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G.R. No. L-46306


October 27, 1939
LEVY HERMANOS, INC. vs. LAZARDO BLAS GERVACIO
On February 9-4, 1938, plaintiff filed a complaint in the Court of First Instance of Manila,
which substantially recites the following facts:
On March 10, 1937, plaintiff Levy Hermanos, Inc., sold to defendant Lazaro Blas
Gervacio, a Packard car. Defendant, after making the initial payment, executed a
promissory note for the balance of P2,400, payable on or before June 15, 1937, with
interest at 12 per cent per annum, to secure the payment of the note, he mortgaged the
car to the plaintiff. Defendant failed to pay the note it its maturity. Wherefore, plaintiff
foreclosed the mortgage and the car was sold at public auction, at which plaintiff was the
highest bidder for P1,800. The present action is for the collection of the balance of
P1,600 and interest.
Defendant admitted the allegations of the complaint, and with this admission, the parties
submitted the case for decision. The lower court applied, the provisions of Act No. 4122,
inserted as articles 1454-A of the Civil Code, and rendered judgment in favor of the
defendant. Plaintiff appealed.
Article 1454-A of the Civil Code reads as follows:
In a contract for the sale of personal property payable in installments shall confer
upon the vendor the right to cancel the sale or foreclose the mortgage if one has
been given on the property, without reimbursement to the purchaser of the
installments already paid, if there be an agreement to this effect.
However, if the vendor has chosen to foreclose the mortgage he shall have no
further action against the purchaser for the recovery of any unpaid balance owing
by the same and any agreement to the contrary shall be null and void.
In Macondray and Co. vs. De Santos (33 Off. Gaz., 2170), we held that "in order to apply
the provisions of article 1454-A of the Civil Code it must appear that there was a contract
for the sale of personal property payable in installments and that there has been a failure
to pay two or more installments." The contract, in the instant case, while a sale of
personal property, is not, however, one on installments, but on straight term, in which the
balance, after payment of the initial sum, should be paid in its totality at the time specified
in the promissory note. The transaction is not is not, therefore, the one contemplated in
Act No. 4122 and accordingly the mortgagee is not bound by the prohibition therein
contained as to the right to the recovery of the unpaid balance.

Undoubtedly, the law is aimed at those sales where the price is payable in several
installments, for, generally, it is in these cases that partial payments consist in relatively
small amounts, constituting thus a great temptation for improvident purchasers to buy
beyond their means. There is no such temptation where the price is to be paid in cash,
or, as in the instant case, partly in cash and partly in one term, for, in the latter case, the
partial payments are not so small as to place purchasers off their guard and delude them
to a miscalculation of their ability to pay. The oretically, perhaps, there is no difference
between paying the price in tow installments, in so far as the size of each partial payment
is concerned; but in actual practice the difference exists, for, according to the regular
course of business, in contracts providing for payment of the price in two installments,
there is generally a provision for initial payment. But all these considerations are
immaterial, the language of the law being so clear as to require no construction at all.
lwphi1.nt

The suggestion that the cash payment made in this case should be considered as an
installment in order to bring the contract sued upon under the operation of the law, is
completely untenable. A cash payment cannot be considered as a payment by
installment, and even if it can be so considered, still the law does not apply, for it requires
non-payment of two or more installments in order that its provisions may be invoked.
Here, only one installment was unpaid.
Judgment is reversed, and the defendant-appellee is hereby sentenced to pay plaintiffappellant the sum of P1,600 with interest at the rate of 12 per cent per annum from June
15, 1937, and the sum of P52.08 with interest at the rate of 6 per cent from the date of
the filing of the complaint, with costs in both instances against the appellee.
G.R. No. 61043
September 2, 1992
DELTA MOTOR SALES CORPORATION vs. NIU KIM DUAN and CHAN FUE ENG
Elevated to this Court by the Court of Appeals, in its Resolution of May 20, 1982, on a
pure question of law, 1 is the appeal therein by defendants-appellants, Niu Kim Duan and
Chan Fue Eng assailing the trial courts decision promulgated on October 11, 1977, 2
which ordered them to pay plaintiff-appellee, Delta Motor Sales Corporation, the amount
of P6,188.29 with a 14% per annum interest which was due on the three (3) "Daikin" airconditioners defendants-appellants purchased from plaintiff-appellee under a Deed of
Conditional Sale, after the same was declared rescinded by the trial court. They were
likewise ordered to pay plaintiff-appellee P1,000.00 for and as attorneys fees.
The events which led to the filing of the case in the lower court were summarized by the
Court of Appeals, as follows:

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"On July 5, 1975, the defendants purchased from the plaintiff three (3) units of DAIKIN
air-conditioner all valued at P19,350.00 as evidenced by the Deed of Conditional Sale,
Exhibit A; that the aforesaid deed of sale had the following terms and conditions:
(a) the defendants shall pay a down payment of P774.00 and the balance of P18,576.00
shall [be] paid by them in twenty four (24) installments; (b) the title to the properties
purchased shall remain with the plaintiff until the purchase price thereof is fully paid; (c) if
any two installments are not paid by the defendants on their due dates, the whole of the
principal sum remaining unpaid shall become due, with interest at the rate of 14% per
annum: and (d) in case of a suit, the defendants shall pay an amount equivalent to 25%
of the remaining unpaid obligation as damages, penalty and attorneys fees; that to
secure the payment of the balance of P18,576.00 the defendants jointly and severally
executed in favor of the plaintiff a promissory note, Exhibit C; that the three (3) airconditioners were delivered to and received by the defendants as shown by the delivery
receipt, Exhibit B; that after paying the amount of P6,966.00, the defendants failed to pay
at least two (2) monthly installments; that as of January 6, 1977, the remaining unpaid
obligation of the defendants amounted to P12,920.08; that statements of accounts were
sent to the defendants and the plaintiffs collectors personally went to the former to effect
collections but they failed to do so; that because of the unjustified refusal of the
defendants to pay their outstanding account and their wrongful detention of the
properties in question, the plaintiff tried to recover the said properties extra-judicially but
it failed to do so; that the matter was later referred by the plaintiff to its legal counsel for
legal action; that in its verified complaint dated January 28, 1977, the plaintiff prayed for
the issuance of a writ of replevin, which the Court granted in its Order dated February 28,
1977, after the plaintiff posted the requisite bond; that on April 11, 1977, the plaintiff, by
virtue of the aforesaid writ, succeeded in retrieving the properties in question: that as of
October 3, 1977, the outstanding account of the defendants is only in the amount of
P6,188.29 as shown by the computation, Exhibit F, after deducting the interests in
arrears, cover charges, replevin bond premiums, the value of the units repossessed and
the like; and, that in view of the failure of the defendants to pay their obligations, the
amount of P6,966.00 which had been paid by way of installments were treated as rentals
for the units in question for two (2) years pursuant to the provisions of paragraph 5 of the
Deed of Conditional Sale, Exhibit A. (pp. 5-7, Record; pp. 4-6, Appellants Brief)."
As above-stated, the trial court ruled in favor of Plaintiff-Appellee.
Defendants-appellants assail the Deed of Conditional Sale under which they purchased
the three (3) Daikin air-conditioners from plaintiff-appellee as being contrary to law,
morals, good custom, public order or public policy. In particular, they point to the
contracts paragraphs 5 and 7 as iniquitous, which paragraphs state that:

