Pledge Case Digest.docx

CREDIT TRANSACTIONS Case Assignment No. 4

Provisions Common to Pledge and Mortgage 1. Guillermo Adriano vs. Romulo Pangilinan G.R. No. 137471, January 16, 2002 Facts: Guillermo Adriano is the registered owner of a parcel of land, he entrusted the TCT of his land to Angelina Salvador, a distant relative for purpose of securing a mortgage. Without the knowledge and consent of Adriano, Angelina Salvador mortgaged the property to Romulo Pangilinan, a businessman involves in buy and sell as in the mortgage of real estate properties. Upon verification of Adriano to Registry of Deeds, he was surprised that the REM was annotated in the TCT in favor of Pangilinan. Adriano denied that he executed such deed of mortgage and denounced his signature as forgery. He repeats the demand from Pangilinan the return or conveyance of the said land but ignored. Thus, this petition. Issue: Whether or not there was a valid Mortgage? Held: No. The mortgage was void and produces no force and effect. The following requisites are essential to the contracts of pledge and mortgage: (1) That they be constituted to secure the fulfillment of a principal obligation; (2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; (3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for that purpose. In the case at bar, not only was it proven in the trial court that the signature of the mortgagor had been forged, but also that somebody else -- an impostor --had pretended to be the owner when the mortgagee made an ocular inspection of the subject property. The respondent is not innocent mortgagee for value. Because he failed to observe due diligence in the grant of the loan and in the execution of the real estate mortgage. Not having executed a Special power of attorney in favor of Angela Salvador, Adriano clearly did not authorize her to be his agent in procuring the mortgage. 2. BANKO SENTRAL NG PILIPINAS Vs. AGUSTIN LIBO-ON FACTS: Spouses Libo-on secured loans from the Rural Bank of Hinirigan, Inc. In the amount of P100,000 and P300,000, respectively. They executed PN payable to the order of Rural Bank for a period of 360 days and executed a deed of Real Estate Mortgage. Rural bank in turn secured a loan from petitioner BSP in the amount of P800,000 and 640,000, respectively. As security for the loan the bank pledged and deposited to BSP PN's with supporting TCT's including the PN and TCT of spouses Libo-on mortgage to the former.

BSP now demanded from the Spouses Libo-on the payment of their outstanding loan with Rural Bank of Hinirigan but they failed to settle their obligation. BSP filed an application for extrajudicial foreclosure of the property. Spouses Libo-on contested extrajudicial foreclosure and filed application for preliminary injunction which was granted by the trial court. BSP Appealed with CA but it was denied. ISSUES: 1. Whether or not Rural Bank has the right to pledge the property. 2. Whether or not BSP has the authority to foreclosed the subject mortgage RULING: 1.No, Rural Bank has no authority to pledge the security documents to BSP during the term of the real estate mortgage contract between Rural bank and the spouses Libo-on because if it is within the term of the contract, the mortgage property remains to be property of the Spouses Libo-on. For a contract of pledge to be valid, it is necessary that: 1. the pledge is constituted to secure the fulfillment of the principal obligation; 2. the pledgor be the absolute owner of the thing pledged; 3. the person constituting the pledge has the free disposal of his property, and in the absence thereof, that he be legally authorized for the purpose. The Rural Bank of Hinirigan was neither the absolute owner of the subject property nor the security documents it had pledge to BSP. 2.No, BSP has no authority to foreclosed the subject mortgage. The mere pledge and deposit of the mortgage contract, transfer certificate of title and PN executed by the Rural Bank of Hinirigan in favor of BSP does not produce the effect of giving BSP the authority to intervene with the transaction between the spouses Libo-on and the Rural Bank much more to foreclosed the mortgage property.

