral or documentary. Instead, they relied on their memoranda in support of their motion to dismiss, predicated mainly on the grounds that: (a) the municipal court did not have jurisdiction to try and decide the case because (1) the issue involved, is ownership, and (2) there was no allegation of prior possession; and (b) failure to prove prior demand 6 pursuant to Section 2, Rule 72, of the Rules of Court.

During the pendency of the appeal to the Court of First Instance, defendants-appellants failed to deposit the rent for November, 1956 within the first 10 days of December, 1956 as ordered in the decision of the municipal court. As a result, the court granted plaintiffs-appellees' motion for execution, and it was actually issued on 24 January 1957. However, the judgment regarding the surrender of possession to plaintiffs-appellees could not be executed because the subject house had been already demolished on 14 January 1957 pursuant to the order of the court in a separate civil case (No. 25816) for ejectment against the present defendants for non-payment of rentals on the land on which the house was constructed. The motion of plaintiffs for dismissal of the appeal, execution of the supersedeas bond and withdrawal of deposited rentals was denied for the reason that the liability therefor was disclaimed and was still being litigated, and under 7 Section 8, Rule 72, rentals deposited had to be held until final disposition of the appeal. On 7 October 1957, the appellate court of First Instance rendered its decision, the dispositive portion of which is quoted earlier. The said decision was appealed by defendants to the Court of Appeals which, in turn, certified the appeal to this Court. Plaintiffs-appellees failed to file a brief and this appeal was submitted for decision without it. Defendants-appellants submitted numerous assignments of error which can be condensed into two questions, namely: . (a) Whether the municipal court from which the case originated had jurisdiction to adjudicate the same; (b) Whether the defendants are, under the law, legally bound to pay rentals to the plaintiffs during the period of one (1) year provided by law for the redemption of the extrajudicially foreclosed house. We will consider these questions seriatim. (a) Defendants-appellants mortgagors question the jurisdiction of the municipal court from which the case originated, and consequently, the appellate jurisdiction of the Court of First Instance a quo, on the theory that the chattel mortgage is void ab initio; whence it would follow that the extrajudicial foreclosure, and necessarily the consequent auction sale, are also void. Thus, the ownership of the house still remained with defendants-appellants who are entitled to possession and not plaintiffs-appellees. Therefore, it is argued by defendants-appellants, the issue of ownership will have to be adjudicated first in order to determine possession. lt is contended further that ownership being in issue, it is the Court of First Instance which has jurisdiction and not the municipal court. Defendants-appellants predicate their theory of nullity of the chattel mortgage on two grounds, which are: (a) that, their signatures on the chattel mortgage were obtained through fraud, deceit, or trickery; and (b) that the subject matter of the mortgage is a house of strong materials, and, being an immovable, it can only be the subject of a real estate mortgage and not a chattel mortgage. On the charge of fraud, deceit or trickery, the Court of First Instance found defendants-appellants' contentions as not 8 supported by evidence and accordingly dismissed the charge, confirming the earlier finding of the municipal court 9 that "the defense of ownership as well as the allegations of fraud and deceit ... are mere allegations." It has been held in Supia and Batiaco vs. Quintero and Ayala that "the answer is a mere statement of the facts 11 which the party filing it expects to prove, but it is not evidence; and further, that when the question to be determined is one of title, the Court is given the authority to proceed with the hearing of the cause until this fact is clearly 12 established. In the case of Sy vs. Dalman, wherein the defendant was also a successful bidder in an auction sale, it was likewise held by this Court that in detainer cases the aim of ownership "is a matter of defense and raises an issue of fact which should be determined from the evidence at the trial." What determines jurisdiction are the 13 allegations or averments in the complaint and the relief asked for. Moreover, even granting that the charge is true, fraud or deceit does not render a contract void ab initio, and can only be a ground for rendering the contract voidable or annullable pursuant to Article 1390 of the New Civil Code, by a 14 proper action in court. There is nothing on record to show that the mortgage has been annulled. Neither is it disclosed that steps were taken to nullify the same. Hence, defendants-appellants' claim of ownership on the basis of a voidable contract which has not been voided fails.
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It is claimed in the alternative by defendants-appellants that even if there was no fraud, deceit or trickery, the chattel mortgage was still null and void ab initio because only personal properties can be subject of a chattel mortgage. The rule about the status of buildings as immovable property is stated in Lopez vs. Orosa, Jr. and Plaza Theatre 15 16 Inc., cited in Associated Insurance Surety Co., Inc. vs. Iya, et al . to the effect that ... it is obvious that the inclusion of the building, separate and distinct from the land, in the enumeration of what may constitute real properties (art. 415, New Civil Code) could only mean one thing that a building is by itself an immovable property irrespective of whether or not said structure and the land on which it is adhered to belong to the same owner. Certain deviations, however, have been allowed for various reasons. In the case of Manarang and Manarang vs. 17 Ofilada, this Court stated that "it is undeniable that the parties to a contract may by agreement treat as personal 18 property that which by nature would be real property", citing Standard Oil Company of New York vs. Jaramillo. In the latter case, the mortgagor conveyed and transferred to the mortgagee by way of mortgage "the following 19 described personal property." The "personal property" consisted of leasehold rights and a building. Again, in the 20 case of Luna vs. Encarnacion, the subject of the contract designated as Chattel Mortgage was a house of mixed materials, and this Court hold therein that it was a valid Chattel mortgage because it was so expressly designated and specifically that the property given as security "is a house of mixed materials, which by its very nature 21 is considered personal property." In the later case of Navarro vs. Pineda, this Court stated that The view that parties to a deed of chattel mortgage may agree to consider a house as personal property for the purposes of said contract, "is good only insofar as the contracting parties are concerned. It is based, partly, upon the principle of estoppel" (Evangelista vs. Alto Surety, No. L11139, 23 April 1958). In a case, a mortgaged house built on a rented land was held to be a personal property, not only because the deed of mortgage considered it as such, but also because it did not form part of the land (Evangelists vs. Abad, [CA]; 36 O.G. 2913), for it is now settled that an object placed on land by one who had only a temporary right to the same, such as the lessee or usufructuary, does not become immobilized by attachment (Valdez vs. Central Altagracia, 222 U.S. 58, cited in Davao Sawmill Co., Inc. vs. Castillo, et al., 61 Phil. 709). Hence, if a house belonging to a person stands on a rented land belonging to another person, it may be mortgaged as a personal property as so stipulated in the document of mortgage. (Evangelista vs. Abad, Supra.) It should be noted, however that the principle is predicated on statements by the owner declaring his house to be a chattel, a conduct that may conceivably estop him from subsequently claiming otherwise . 22 (Ladera vs. C.N. Hodges, [CA] 48 O.G. 5374): In the contract now before Us, the house on rented land is not only expressly designated as Chattel Mortgage; it specifically provides that "the mortgagor ... voluntarily CEDES, SELLS and TRANSFERS by way of Chattel 23 Mortgage the property together with its leasehold rights over the lot on which it is constructed and participation 24 ..." Although there is no specific statement referring to the subject house as personal property, yet by ceding, selling or transferring a property by way of chattel mortgage defendants-appellants could only have meant to convey the house as chattel, or at least, intended to treat the same as such, so that they should not now be allowed to make an inconsistent stand by claiming otherwise. Moreover, the subject house stood on a rented lot to which defendatsappellants merely had a temporary right as lessee, and although this can not in itself alone determine the status of the property, it does so when combined with other factors to sustain the interpretation that the parties, particularly the mortgagors, intended to treat the house as personalty. Finally unlike in the Iya cases, Lopez vs. Orosa, Jr. and Plaza 25 26 Theatre, Inc. and Leung Yee vs. F. L. Strong Machinery and Williamson , wherein third persons assailed the 27 validity of the chattel mortgage, it is the defendants-appellants themselves, as debtors-mortgagors, who are attacking the validity of the chattel mortgage in this case. The doctrine of estoppel therefore applies to the herein defendants-appellants, having treated the subject house as personalty. (b) Turning to the question of possession and rentals of the premises in question. The Court of First Instance noted in its decision that nearly a year after the foreclosure sale the mortgaged house had been demolished on 14 and 15 January 1957 by virtue of a decision obtained by the lessor of the land on which the house stood. For this reason, the said court limited itself to sentencing the erstwhile mortgagors to pay plaintiffs a monthly rent of P200.00 from 27 March 1956 (when the chattel mortgage was foreclosed and the house sold) until 14 January 1957 (when it was torn down by the Sheriff), plus P300.00 attorney's fees. Appellants mortgagors question this award, claiming that they were entitled to remain in possession without any obligation to pay rent during the one year redemption period after the foreclosure sale, i.e., until 27 March 1957. On this issue, We must rule for the appellants.