"5. Should BUYER fail to pay any of the monthly installments when due, or otherwise fail
to comply with any of the terms and conditions herein stipulated, this contract shall
automatically become null and void and all sums so paid by BUYER by reason thereof
shall be considered as rental and the SELLER shall then and there be free to take
possession thereof without liability for trespass or responsibility for any article left in or
attached to the PROPERTY:
x

"7. Should SELLER rescind this contract for any of the reasons stipulated in the
preceding paragraph, the BUYER, by these presents obligates himself to peacefully
deliver the PROPERTY to the SELLER in case of rescission, and should a suit be
brought in court by the SELLER to seek judicial declaration of rescission and take
possession of the PROPERTY, the BUYER hereby obligates himself to pay all the
expenses to be incurred by reason of such suit and in addition to pay the sum equivalent
to 25% of the remaining unpaid obligation as damages, penalty and attorneys fees;" 3

Defendants-appellants claim that for the use of the plaintiff-appellees three airconditioners, from July 5, 1975 4 to April 11, 1977, 5 or for a period of about 22 months,
they, in effect, paid rentals in the amount of P6,429,92, 6 or roughly one-third (1/3) of the
entire price of said air-conditioners which was P19,350.00. They also complain that for
the said period the trial court is ordering them to pay P6,188.29 as the balance due for
the three air-conditioners repossessed. Defendants-appellants were likewise ordered to
pay P1,000.00 as attorneys fees when plaintiff-appellee never sought for attorneys fees
in its complaint. They satirically pointed out that by putting "a few touches here and there,
the same units can be sold again to the next imprudent customer" 7 by plaintiff-appellee.
Thus, enforcement of the Deed of Conditional Sale will unjustly enrich plaintiff-appellee
at the expense of defendants-appellants.
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Defendants-appellants cannot complain that their downpayment of P774.00 and
installment payments of P5,655.92 8 were treated as rentals even though the total
amount of P6,429,92 which they had paid, approximates one-third (1/3) of the cost of the
three (3) air-conditioners. A stipulation in a contract that the installments paid shall not be
returned to the vendee is valid insofar as the same may not be unconscionable under the
circumstances is sanctioned by Article 1486 of the New Civil Code. 9 The monthly
installment payable by defendants-appellants was P774.00. 10 The P5,655.92
installment payments correspond only to seven (7) monthly installments. Since they
admit having used the air-conditioners for twenty-two (22) months, this means that they
did not pay fifteen (15) monthly installments on the said air-conditioners and were thus

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using the same FREE for said period to the prejudice of plaintiff-appellee. Under the
circumstances, the treatment of the installment payments as rentals cannot be said to be
unconscionable.
II
The vendor in a sale of personal property payable in installments may exercise one of
three remedies, namely, (1) exact the fulfillment of the obligation, should the vendee fail
to pay; (2) cancel the sale upon the vendees failure to pay two or more installments; (3)
foreclose the chattel mortgage, if one has been constituted on the property sold, upon
the vendees failure to pay two or more installments. The third option or remedy,
however, is subject to the limitation that the vendor cannot recover any unpaid balance of
the price and any agreement to the contrary is void (Art. 1484)
The three (3) remedies are alternative and NOT cumulative. If the creditor chooses one
remedy, he cannot avail himself of the other two.
It is not disputed that the plaintiff-appellee had taken possession of the three airconditioners, through a writ of replevin when defendants-appellants refused to extrajudicially surrender the same. This was done pursuant to paragraphs 5 and 7 of its Deed
of Conditional Sale when defendants-appellants failed to pay at least two (2) monthly
installments, so much so that as of January 6, 1977, the total amount they owed plaintiffappellee, inclusive of interest, was P12,920.08. 12 The case plaintiff-appellee filed was
to seek a judicial declaration that it had validly rescinded the Deed of Conditional Sale.
Clearly, plaintiff-appellee chose the second remedy of Article 1484 in seeking
enforcement of its contract with defendants-appellants. This is shown from the fact that
its Exhibit "F" which showed the computation of the outstanding account of defendantsappellants as of October 3, 1977 took into account " the value of the units repossessed. "
Having done so, it is barred from exacting payment from defendants-appellants of the
balance of the price of the three air-conditioning units which it had already repossessed.
It cannot have its cake and eat it too.
WHEREFORE, the judgment of the trial court in Civil Case No. 25578 is hereby SET
ASIDE and the complaint filed by plaintiff-appellee Delta Motor Sales Corporation is
hereby DISMISSED. No costs.
SO ORDERED.

G.R. No. L-10789


May 28, 1957
AMADOR TAJANLANGIT, ET AL. vs. SOUTHERN MOTORS, INC., ET AL.

The case. Appellants seek to reverse the order of Hon. Pantaleon Pelayo, Judge of the
Iloilo court of first instance refusing to interfere with the alias writ of execution issued in
Civil Case No. 2942 pending in another sala of the same court.
The facts. In April 1953 Amador Tajanlangit and his wife Angeles, residents of Iloilo,
bought, from the Southern Motors Inc. of Iloilo two tractors and a thresher. In payment for
the same, they executed the promissory note Annex A whereby they undertook to satisfy
the total purchase price of P24,755.75 in several installments (with interest) payable on
stated dates from May 18, 1953 December 10, 1955. The note stipulated that if default
be made in the payment of interest or of any installment, then the total principal sum still
unpaid with interest shall at once become demandable etc. The spouse failed to meet
any installment. Wherefore, they were sued, in the above Civil Case No. 2942, for the
amount of the promissory note.1 The spouses defaulted, and the court, after listening to
the Southern Motors' evidence entered Judgment for it in the total sum of P24,755.75
together with interest at 12 per cent, plus 10 per cent of the total amount due as
attorney's fees and costs of collection.
Carrying out the order of execution, the sheriff levied on the same machineries and farm
implements which had been bought by the spouses; and later sold them at public auction
to the highest bidder which turned out to be the Southern Motors itself for the total
sum of P10,000.
As its judgment called for much more, the Southern Motors subsequently asked and
obtained, an alias writ of execution; and pursuant thereto, the provincial sheriff levied
attachment on the Tajanlangits' rights and interests in certain real properties with a
view to another sale on execution.
To prevent such sale, the Tajanlangits instituted this action in the Iloilo court of first
instance for the purpose among others, of annulling the alias writ of execution and all
proceedings subsequent thereto. Their two main theories: (1) They had returned the
machineries and farm implements to the Southern Motors Inc., the latter accepted them,
and had thereby settled their accounts; for that reason, said spouses did not contest the
action in Civil Case No. 2942; and (2) as the Southern Motors Inc. had repossessed the
machines purchased on installment (and mortgaged) the buyers were thereby relieved
from further responsibility, in view of the Recto Law, now article 1484 of the New Civil
Code.
For answer, the company denied the alleged "settlement and understanding" during the
pendency of civil case No. 2949. It also denied having repossessed the machineries, the

