Case Summary (G.R. No. 214752)
Petitioner’s and Respondent’s Positions
Petitioner: granted a loan to respondent and asserted remedies available to a mortgagee after respondent’s default, including recovery of possession via writ of replevin and foreclosure under the Chattel Mortgage Law, or alternatively collection of the unpaid loan balance. Respondent: admitted default for January–February 2007, claimed she obtained the bank officer’s consent for delayed payments and made late payments of P70,000.00 (Mar 8, 2007) and P33,000.00 (Mar 20, 2007), totaling P103,000.00; challenged petitioner’s simultaneous recovery of the vehicle and pursuit of unpaid balance.
Key Dates
Purchase/loan transaction: August 15–18, 2005 (loan amount P1,196,100.00; monthly installments of P33,225.00 starting Sept 18, 2005). Timely payments through Dec 21, 2006; defaults in Jan–Feb 2007. Demand letter: Feb 22, 2007 (remaining balance P664,500.00). Complaint with replevin filed: Mar 7, 2007. Writ of replevin served: Apr 26, 2007; sheriff’s return: May 8, 2007. Respondent’s late payments: Mar 8 and Mar 20, 2007 (total P103,000.00). RTC decision: May 20, 2010; CA decision: Feb 13, 2014; CA resolution denying partial reconsideration: Oct 8, 2014; Supreme Court decision reviewed here.
Applicable Law and Governing Legal Framework
Primary statutory and doctrinal provisions invoked: the 1987 Constitution (as the governing constitutional framework given the decision date), Civil Code provisions governing installment sales and remedies (Article 1484), Article 2208 on recoverable attorney’s fees and expenses, and Act No. 1508 (The Chattel Mortgage Law), including Section 14 on disposition of foreclosure proceeds. The Promissory Note with Chattel Mortgage executed by the parties contains an acceleration clause and expressly authorizes remedies available to a mortgagee upon default.
Factual Findings Below
Respondent defaulted in January and February 2007, prompting acceleration of the loan balance to P664,500.00. Petitioner sent a demand letter and filed a complaint for recovery of possession with replevin, seeking either possession of the vehicle for foreclosure or, alternatively, collection of the unpaid balance. A writ of replevin was executed and petitioner regained possession. Respondent made late payments aggregating P103,000.00 after petitioner’s filing but before or about the time of the writ’s implementation.
Trial Court Ruling (RTC)
The RTC found respondent in default and confirmed petitioner’s right and possession over the vehicle. The court ordered respondent to pay petitioner P15,000.00 as attorney’s fees and costs of suit. The RTC declined to grant petitioner’s alternative prayer for recovery of the unpaid balance because the writ of replevin had been implemented and possession had been restored to petitioner.
Court of Appeals Ruling
The CA affirmed the RTC with modification: it ordered petitioner to return the P103,000.00 in late payments to respondent and it deleted the award of attorney’s fees due to insufficient basis. The CA reasoned that petitioner’s election to recover the vehicle via replevin constituted a waiver of its right to recover unpaid installments under Article 1484 of the Civil Code (which, in the CA’s view, governs installment-sale remedies) and thus petitioner could not retain the late payments.
Supreme Court’s Characterization of the Contract
The Supreme Court reversed the CA’s characterization: the transaction between the parties was not a vendor–vendee sale of personal property payable in installments but a loan secured by a chattel mortgage. The records show respondent obtained financing from petitioner to purchase a vehicle from a third party; the parties executed a Promissory Note with Chattel Mortgage documenting a debtor–creditor relationship. Because the contract was a loan with an accessory chattel mortgage and not an installment sale, Article 1484’s rule that foreclosure of a chattel mortgage bars further recovery of unpaid balance (third paragraph principle) does not apply as the CA applied it.
Supreme Court’s Analysis on Article 1484 and Waiver
Article 1484 applies to contracts of sale of personal property payable in installments and provides specific remedies for the vendor, including foreclosure of a chattel mortgage as a remedy which, when exercised, precludes further action to recover unpaid balance. The Supreme Court held that the Article cannot be read to govern a pure loan transaction documented by a promissory note and an accessory chattel mortgage; the parties’ rights and remedies are governed by the chattel mortgage instrument and Act No. 1508. Consequently, the CA erred in concluding that petitioner’s pursuit of replevin equated to a statutory waiver of its right to recover unpaid loan installments.
