SPOUSES ROMULO DE LA CRUZ AND DELIA DE LA CRUZ, AND DANIEL FAJARDO, PETITIONERS, VS. ASIAN CONSUMER AND INDUSTRIAL FINANCE CORPORATION AND THE HONORABLE COURT OF APPEALS, RESPON…

De la Cruz versus Asian Consumer and Industrial Finance Corporation

The Case

This is a petition for review of a decision of the Court of Appeals affirming a judgment of the trial court in an ordinary action for collection of the unpaid balance of the purchase price of a motor vehicle sold on installment. The spouses Romulo de la Cruz and Delia de la Cruz, together with Daniel Fajardo, are the petitioners, and they are sued by Asian Consumer and Industrial Finance Corporation, the assignee of the seller's rights. The case matters because it fixes the exact point at which a chattel mortgagee is deemed to have chosen the remedy of foreclosure under the Recto Law, and it warns that a creditor may not keep the mortgaged chattel and still collect the full balance of the price.

Procedural History

Asian Consumer and Industrial Finance Corporation filed an ordinary action for collection of the balance of the purchase price, plus liquidated damages and attorney's fees, before the trial court. After trial, the court below rendered judgment in favor of the finance corporation. The spouses and their co-obligor appealed to the Court of Appeals, which affirmed the judgment. It held that no extrajudicial foreclosure ever transpired, because possession of the chattel by the sheriff and a sale at public auction are necessary, and that since the remedy of foreclosure proved ineffectual through no fault of the creditor, the creditor could still exact fulfillment and recover the deficiency. The petitioners then came to the Supreme Court by petition for review.

Facts

On 22 September 1982, the spouses Romulo de la Cruz and Delia de la Cruz, and Daniel Fajardo, purchased on installment one unit Hino truck from Benter Motor Sales Corporation. To secure payment, they executed in favor of the seller a chattel mortgage over the vehicle and a promissory note for 282,360 pesos, payable in thirty monthly installments of 9,412 pesos. On the same date, the seller assigned its rights and interest over the vehicle to Asian Consumer and Industrial Finance Corporation. The buyers initially paid some installments but later defaulted on more than two installments, and they failed to settle despite a demand letter.

On 26 September 1984, by virtue of a petition for extrajudicial foreclosure of the chattel mortgage, the sheriff attempted to repossess the vehicle but was unsuccessful because the son of the petitioner refused to surrender it. The sheriff therefore made a return that the service was not satisfied. On 10 October 1984, Romulo de la Cruz brought the vehicle to the office of the finance corporation and left it there, where it was inventoried and inspected.

On 27 November 1984, the finance corporation filed an ordinary action for collection of the balance of 196,152 pesos and 99 centavos of the purchase price, plus liquidated damages and attorney's fees. No auction sale of the vehicle was ever conducted.

Issues

• Whether or not a chattel mortgagee, after opting to foreclose the mortgage but failing afterwards to sell the property at public auction, may still sue to recover the unpaid balance of the purchase price.
• Whether or not the mortgagee, having recovered possession of the mortgaged chattel, may retain it and at the same time collect the full unpaid balance from the debtors.

Applicable Provisions

Article 1484 of the New Civil Code, the Recto Law, provides:

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 on 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 supplies the three alternative remedies and the bar on recovering any unpaid balance once foreclosure is the remedy actually pursued.

Ruling

On the first issue, the Court ruled that the finance corporation could still sue for the unpaid balance. The three remedies under the Recto Law are alternative and not cumulative, and the exercise of one precludes the others. But the Court stressed that it is the fact of foreclosure and actual sale of the mortgaged chattel that bars recovery of any balance. Here, the sheriff failed to recover the vehicle, and no auction sale was ever conducted. The Court quoted its earlier ruling that if the vendor desisted, on his own initiative, from consummating the auction sale, such desistance was a timely disavowal of the remedy of foreclosure, and the vendor can still sue for specific performance. Since there was no actual foreclosure, the ordinary action for collection was proper.

On the second issue, the Court ruled for the petitioners in part. It noted that the trial court and the Court of Appeals failed to consider that the vehicle was already in the possession of the finance corporation when the petitioners were ordered to pay the balance. The Court held that law and equity will not permit the creditor to have its cake and eat it too. Allowing it to retain the vehicle and still collect the unpaid balance would result in unjust enrichment. Accordingly, ownership and possession of the vehicle should be returned to the petitioners in the condition it was when delivered, and if that is no longer feasible, the amount of 60,000 pesos, its appraised value, should be deducted from their adjudged liability.

Doctrine

Under the Recto Law, the vendor in a sale of personal property payable in installments has three alternative remedies: exact fulfillment, cancellation of the sale, or foreclosure of the chattel mortgage. These remedies are alternative and not cumulative, so the choice of one precludes the others. The remedy of foreclosure is deemed chosen and consummated only when there is an actual foreclosure and sale of the mortgaged chattel at public auction. A mere attempt to foreclose that fails, or a desistance from the auction sale, is a timely disavowal of that remedy, and the vendor may still sue to collect the unpaid balance. However, a creditor who recovers possession of the mortgaged chattel may not retain it and at the same time collect the full balance, for that would result in unjust enrichment; the chattel must be returned, or its appraised value deducted from the liability.

Disposition

The Court affirmed the decision of the Court of Appeals, with the modification that the subject vehicle be returned to the petitioners or, at their option, that they be allowed to deduct 60,000 pesos from their adjudged liability, with no costs.

Remember This

The single line to memorize is that it is the fact of foreclosure and actual sale of the mortgaged chattel that bars recovery of any balance under the Recto Law, not the mere filing of a foreclosure petition. Examiners like to use this case to test the alternative remedies under Article 1484 and the equitable rule against a creditor having its cake and eating it too.