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truth being that they were attached by the sheriff and then deposited by the latter in its
shop for safekeeping, before the sale at public auction.
The case was submitted for decision mostly upon a stipulation of facts. Additional
testimony was offered together with documentary evidence. Everything considered the
court entered judgment, saying in part;
The proceedings in Civil Case No. 2942 above referred to, were had in the Court
of First Instance (Branch 1) of the Province and of the City of Iloilo. While this
court (Branch IV) sympathizes with plaintiffs, it cannot grant, in this action, the
relief prayed for the complaint because courts of similar jurisdiction cannot
invalidate the judgments and orders of each other. Plaintiffs have not pursued the
proper remedy. This court is without authority and jurisdiction to declare null and
void the order directing the issuance of alias writ of execution because it was
made by another court of equal rank and category (see Cabiao and
Izquierdo vs. Del Rosario and Lim, 44 Phil., 82-186).
WHEREFORE, judgement is hereby rendered dismissing the complaint with
costs against plaintiffs costs against plaintiffs. Let the writ of preliminiary
injunction issued on August 26, 1954, be lifted.
The plaintiffs reasonably brought the matter to the Court of Appeals, but the latter
forwarded the expediente, being of the opinion that the appeal involved questions of
jurisdiction and/or law
Discussion. Appellants' brief elaborately explains in the nine errors assigned, their
original two theories although their "settlement" idea appears to be somewhat modified.
"What is being sought in this present action" say appellants "is to prohibit and forbid the
appellee Sheriff of Iloilo from attaching and selling at public auction sale the real
properties of appellants because that is now forbidden by our law after the chattels that
have been purchased and duly mortgagee had already been repossessed by the same
vendor-mortgagee and later on sold at public auction sale and purchased by the same at
such meager sum of P10,000."
"Our law" provides,
ART. 1484. In a contract of sale of personal property the price of which is payable
in installments, the vendor may exercise 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. (New Civil Code.)
Appellants would invoke the last paragraph. But there has been no foreclosure of the
chattel mortgage nor a foreclosure sale. Therefore the prohibition against further
collection does not apply.
At any rate it is the actual sale of the mortgaged chattel in accordance with
section 14 Act No. 1508 that would bar the creditor (who chooses to foreclose)
from recovering any unpaid balance. (Pacific Com. Co. vs.De la Rama, 72 Phil.
380.) (Manila Motor Co. vs. Fernandez, 99 Phil., 782.).
It is true that there was a chattel mortgage on the goods sold. But the Southern Motors
elected to sue on the note exclusively, i.e. to exact fulfillment of the obligation to pay. It
had a right to select among the three remedies established in Article 1484. In choosing to
sue on the note, it was not thereby limited to the proceeds of the sale, on execution, of
the mortgaged good.2
In Southern Motors Inc. vs. Magbanua, (100 Phil., 155) a similar situation arose in
connection with the purchase on installment of a Chevrolet truck by Magbanua. Upon the
latter's default, suit on the note was filed, and the truck levied on together with other
properties of the debtor. Contending that the seller was limited to the truck, the debtor
obtained a discharge of the other properties. This court said:
By praying that the defendant be ordered to pay the sum of P4,690 together with
the stipulated interest at 12% per annum from 17 March 1954 until fully paid, plus
10 per cent of the total amount due as attorney's fees and cost of collection, the
plaintiff acted to exact the fulfillment of the obligation and not to foreclose the
mortgage on the truck. . . .
As the plaintiff has chosen to exact the fulfillment of the defendant's obligation,
the former may enforce execution of the judgement rendered in its favor on the
personal and real properties of the latter not exempt from execution sufficient to

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satisfy the judgment. That part of the judgement depriving the plaintiff of its right
to enforce judgment against the properties of the defendant except the
mortgaged truck and discharging the writ of attachment on his other properties
is erroneous. (Emphasis ours.)
Concerning their second theory, settlement or cancellation appellants allege that
the very implements sold "were duly returned" by them, and "were duly received and
accepted by the said vendor-mortgagee". Therefore they argue, "upon the return of the
same chattels and due acceptance of the same by the vendor-mortgagee, the conditional
sale is ipso facto cancelled, with the right of the vendor-mortgagee to appropriate
whatever downpayment and posterior monthly installments made by the purchaser as it
did happen in the present case at bar."
The trouble with the argument is that it assumes that acceptance of the goods by the
Southern Motors Co, with a view to "cancellation" of the sale. The company denies such
acceptance and cancellation, asserting the goods, were deposited in its shop when the
sheriff attached them in pursuance of the execution. Its assertion is backed up by the
sheriff, of whose credibility there is no reason to doubt. Anyway this cancellation or
settlement theory may not be heeded now, because it would contravene the decision in
Civil Case No. 2942 above-mentioned it would show the Tajanlangits owned nothing
to Southern Motors Inc. Such decision is binding upon them, unless and until they
manage to set it aside in a proper proceeding and this is not it.
There are other points involved in the case, such as the authority of the judge of one
branch of a court of first instance to enjoin proceedings in another branch of the same
court. As stated, Judge Pelayo refused to interfere on that ground. Appellants insist this
was error on several counts. We deem it unnecessary to deal with this procedural
aspect, inasmuch as we find that, on the merits, plaintiffs are not entitled to the relief
demanded.
Judgment. The decision dismissing the complaint, is affirmed, with costs against
appellants. So ordered.
G.R. No. L-67181 November 22, 1985
SPOUSES RESTITUTO NONATO and ESTER NONATO vs. IAC and INVESTORS
FINANCE CORPORATION
The issue posed in this petition for review of the decision of the respondent appellate
court is whether a vendor, or his assignee, who had cancelled the sale of a motor vehicle

for failure of the buyer to pay two or more of the stipulated installments, may also
demand payment of the balance of the purchase price.
The pertinent facts are summarized by the respondent appellate court as follows:
On June 28, 1976, defendant spouses Restituto Nonato and Ester Nonato
purchased one (1) unit of Volkswagen Sakbayan from the People's Car, Inc., on
installment basis. To secure complete payment, the defendants executed a
promissory note (Exh. A or 1) and a chattel mortgage in favor of People's Car,
Inc, (Exh. B or 2). People's Car, Inc., assigned its rights and interests over the
note and mortgage in favor of plaintiff Investor's Finance Corporation (FNCB)
Finance). For failure of defendants to pay two or more installments, despite
demands, the car was repossessed by plaintiff on March 20, 1978 (Exh. E or 4).
Despite repossession, plaintiff demanded from defendants that they pay the
balance of the price of the car (Exhs. F and C). Finally, on June 9, 1978, plaintiff
filed before the Court of First Instance of Negros Occidental the present
complaint against defendants for the latter to pay the balance of the price of the
car, with damages and attorney's fees. (Records, pp. 36-37)
In their answer, the spouses Nonato alleged by way of defense that when the company
repossessed the vehicle, it had, by that act, effectively cancelled the sale of the vehicle.
It is therefore barred from exacting recovery of the unpaid balance of the purchase price,
as mandated by the provisions of Article 1484 of the Civil Code.
After due hearing, the trial court rendered a decision in favor of the IFC and against the
Nonatos, as follows:
PREMISES CONSIDERED, the Court hereby renders judgment ordering the
defendant to pay to the plaintiff the amount of P 17,537.60 with interest at the
rate of 14% per annum from July 28, 1976 until fully paid, 10% of the amount due
as attorney's fees, litigation expenses in the amount of P 133.05 plus the costs of
this suit. No pronouncement as to other charges and damages, the same not
having been proven to the satisfaction of the Court. 1
On appeal, the respondent appellate court affirmed the j judgment.
Hence, this petition for review on certiorari.