Chattel mortgages are covered and regulated by the Chattel Mortgage Law, Act No. 1508. Section 14 of this Act allows the mortgagee to have the property mortgaged sold at public auction through a public officer in almost the same manner as that allowed by Act No. 3135, as amended by Act No. 4118, provided that the requirements of the 29 law relative to notice and registration are complied with. In the instant case, the parties specifically stipulated that 30 "the chattel mortgage will be enforceable in accordance with the provisions of Special Act No. 3135 ... ." (Emphasis supplied). Section 6 of the Act referred to provides that the debtor-mortgagor (defendants-appellants herein) may, at any time within one year from and after the date of the auction sale, redeem the property sold at the extra judicial foreclosure 32 sale. Section 7 of the same Act allows the purchaser of the property to obtain from the court the possession during the period of redemption: but the same provision expressly requires the filing of a petition with the proper Court of First Instance and the furnishing of a bond. It is only upon filing of the proper motion and the approval of the corresponding bond that the order for a writ of possession issues as a matter of course. No discretion is left to the 33 court. In the absence of such a compliance, as in the instant case, the purchaser can not claim possession during the period of redemption as a matter of right. In such a case, the governing provision is Section 34, Rule 39, of the 34 Revised Rules of Court which also applies to properties purchased in extrajudicial foreclosure 35 proceedings. Construing the said section, this Court stated in the aforestated case of Reyes vs. Hamada. In other words, before the expiration of the 1-year period within which the judgment-debtor or mortgagor may redeem the property, the purchaser thereof is not entitled, as a matter of right, to possession of the same. Thus, while it is true that the Rules of Court allow the purchaser to receive the rentals if the purchased property is occupied by tenants, he is, nevertheless, accountable to the judgment-debtor or mortgagor as the case may be, for the amount so received and the same will be duly credited against the redemption price when the said debtor or mortgagor effects the redemption.Differently stated, the rentals receivable from tenants, although they may be collected by the purchaser during the redemption period, do not belong to the latter but still pertain to the debtor of mortgagor. The rationale for the Rule, it seems, is to secure for the benefit of the debtor or mortgagor, the payment of the redemption amount and the consequent return to him of his properties sold at public auction. (Emphasis supplied) The Hamada case reiterates the previous ruling in Chan vs. Espe.
36 31

