A.C. No. 10565 - Bacatan vs. Dadula

This action arose from a foreclosure of a chattel mortgage entered into after the new Civil Code took effect.
The defendant borrowed P52,250 from the plaintiff, with the obligation to pay after sixty days and with interest at 12% per annum.
To secure the loan, the defendant executed a chattel mortgage on an Oldsmobile car.

The defendant failed to pay the indebtedness on the due date, breaking one of the conditions stipulated in the mortgage.
Upon the default, the plaintiff proceeded with an extrajudicial foreclosure sale of the mortgaged chattel.
The public auction of the Oldsmobile car resulted in a sale price of only P700.
After subtracting the proceeds of the sale from the total indebtedness (which included interest and liquidated damages), a deficiency of P2,675 remained.

The defendant was served with the summons and complaint but failed to answer within the reglementary period, leading to a declaration of default.
The plaintiff presented his evidence and submitted the case for decision.
On August 30, 1956, the trial court rendered a decision dismissing the deficiency claim on the basis that, according to Articles 2141 and 2115 of the new Civil Code, a mortgage creditor is not entitled to a deficiency judgment—even if the debtor is in default—because such judgment is manifestly against the law.

Article 2141 of the new Civil Code provides that the provisions on pledge apply to a chattel mortgage only to the extent that they are not in conflict with the Chattel Mortgage Law.
Article 2115 of the new Civil Code states that once the sale of the pledged item extinguishes the principal obligation, deficiency recovery is not permissible regardless of any stipulation to the contrary.
The Chattel Mortgage Law, particularly Section 14, outlines the procedure for foreclosure and the application of the proceeds, which differs from the effect provided by Article 2115 regarding deficiency judgments.

Whether the provisions of the new Civil Code on pledge, particularly Article 2115, should apply to chattel mortgages despite potential conflict with the Chattel Mortgage Law.
Whether a mortgage creditor is entitled to pursue a deficiency judgment after an extrajudicial foreclosure sale where the sale proceeds are insufficient to cover the total indebtedness.

Whether the chattel mortgage, being a security for a debt rather than a payment of the debt, permits the creditor to recover a deficiency even when the collateral (the chattel) is sold.
Whether allowing a deficiency judgment would lead to an absurd or unjust result, such as affording the creditor an advantage in cases where the chattel’s value fluctuates significantly.

Whether the trial court erred in applying Article 2115 of the new Civil Code instead of the provisions of the Chattel Mortgage Law, which expressly provide for the possibility of a deficiency judgment in the event of underpayment at auction.