3. A. Francisco Realty and Development Corporation v. Court of Appeals and Spouses Javillonar (JAG) FACTS: A. Francisco Realty and Development Corporation granted a loan of to the spouses Romulo and Erlinda Javillonar, in consideration executed a promissory note expressing when the spouses fail to pay the interest on the loan, the property will be transferred to A.Francisco and the deed of sale will be registered. A.Francisco claimed that Javillonar failed to pay the interest and thus registered the land in its favor. Spouses loaned an additional from A.Francisco in exchange for another promissory note with a provision that upon failure to pay their loans, they would immediately vacate the premises. A.Francisco now demanded possession of the property. The spouses refused. A.Francisco then filed an action for possession and payment of the interest from the loan with the RTC. Spouses counterclaimed for the cancellation of the TCT of A.Francisco. RTC ruled in favor of A.Francisco. CA reversed the decision of the RTC. The deed of sale was void because it was in fact a pactum commissorium prohibited by Art.2088 of the NCC. ISSUES:

W/N the contractual documents are constitutive of pactum commissorium? HELD: YES it was a pactum commissorium and thus the registration of A.Francisco is void. The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil Code: Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgagee, or dispose of the same. Any stipulation to the contrary is null and void. The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation; and (2) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the principal obligation within the stipulated period.

PLEDGE: 1. Ong vs. IAC G.R. No. 74073, September 13, 1991 Madrigal Shipping Co., Inc., owner of a Barge, pledged said vessel and tugboat to secure the Shipping Company's obligation to private respondent Solidbank. Both parties executed a document denominated as "Pledge Agreement". Madrigal failed to pay its obligation to the Solidbank. When the latter was about to sell the pledge property, the same was no where to be found from its bodega. Meanwhile, petitioner Honesto Ong bought one barge, the same barge which was the subject of the pledge. Solidbank filed a complaint against Honesto Ong, et al. Petitioner contends that they are purchaser in good faith, and the contract of pledge by and between Solidbank and Madrigal Shipping Co., Inc. was not recorded under Section 804 and 809 of the Tariff and Custom Code, hence, not binding on third person like the petitioners. Private respondent argued that petitioner acted in bad faith, and that it complied with all the requirements necessary to bind third persons. ISSUE: WON the contract of pledge entered into by and between Solidbank and Madrigal Shipping Co., Inc. is binding to petitioner Ong? HELD: YES, it is binding on said petitioners. Article 2096 of the Civil Code requires that a pledge to take effect against third persons, it should be in a “Public Instrument” which must contain the description of the thing pledged and the date of the pledges. In the case at bar, all three requirements have been complied.

2. MANILA SURETY v VELAYO Facts: Manila Surety & Fidelity Co., upon request of Rodolfo Velayo, executed a bond for P2,800.00 for the dissolution of a writ of attachment obtained by one Jovita Granados in a suit against Rodolfo Velayo in the Court of First Instance of Manila. Velayo undertook to pay the surety company an annual premium of P112.00 and provided collateral jewelry with the authority to sell in case Manila Surety will be obliged to pay. Judgment having been rendered in favor of Jovita Granados and against Rodolfo Velayo, and execution having been returned unsatisfied, the surety company was forced to pay P2,800.00 that it later sought to recoup from Velayo; and upon the latter's failure to do so, the surety caused the pledged jewelry to be sold, realizing therefrom a net product of P235.00 only The surety files a claim against Velayo because the security is insufficient. Velayo claims the sale of the jewelry even if insufficient, extinguishes the principal obligation. Issue: Won Velayo’s contention is correct? Ruling: Yes.The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case.

Real Estate Mortgage 1. Prudential Bank Vs. Hon. Panis, Fernando Magcale & Teodula Maluyut-Magcale Facts: Spouses Magcale secured a loan from Prudential Bank. As security, respondent’s spouses executed a real estate mortgage, their residential building as security. Since the respondents was not able to fulfil their obligation, the security was extrajudicial foreclosed and was eventually sold in a public auction. Hence this case, to assail the validity of the mortgage and to recover the foreclosed land. Issue: Whether or not a real estate mortgage can be instituted on the building of a land belonging to another? Held: While it is true that a mortgage of land necessarily includes in the absence of stipulation of the improvements thereon, buildings, still a building in itself may be mortgaged by itself apart from the land on which it is built. Such a mortgage would still be considered as a REM for the building would still be considered as immovable property even if dealt with separately and apart from the land. The original mortgage on the building and right to occupancy of the land was executed before the issuance of the sales patent and before thegovernment was divested of title to t he land. Under the foregoing, it is evident that the mortgage executed by private respondent o n his own building was a valid mortgage.