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The applicable law in the case at bar, involving as it does a sale of personal property on
installment, is Article 1484 of the Civil Code which 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.
The meaning of the aforequoted provision has been repeatedly enunciated in a long line
of cases. Thus: "Should the vendee or purchaser of a personal property default in the
payment of two or more of the agreed installments, the vendor or seller has the option to
avail of any of these three remedies-either to exact fulfillment by the purchaser of the
obligation, or to cancel the sale, or to foreclose the mortgage on the purchased personal
property, if one was constituted. These remedies have been recognized as alternative,
not cumulative, that the exercise of one would bar the exercise of the others. 2
It is not disputed that the respondent company had taken possession of the car
purchased by the Nonatos on installments. But while the Nonatos maintain that the
company had, by that act, exercised its option to cancel the contract of sale, the
company contends that the repossession of the vehicle was only for the purpose of
appraising its value and for storage and safekeeping pending full payment by the
Nonatos of the purchasing price. The company thus denies having exercised its right to
cancel the sale of the repossessed car. The records show otherwise.
The receipt issued by the respondent company to the Nonatos when it took possession
of the vehicle states that the vehicle could be redeemed within fifteen [151 days. 3 This
could only mean that should petitioners fail to redeem the car within the aforesaid period by
paying the balance of the purchase price, the company would retain permanent possession of
the vehicle, as it did in fact. This was confirmed by Mr. Ernesto Carmona, the company's
witness, who testified, to wit:
ATTY. PAMPLONA:

So that Mr. Witness, it is clear now that, per your receipt and your answer, the
company will not return the unit without paying a sum of money, more particularly
the balance of the account?
WITNESS: Yes, sir. 4
Respondent corporation further asserts that it repossessed the vehicle merely for the
purpose of appraising its current value. The allegation is untenable, for even after it had
notified the Nonatos that the value of the car was not sufficient to cover the balance of
the purchase price, there was no attempt at all on the part of the company to return the
repossessed car,
Indeed, the acts performed by the corporation are wholly consistent with the conclusion
that it had opted to cancel the contract of sale of the vehicle. It is thus barred from
exacting payment from petitioners of the balance of the price of the vehicle which it had
already repossessed. It cannot have its cake and eat it too.
WHEREFORE, the judgment of the appellate court in CA-G.R. No. 69276-R is hereby
set aside and the complaint filed by respondent Investors Finance Corporation against
petitioner in Civil Case No. 13852 should be, as it is hereby, dismissed. No costs.
SO ORDERED.
G.R. No. L-39806 January 27, 1983
LUIS RIDAD and LOURDES RIDAD vs. FILIPINAS INVESTMENT and FINANCE
CORPORATION, JOSE D. SEBASTIAN and JOSE SAN AGUSTIN, in his capacity as
Sheriff

Appeal from the decision of the Court of First Instance of Rizal, Branch I, in Civil Case
No. 9140 for annulment of contract, originally filed with the Court of Appeals but was
subsequently certified to this Court pursuant to Section 3 of Rule 50 of the Rules of
Court, there being no issue of fact involved in this appeal.
The materials facts of the case appearing on record may be stated as follows: On April
14, 1964, plaintiffs purchased from the Supreme Sales arid Development Corporation
two (2) brand new Ford Consul Sedans complete with accessories, for P26,887 payable
in 24 monthly installments. To secure payment thereof, plaintiffs executed on the same
date a promissory note covering the purchase price and a deed of chattel mortgage not
only on the two vehicles purchased but also on another car (Chevrolet) and plaintiffs'

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franchise or certificate of public convenience granted by the defunct Public Service
Commission for the operation of a taxi fleet. Then, with the conformity of the plaintiffs, the
vendor assigned its rights, title and interest to the above-mentioned promissory note and
chattel mortgage to defendant Filipinas Investment and Finance Corporation.

THE LOWER COURT ERRED IN DECLARING THE CHATTEL


MORTGAGE, EXHIBIT "C", NULL AND VOID.

Due to the failure of the plaintiffs to pay their monthly installments as per promissory
note, the defendant corporation foreclosed the chattel mortgage extra-judicially, and at
the public auction sale of the two Ford Consul cars, of which the plaintiffs were not
notified, the defendant corporation was the highest bidder and purchaser. Another
auction sale was held on November 16, 1965, involving the remaining properties subject
of the deed of chattel mortgage since plaintiffs' obligation was not fully satisfied by the
sale of the aforesaid vehicles, and at the public auction sale, the franchise of plaintiffs to
operate five units of taxicab service was sold for P8,000 to the highest bidder, herein
defendant corporation, which subsequently sold and conveyed the same to herein
defendant Jose D. Sebastian, who then filed with the Public Service Commission an
application for approval of said sale in his favor.

THE LOWER COURT ERRED IN HOLDING THAT THE SALE AT


PUBLIC AUCTION CONDUCTED BY THE CITY SHERIFF OF MANILA
CONCERNING THE TAXICAB FRANCHISE IS OF NO LEGAL EFFECT.

On February 21, 1966, plaintiffs filed an action for annulment of contract before the Court
of First Instance of Rizal, Branch I, with Filipinas Investment and Finance Corporation,
Jose D. Sebastian and Sheriff Jose San Agustin, as party-defendants. By agreement of
the parties, the case was submitted for decision in the lower court on the basis of the
documentary evidence adduced by the parties during the pre-trial conference.
Thereafter, the lower court rendered judgment as follows:
IN VIEW OF THE ABOVE CONSIDERATIONS, this Court declares the chattel
mortgage, Exhibit "C", to be null and void in so far as the taxicab franchise and
the used Chevrolet car of plaintiffs are concerned, and the sale at public auction
conducted by the City Sheriff of Manila concerning said taxicab franchise, to be
of no legal effect. The certificate of sale issued by the City Sheriff of Manila in
favor of Filipinas Investment and Finance Corporation concerning plaintiffs'
taxicab franchise for P8,000 is accordingly cancelled and set aside, and the
assignment thereof made by Filipinas Investment in favor of defendant Jose
Sebastian is declared void and of no legal effect. (Record on Appeal, p. 128).
1wph1.t

From the foregoing judgment, defendants appealed to the Court of Appeals which, as
earlier stated, certified the appeal to this Court, appellants imputing to the lower court five
alleged errors, as follows:
I