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Since the defendants-appellants were occupying the house at the time of the auction sale, they are entitled to remain in possession during the period of redemption or within one year from and after 27 March 1956, the date of the auction sale, and to collect the rents or profits during the said period. It will be noted further that in the case at bar the period of redemption had not yet expired when action was instituted in the court of origin, and that plaintiffs-appellees did not choose to take possession under Section 7, Act No. 3135, as amended, which is the law selected by the parties to govern the extrajudicial foreclosure of the chattel mortgage. Neither was there an allegation to that effect. Since plaintiffs-appellees' right to possess was not yet born at the filing of the complaint, there could be no violation or breach thereof. Wherefore, the original complaint stated no cause of action and was prematurely filed. For this reason, the same should be ordered dismissed, even if there was no assignment of error to that effect. The Supreme Court is clothed with ample authority to review palpable errors not 37 assigned as such if it finds that their consideration is necessary in arriving at a just decision of the cases. It follows that the court below erred in requiring the mortgagors to pay rents for the year following the foreclosure sale, as well as attorney's fees. FOR THE FOREGOING REASONS, the decision appealed from is reversed and another one entered, dismissing the complaint. With costs against plaintiffs-appellees.

TUMALAD V. VICENCIO 41 SCRA 143 FACTS:

Vicencio and Simeon executed a chattel mortgage in favor of plaintiffs Tumalad over their house, which was being rented by Madrigal and company. with a 12% per annum interest. This was executed to guarantee a loan, payable in one year

The mortgage was extrajudicially foreclosed upon failure to pay the loan. The house was sold at a public auction and the plaintiffs were the highest bidder. A corresponding certificate of sale was issued. Thereafter, the

plaintiffs filed an action for ejectment against the defendants, praying that the latter vacate the house as they were the proper owners.

HELD: Certain deviations have been allowed from the general doctrine that buildings are immovable property such as when through stipulation, parties may agree to treat as personal property those by their nature would be real property. This is partly based on the principle of estoppel wherein the principle is predicated on statements by the owner declaring his house as chattel, a conduct that may conceivably stop him from subsequently claiming otherwise.

In the case at bar, though there be no specific statement referring to the subject house as personal property, yet by ceding, selling or transferring a property through chattel mortgage could only have meant that defendant conveys the house as chattel, or at least, intended to treat the same as such, so that they should not now be allowed to make an inconsistent stand by claiming otherwise.

INDUSTRIAL FINANCE CORPORATION, petitioner, vs. CASTOR TOBIAS, respondent. Santos S. Carlos for petitioner. Amado J. Garcia for respondent.

MARTIN, J: This is a petition for review of the decision of the Court of Appeals * in CA-G.R. No. 53916, entitled "Industrial Finance Corporation vs. Castor Tobias", affirming that of the Court of First Instance of Manila with a slight modification. On June 16, 1968, respondent Castor Tobias bought on installment one (1) Dodge truck from Leelin Motors, Inc. To answer for his obligation he executed a promissory note in favor of the latter, for the sum of P29.070.28 payable in thirty-six (36) equal installments with interest at the rate of 12% per annum payable in the amounts and dates 1 indicated in said promissory note. To secure payment of the promissory note, respondent Tobias executed in favor of Leelin Motors, Inc. a chattel mortgage on the Dodge truck.

On June 19, 1969, Leelin Motors, Inc. indorsed the promissory note and assigned the chattel mortgage to petitioner Industrial Finance Corporation. As a consequence respondent Tobias paid six (6) installments on the promissory note 2 directly to the petitioner Industrial Finance Corporation the last of which was made on February 19, 1970. On May 14, 1970, the petitioner's counsel wrote to respondent Tobias the following letter: xxx xxx xxx Dear Mr. Tobias: My client, the INDUSTRIAL FINANCE CORPORATION, has referred to me for appropriate legal action your account with it (LCI-690) which is in arrears in the amount of P4,254.65 and a balance of P25,249.65 as of May 16, 1970. In view of your default in the payment of your installments due pursuant to the Promissory Note and Chattel Mortgage you executed in favor of Leelin Motors, Inc. and assigned to Industrial Finance Corporation, demand is- hereby made upon you to pay the amount of P25,249.65 on or before May 24, 1970 or to surrender within the same period the following described personality: One (1) Unit 1969 Motor Vehicle Dodge D-600 FFC 197 "WB" Engine No. CPC4007 Serial No. 1589070794 otherwise, the corresponding action will be filed against you plus damages and attorney's fees. Please consider this a final demand. Very truly yours, C.R. SANCHEZ LAW OFFICE SGD. CATALINO R. SANCHEZ.
3

At the time the foregoing letter was written, respondent Tobias was in arrear in the payment of more than two (2) 4 installments. On May 27, 1970, respondent Tobias wrote petitioner's counsel the following letter: Dear Sir: This is in response to your letter of demand dated May 14, 1970 asking me to surrender Dodge Truck with engine no. CPC-4007 Serial No. 1589070794. I am now voluntarily and willingly surrendering said truck due to the ff. reasons: 1. That said truck has been with Leelin Motors ever since the later part of February when it met an accident. 2. That there is too much delay in the repair of said truck because until now the truck is not yet completely finished. 3. That upon seeing said truck, I am not satisfied with the repair of the finished portions. I am now giving full authority to your client Industrial Finance Corporation to get said truck at Leelin Motors, Inc.