Effect of Respondent’s Late Payments and Treatment of the P103,000.00
The Supreme Court held there is nothing in the Promissory Note with Chattel Mortgage that bars petitioner from receiving late partial payments. Acceptance of such payments reduces the outstanding indebtedness. Accordingly, respondent’s aggregate late payments of P103,000.00 should be credited against the accelerated outstanding balance (P664,500.00), reducing it to P561,500.00. This reduction must be accounted for in any foreclosure proceeding and in the application of proceeds from a foreclosure sale.
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Facts
- On August 15, 2005, respondent Rosalinda C. Palces purchased a Hyundai Starex GRX Jumbo (the subject vehicle) and obtained financing from petitioner Equitable Savings Bank in the amount of P1,196,100.00.
- To secure the loan, respondent executed a Promissory Note with Chattel Mortgage dated August 18, 2005, whereby respondent acknowledged indebtedness and placed the subject vehicle as security.
- The Promissory Note stipulated, inter alia:
- payment of the loan in 36 monthly installments of P33,225.00 beginning September 18, 2005 and every 18th thereafter until full payment;
- default in paying any installment renders the remaining balance due and payable;
- failure to pay installments gives petitioner the right to declare the entire obligation due and payable and to foreclose the mortgage or file an ordinary civil action for collection and/or other actions allowed under law.
- Respondent paid installments from September 18, 2005 to December 21, 2006, but failed to pay the January and February 2007 installments.
- The January–February 2007 default triggered the acceleration clause and petitioner sent a demand letter dated February 22, 2007, demanding payment of the remaining balance of P664,500.00.
- Petitioner filed on March 7, 2007 a Complaint for Recovery of Possession with Replevin with Alternative Prayer for Sum of Money and Damages, praying for:
- issuance of a writ of replevin to seize and deliver the subject vehicle to petitioner; or
- alternatively, judgment ordering respondent to pay the remaining balance, including penalties, charges, and costs.
- Summons and a writ of replevin were personally served on respondent on April 26, 2007; a Sheriff's Return dated May 8, 2007 was submitted showing implementation of the writ.
- Respondent admitted default for January and February 2007 but asserted she called a bank officer (Rodrigo Dumagpi) who gave consent to the delay.
- Respondent maintained she paid P70,000.00 on March 8, 2007 and P33,000.00 on March 20, 2007 — total P103,000.00 — in order to update installments, yet petitioner filed the complaint and the sheriff took possession of the vehicle.
Ruling of the Regional Trial Court (RTC)
- In a Decision dated May 20, 2010, the RTC ruled in favor of petitioner, confirming petitioner's right and possession over the subject vehicle.
- The RTC ordered respondent to pay petitioner P15,000.00 as attorney’s fees and the costs of suit.
- The RTC found respondent defaulted on the January and February 2007 installments, rendering the full balance of P664,500.00 due and demandable under the acceleration clause.
- The RTC observed respondent’s subsequent payments were late and irregular and insufficient to fully pay the outstanding obligation, particularly after petitioner had declared the entire balance due and demandable.
- Because the writ of replevin had already been implemented and possession returned to petitioner, the RTC confirmed petitioner’s possession and declined to grant petitioner’s alternative prayer for payment of the remaining balance at that juncture.
RTC Reconsideration and Appeal
- Respondent moved for reconsideration (motion dated June 21, 2010), which the RTC denied by Order dated August 31, 2010.
- Respondent appealed to the Court of Appeals (CA), arguing petitioner acted in bad faith by attempting to recover the unpaid balance while also recovering possession of the vehicle.
Ruling of the Court of Appeals (CA)
- In a Decision dated February 13, 2014, the CA affirmed the RTC decision with modification:
- ordered petitioner to return to respondent the aggregate amount of P103,000.00 representing respondent’s late p