in-law of plaintiff Leonardo Mojica, were notified of such auction sale However, no sale was consummated during that scheduled sale and the property concerned up to now still remains in the possession of respondent bank. The refusal of the same bank to allow Dionisio Mojica to pay the unpaid balance of the loan as per the "Computation Slip" amounting to P21,272.50, resulted in the filing of a complaint. TC dismissed complaint. CA affirmed. ISSUE: WON the foreclosure sale had for its basis, a valid and subsisting mortgage contract. RULING: It has long been settled by a long line of decisions that mortgages given to secure future advancements are valid and legal contracts; that the amounts named as consideration in said contract do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. A mortgage given to secure advancements is a continuing security and is not discharged by repayment of the amount named in the mortgage, until the full amount of the advancements are paid fact, it has also been held that where the annotation on the back of a certificate of title about a first mortgage states "that the mortgage secured the payment of a certain amount of money plus interest plus other obligations. There was no necessity for any notation of the later loans on the mortgagors' title. It was incumbent upon any subsequent mortgagee or encumbrances of the property in question to entry in the books and records of the bank, as first mortgagee, regarding the credit standing of the debtors. ISSUE: WON the RB is correct for not allowing the sales as per computation slip. RULING:

2. DIONISIO MOJIA vs. CA, Rural Bank of Kawit, Inc. Facts: Deceased Spouses Mojica obtained a loan with Rural bank of Kawit, Inc. and secured by a real estate mortgage. Spouses failed to pay their obligation after its maturity. Rural bank extra judicially foreclosed the real estate mortgage on the justification that it was adopted as a mortgage for the new loan. There was auction sale, defendant rural bank was the highest bidder. The proceeds from the sale of the piece of land of plaintiffs spouses were applied to their outstanding obligation with defendant bank. It was recorded in the Office of the Register of Deeds of Cavite. The one-year period for redemption elapses without plaintiff’s spouses having redeemed the foreclosure property. Now, Dionisio Mojica, the son of petitioners-spouses, attempt to pay the debt. Dionisio Mojica and one Teodorico Rufido, brother-

Yes. The property covered by the REM became the acquired asset of the bank. The petitioners have lost its right of legal redemption after the lapse of one year the date of certificate of sale was registered in the ROD. Conventional redemption was subject to be exercised up to March 3, 1982 and was extended up to April 19, 1982 for a fixed amount of P85,000.00. The respondent bank even favored the petitioner by giving them the first preference to repurchase the property but they failed to avail of this opportunity, although the bank "is certainly disposed to release at anytime" the deposits. Further, the evidence on record also shows that the mortgage property was auctioned on June 27, 1979. The only bidder was the respondent bank which bid for P26,387.04. As the highest bidder, the respondent bank can rightfully consolidate its title over the property. The petition is DISMISSED.

3. CLAUDIO(s) VS. Spouses Federico and Norma Saraza Facts: This case is for annullment of sale, power of attorney and mortgage with prayer of damages by petitioners Claudios against Florentino Cladio and Spouses Federico and Norma Saraza. It was alleged on this case, Florentino excuted a deed of real estate mortage over the property of their deceased parents. The siblings averred that the signatures where forged. That such property was sold by their parents to Florentino was void. RTC and CA favored respondents Spouses Saraza as Mortgagee in good faith. Thus this petition. Whether or not the respondent spouses was a mortgagee in good faith? No. They are morgagee in bad faith. The Real estate mortage was executed on June 22, 2004, in the name of FLorentino, was issued by the Register of deeds only 6 (six) days later or on June 28, 2004. Evidently, the property, offered as collateral to the Loan of P1M, was not in Florentino's name yet when he entered into a mortgage agreement with spouses Saraza. The doctrine of mortgagee in good faith only applies when the mortgagor has already obtained a certificate of title in his or her name at the time of the mortgage. Accordingly, an innocent mortgagee for value is one who entered into a mortgage contract with a mortgagor bearing a certificate of title in his name over the mortgaged property. Such was not the situation of Spouses Saraza. They cannot claim the protection accorded by law to innocent mortgagees for value considering that there was no certificate of title yet in the name of Florentino to rely on when the mortgaged contract was executed. Good faith connotes an honest intention to abstain from taking unconscientious advantage of another. Spouses Saraza could not be deemed to have acted in good faith because they knew that they were not dealing with the registered owner of the property when it was mortgaged and that the subject land had yet to be titled in the name of mortgagor Florentino.