I am hoping that due to the ff. good reasons my name will not be blacklisted in your credit division. Very truly yours, Castor Tobias
5

Upon learning that the truck met an accident, petitioner decided not to get the truck anymore from Leelin Motors, Inc. On February 16, 1971, petitioner filed in the Court of First Instance of Manila an action against respondent Tobias to recover the unpaid balance of the promissory note.- The lower court dismissed the complaint on the ground that "(I)nasmuch as the defendant voluntarily and willingly surrendered the truck and gave the Industrial Finance Corporation full authority to get said truck from Leelin Motors, Inc. (Exhibit 2) pursuant to the demand to surrender 6 (Exhibit B) the defendant complied with the demands of the plaintiff. On appeal, the Court of Appeals affirmed the decision of the lower court dismissing the complaint of petitioner Industrial Finance Corporation but modifying the same by ordering respondent Tobias to pay the cost of repairs of the damaged truck in the amount of P5,396.78 plus interest. The main thrust of the petitioner's argument is that the respondent Court of Appeals erred in affirming the dismissal of the complaint of the petitioner in the lower court by not considering his right as an unpaid vendor of the truck in 7 question under Art. 1484 of the New Civil Code. Petitioner claims that under Art. 1484 of the New Civil Code, an unpaid vendor may choose any of the remedies provided therein and that as an unpaid vendor, it has chosen to exact fulfillment of the obligation for failure of the vendee to pay. Respondent Tobias, however, claims that petitioner is estopped to insist on its claim on the balance of the promissory note when it demanded the return or surrender of the truck in its letter of May 14, 1970, to which demand, respondent acceded in his letter dated May 27, 1970. The claim of respondent cannot be sustained. Art. 1484 is clear that "should the vendee or purchaser of a personal property be in default in the payment of two or more of the agreed installments, the vendor or seller has the option to either exact fulfillment by the purchaser of -the obligation, or to cancel the sale, or to foreclose the mortgage on the 8 purchased personal property, if one was constituted. Since the case involves the sale of personal property on installments Art. 1484 of the Civil Code should apply. The remedies provided for in Art. 1484 are considered 9 10 alternative, not cumulative such that the exercise of one would bar the exercise by the others. Here, petitioner has not cancelled the sale, nor has it exercised the remedy of foreclosure. Foreclosure, judicial or extra-judicial, 11 presupposes something more than a mere demand to surrender possession of the object of the mortgage. Since the petitioner has not availed itself of the remedy of cancelling the sale of the truck in question or of foreclosing the chattel mortgage on said truck, petitioner is still free to avail of the remedy of exacting fulfillment ' of the obligation of 12 respondent Tobias, the vendee of the truck in question. In Radiowealth Inc. vs. Lavin, the facts of which are similar to the 'present case, the issue was "whether the plaintiff is precluded to press for collection of an account secured by a chattel mortgagee after it shall have informed the defendants of its intention to foreclose said mortgage, and the voluntary acceptance of such step (foreclosure) by defendant mortgagor," the Supreme Court ruled in favor of the plaintiff mortgagee. Said the Court: The contract being a sale of machinery payable in installments, the applicable provision of law is Article 1484 of the Civil Code, which gives the vendor the option to exercise any one of the alternative remedies therein mentioned: exact fulfillment of the obligation, cancel the sale, or foreclose the chattel mortgage. But the vendor- mortgagor in the present case desisted, on its own initiative, from consummating the auction sale, without gaining any advantage or benefit, and without causing any disadvantage, or harm to the vendees-mortgagees. The least that could be said is that such desistance of the plaintiff from proceeding with auction sale was a timely disavowal that cancelled and rendered useless its previous choice to foreclose; its acts, being extra-judicial, brought no trouble upon any court, and were harmless to the defendants. For this reason, the plaintiff can not be considered as having "exercised" (the Code uses the word "exercise") the remedy of foreclosure because of its incomplete implementation, and, therefore, the plaintiff is not barred from suing on the unpaid account. In effect this ruling answers the issue of estoppel raised by respondent Tobias. Besides, to hold the petitioner in estoppel, it must be shown that when it gave the respondent the choice of either paying the balance of the purchase price or of surrending the truck, it had already knowledge of the accident and the consequent damage to the truck. In 13 the present case petitioner claims it had no knowledge of the accident when it gave the respondent the choice of

either paying the balance of the promissory note or of surrendering the truck. It is hard to believe that petitioner would make such offer to respondent either to pay the balance on the promissory, note or to surrender the truck in question if it knew that the truck has had an accident. The more plausible thing it would have asked the respondent is to ask for the balance on the promissory note. Besides the allegation of petitioner that it had no knowledge of the accident is a negative allegation and needs no evidence to support it, not being an essential part of the statement of the right on 14 which the cause of action is founded. It is therefore the respondent Tobias who has the burden of disproving the claim of petitioner that he has no knowledge of the accident when it made the offer to respondent either to pay the balance on the promissory note or to surrender the truck. Respondent failed in this. It is claimed by respondent Tobias that he has surrendered the truck to petitioner in his letter dated May 27, 1970. But the alleged surrender was ineffectual as far as the petitioner is concerned because petitioner could not take possession of the truck in question as it was in the custody of Leelin Motors, Inc., which had a mechanic's lien over it. Even respondent Tobias cannot expect petitioner to accept the term of surrender because aside from the fact that the truck being surrendered met an accident petitioner was not satisfied with the repair of the finished portion of the truck in question. Petitioner therefore was justified refusing to accept such surrender and in bringing suit to recover the balance of the purchase price. IN VIEW OF THE FOREGOING, the judgment of the respondent Court of Appeals and of the lower court are hereby set aside and a new one rendered ordering respondent Tobias to pay petitioner the balance of the purchase price of the truck in question in the amount of P27,210.77 plus legal rate of interest from the time of the filing of the complaint. Costs against the respondent.

EUTROPIO ZAYAS, JR., petitioner, vs. LUNETA MOTOR COMPANY and HONORABLE JUAN O. REYES, Presiding Judge of the Court of First Instance of Manila, Branch XXI, respondents. Pantaleon Z. Salcedo for petitioner. Leandro B. Fernandez for respondents.

