ASIATRUST DEVELOPMENT BANK, SUBSTITUTED BY ASIA UNITED BANK CORPORATION, PLAINTIFF-APPELLANT, VS. MITSUBOSHI APPLIANCE CORPORATION AND ANTHONY NGO, DEFENDANTS-APPELLEES.

Asiatrust Development Bank versus Mitsuboshi Appliance Corporation

The Case

This is a case about a bank that lent money, took machinery as security, foreclosed on that machinery when the borrower defaulted, and then asked the courts to recover the shortfall. Asiatrust Development Bank, later substituted by Asia United Bank Corporation, sued Mitsuboshi Appliance Corporation and its surety Anthony Ngo for replevin and damages after the borrower failed to pay a restructured loan. The trial court dismissed the complaint and even awarded damages against the bank; the bank appealed. The case matters because it gathers in one place the rules every reviewee must know on the mortgagee's right to possession, the validity of a deficiency claim after extrajudicial foreclosure of a chattel mortgage, and the evidentiary burden of a debtor who cries gross inadequacy of the bid price.

Procedural History

Asiatrust filed a complaint for replevin and damages before Branch 96 of the Regional Trial Court of Quezon City. The trial court granted the application for a writ of replevin upon the posting of a bond, and the sheriff seized the four machineries. After trial on the merits, the trial court rendered judgment in favor of the defendants, dismissing the complaint for lack of merit and ordering the bank to pay moral damages of three million pesos, exemplary damages of one million pesos, attorney's fees of fifty thousand pesos plus three thousand pesos per court appearance, and the costs of suit. Asia United Bank, as substituted plaintiff, appealed. The appeal reached the Supreme Court, which resolved it by reversing the trial court.

Facts

On May 31, 1999, Asiatrust granted Mitsuboshi a credit facility of five million pesos, effective for only three months. The loan was secured by a chattel mortgage dated November 27, 2000 over four plastic injection moulding machines. On October 1, 2004, the loan was restructured into a five year term loan of four million five hundred eight thousand one hundred forty five pesos and eighty seven centavos, at ten percent interest per annum. A promissory note dated October 15, 2004, maturing on January 15, 2010, was issued, a supplemental agreement extended the old chattel mortgage to the restructured loan, and Anthony Ngo executed a continuing suretyship as additional security.

Mitsuboshi defaulted despite demands. A final demand letter dated July 23, 2007 pegged the outstanding obligation at three million eight hundred ninety two thousand one hundred thirty five pesos and seventy nine centavos, exclusive of interest, penalties and charges, but the demand was unheeded. Asiatrust then filed its complaint for replevin and damages. The trial court issued the writ upon a bond of five million one hundred thousand pesos, the sheriff seized the machineries, and on January 14, 2008 the auction sale was held, with Asiatrust as the lone and highest bidder at one million three hundred fifty nine thousand pesos.

Mitsuboshi amended its answer to allege irregularities in the auction, claiming that Anthony Ngo and a friend willing to bid as high as eight million pesos were led to believe no sale would take place, and that the careless dismantling of the machineries reduced them to junk. Anthony Ngo was later impleaded as surety and denied liability, saying he signed as an officer of the corporation. The trial court dismissed the complaint and awarded damages against the bank, prompting the appeal.

Issues

• Whether or not Asia United is entitled to recover from the defendants the deficiency amount arising from the extrajudicial foreclosure of the subject machineries.
• Whether or not the award by the trial court of damages and attorney's fees in favor of the defendants was proper.

Applicable Provisions

Section 14 of the Chattel Mortgage Law provides:

The mortgagee, his executor, administrator, or assign, may, after thirty days from the time the condition is broken, cause the mortgaged property, or any part thereof, to be sold at public auction.

This is the statutory source of the mortgagee's right to cause the public sale of the chattel upon breach of the condition.

Rule 60 of the Rules of Court, on the judgment in a replevin case, provides:

After trial of the issues, the court shall determine who has the right of possession to and the value of the property and shall render judgment in the alternative for the delivery thereof to the party entitled to the same, or for its value in case delivery cannot be made, and also for such damages as either party may prove, with costs.

This defines what the trial court was called upon to adjudicate, namely possession, value, and proven damages.

Section 6 of the Chattel Mortgage provides:

The Mortgagor is in default within the meaning and contemplation of this Mortgage without need for notice to or consent of the Mortgagor, or any other act or deed, in case the Borrower and or the Mortgagor is in default under the provisions of the Agreement.

This establishes that default arose without need of further notice, supporting the foreclosure.

Section 7 of the Chattel Mortgage provides:

Default by the Mortgagor within the meaning and contemplation of Section 6 shall, without need for any notice or demand or any act or deed, all of which are hereby waived, have the same effects and entitle the Mortgagee to exercise the same remedies provided for in the Agreement, in addition to the following, all of which remedies shall be alternative, concurrent and cumulative unless prohibited by law: a) The Mortgagee shall have the right to immediately foreclose on this Mortgage in accordance with Section 8 and shall have the rights, powers and remedies set forth in said Section.

This contractual clause confirms the bank's right to foreclose immediately upon default.

Ruling

On the first issue, the Court ruled in favor of the bank. Upon default, the mortgagee has the right to possession of the mortgaged property preparatory to its sale at public auction, and where the debtor refuses to yield it, the creditor must institute an action, either for judicial foreclosure or to secure possession as a preliminary to the sale. The Court stressed that the mortgagee cannot lawfully take the property by force against the will of the debtor, and must act in an orderly manner without breach of the peace. Here, the complaint was precisely for delivery of personal property with a writ of replevin, and the properties were sold at public auction. Since the proceeds were insufficient, the Court held that the bank is entitled to recover the deficiency, because a chattel mortgage is only security and not payment for the debt. The Court rejected the claim of gross inadequacy of the bid price, noting that the chattel mortgage was executed in 2000 and could not accurately estimate market value eight years later, that wear and tear depreciates the chattels, and that the suretyship itself suggested the collateral was insufficient. The debtor's self-serving declaration and the account officer's testimony were not enough.

On the second issue, the Court found the award of damages and attorney's fees improper, since the defendants failed to substantiate their counterclaim, and the alleged irregularities in the auction rested on their own misgivings rather than on proof of any legal violation.

Doctrine

First, upon default, the mortgagee has the right to possession of the mortgaged chattel preparatory to public sale, but must secure it in an orderly manner, without force and without breach of the peace, and if the debtor refuses, by instituting the proper action. Second, if the proceeds of the extrajudicial foreclosure are insufficient to cover the debt, the mortgagee may recover the deficiency, because a chattel mortgage is given only as security and not as payment. Third, the debtor who alleges gross inadequacy of the bid price bears the burden of proving the fair market value at the time of sale; the mortgage contract's valuation and self-serving declarations do not suffice. Fourth, damages and attorney's fees cannot be awarded absent proof of the factual and legal basis of the counterclaim.

Disposition

The Supreme Court granted the appeal, reversed the trial court, and upheld the bank's right to recover the deficiency, setting aside the award of damages and attorney's fees in favor of the defendants.

Remember This

The one line to memorize: a chattel mortgage is security, not payment, so the mortgagee may claim the deficiency after foreclosure. Examiners use this case to test the mortgagee's right to possession under Section 14 of the Chattel Mortgage Law and the evidentiary burden on a debtor alleging gross inadequacy of the bid price.