4. Maybank Philippines, Inc. (Formerly PNB-Republic Bank), Petitioner vs. Spouses Oscar and Nenita Tarrosa, Respondents. Facts:

On December 15, 1980, respondent Spouses Tarrosa obtained a loan from PNB-Republic Bank, now Maybank Philippines, secured by a real estate mortgage. After payment of said loan, the respondents again obtained another loan from Maybank on March 11, 1984. Respondents failed to pay upon maturity. Sometime in April 1998, a Final Demand Letter was sent by petitioner bank to respondents requiring the latter to settle their loan obligation inclusive of principal, interest, and penalty charges. The spouses offered to settle it in a lesser amount to which the bank refused. On June 25, 1998, Maybank instituted an extrajudicial foreclosure proceeding and the subject property was eventually sold in a public auction to Philmay Property Inc. (PPI). The spouses then filed a complaint for declaration of nullity and invalidity of the foreclosure sale averring among others that the second loan is an unsecured loan and that, Maybank’s right to foreclose had already prescribed. Issue: Whether or not the foreclosure is valid? Ruling: Yes. An action to enforce a right arising from a mortgage should be enforced within ten (10) years from the time the right of action accrues, i.e., when the mortgagor defaults in the payment of his obligation to the mortgagee; otherwise, it will be barred by prescription and the mortgagee will lose his rights under the mortgage. However, mere delinquency in payment does not necessarily mean delay in the legal concept. In order that the debtor may be in default, it is necessary that: (a) the obligation be demandable and already liquidated; (b) the debtor delays performance; and (c) the creditor requires the performance judicially or extrajudicially, unless demand is not necessary. – i.e., when there is an express stipulation to that effect; where the law so provides; when the period is the controlling motive or the principal inducement for the creation of the obligation; and where demand would be useless. Moreover, it is not sufficient that the law or obligation fixes a date for performance; it must further state expressly that after the period lapses, default will commence. Thus, it is only when demand to pay is unnecessary in case of the aforementioned circumstances, or when required, such demand is made and subsequently refused that the mortgagor can be considered in default and the mortgagee obtains the right to file an action to collect the debt or foreclose the mortgage. In this case, the provision in the Real Estate Mortgage between the parties merely articulated Maybank's right to elect foreclosure upon Sps. Tarrosa's failure or refusal to comply with the obligation secured, which is one of the rights duly accorded to mortgagees in a similar situation. In no way did it affect the general parameters