GUTIERREZ, JR., J.: Eutropio Zayas, Jr., filed this petition for review by certiorari to secure a reversal of the respondent court's orders which remanded Civil Case No. 74381 for further proceedings instead of affirming the city court's order of dismissal, The petitioner Eutropio Zayas, Jr, purchased on installment basis a motor vehicle described as ONE (1) UNIT FORD THAMES FREIGHTER W/PUJ BODY with Engine No. 400E-127738 and Chassis No. 400E-127738 from Mr. Roque Escao of the Escao Enterprises in Cagayan de Oro City, dealer of respondent Luneta Motor Company, under the following terms and conditions: Selling price Financing charge Total Selling Price Payable on Delivery Payable in 24 months at 12% interest per annum P7,500.00 P1,426.82 P8,926.82 P1,006.82

P7,920.00

The motor vehicle was delivered to the petitioner who 1) paid the initial payment in the amount of P1,006.82; and 2) executed a promissory note in the amount of P7,920.00, the balance of the total selling price, in favor of respondent Luneta Motor Company. The promissory note stated the amounts and dates of payment of twenty-six installments covering the P7,920.00 debt. Simultaneously with the execution of the promissory note and to secure its payment, the petitioner executed a chattel mortgage on the subject motor vehicle in favor of the respondent. After paying a total amount of P3,148.00, the petitioner was unable to pay further monthly installments prompting the respondent Luneta Motor Company to extra-judicially foreclose the chattel mortgage (Annex "A" to Answer, Original Record, p. 10, supra). The motor vehicle was sold at public auction with the respondent Luneta Motor Company represented by Atty. Leandro B. Fernandez as the highest bidder in the amount of P5,000.00 (Annex "B" to Answer, Original Record, p. 11, supra). Since the payments made by petitioner Eutropio Zayas, Jr. plus the P5,000.00 realized from the foreclosure of the chattel mortgage could not cover the total amount of the promissory note executed by the petitioner in favor of the respondent Luneta Motor Company, the latter filed Civil Case No. 165263 with the City Court of Manila for the recovery of the balance of P1,551.74 plus interests. Luneta Motor Company alleged in its complaint that defendant Eutropio Zayas, Jr. executed a promissory note in the amount of P7,920.00 in its favor; that out of the P7,920.00, Eutropio Zayas, Jr. had paid only P6,368.26 plus interest up to the date of the sale at public auction of the motor vehicle; that the balance of P1,551.74 plus interest of 12% thereon from that date had already become due and payable but despite repeated demands to pay the same, Eutropio Zayas, Jr., refused and failed to pay. In his answer with affirmative defenses and counterclaim, Eutropio Zayas, Jr. admitted having executed the promissory note for the monthly payments, on a Ford Thames vehicle bearing Engine No. 400E-127738 which he purchased from the Luneta Motor Company but he denied his alleged outstanding liability of P1,551.74 plus interest thereon ... the said obligation if there was any, had already been discharged either by payment or by sale in public auction of the said motor vehicle as evidenced by a Notice of Sale marked as Annex "A" and Certificate of Sale marked as Annex "B"; (Answer, p. 7, Original Record). He alleged as affirmative defenses, among others: 1) that the plaintiff has no cause of action against him; and 2) that pursuant to Article 1484 of the New Civil Code and the case of Pacific Commercial Co. v. De La Rama, (72 Phil. 380) his obligation per the promissory note was extinguished by the sale at public auction of the motor vehicle, the subject of the chattel mortgage which was executed by him in favor of the plaintiff as security for the payment of said promissory note. (Answer, p. 8, Original Record) In its Reply, Luneta Motor Company denied the applicability of Article 1484 of the Civil Code ... for the simple reason that the contract involved between the parties is not one for a sale on installment" (Reply, p. 13, Original Record). After several postponements, the case was set for hearing. As a result of the non- appearance of the plaintiff and its counsel on the date set for hearing, defendant Zayas, Jr. moved to have the case dismissed for lack of interest on the part of the plaintiff. He also asked the court to allow him to discuss the merits of his affirmative defense as if a motion to dismiss had been filed. The issue raised and argued by the defendant was whether or not a deficiency amount after the motor vehicle, subject of the chattel mortgage, has been sold at public auction could still be recovered. Zayas cited the case of Ruperto Cruz v. Filipinas Investment (23 SCRA 791).<re||an1w> Acting on the motion, the city court issued an Order: On Petition of counsel for the defendant for the dismissal of this case on the ground that the defendant is no longer liable for the deficiency judgment inas much as the chattel mortgage has been foreclosed, with the plaintiff as the highest bidder thereof, citing the case of Ruperto G. Cruz v. Filipinas Investmentdecided on May 27, 1968, G.R. No. L-24772 in connection with Article 1484 of the Civil Code, and finding the same well taken. Let this case be dismissed without pronouncement as to costs. Luneta Motor Company filed an "Urgent Motion for Reconsideration" reiterating its stand that Article 1484 of the New Civil Code on sale of personal property by installment was not applicable and that the contract involving the parties was a mere case of an ordinary loan secured by chattel mortgage. According to the plaintiff, the defendant executed the promissory note and chattel mortgage to secure the plaintiff's interest for having financed the purchase of the motor vehicle by the defendant from the Escao Enterprises of Cagayan de Oro City, an entity entirely different and distinct from the plaintiff corporation (p. 33, Original Record). The court denied the motion for reconsideration for lack of merit.