II

III
THE LOWER COURT ERRED IN SETTING ASIDE THE CERTIFICATE
OF SALE ISSUED BY THE CITY SHERIFF OF MANILA IN FAVOR OF
FILIPINAS INVESTMENT AND FINANCE CORPORATION COVERING
PLAINTIFFS' TAXICAB FRANCHISE.
IV
THE LOWER COURT ERRED IN DECLARING VOID AND OF NO
LEGAL EFFECT THE ASSIGNMENT OF THE TAXICAB FRANCHISE
MADE BY FILIPINAS INVESTMENT AND FINANCE CORPORATION IN
FAVOR OF DEFENDANT.
V
THE LOWER COURT (sic) IN NOT DECIDING THE CASE IN FAVOR OF
THE DEFENDANTS. Appellants' Brief, pp. 9 & 10)
From the aforequoted assignment of errors, the decisive issue for consideration is the
validity of the chattel mortgage in so far as the franchise and the subsequent sale thereof
are concerned.
The resolution of said issue is unquestionably governed by the provisions of Article 1484
of the Civil Code which states:
Art. 1484. In a contract of sale of personal property the price of which is payable
in installments, the vendor may exercise y of the following remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;

8
(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.
Under the above-quoted article of the Civil Code, the vendor of personal property the
purchase price of which is payable in installments, has the right, should the vendee
default in the payment of two or more of the agreed installments, to exact fulfillment by
the purchaser of the obligation, or to cancel the sale, or to foreclose the mortgage on the
purchased personal property, if one was constituted. 1 Whichever right the vendor elects,
he cannot avail of the other, these remedies being alternative, not cumulative. 2 Furthermore,
if the vendor avails himself of the right to foreclose his mortgage, the law prohibits him from
further bringing an action against the vendee for the purpose of recovering whatever balance
of the debt secured not satisfied by the foreclosure sale. 3 The precise purpose of the law is
to prevent mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a
low price and then bringing suit against the mortgagor for a deficiency judgment, otherwise,
the mortgagor-buyer would find himself without the property and still owing practically the full
amount of his original indebtedness. 4
In the instant case, defendant corporation elected to foreclose its mortgage upon default
by the plaintiffs in the payment of the agreed installments. Having chosen to foreclose
the chattel mortgage, and bought the purchased vehicles at the public auction as the
highest bidder, it submitted itself to the consequences of the law as specifically
mentioned, by which it is deemed to have renounced any and all rights which it might
otherwise have under the promissory note and the chattel mortgage as well as the
payment of the unpaid balance.
Consequently, the lower court rightly declared the nullity of the chattel mortgage in
question in so far as the taxicab franchise and the used Chevrolet car of plaintiffs are
concerned, under the authority of the ruling in the case ofLevy Hermanos, Inc. vs. Pacific
Commercial Co., et al., 71 Phil. 587, the facts of which are similar to those in the case at
bar. There, we have the same situation wherein the vendees offered as security for the
payment of the purchase price not only the motor vehicles which were bought on
installment, but also a residential lot and a house of strong materials. This Court
sustained the pronouncement made by the lower court on the nullity of the mortgage in
so far as it included the house and lot of the vendees, holding that under the law, should
the vendor choose to foreclose the mortgage, he has to content himself with the

proceeds of the sale at the public auction of the chattels which were sold on installment
and mortgaged to him and having chosen the remedy of foreclosure, he cannot nor
should he be allowed to insist on the sale of the house and lot of the vendees, for to do
so would be equivalent to obtaining a writ of execution against them concerning other
properties which are separate and distinct from those which were sold on installment.
This would indeed be contrary to public policy and the very spirit and purpose of the law,
limiting the vendor's right to foreclose the chattel mortgage only on the thing sold.
In the case of Cruz v. Filipinos Investment & Finance Corporation, 23 SCRA 791, this
Court ruled that the vendor of personal property sold on the installment basis is
precluded, after foreclosing the chattel mortgage on the thing sold from having a
recourse against the additional security put up by a third party to guarantee the
purchaser's performance of his obligation on the theory that to sustain the same would
overlook the fact that if the guarantor should be compelled to pay the balance of the
purchase price, said guarantor will in turn be entitled to recover what he has paid from
the debtor-vendee, and ultimately it will be the latter who will be made to bear the
payment of the of the balance of the price, despite the earlier foreclosure of the chattel
mortgage given by him, thereby indirectly subverting the protection given the latter.
Consequently, the additional mortgage was ordered cancelled. Said ruling was reiterated
in the case of Pascual v. Universal Motors Corporation, 61 SCRA 121. If the vendor
under such circumstance is prohibited from having a recourse against the additional
security for reasons therein stated, there is no ground why such vendor should not
likewise be precluded from further extrajudicially foreclosing the additional security put up
by the vendees themselves, as in the instant case, it being tantamount to a further
action 5 that would violate Article 1484 of the Civil Code, for then is actually no between an
additional security put up by the vendee himself and such security put up by a third party
insofar as how the burden would ultimately fall on the vendee himself is concerned.
Reliance on the ruling in Southern Motors, inc. v. Moscoso, 2 SCRA 168, that in sales on
installments, where the action instituted is for and the mortgaged property is
subsequently attached and sold, the sales thereof does not amount to a foreclosure of
the mortgage, hence, the seller creditor is entitled to a deficiency judgment, does not for
the stand of the appellants for that case is entirely different from the case at bar. In that
case, the vendor has availed of the first remedy provided by Article 1484 of the Civil
Code, i.e., to exact fulfillment of the obligation whereas in the present case, the remedy
availed of was foreclosure of the chattel mortgage.
The foregoing disposition renders superfluous a determination of the other issue raised
by the parties as to the validity of the auction sale, in so far as the franchise of plaintiffs is
concerned, which sale had been admittedly held without any notice to the plaintiffs.

9
IN VIEW HEREOF, the judgment appealed from is hereby affirmed, with costs against
the appellants.
SO ORDERED.
G.R. No. L-30583 October 23, 1982
EUTROPIO ZAYAS, JR. vs. LUNETA MOTOR COMPANY and HONORABLE JUAN O.
REYES, Presiding Judge of the Court of First Instance of Manila, Branch XXI
Eutropio Zayas, Jr., filed this petition for review by certiorari to secure a reversal of the
respondent court's orders which remanded Civil Case No. 74381 for further proceedings
instead of affirming the city court's order of dismissal,
The petitioner Eutropio Zayas, Jr, purchased on installment basis a motor vehicle
described as ONE (1) UNIT FORD THAMES FREIGHTER W/PUJ BODY with Engine
No. 400E-127738 and Chassis No. 400E-127738 from Mr. Roque Escao of the Escao
Enterprises in Cagayan de Oro City, dealer of respondent Luneta Motor Company, under
the following terms and conditions:

Selling price

P7,500.00

Financing
charge

P1,426.82

Total Selling
Price

P8,926.82

Payable on
Delivery

P1,006.82

Payable in 24

P7,920.00

months at 12%
interest per
annum

The motor vehicle was delivered to the petitioner who 1) paid the initial payment in the
amount of P1,006.82; and 2) executed a promissory note in the amount of P7,920.00,
the balance of the total selling price, in favor of respondent Luneta Motor Company. The
promissory note stated the amounts and dates of payment of twenty-six installments
covering the P7,920.00 debt. Simultaneously with the execution of the promissory note
and to secure its payment, the petitioner executed a chattel mortgage on the subject
motor vehicle in favor of the respondent. After paying a total amount of P3,148.00, the
petitioner was unable to pay further monthly installments prompting the respondent
Luneta Motor Company to extra-judicially foreclose the chattel mortgage (Annex "A" to
Answer, Original Record, p. 10, supra). The motor vehicle was sold at public auction with
the respondent Luneta Motor Company represented by Atty. Leandro B. Fernandez as
the highest bidder in the amount of P5,000.00 (Annex "B" to Answer, Original Record, p.
11, supra). Since the payments made by petitioner Eutropio Zayas, Jr. plus the
P5,000.00 realized from the foreclosure of the chattel mortgage could not cover the total
amount of the promissory note executed by the petitioner in favor of the respondent
Luneta Motor Company, the latter filed Civil Case No. 165263 with the City Court of
Manila for the recovery of the balance of P1,551.74 plus interests.
Luneta Motor Company alleged in its complaint that defendant Eutropio Zayas, Jr.
executed a promissory note in the amount of P7,920.00 in its favor; that out of the
P7,920.00, Eutropio Zayas, Jr. had paid only P6,368.26 plus interest up to the date of the
sale at public auction of the motor vehicle; that the balance of P1,551.74 plus interest of
12% thereon from that date had already become due and payable but despite repeated
demands to pay the same, Eutropio Zayas, Jr., refused and failed to pay.
In his answer with affirmative defenses and counterclaim, Eutropio Zayas, Jr. admitted
having executed the promissory note for the monthly payments, on a Ford Thames
vehicle bearing Engine No. 400E-127738 which he purchased from the Luneta Motor
Company but he denied his alleged outstanding liability of P1,551.74 plus interest
thereon ... the said obligation if there was any, had already been discharged either by
payment or by sale in public auction of the said motor vehicle as evidenced by a Notice
of Sale marked as Annex "A" and Certificate of Sale marked as Annex "B"; (Answer, p. 7,
Original Record). He alleged as affirmative defenses, among others: 1) that the plaintiff
has no cause of action against him; and 2) that pursuant to Article 1484 of the New Civil
Code and the case of Pacific Commercial Co. v. De La Rama, (72 Phil. 380) his
obligation per the promissory note was extinguished by the sale at public auction of the

10
motor vehicle, the subject of the chattel mortgage which was executed by him in favor of
the plaintiff as security for the payment of said promissory note. (Answer, p. 8, Original
Record)
In its Reply, Luneta Motor Company denied the applicability of Article 1484 of the Civil
Code ... for the simple reason that the contract involved between the parties is not one
for a sale on installment" (Reply, p. 13, Original Record).
After several postponements, the case was set for hearing. As a result of the nonappearance of the plaintiff and its counsel on the date set for hearing, defendant Zayas,
Jr. moved to have the case dismissed for lack of interest on the part of the plaintiff. He
also asked the court to allow him to discuss the merits of his affirmative defense as if a
motion to dismiss had been filed. The issue raised and argued by the defendant was
whether or not a deficiency amount after the motor vehicle, subject of the chattel
mortgage, has been sold at public auction could still be recovered. Zayas cited the case
of Ruperto Cruz v. Filipinas Investment (23 SCRA 791).
<re||an1w>

Acting on the motion, the city court issued an Order:


On Petition of counsel for the defendant for the dismissal of this case on the
ground that the defendant is no longer liable for the deficiency judgment inas
much as the chattel mortgage has been foreclosed, with the plaintiff as the
highest bidder thereof, citing the case of Ruperto G. Cruz v. Filipinas
Investmentdecided on May 27, 1968, G.R. No. L-24772 in connection with Article
1484 of the Civil Code, and finding the same well taken.
Let this case be dismissed without pronouncement as to costs.
Luneta Motor Company filed an "Urgent Motion for Reconsideration" reiterating its stand
that Article 1484 of the New Civil Code on sale of personal property by installment was
not applicable and that the contract involving the parties was a mere case of an ordinary
loan secured by chattel mortgage. According to the plaintiff, the defendant executed the
promissory note and chattel mortgage to secure the plaintiff's interest for having financed
the purchase of the motor vehicle by the defendant from the Escao Enterprises of
Cagayan de Oro City, an entity entirely different and distinct from the plaintiff corporation
(p. 33, Original Record).
The court denied the motion for reconsideration for lack of merit.
Luneta Motor Company appealed the case to the Court of First Instance of Manila where
it was docketed as Civil Case No. 74381.

After various incidents, the respondent court issued an order which, in part, reads:
This is an appeal taken by plaintiff from the order of the City Court of Manila,
dismissing its complaint on the ground that the defendant is no longer liable for
the deficiency judgment inasmuch as the chattel mortgage has been foreclosed,
with the plaintiff as the highest bidder thereof, in line with the ruling of the
Supreme Court in the case of Ruperto G. Cruz v. Filipinas Investment (G.R. No.
L24772) in connection with Article 1484 of the Civil Code.
xxx xxx xxx
After going over the pleadings in this case, more particularly the
complaint and the answer to the complaint filed with the City Court of
Manila, this Court is of the impression that the case at bar may not be
decided merely, as the City Court had done, on the question of law since
the presentation of evidence is necessary to adjudicate the questions
involved. WHEREFORE, this case is hereby remanded to the court of
origin for further proceedings. (pp. 82-83, Original Record)
Hence, this petition.
Petitioner Eutropio Zayas, Jr. now maintains::
That Respondent Court of First Instance erred:
1. IN HOLDING THAT THE QUESTION OF LAW CANNOT BE DECIDED SINCE
PRESENTATION OF EVIDENCE IS NECESSARY- REGARDING THE
QUESTION OF RECOVERY OF THE DEFICIENCY AMOUNT IN A CHATTEL
MORTGAGE AFTER SELLING IT IN A PUBLIC AUCTION;
2. IN ORDERING THE REMAND OF THE CASE TO THE CITY COURT FOR
FURTHER PROCEEDINGS TAKEN BY THE RESPONDENT FROM THE CITY
COURT TO THE COURT OF FIRST INSTANCE, BRANCH XXI, MANILA; and
3. IN NOT DISMISSING THE APPEAL TAKEN BY THE PRIVATE RESPONDENT
FROM THE CITY COURT TO THE COURT OF FIRST INSTANCE.
The main defense of respondent Luneta Motor Company is that Escano Enterprises,
Cagayan de Oro City from which petitioner Eutropio Zayas, Jr. purchased the subject
motor vehicle was a distinct and different entity; that the role of Luneta Motor Company
in the said transaction was only to finance the purchase price of the motor vehicle; and
that in order to protect its interest as regards the promissory note executed in its favor, a

11
chattel mortgage covering the same motor vehicle was also executed by petitioner
Eutropio Zayas, Jr. In short, respondent Luneta Motor Company maintains that the
contract between the company and the petitioner was only an ordinary loan removed
from the coverage of Article 1484 of the New Civil Code.

