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Apr 28, 2008

G.R. No. 103576, Aug. 22, 1996

  • Contracts of Security: Chattel Mortgage
  • The rule on after-incurred obligations
  • Is a corporation entitled to moral damages?


Chua Pac, president and general manager of Acme Shoe, Rubber and Plastic Corporation, executed a chattel mortgage in favor of Producers Bank of the Philippines, as a security for a corporate loan in the amount of P3M. The chattel mortgage contained a clause that provided for the mortgage to stand as security for all other obligations contracted before, during and after the constitution of the mortgage.

The P3M was paid. Subsequently, the corporation obtained additional financial accommodations totalling P2.7M. This was also paid on the due date. Again, the bank extended another loan to the corporation in the amount of P1M, covered by four promissory notes. However, the corporation was unable to pay this at maturity. Thereupon, the bank applied for an extra-judicial foreclosure of mortgage.

For its part, the corporation filed an action for injunction with prayer for damages. The lower court ultimately dismissed the case and ordered the extra-judicial foreclosure of mortgage. Hence, this appeal.

  • W/N extra-judicial foreclosure of the chattel mortgage is proper
  • If not proper, W/N the corporation is entitled to damages as a result of the extra-judicial foreclosure


Contracts of Security

Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or suretyship, the faithful performance of the obligation by the principal debtor is secured by the personal commitment of another (the guarantor or surety). In contracts of real security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property -- in pledge, the placing of movable property in the possession of the creditor; in chattel mortgage by the execution of the corresponding and substantially in teh form prescribed by law; in real estate mortgage, by the execution of a public instrument encumbering the real property covered thereby; and in antichresis, by a written instrument granting to the creditor the right to receive the fruits of an immovable property with the obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal of his credit -- upon the essential condition that if the obligation becomes due and the debtor defaults, then the property encumbered can be alienated for the payment of the obligation, but that should the obligation be duly paid, then the contract is automatically extinguished proceeding from the accessory character of the agreement. As the law so puts it, once the obligation is complied with, then the contract of security becomes, ipso facto, null and void.

After-incurred Obligations

While a pledge, real estate mortgage, or antichresis may exceptionaly secure after-incurred obligations so long as these future debts are accurately described, a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covered the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with the Chattel Mortgage Law. Refusal on the part of borrower to execute the agreement so as to cover the after-incurred obligation can constitute as an act of default on the part of the borrower of the financing agreement wherein the promise is written, but, of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed.

In the case at bar, the chattel mortgage was terminated when payment for the P3M loan was made so there was no chattel mortgage to even foreclose at the time the bank instituted the extra-judicial foreclosure.


In its complaint, the corporation asked for moral damages sustained "as a result of the unlawful action taken by the respondent bank against it." The court said --

"Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills and sorrows and griefs of life -- all of which cannot be suffered by respondent bank as an artificial person.

"Although Chua Pac was included in the case, he was only so named as a party in representation of the corporation."


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