THE BANK OF THE PHILIPPINE ISLANDS, PLAINTIFF AND APPELLANT, VS. OLUTANGA LUMBER COMPANY, DEFENDANT AND APPELLEE.

JOHNSON, J.:

This appeal presents a question of law only. It is: May a creditor who has
taken a chattel mortgage to secure the payment of a debt, maintain an action for
a deficiency resulting from a foreclosure of the chattel mortgage? The facts in
the present case are admitted. They are:

(a) That on the 19th day of March, 1918, and on the 1st day of June,
1918, respectively, the plaintiff loaned to the defendant the sum of P85,000,
the payment of which sum was secured by two chattel mortgages executed on said
dates, respectively;

(b) That both of said mortgages were foreclosed and the property
mentioned in each was sold at public auction by the sheriff of the Province of
Zamboanga;

(c) That after the foreclosure of said mortgage there still
remained, due and unpaid, of said indebtedness, the sum of P78,765.81; and

(d) That the defendant having failed and refused to pay said
deficiency, the present action was instituted in the Court of First Instance of
the Province of Zamboanga on the 20th diy of November, 1923.

The defendant demurred to the complaint, upon the ground that the facts
stated were not sufficient to constitute a cause of action.

Upon the issue thus presented, the lower court, after a consideration of the
facts, sustained the demurrer, denying the plaintiff the right to maintain its
action. From that judgment the plaintiff appealed and in four different
assignments of error presents the question indicated above.

The theory of the court a quo evidently is, that a chattel mortgage is a
conditional sale of the property, and, in case of a failure of the condition, to
wit, to pay the debt, the sale becomes absolute and the creditor is obliged to
resort to the mortgaged property for a payment of his debt, and the foreclosure
of the mortgage is his sole recourse.

While it is true that section 3 of Act No. 1508 provides that “a chattel
mortgage is a conditional sale,” it further provides that it “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 lower court
overlooked the fact that the chattels included in the chattel mortgage are only
given as a security and not as a payment of the debt, in case of a
failure of payment. (See Bachrach Motor Co. vs. Summers, 42 Phil., 3,
for a very instructive opinion by Mr. Justice Street upon the theory and effect
of a chattel mortgage.)

The theory of the lower court would lead to the absurd conclusion that if the
chattels mentioned in the mortgage, given as security, should sell for more than
the amount of the indebtedness secured, that the creditor would be entitled to
the full amount for which it might be sold, even though that amount was greatly
in excess of the indebtedness. Such a result certainly was not contemplated by
the Legislature when it adopted Act No. 1508. There seems to be no reason
supporting that theory under the provision of the law. The value of chattels
changes greatly from time to time, and sometimes very rapidly. If, for example,
the chattels should greatly increase in value and a sale under that condition
should result in largely overpaying the indebtedness, and if the creditor is not
permitted to retain the excess, then the same token would require the debtor to
pay the deficiency in case of a reduction in the price of the chattels between
the date of the contract and a breach of the condition.

Mr. Justice Kent, in the 12th edition of his Commentaries, as well as other
authors on the question of chattel mortgages, have said, that “in case of a sale
under a foreclosure of a chattel mortgage, there is no question that the
mortgagee or creditor may maintain an action for the deficiency, if any should
occur.” And the fact that Act No. 1508 permits a private sale, such sale is not,
in fact, a satisfaction of the debt, to any greater extent than the value of the
property at the time of the sale. The amount received at the time of the sale,
of course, always requiring good faith and honesty in the sale, is only a
payment pro tanto, and an action may be maintained for a deficiency in
the debt.

In view of the foregoing facts and law, we find no escape from the conclusion
that the judgment of the lower court upon the demurrer must be revoked, and the
cause is hereby remanded to the court whence it came, with permission on the
part of the defendant, within a period of five days from notice hereof, to
answer the complaint and a failure so to do will be taken as a confession of
judgment for the amount prayed for in the complaint. And, without any finding as
to costs, it is so ordered.

Street, Malcolm, Villamor, Ostrand, Johns, and Romualdez,
JJ., concur.