Title
Filipinas Investment and Fice Corp. vs. Vitug, Jr.
Case
G.R. No. L-25951
Decision Date
Jun 30, 1969
FIFC sued Supreme Sales for deficiency after Vitug defaulted on a car loan. Court ruled "with-recourse" agreement valid, Recto Law inapplicable to seller-assignee disputes.
chattel mortgage
deficiency
foreclosing

Case Summary (G.R. No. L-25951)

Factual Background

The amended complaint alleged that Julian R. Vitug, Jr. executed and delivered to Supreme Sales & Development Corporation a promissory note in the amount of P14,605.00, payable in monthly installments according to a payment schedule. The note represented the purchase price of a motor vehicle, a 4-door Consul sedan, and the payment of the price was secured by a chattel mortgage over the automobile. On the same day, Supreme Sales negotiated the promissory note to Filipinas Investment & Finance Corporation (appellant) and assigned to it all rights, title, and interests in the note, including the right of recourse against Supreme Sales. The complaint further alleged that Vitug defaulted on the installments due on January 6, 1965 and the three succeeding monthly installments due on February 6, March 6, and April 6, 1965. The promissory note and chattel mortgage contained a stipulation that failure to pay installments would render the entire obligation due and demandable.

Foreclosure, Sale, and Claimed Deficiency

After the default, appellant demanded payment of the outstanding balance. The appellee allegedly “authorized (appellant) to take such action as may be necessary to enable (it) to take possession of the x x x motor vehicle.” Appellant obtained a writ of replevin from the court for purposes of foreclosure, but the writ became unnecessary because Vitug voluntarily surrendered the vehicle upon learning of it. Thereafter, appellant sold the car at public auction. Despite the sale, a deficiency remained in the amount of P8,349.35, plus interest of 12% per annum from April 21, 1965. Appellant sought to recover this unpaid balance, together with attorney’s fees and costs, from Supreme Sales notwithstanding the foreclosure and auction.

Dismissal in the Trial Court Based on Article 1484

On August 4, 1965, appellee filed an urgent motion to dismiss, inter alia on the ground that appellant had no cause of action against it under Article 1484 of the Civil Code. The trial court, in its order dated August 30, 1965, agreed with that contention and dismissed the amended complaint as to the appellee. The dismissal order reasoned that it was undisputed that the P14,605.00 amount in both the promissory note and chattel mortgage corresponded to the selling price of the automobile payable in installments. It also found that, under the relevant pleadings, the writ of replevin was obtained to foreclose the mortgage. Concluding that appellant had made its choice to foreclose, the trial court ruled that what remained was for appellant to sell the automobile through judicial or extrajudicial foreclosure, without any deficiency judgment or deficiency collection, should the foreclosure proceeds be less than the unpaid installment sale price.

Appellant moved for reconsideration on September 23, 1965, but the motion was denied on October 26, 1965. Appellant thereafter appealed.

The Parties’ Contentions on Appeal

Appellant assigned as its principal error the trial court’s application of Article 1484 to the transaction between appellant and appellee. Appellant contended that the agreement with appellee reserved to it a right of recourse in the event appellant could not recover the full amount from Vitug. In the amended complaint, appellant alleged that on November 4, 1964, Supreme Sales negotiated and endorsed the promissory note in favor of appellant on a with-recourse basis, such that upon Vitug’s failure or refusal to pay, appellant had the right of recourse against Supreme Sales. Appellant also alleged that Supreme Sales assigned to appellant its rights in the promissory note and the chattel mortgage, as shown by a deed of assignment, and that this assignment was likewise subject to the right of recourse.

Appellant argued that its action was not against the buyer, Vitug, to obtain a deficiency prohibited by the Recto Law. Instead, appellant claimed it sued Supreme Sales as the seller/assignor, on the basis of the contractual right of recourse. The question, appellant maintained, was whether the recourse stipulation violated the Recto Law’s prohibition on agreements contrary to Article 1484.

Issue for Resolution

The Supreme Court framed the decisive issue as whether the provision in the agreement between appellant and appellee regarding recourse violated the Recto Law, considering that the law declares void any agreement contrary to its terms, particularly the restriction that—after foreclosure—the vendor has no further action against the purchaser to recover any unpaid balance.

Supreme Court’s Ruling on Applicability of Article 1484

The Supreme Court rejected the trial court’s view that Article 1484 barred appellant’s suit against appellee. It held that the recourse clause did not violate the Recto Law under the circumstances alleged in the amended complaint, which the Court treated as admitted for purposes of the motion to dismiss. The Court reasoned that the arrangement between appellant and appellee was an ordinary discounting transaction. In that transaction, Vitug’s promissory note was negotiated by the seller in favor of appellant for valuable consideration at a discount. The transaction included the assignment of the chattel mortgage securing the payment of the installment obligation, with an express stipulation that if there was any deficiency, recourse could be had against appellee.

The Court stressed that appellant’s remedy was not directed against Vitug as the buyer, but against the seller/assignor, Supreme Sales. It further explained that Article 1484 aims to protect installment buyers, who historically were victimized by sellers who retained both the property and the amounts already paid, and who also demanded additional damages notwithstanding default. The Court expressed the view that Congress could not have intended to impair the seller’s commercial use of credit against the buyer in a manner consistent with the law’s permitted limits. It therefore concluded that the Recto Law did not extend to defeat appellant’s contractual recourse against appellee in the specific structure of the transaction alleged.

Distinction from Cruz v. Filipinas Investment & Finance Corporation

The Court addressed Cruz, et al. vs. the same Filipinas Investment & Finance Corporation, L-24772, May 27, 1968, 23 SCRA 791, where the Court had broadened the Recto Law beyond a literal reading and held that a seller on installment had no right of action against a third party who, in addition to the buyer’s mortgage, furnished additional security. The Supreme Court quoted the reasoning in Cruz that compelling the guarantor to pay would ultimately shift the burden back to the buyer, thereby indirectly subverting the protection of Article 1484 and overruling public policy.

However, the Court held that Cruz was materially different from the present case. It noted that in Cruz, the plaintiff seller attempted to collect the alleged deficiency from a guarantor of the buyer. In the present case, by contrast, the Court found that it was precisely stipulated in effect that appellant had a right of recourse against the seller/assignor if the buyer failed to pay the assigned credit in full. Thus, the Court treated the recourse against appellee as a direct contractual right in the seller-to-discounting-financier relationship, rather than an attempt to recover against security fu

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