Luneta Motor Company appealed the case to the Court of First Instance of Manila where it was docketed as Civil Case No. 74381. After various incidents, the respondent court issued an order which, in part, reads: This is an appeal taken by plaintiff from the order of the City Court of Manila, dismissing its complaint on the ground that the defendant is no longer liable for the deficiency judgment inasmuch as the chattel mortgage has been foreclosed, with the plaintiff as the highest bidder thereof, in line with the ruling of the Supreme Court in the case of Ruperto G. Cruz v. Filipinas Investment (G.R. No. L24772) in connection with Article 1484 of the Civil Code. xxx xxx xxx After going over the pleadings in this case, more particularly the complaint and the answer to the complaint filed with the City Court of Manila, this Court is of the impression that the case at bar may not be decided merely, as the City Court had done, on the question of law since the presentation of evidence is necessary to adjudicate the questions involved. WHEREFORE, this case is hereby remanded to the court of origin for further proceedings. (pp. 82-83, Original Record) Hence, this petition. Petitioner Eutropio Zayas, Jr. now maintains:: That Respondent Court of First Instance erred: 1. IN HOLDING THAT THE QUESTION OF LAW CANNOT BE DECIDED SINCE PRESENTATION OF EVIDENCE IS NECESSARY- REGARDING THE QUESTION OF RECOVERY OF THE DEFICIENCY AMOUNT IN A CHATTEL MORTGAGE AFTER SELLING IT IN A PUBLIC AUCTION; 2. IN ORDERING THE REMAND OF THE CASE TO THE CITY COURT FOR FURTHER PROCEEDINGS TAKEN BY THE RESPONDENT FROM THE CITY COURT TO THE COURT OF FIRST INSTANCE, BRANCH XXI, MANILA; and 3. IN NOT DISMISSING THE APPEAL TAKEN BY THE PRIVATE RESPONDENT FROM THE CITY COURT TO THE COURT OF FIRST INSTANCE. The main defense of respondent Luneta Motor Company is that Escano Enterprises, Cagayan de Oro City from which petitioner Eutropio Zayas, Jr. purchased the subject motor vehicle was a distinct and different entity; that the role of Luneta Motor Company in the said transaction was only to finance the purchase price of the motor vehicle; and that in order to protect its interest as regards the promissory note executed in its favor, a chattel mortgage covering the same motor vehicle was also executed by petitioner Eutropio Zayas, Jr. In short, respondent Luneta Motor Company maintains that the contract between the company and the petitioner was only an ordinary loan removed from the coverage of Article 1484 of the New Civil Code. The respondent's arguments have no merit. The Escao Enterprises of Cagayan de Oro City was an agent of Luneta Motor Company. A very significant evidence which proves the nature of the relationship between Luneta Motor Company and Escao Enterprises is Annex "A. of the petitioner's OPPOSITION TO URGENT MOTION FOR RECONSIDERATION. (Original Record, p. 36) Annex "A" is a Certification from the cashier of Escano Enterprises on the monthly installments paid by Mr. Eutropio Zayas, Jr. In the certification, the promissory note in favor of Luneta Motor Company was specifically mentioned. There was only one promissory note executed by Eutropio Zayas, Jr. in connection with the purchase of the motor vehicle. The promissory note mentioned in the certification refers to the promissory note executed by Eutropio Zayas, Jr. in favor of respondent Luneta Motor Company. Thus: CERTIFICATION

This is to certify that Mr. EUTROPIO ZAYAS, JR. has paid from us the following, of his FORD THAMES BEARING Engine No. 400E-127738, promissory note dated October 6, 1966. Viz: ESCAO ENTERPRISES (SGD.) EMELITA H. BACULIO

Escano Enterprises, a dealer of respondent Luneta Motor Company, was merely a collecting-agent as far as the purchase of the subject motor vehicle was concerned. The principal and agent relationship is clear. But even assuming that the "distinct and independent entity" theory of the private respondent is valid, the nature of the transaction as a sale of personal property on installment basis remains. When, therefore, Escao Enterprises, assigned its rights vis-a-vis the sale to respondent Luneta Motor Company, the nature of the transaction involving Escano Enterprises and Eutropio Zayas, Jr. 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. To rule otherwise would pave the way for subverting the policy underlying Article 1484 of the New Civil Code, on the foreclosure of chattel mortgages over personal property sold on installment basis. 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: xxx xxx xxx xxx xxx xxx (3) Foreclose the chattel ;mortgage on 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. xxx xxx xxx ... the established rule is to the effect that the foreclosure and actual sale of a mortgaged chattel bars further recovery by the vendor of any balance on the purchaser's outstanding obligation not so satisfied by the sale. And the reason for this doctrine was aptly stated in the case of Bachrach Motor Co. vs. Millan, supra, thus: Undoubtedly the principal object of the above amendment 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 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. Under this amendment the vendor of personal property, the purchase price of which is payable in installments, has the right to cancel the sale or foreclose the mortgage if one has been given on the property. Whichever right the vendor elects he need not return to the purchaser the amount of the installments already paid, "if there be an agreement to that effect". Furthermore, if the vendor avails himself of the right to foreclose the mortgage this amendment prohibits him from bringing an action against the purchaser for the unpaid balance. (Cruz v. Filipinas Investment & Finance Corporation, 23 SCRA 791) Our findings and conclusions are borne out by the records available to the respondent court. There was no necessity for the remand of records to the city court for the presentation of evidence on the issue raised in the case.

WHEREFORE, the instant petition is hereby granted. The orders remanding the case to the court of origin and denying the motion for reconsideration of the Court of First Instance of Manila, Branch XXI issued in Civil Case No. 74381 are annulled. Accordingly, the Court of First Instance of Manila, Branch XXI is directed to dismiss the appeal in Civil Case No. 74381. The Order of the City Court of Manila dismissing the complaint in Civil Case No. 165263 is affirmed.