10749
10132
10788
10795
10827
10934
10991
11105

The respondent's arguments have no merit.


The Escao Enterprises of Cagayan de Oro City was an agent of Luneta Motor
Company. A very significant evidence which proves the nature of the relationship
between Luneta Motor Company and Escao Enterprises is Annex "A. of the petitioner's
OPPOSITION TO URGENT MOTION FOR RECONSIDERATION. (Original Record, p.
36) Annex "A" is a Certification from the cashier of Escano Enterprises on the monthly
installments paid by Mr. Eutropio Zayas, Jr. In the certification, the promissory note in
favor of Luneta Motor Company was specifically mentioned. There was only one
promissory note executed by Eutropio Zayas, Jr. in connection with the purchase of the
motor vehicle. The promissory note mentioned in the certification refers to the promissory
note executed by Eutropio Zayas, Jr. in favor of respondent Luneta Motor Company.
Thus:

March 22, 1967


March 30,1967
April 8, 1967
April 11, 1967
April 18, 1967
May 10, 1967
May 26,1967
June 19,1967
P3,148.00

60.00
100.00
100.00
100.00
100.00
100.00
100.00
150.00

ESCAO ENTERPRISES
(SGD.) EMELITA H. BACULIO
Cashier
Escano Enterprises, a dealer of respondent Luneta Motor Company, was merely a
collecting-agent as far as the purchase of the subject motor vehicle was concerned. The
principal and agent relationship is clear.

C E R T I F I C AT I O N
This is to certify that Mr. EUTROPIO ZAYAS, JR. has paid from us the following, of his
FORD THAMES BEARING Engine No. 400E-127738, promissory note dated October 6,
1966. Viz:
C E R T I F I C AT I O N
This is to certify that Mr. EUTROPIO ZAYAS, JR. has paid from us the following, of his
FORD THAMES BEARING Engine No. 400E-127738, promissory note dated October 6,
1966. Viz:
ESCAO O.R NUMBER
09998
10064
10188
10355
LMC C.R. #40031
10536
10645
10704

DATE RECEIVED
October 5, 1966
October 20, 1966
November 8, 1966
December 12,1966
January 19, 1967
February 1, 1967
February 27, 1967
March 13,1967

AMOUNT
P1,000.00
242.00
166.00
400.00
270.00
60.00
100.00
100.00

But even assuming that the "distinct and independent entity" theory of the private
respondent is valid, the nature of the transaction as a sale of personal property on
installment basis remains. When, therefore, Escao Enterprises, assigned its rights visa-vis the sale to respondent Luneta Motor Company, the nature of the transaction
involving Escano Enterprises and Eutropio Zayas, Jr. did not change at all. As assignee,
respondent Luneta Motor Company had no better rights than assignor Escao
Enterprises under the same transaction. The transaction would still be a sale of personal
property in installments covered by Article 1484 of the New Civil Code. To rule otherwise
would pave the way for subverting the policy underlying Article 1484 of the New Civil
Code, on the foreclosure of chattel mortgages over personal property sold on installment
basis.
ART. 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:
xxx xxx xxx
xxx xxx xxx
(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

12
shall have no further action against the purchaser to recover any unpaid balance
of the price. Any agreement to the contrary shall be void.

Direct appeal on questions of law from the portion of the judgment of the Court of First
Instance of Manila, Branch XXII, in its Civil Case No. 66199, ordering the plaintiff to pay
defendant Casiano Sapinoso the sum of P1,250.00.

xxx xxx xxx


... the established rule is to the effect that the foreclosure and actual sale of a mortgaged
chattel bars further recovery by the vendor of any balance on the purchaser's
outstanding obligation not so satisfied by the sale. And the reason for this doctrine was
aptly stated in the case of Bachrach Motor Co. vs. Millan, supra, thus:
Undoubtedly the principal object of the above amendment was to remedy the
abuses committed in connection with the foreclosure of chattel mortgages. This
amendment prevents mortgagees from seizing the mortgaged property, buying it
at foreclosure sale for a low price and then bringing suit against the mortgagor for
a deficiency judgment. The almost invariable result of this procedure was that the
mortgagor found himself minus the property and still owing practically the full
amount of his original indebtedness. Under this amendment the vendor of
personal property, the purchase price of which is payable in installments, has the
right to cancel the sale or foreclose the mortgage if one has been given on the
property. Whichever right the vendor elects he need not return to the purchaser
the amount of the installments already paid, "if there be an agreement to that
effect". Furthermore, if the vendor avails himself of the right to foreclose the
mortgage this amendment prohibits him from bringing an action against the
purchaser for the unpaid balance. (Cruz v. Filipinas Investment & Finance
Corporation, 23 SCRA 791)
Our findings and conclusions are borne out by the records available to the respondent
court. There was no necessity for the remand of records to the city court for the
presentation of evidence on the issue raised in the case.
WHEREFORE, the instant petition is hereby granted. The orders remanding the case to
the court of origin and denying the motion for reconsideration of the Court of First
Instance of Manila, Branch XXI issued in Civil Case No. 74381 are annulled. Accordingly,
the Court of First Instance of Manila, Branch XXI is directed to dismiss the appeal in Civil
Case No. 74381. The Order of the City Court of Manila dismissing the complaint in Civil
Case No. 165263 is affirmed. SO ORDERED.
G.R. No. L-28074 May 29, 1970
NORTHERN MOTORS, INC vs. CASIANO SAPINOSO and "JOHN DOE"

The facts of this case are as follows:


On June 4, 1965, Casiano Sapinoso purchased from Northern Motors, Inc. an Opel
Kadett car for the price of P12,171.00, making a down payment and executing a
promissory note for the balance of P10,540.00 payable in installments with interest at
12% per annum, as follows: P361.00 on July 5, 1965, and P351.00 on the 5th day of
each month beginning August, 1965, up to and including December, 1967. To secure the
payment of the promissory note, Sapinoso executed in favor of Northern Motors, Inc. a
chattel mortgage on the car. The mortgage contract provided, among others, that upon
default by the mortgagor in the payment of any part of the principal or interest due, the
mortgagee may elect any of the following remedies: (a) sale of the car by the mortgagee;
(b) cancellation of the contract of sale; (c) extrajudicial foreclosure; (d) judicial
foreclosure; (e) ordinary civil action to exact fulfillment of the mortgage contract. It was
further stipulated that "[w]hichever remedy is elected by the mortgagee, the mortgagor
expressly waives his right to reimbursement by the mortgagee of any and all amounts on
the principal and interest already paid by him."
Sapinoso failed to pay the first installment of P361.00 due on July 5, 1965, and the
second, third, fourth and fifth installments of P351.00 each due on the 5th day of August,
September, October and November, 1965, respectively. Several payments were,
however, made by Sapinoso, to wit: P530.52 on November 21, 1965, P480.00 on
December 21, 1965, and P400.00 on April 30, 1966. The first and third payments
aforesaid were applied to accrued interest up to April 17, 1966, while the second
payment was applied partly (P158.10) to interest, and partly (P321.90) to the principal,
thereby reducing the balance unpaid to P10,218.10.
The vendee-mortgagor having failed to make further payments, Northern Motors, Inc.
filed the present complaint on July 22, 1966, against Sapinoso and a certain person
whose name, identity and address were still unknown to the plaintiff, hence denominated
in the complaint as "John Doe." In its complaint, Northern Motors, Inc. stated that it was
availing itself of the option given it under the mortgage contract of extrajudicially
foreclosing the mortgage, and prayed that a writ of replevin be issued upon its filing of a
bond for the seizure of the car and for its delivery to it; that after hearing, the plaintiff be
adjudged to have the rightful possession and ownership of the car; that in default of
delivery, the defendants be ordered to pay the plaintiff the sum of P10,218.10 with
interest, at 12% per annum from April 18, 1966, until full payment of the said sum, as well