of default, particularly the need of prior demand under Article 116941 of the Civil Code, considering that it did not expressly declare: (a) that demand shall not be necessary in order that the mortgagor may be in default; or (b) that default shall commence upon mere failure to pay on the maturity date of the loan. Therefore, Maybank's right to foreclose the real estate mortgage accrued only after the lapse of the period indicated in its final demand letter for Sps. Tarrosa to pay, i.e., after the lapse of five (5) days from receipt of the final demand letter dated March 4, 1998. 4. Serfino vs. CA A land was patented in the name of Casamayor. Later it was sold to Baltazar. During the war the OCT was lost and reconstitution thereof was made in the name of Casamayor. In 1946 Baltazar was issued TCT. Later the land was sold to Lopez Sugar but the latter did not register until Dec. 1964. The office refused registration upon its discovery that the same property was covered by another certificate of title, int he name of Serfino. An inquiry into this discrpancy reveals that the Provincial Treasurer had conducted an auction sale of this land for tax delinquency starting 1950. Notice was send only to Casamayor. Serfino was issed a Certificate of Repurchase of REal Properpety after payment on May 14, 1964. In May 28, 1964 Serfino filed a petition of Reonstitution of OCT in the name of Casamayor. In Oct. 1964 the ourt granted the petition of Serfino for confirmation of his titled of the land as purchases in auction sale. TCT was issued to Serfino in NOv. 2, 1964. TO secure a loan Serfino mortgaged the land to PNB. Hence, this was the situation of the land when the office of the Register of Deeds refused registration of tha praty in question by Lopez. Issue: Whether the PNB is a mortgagee in good faith? Yes. PNB relied on the TCT of Serfino, the genuiness of which is not issue as it was really issued by the Register of Deeds. PNB had every right to rely on TCT as it was sufficient evidence of ownership of the mortgagor. The PNB at the time had no way of knowing of the existence of another genuine title covering the same land in question. The fact that the public auction sale of the disputed property was not valid (for lack of notice of the auction of sale tot he actual owner) cannot in any way be attributed to the mortgagee's (PNB's) fault. The fact remains that inspite of the lack of notice to the actual registered owner at that time (who was Nemisia Baltazar) the Registered of Deeds issued a TCT in the name of Serfenio which title was relied by PNB. Be it noted that the inabilit of the Registry of Deeds to notify the actual owner or Lopez Sugar

Central to declare the land in its name for a number of years and to pay the complete taxes thereon. PNB is therefore entitled to the payment of the mortgage loan as ruled by the trial court and exempt 5. GE MONEY BANK, INC. (FORMERLY KEPPEL BANK PHILIPPINES, INC.), v. SPOUSES VICTORINO M. DIZON AND ROSALINA L. DIZON, Facts: Spouses Dizon obtained a loan from Monte de Pieda and Savings Banks, the predecessor in interest of Keppel Monte Bank, Inc. now GE Money Bank. By way of security for the loan, they executed a real estate mortgage over their two (2) lots covered by TCT. They defaulted and the mortgaged properties were extra-judicially foreclosed. The Bank was the highest bidder and he Certificate of Sale was registered with the Register of Deeds for Manila on October 18, 1993. Hence, the Spouses Dizon had one (1) year therefrom, or until October 18, 1994, within which to redeem the subject properties. Within the redemption period, the Spouses Dizon were not able to redeem it. However, Spouses Dizon manifested their desire to re-acquire the subject property, but the Bank declined to entertain the same as they still failed to tender the full amount of the redemption price.

Issue: Whether or not spouses Dizon may still redeem the property Ruling: No. To be valid and effective, the offer to redeem must be accompanied by an actual tender of the redemption price. Redemption price should either be fully offered in legal tender or validly consigned in court. Only by such means can the auction winner be assured that the offer to redeem is being made in good faith. The right to redeem becomes functus officio on the date of its expiry, and its exercise after the period is not really one of redemption but a repurchase. Distinction must be made because redemption is by force of law; the purchaser at public auction is bound to accept redemption. Repurchase, however, of foreclosed property, after redemption period, imposes no such obligation. After expiry, the purchaser may or may not re-sell the property but no law will compel him to do so. And, he is not bound by the bid price; it is entirely within his discretion to set a higher price, for after all, the property already belongs to him as owner. All told, the Spouses Dizon cannot, therefore, argue that equity should prevail. “Equity has been defined as justice outside law, being ethical rather than jural and belonging to the sphere of morals than of law. It is grounded on the precepts of conscience and not on any sanction of positive law.” Yet equity applies only in the absence of, and never against, statutory law or judicial rules of procedure.