LUIS RIDAD and LOURDES RIDAD, plaintiffs-appellees, vs. FILIPINAS INVESTMENT and FINANCE CORPORATION, JOSE D. SEBASTIAN and JOSE SAN AGUSTIN, in his capacity as Sheriff, defendants-appellants. Osmundo Victoriano for plaintiffs-appellees. Wilhelmina V. Joven for defendant-appellants.

DE CASTRO, J: Appeal from the decision of the Court of First Instance of Rizal, Branch I, in Civil Case No. 9140 for annulment of contract, originally filed with the Court of Appeals but was subsequently certified to this Court pursuant to Section 3 of Rule 50 of the Rules of Court, there being no issue of fact involved in this appeal. The materials facts of the case appearing on record may be stated as follows: On April 14, 1964, plaintiffs purchased from the Supreme Sales arid Development Corporation two (2) brand new Ford Consul Sedans complete with accessories, for P26,887 payable in 24 monthly installments. To secure payment thereof, plaintiffs executed on the same date a promissory note covering the purchase price and a deed of chattel mortgage not only on the two vehicles purchased but also on another car (Chevrolet) and plaintiffs' franchise or certificate of public convenience granted by the defunct Public Service Commission for the operation of a taxi fleet. Then, with the conformity of the plaintiffs, the vendor assigned its rights, title and interest to the above-mentioned promissory note and chattel mortgage to defendant Filipinas Investment and Finance Corporation. Due to the failure of the plaintiffs to pay their monthly installments as per promissory note, the defendant corporation foreclosed the chattel mortgage extra-judicially, and at the public auction sale of the two Ford Consul cars, of which the plaintiffs were not notified, the defendant corporation was the highest bidder and purchaser. Another auction sale was held on November 16, 1965, involving the remaining properties subject of the deed of chattel mortgage since plaintiffs' obligation was not fully satisfied by the sale of the aforesaid vehicles, and at the public auction sale, the franchise of plaintiffs to operate five units of taxicab service was sold for P8,000 to the highest bidder, herein defendant corporation, which subsequently sold and conveyed the same to herein defendant Jose D. Sebastian, who then filed with the Public Service Commission an application for approval of said sale in his favor. On February 21, 1966, plaintiffs filed an action for annulment of contract before the Court of First Instance of Rizal, Branch I, with Filipinas Investment and Finance Corporation, Jose D. Sebastian and Sheriff Jose San Agustin, as party-defendants. By agreement of the parties, the case was submitted for decision in the lower court on the basis of the documentary evidence adduced by the parties during the pre-trial conference. Thereafter, the lower court rendered judgment as follows: IN VIEW OF THE ABOVE CONSIDERATIONS, this Court declares the chattel mortgage, Exhibit "C", to be null and void in so far as the taxicab franchise and the used Chevrolet car of plaintiffs are concerned, and the sale at public auction conducted by the City Sheriff of Manila concerning said taxicab franchise, to be of no legal effect.1wph1.t The certificate of sale issued by the City Sheriff of Manila in favor of Filipinas Investment and Finance Corporation concerning plaintiffs' taxicab franchise for P8,000 is accordingly cancelled and set aside, and the assignment thereof

made by Filipinas Investment in favor of defendant Jose Sebastian is declared void and of no legal effect. (Record on Appeal, p. 128). From the foregoing judgment, defendants appealed to the Court of Appeals which, as earlier stated, certified the appeal to this Court, appellants imputing to the lower court five alleged errors, as follows: I THE LOWER COURT ERRED IN DECLARING THE CHATTEL MORTGAGE, EXHIBIT "C", NULL AND VOID. II THE LOWER COURT ERRED IN HOLDING THAT THE SALE AT PUBLIC AUCTION CONDUCTED BY THE CITY SHERIFF OF MANILA CONCERNING THE TAXICAB FRANCHISE IS OF NO LEGAL EFFECT. III THE LOWER COURT ERRED IN SETTING ASIDE THE CERTIFICATE OF SALE ISSUED BY THE CITY SHERIFF OF MANILA IN FAVOR OF FILIPINAS INVESTMENT AND FINANCE CORPORATION COVERING PLAINTIFFS' TAXICAB FRANCHISE. IV THE LOWER COURT ERRED IN DECLARING VOID AND OF NO LEGAL EFFECT THE ASSIGNMENT OF THE TAXICAB FRANCHISE MADE BY FILIPINAS INVESTMENT AND FINANCE CORPORATION IN FAVOR OF DEFENDANT. V THE LOWER COURT (sic) IN NOT DECIDING THE CASE IN FAVOR OF THE DEFENDANTS. Appellants' Brief, pp. 9 & 10) From the aforequoted assignment of errors, the decisive issue for consideration is the validity of the chattel mortgage in so far as the franchise and the subsequent sale thereof are concerned. The resolution of said issue is unquestionably governed by the provisions of Article 1484 of the Civil Code which states: Art. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise y 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 on 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. Under the above-quoted article of the Civil Code, the vendor of personal property the purchase price of which is payable in installments, has the right, should the vendee default in the payment of two or more of the agreed installments, to exact fulfillment by the purchaser of the obligation, or to cancel the sale, or to foreclose the mortgage 1 on the purchased personal property, if one was constituted. Whichever right the vendor elects, he cannot avail of

