Sonny Inc., (SI) purchased several heavy machineries from Single Equipment Philippines, Inc. (SEP) for PhP 10 million, payable in 36 monthly installments. A chattel mortgage was constituted on the same machineries as security for the amount. As additional security, the President of SI, Stan Smith, mortgaged his personal house and lot. SI failed to pay the 16th and succeeding monthly installments. SEP then commenced a collection suit against SI, and in the course of the proceedings, a writ of attachment was issued against Sl’s properties, including the mortgaged machineries. The attached properties were subsequently sold at public action, but the proceeds thereof were insufficient to satisfy the judgment credit.
(a) Can SEP legally recover the deficiency? (2.5%)
(b) Instead of collecting the deficiency, can SEP commence extrajudicial proceedings to foreclose the mortgage on Stan’s house and lot in order to recover the deficiency? (2.5%)
Suggested answer only. Not an official answer and not legal advice.
(a) Yes, SEP can legally recover the deficiency. (b) No, SEP cannot foreclose the mortgage on Stan's house and lot. Under Article 1484 of the Civil Code, the prohibition against recovering a deficiency applies only when the seller chooses
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Quick check
Under Article 1484 of the Civil Code (Recto Law), what are the three legal remedies available to a seller of personal property on installment upon the buyer's default?
Article 1484 provides three alternative remedies: exact fulfillment, cancellation of sale, or foreclosure of the chattel mortgage.
Why is a seller who files a collection suit for installment payments allowed to recover the deficiency after an execution sale?
The prohibition against recovering a deficiency applies only when the seller elects to foreclose the chattel mortgage under Article 1484(3).
Under Caltex Philippines, Inc. v. IAC, what is the legal consequence when a mortgage creditor files an ordinary civil action for collection?
Filing an ordinary civil action for collection waives and abandons the mortgage lien securing the obligation.
Why was SEP barred from extrajudicially foreclosing the real estate mortgage on Stan Smith's house and lot to recover the deficiency?
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If a seller of personal property on installment elects to foreclose the chattel mortgage under Article 1484(3), what happens to the unpaid balance if the proceeds are insufficient?
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Learn more about these topics
1. Recto Law Remedies
Under Article 1484 of the Civil Code, commonly known as the Recto Law, a seller of personal property payable in installments has three alternative remedies in case of default: exact fulfillment of the obligation, cancel the sale, or foreclose the chattel mortgage. These remedies are strictly alternative, not cumulative. Choosing exact fulfillment through a collection suit allows the creditor to attach and execute upon any properties of the debtor. However, if the seller chooses to foreclose the chattel mortgage, he is barred from recovering any unpaid deficiency resulting from the foreclosure sale.
2. Execution Sale Deficiency
Under Article 1484(1) of the Civil Code, when the seller elects the remedy of exacting fulfillment of the obligation by filing a civil collection suit, an execution sale of the debtor's attached properties does not constitute a foreclosure of the chattel mortgage. Because the sale is an ordinary execution sale pursuant to a judgment credit rather than a foreclosure under Article 1484(3), the statutory prohibition against recovering a deficiency does not apply. Consequently, the judgment creditor retains the legal right to collect any unsatisfied deficiency balance from the debtor.
3. Waiver of Mortgage
Under the rule established in Caltex Philippines, Inc. v. IAC, a mortgage creditor who elects to file an ordinary civil action for collection of a debt is deemed to have abandoned and waived his real security interest under the mortgage. The remedies of a personal action for collection and a real action for mortgage foreclosure are mutually exclusive. Once the creditor files a collection suit and obtains a personal judgment against the debtor, he cannot subsequently institute extrajudicial foreclosure proceedings against the mortgaged property to satisfy any remaining deficiency.