7. Dimasacat vs. CA, PNB Facts: Lagdameo mortgaged four (4) continous parcels of land covered by TCT to PNB, which mortgaged was duly annotated on the title. More than a year later, Lagdameo sold to Dimasacat a portion of the same land. The sale was not registered. Another TCT was issued to PNB in view of the failure of Lagdameo to redeem the property within one (1) year after foreclosure. Prior to expiration of the said period, Dimasacat offered to purchase the property from PNB who rejected the offer. Dimasacat maintains that as successor in interest of the mortgage debtor, in part of the property and therefore qualified to repurchase the entirety of the said property. Issue: Whether Dimasacat has the right to redeem all the parcels of land? Ruling: No. Dimasacat has at best, a personal right to demand from Lagdameo (who had repurchased the land from PNB while the case is pending) a status of co-ownership over said property because the deed of sale in his favor had not been registered and the portion covered by said deed of sale had not been surveyed so that the precise boundaries thereof had not been delimited by metes and bounds much less segregated from the mass of Lagdameo's property covered by the TCT's aforementioned. In as much as, even if Dimasacat had managed to redeem the whole property, so much thereof as exceeded the portion sold to him by Lagdameo could have been repurchased by Lagdameo and the title to said property has meanwhile reverted fully to the latter, it follows that Dimasacat is entitled to more than the consummation of the sale made in his favor. Dimasacat is declared co-owner of the land in question to the extent of the interest conveyed to him, subject to his right to partition said property.

8. Bank of the Philippine Islands Vs. Sps. Johnson & Evelyn Co & Jupiter Real Estate Ventures, Inc./Sps. Johnson & Evelyn Co Vs. Bank of the Philippine Islands FACTS: Jupiter Real Estate Ventures, Inc. (“Jupiter”) and Spouses Co obtained a loan from Far East Bank and Trust Company (“FEBTC”). Jupiter and Spouses Co mortgaged in favor of FEBTC parcels of land including their improvements covered by Transfer Certificates of Title. Meanwhile, BPI and FEBTC merged, with BPI as the surviving corporation. Jupiter and Spouses Co defaulted on the payment of the loan. BPI, as successor-in-interest of FEBTC, foreclosed the real estate mortgage pursuant to Act No. 3135, as amended. An auction sale

was held where the mortgaged properties were sold to BPI as the highest bidder. The Certificate of Sale was registered and annotated at the back of the certificates of title on. After the expiration of the period of redemption, BPI consolidated its ownership over the real properties, and new titles were issued in its name. Spouses Co and Jupiter filed a complaint for the nullification of foreclosure proceedings and damages and BPI also filed a petition for the issuance of a writ of possession. Jupiter filed a petition for corporate rehabilitation and moved for the suspension of the proceedings since among the properties covered were those subject of the real estate mortgage. BPI opposed alleging that as registered owner of the properties subject of the foreclosure, it has the right to the immediate possession of the property and its right to immediate possession is impaired by the grant of the appeal. ISSUE: Whether or not a purchaser in a foreclosure sale may apply for a writ of possession even during the redemption period. RULING: In the affirmative. Under Section 752 of Act No. 3135, as amended by Act No. 4118, the purchaser in a foreclosure sale may apply for a writ of possession during the redemption period. and well settled is the rule that a writ of possession will issue as a matter of course, even without the filing and approval of a bond, after consolidation of ownership and the issuance of a new TCT in the name of the purchaser. Upon expiration of the redemption period, the right of the purchaser to the possession of the foreclosed property becomes absolute. This right to possession is based on the purchaser’s ownership of the property. In like manner, the mere filing of an ex parte motion for the issuance of the writ of possession would suffice and the filing of a bond is no longer necessary. This is because possession has become the absolute right of the purchaser as the confirmed owner. Thus, as the new registered owner, BPI is even more entitled to the possession of the properties and has the unmistakable right to file an ex parte motion for the issuance of a writ of possession.

