MAGNA FINANCIAL SERVICES GROUP, INC., PETITIONER, VS. ELIAS COLARINA, RESPONDENT.

Magna Financial Services Group versus Colarina

The Case

This is a petition for review on certiorari brought by Magna Financial Services Group, Inc., the vendor and mortgagee, against Elias Colarina, the buyer of a Suzuki Multicab on installment, and later against his substituted heirs. The action began as a complaint for foreclosure of chattel mortgage with replevin. The case matters because it fixes the consequences of a financier's election among the remedies under Article 1484 of the Civil Code in a sale of personal property payable in installments. It teaches that a creditor who forecloses the chattel mortgage may not also exact payment of the unpaid balance, and that the election, once made, binds the creditor.

Procedural History

Magna Financial Services Group, Inc. filed a complaint for foreclosure of chattel mortgage with replevin before the Municipal Trial Court in Cities of Legaspi City. Colarina was declared in default, and the trial court rendered judgment ordering him to pay the principal balance with penalty charges, attorney's fees, and costs, with the vehicle to be sold at public auction only upon default in payment.

Colarina appealed to the Regional Trial Court of Legazpi City, which affirmed the trial court in full. During the appeal he died and was substituted by his heirs. The heirs then filed a petition for review before the Court of Appeals, which reversed and set aside the decisions below. The Court of Appeals ordered the foreclosure of the chattel mortgage as prayed for, without any right to seek the unpaid balance or a deficiency judgment under Article 1484 of the Civil Code. Magna's motion for reconsideration was denied, so Magna came to the Supreme Court by petition for review on certiorari.

Facts

On 11 June 1997, Elias Colarina bought on installment from Magna Financial Services Group, Inc. one unit of Suzuki Multicab. After making a down payment, he executed a promissory note for the balance of 229,284 pesos, payable in thirty-six equal monthly installments of 6,369 pesos beginning 18 July 1997. To secure payment, he executed an integrated promissory note and deed of chattel mortgage over the motor vehicle.

Colarina failed to pay beginning January 1999, accumulating an unpaid balance of 131,607 pesos. Despite repeated demands, he did not pay. On 31 October 2000, Magna filed a complaint for foreclosure of chattel mortgage with replevin. Upon the filing of a replevin bond, a writ of replevin was issued. Summons and the writ were served on Colarina, who voluntarily surrendered physical possession of the vehicle to the sheriff. The vehicle was then turned over to Magna.

Colarina was declared in default for filing his answer late, and the trial court rendered judgment on the facts alleged in the complaint. The complaint, however, prayed both for payment of the unpaid amortizations and for surrender of the vehicle so that it could be sold at public auction. This double prayer is the heart of the case.

Issues

• Whether or not a vendor in a sale of personal property payable in installments may simultaneously avail itself of the remedy of exacting fulfillment of the obligation and the remedy of foreclosing the chattel mortgage.
• Whether or not the mortgagee, having elected the remedy of foreclosure under Article 1484, is barred from recovering the unpaid balance of the purchase price or any deficiency judgment.
• Whether or not there has been an actual foreclosure of the mortgaged vehicle, and what the remedy of foreclosure requires.

Applicable Provisions

Article 1484 of the Civil Code provides:

Article 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: (1) Exact fulfillment of the obligation, should the vendee fail to pay; (2) Cancel the sale, should the vendee's failure to pay cover two or more installments; (3) Foreclose the chattel mortgage or the thing sold, if one has been constituted, should the vendee's failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.

This provision limits the vendor to a single remedy and expressly bars any further action for the unpaid balance once foreclosure is chosen.

Section 3 of Act Number 1508, the Chattel Mortgage Law, provides:

Section 3. A chattel mortgage is a conditional sale of personal property as security for the payment of a debt, or the performance of some other obligation specified therein, the condition being that the sale shall be void upon the seller's paying to the purchaser a sum of money or doing some other act named. If the condition is performed according to its terms the mortgage and sale immediately become void, and the mortgagee is thereby divested of his title.

This defines the nature of the security and explains why the mortgagee's title is only for security, not ownership to be enjoyed alongside a money claim.

Section 14 of Act Number 1508 provides:

Section 14. The mortgagee, his executor, administrator, or assign, may, after thirty days from the time of condition broken, cause the mortgaged property, or any part thereof, to be sold at public auction by a public officer at a public place in the municipality where the mortgagor resides, or where the property is situated, provided at least ten days notice of the time, place, and purpose of such sale has been posted at two or more public places in such municipality, and the mortgagee, his executor, administrator, or assign, shall notify the mortgagor or person holding under him and the persons holding subsequent mortgages of the time and place of sale, either by notice in writing directed to him or left at his abode, if within the municipality, or sent by mail if he does not reside in such municipality, at least ten days previous to the sale.

This provision prescribes the manner of extrajudicial foreclosure, which the Court holds must actually be carried out to completion.

Ruling

On the first issue, the Court held that Magna availed itself of both the first and the third remedies under Article 1484 at the same time. Its prayer sought payment of the unpaid amortizations, which is the remedy of exacting fulfillment, and also sought surrender of the vehicle for sale at public auction, which is foreclosure. The Court called this scheme not only irregular but a flagrant circumvention of the prohibition of the law. By praying for foreclosure, Magna renounced whatever claim it may have had under the promissory note.

On the second issue, the Court stressed the statutory bar:

Article 1484, paragraph 3, provides that if the vendor has availed himself of the right to foreclose the chattel mortgage, he shall have no further action against the purchaser to recover any unpaid balance of the purchase price. Any agreement to the contrary shall be void.

The Court explained that in all proceedings for the foreclosure of chattel mortgages on chattels sold on the installment plan, the mortgagee is limited to the property included in the mortgage. The Court also rejected Magna's theory that foreclosure is merely an action for a sum of money with execution of the security, and clarified that a chattel mortgage is a conditional sale given as security, which becomes void once the condition is performed.

On the third issue, the Court held that although the vehicle was already in Magna's possession, no actual foreclosure had been commenced or concluded. The law requires the actual sale of the mortgaged chattel at public auction under Section 14 of the Chattel Mortgage Law. Mere delivery of possession to the mortgagee does not extinguish the buyer's liability unless the mortgagee actually caused the foreclosure sale. Since Magna had consistently avowed that it elected foreclosure, the Court of Appeals correctly directed the foreclosure of the vehicle without more.

Doctrine

A vendor in a sale of personal property payable in installments may exercise only one of the remedies under Article 1484: exact fulfillment, cancellation of the sale, or foreclosure of the chattel mortgage. These remedies are alternative, not cumulative. Once the vendor elects foreclosure, it is bound by that election and may not change it or ask for more. It cannot recover the unpaid balance of the purchase price or any deficiency judgment, and any agreement to the contrary is void. Foreclosure must be actual, meaning the proceedings must be carried through to the sale of the property at public auction under Section 14 of the Chattel Mortgage Law. Possession of the chattel by the mortgagee, without an actual foreclosure sale, does not by itself extinguish the buyer's obligation.

Disposition

The petition was denied for lack of merit, and the decision of the Court of Appeals ordering the foreclosure of the chattel mortgage without any right to recover the unpaid balance or a deficiency judgment was affirmed, with costs against Magna Financial Services Group, Inc.

Remember This

Memorize this line: the remedies under Article 1484 are alternative, and foreclosure bars any further action for the unpaid balance. Examiners use this case to test whether a student can spot a creditor who tries to have its cake and eat it too by combining exact fulfillment with foreclosure.