the other, these remedies being alternative, not cumulative. Furthermore, if the vendor avails himself of the right to foreclose his mortgage, the law prohibits him from further bringing an action against the vendee for the purpose of 3 recovering whatever balance of the debt secured not satisfied by the foreclosure sale. The precise purpose of the law is 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, otherwise, the mortgagor-buyer would find himself 4 without the property and still owing practically the full amount of his original indebtedness. In the instant case, defendant corporation elected to foreclose its mortgage upon default by the plaintiffs in the payment of the agreed installments. Having chosen to foreclose the chattel mortgage, and bought the purchased vehicles at the public auction as the highest bidder, it submitted itself to the consequences of the law as specifically mentioned, by which it is deemed to have renounced any and all rights which it might otherwise have under the promissory note and the chattel mortgage as well as the payment of the unpaid balance. Consequently, the lower court rightly declared the nullity of the chattel mortgage in question in so far as the taxicab franchise and the used Chevrolet car of plaintiffs are concerned, under the authority of the ruling in the case of Levy Hermanos, Inc. vs. Pacific Commercial Co., et al., 71 Phil. 587, the facts of which are similar to those in the case at bar. There, we have the same situation wherein the vendees offered as security for the payment of the purchase price not only the motor vehicles which were bought on installment, but also a residential lot and a house of strong materials. This Court sustained the pronouncement made by the lower court on the nullity of the mortgage in so far as it included the house and lot of the vendees, holding that under the law, should the vendor choose to foreclose the mortgage, he has to content himself with the proceeds of the sale at the public auction of the chattels which were sold on installment and mortgaged to him and having chosen the remedy of foreclosure, he cannot nor should he be allowed to insist on the sale of the house and lot of the vendees, for to do so would be equivalent to obtaining a writ of execution against them concerning other properties which are separate and distinct from those which were sold on installment. This would indeed be contrary to public policy and the very spirit and purpose of the law, limiting the vendor's right to foreclose the chattel mortgage only on the thing sold. In the case of Cruz v. Filipinos Investment & Finance Corporation, 23 SCRA 791, this Court ruled that the vendor of personal property sold on the installment basis is precluded, after foreclosing the chattel mortgage on the thing sold from having a recourse against the additional security put up by a third party to guarantee the purchaser's performance of his obligation on the theory that to sustain the same would overlook the fact that if the guarantor should be compelled to pay the balance of the purchase price, said guarantor will in turn be entitled to recover what he has paid from the debtor-vendee, and ultimately it will be the latter who will be made to bear the payment of the of the balance of the price, despite the earlier foreclosure of the chattel mortgage given by him, thereby indirectly subverting the protection given the latter. Consequently, the additional mortgage was ordered cancelled. Said ruling was reiterated in the case of Pascual v. Universal Motors Corporation, 61 SCRA 121. If the vendor under such circumstance is prohibited from having a recourse against the additional security for reasons therein stated, there is no ground why such vendor should not likewise be precluded from further extrajudicially foreclosing the additional 5 security put up by the vendees themselves, as in the instant case, it being tantamount to a further action that would violate Article 1484 of the Civil Code, for then is actually no between an additional security put up by the vendee himself and such security put up by a third party insofar as how the burden would ultimately fall on the vendee himself is concerned. Reliance on the ruling in Southern Motors, inc. v. Moscoso, 2 SCRA 168, that in sales on installments, where the action instituted is for and the mortgaged property is subsequently attached and sold, the sales thereof does not amount to a foreclosure of the mortgage, hence, the seller creditor is entitled to a deficiency judgment, does not for the stand of the appellants for that case is entirely different from the case at bar. In that case, the vendor has availed of the first remedy provided by Article 1484 of the Civil Code, i.e., to exact fulfillment of the obligation whereas in the present case, the remedy availed of was foreclosure of the chattel mortgage. The foregoing disposition renders superfluous a determination of the other issue raised by the parties as to the validity of the auction sale, in so far as the franchise of plaintiffs is concerned, which sale had been admittedly held without any notice to the plaintiffs. IN VIEW HEREOF, the judgment appealed from is hereby affirmed, with costs against the appellants.

Luis Ridad and Lourdes Ridad, plaintiffs-appellees, v Filipinas Investment and Finance Corporation, Jose D. Sebastian and Jose San Agustin, inhis capacity as Sheriff, defendants-appellants January 27, 1983De Castro, J.

Plaintiffs purchased from Supreme Sales and Development Corporation (Supreme) 2 brand new Ford Consul Sedans, for P26,887 payable in 24 monthly installments.

To secure payment thereof, plaintiffs executed a promissory note covering the purchase priceand a deed of chattel mortgage on the two vehicles purchased and also on another car (Chevrolet) and plaintiffs franchise or certificate of public convenience granted by the defunct Public Service Commission for the operation of a taxi fleet.

With the conformity of plaintiffs, the vendor Supreme assigned its rights, title and interest to thepromissory note and chattel mortgage to the defendant Filipinas Investment and FinanceCorporation.

Plaintiffs failed to pay their monthly installments. Filipinas foreclosed the chattel mortgageextra-judicially.

During the public auction, of which the plaintiffs were not notified, the 2 Ford Consul cars werebought by defendant Filipinas, who was as the highest bidder. During another public auction,the rest of the properties (including the taxi franchise) subject of the chattel mortgage weresold, and bought by defendant Filipinas also.

Filipinas subsequently sold the taxi franchise to defendant Jose D. Sebastian, who filed with thePublic Service Commission an application for approval of said sale.

Plaintiffs then filed an action for annulment of contract before the CFI, against Filipinas,Sebastian, and Sheriff San Agustin.

CFI ruling: The chattel mortgage was null and void in so far as the taxi franchise and the usedChevrolet car were concerned, and the sale at public auction of the taxicab franchise was to beof no legal effect. The Certificate of Sale issued by the Sheriff of Manila in favor of Filipinasconcerning the taxi franchise was cancelled and set aside. The assignment made by Filipinas infavor of Jose Sebastian was also declared void and of no legal effect. The CA certified the defendants appeal to the SC.