CHATTEL MORTGAGE 1. Marquez vs Elisan Credit Corporation Facts:

Marquez obtained from Elisan Credit Corporation a loan payable in weekly installments and subject to annual interest with monthly penalties and attorney’s in case of nonpayment. A chattel mortgage was also executed stipulating that “the motor vehicle shall stand as a security for all other obligations of every kind already incurred or which hereafter may be incurred”. The payment of that loan was acknowledged by both parties. Subsequently, Marquez obtained another loan evidenced by a promissory note with the same terms and conditions as the first loan. When the second loan matured, there still remained an unpaid balance. Marquez requested the creditor to pay the unpaid balance by daily installments until the loan is paid; the creditor agreed. Thus, several months after the maturity of the loan, Marquez had already paid a total amount which is greater than the amount of the principal. Despite such, the creditor filed a complaint for foreclosure of the CM on the ground that Marquez allegedly failed to pay the principal of the second loan despite demand. It was also prayed that the unpaid balance plus accrued penalties and interests be paid because, allegedly, Marquez’ failure to pay upon maturity triggered the imposition of monthly penalties and attorney’s fees. Marquez, citing Art 1176 and 1235 of the Civil Code, insists that his daily payments should be deemed to have been credited against the principal, as the official receipts issued by the creditor were silent with respect to the payment of interest and penalties. Issue W/N an order for foreclosure is proper No. Foreclosure in this case is without legal and factual basis because the chattel mortgage was already extinguished when the obligation under the first loan was duly paid. A CM can only cover obligations existing at the time the mortgage is constituted. For a CM to cover debts yet to be contracted, a fresh chattel mortgage may be executed or the old contract be amended conformably to the form prescribed by the CM Law. Here, since there was no showing that a new agreement was executed, the security can no longer apply to the second loan. The chattel mortgage was already extinguished because being merely an accessory in nature, it cannot exist independently of the principal obligation. 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 act of default on the part of the borrower of the financing agreement whereon the promise is written, but 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.

The Chattel Mortgage Law requires the parties to the contract to attach an affidavit of good faith and execute an oath that – “… the mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purposes, and that the same is a just and valid obligation, and one not entered into for the purposes of fraud.” It is obvious therefore that the debt referred in the law is a current, not an obligation that is yet merely contemplated. The only obligation specified in the chattel mortgage contract was the first loan which the petitioner later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage terminated; the chattel mortgage had ceased to exist upon full payment of the first loan. Being merely an accessory in nature, it cannot exist independently of the principal obligation. The parties did not execute a fresh chattel mortgage nor did they amend the chattel mortgage to comply with the Chattel Mortgage Law which requires that the obligation must be specified in the affidavit of good faith. Simply put, there no longer was any chattel mortgage that could cover the second loan upon full payment of the first loan. The order to foreclose the motor vehicle therefore had no legal basis. Relevant Laws Article 1176, Civil Code: The receipt of the principal by the creditor, without reservation with respect to the interest, shall give rise to the presumption that said interest has been paid. Article 1235, Civil Code: When the obligee accepts the performance of an obligation, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with. Article 1253, Civil Code: If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. 2. Northern Motors vs. Coquia Facts: Taxicabs have been levied upon and sold at public auction to satisfy the judgement credit. it was held that the lien of a chattel mortgage over certain claims over certain taxicabs is superior to the levy made on the said cabs by the assignee of the unsecured judgement creditor of the chattel mortgagor. So this motion of reconsideration is filed. Issue: Whether the assignee, Ong of the unsecured judgement creditor has the right to levy upon the mortgage taxicab. Whether the lien of a chattel mortgagee is superior to the levy

made by the same by assignee of the unjudgement creditor of the chattel mortgage? Ruling: No. Chattel mortgage should answer for the mortgage credit and not for the judgement credit of the mortgagor's unsecured creditor. Yes. The lien of a chattel mortgage over the mortgaged property is superior to the levy made on the same by the assignee of the unsecured judgement creditor of the chattel mortgagor. The theory that the breach by the mortgagor of the chattel mortgage should not affect the assignee because he is not a privy to such contract is untenable. A judgement creditor can only attach the equity or right of redemption of the mortgagor. The mortgagee is not obliged to file an independent action for the enforcement of his credit chattel mortgage's purpose is to give mortgagee the preference over the mortgage chattels for satisfaction of his credit. The mortgage creates a real right or lien which being recorded, follows the chattel wherever it goes.