13
as an amount equivalent to 25% of the sum due as and for attorney's fees and expenses
of collection, and the costs of the suit. Plaintiff also prayed for such other remedy as
might be deemed just and equitable in the premises.
Subsequent to the commencement of the action, but before the filing of his answer,
defendant Sapinoso made two payments on the promissory note, the first on August 22,
1966, for P500.00, and the second on September 27, 1966, for P750.00. In the
meantime, on August 9, 1966, upon the plaintiff's filing of a bond, a writ of replevin was
issued by the court. On October 20, 1966, copies of the summons, complaint and
annexes thereto were served on defendant Sapinoso by the sheriff who executed the
seizure warrant by seizing the car from defendant Sapinoso on the same date, and
turning over its possession to the plaintiff on October 25, 1966.
On November 12, 1966, defendant Sapinoso filed an answer admitting the allegations in
the complaint with respect to the sale to him of the car, the terms thereof, the execution
of the promissory note and of the chattel mortgage contract, and the options open to the
plaintiff under the said contract. He alleged, however, that he had paid the total sum of
P4,230.52, leaving a balance of only P5,987.58; that upon demand he immediately
surrendered the possession of the car to the plaintiff's representative; and that the value
of the car was only about P5,000.00, and not P10,000.00 as alleged in the complaint. As
special defenses the said defendant alleged that he failed to pay the installments due
because the car was defective, and the plaintiff failed to have it fixed although he had
repeatedly called the plaintiff's attention thereto, hence, the defendant had to
procrastinate in his payments in order to move the plaintiff to repair the car; and that
although the car could not be used, he paid P700.00 to the plaintiff upon the latter's
assurance that the car would be fixed, but that instead of having the car fixed, the
plaintiff, in bad faith, filed the present complaint. The defendant prayed that the complaint
be dismissed and that the plaintiff be ordered to return the car to him. He stated in his
prayer that he would be very much willing to pay the car in a compromise agreement
between him and the plaintiff.
After trial, the court a quo, in its decision dated April 4, 1967, held that defendant
Sapinoso having failed to pay more than two (2) installments, plaintiff-mortgagee
acquired the right to foreclose the chattel mortgage, which it could avail of as it has
done in the present case by filing an action of replevin to secure possession of the
mortgaged car as a preliminary step to the foreclosure sale contemplated in the Chattel
Mortgage Law; and that the foreclosure of the chattel mortgage and the recovery of the
unpaid balance of the price are alternative remedies which may not be pursued
conjunctively, so that in availing itself of its right to foreclose the chattel mortgage, the
plaintiff thereby renounced whatever claim it may have had on the promissory note, and,

therefore, the plaintiff has no more right to the collection of the attorney's fees stipulated
in the promissory note, and should return to defendant Sapinoso the sum of P1,250.00
which the plaintiff had received from the latter after having filed the present case on July
22, 1966, and elected to foreclose the chattel mortgage. The dispositive portion of the
decision reads:
WHEREFORE, the Court finds that the plaintiff has the right to the possession of
the OPEL KADETT two-door station wagon Model 3464-91.5, with engine No.
10-0354333, and the delivery thereof to the plaintiff is hereby ratified and
confirmed but said party is sentenced to pay to the defendant the sum of P1,250,
with legal interest on P500 from August 22, 1966 and or P750 from September
27, 1966, until fully paid, without any pronouncement as to costs.
In this appeal plaintiff-appellant claims that the court a quo erred in ordering it to
reimburse to defendant-appellee Sapinoso the sum of P1,250.00 which the latter had
paid. It contends that under Article 1484 of the Civil Code it is the exercise, not the
mere election, of the remedy of foreclosure that bars the creditor from recovering the
unpaid balance of the debt; that what the said Article 1484 prohibits is "further action" to
collect payment of the deficiency after the creditor has foreclosed the mortgage; and that
in paying plaintiff-appellant the sum of P1,250.00 before defendant-appellee Sapinoso
filed his answer, and in not filing a counterclaim for the recovery thereof, the said
defendant-appellee in effect renounced whatever right he might have had to recover the
said amount.
The appeal is meritorious.
In issuing a writ of replevin, and, after trial, in upholding plaintiff-appellant's right to the
possession of the car, and ratifying and confirming its delivery to the said plaintiffappellant, the court below correctly considered the action as one of replevin to secure
possession of the mortgaged vehicle as a preliminary step to this foreclosure sale
contemplated in Section 14 of Act No. 1508 (Bachrach Motor Co. vs. Summers, 42 Phil.,
3; Seo vs. Pestolante, G.R. No. L-11755, April 23, 1958). The said court however erred
in concluding that the legal effect of the filing of the action was to bar plaintiff-appellant
from accepting further payments on the promissory note. That the ultimate object of the
action is the foreclosure of the chattel mortgage, is of no moment, for it is the fact of
foreclosure and actual sale of the mortgaged chattel that bar further recovery by the
vendor of any balance on the purchaser's outstanding obligation not satisfied by the sale.
(Manila Motor Co., Inc. vs. Fernandez, 99 Phil., 782, 786; Bachrach Motor Co. vs. Millan,
61 Phil., 409; Manila Trading & Supply Co. vs. Reyes, 62 Phil. 461, 471; Cruz et al. vs.
Filipinas Investment & Finance Corporation, G.R. No. L-24772, May 27, 1968 [23 SCRA

14
791, 796].) In any event, what Article 1484(3) prohibits is "further action against the
purchaser to recover any unpaid balance of the price;" and although this Court has
construed the word "action" in said Article 1484 to mean "any judicial or extrajudicial
proceeding by virtue of which the vendor may lawfully be enabled to exact recovery of
the supposed unsatisfied balance of the purchase price from the purchaser or his privy"
(Cruz, et al. vs. Filipinas Investment & Finance Corporation, supra), there is no occasion
at this stage to apply the restrictive provision of the said article, because there has not
yet been a foreclosure sale resulting in a deficiency. The payment of the sum of
P1,250.00 by defendant-appellee Sapinoso was a voluntary act on his part and did not
result from a "further action" instituted by plaintiff-appellant. If the mortgage creditor,
before the actual foreclosure sale, is not precluded from recovering the unpaid balance
of the price although he has filed an action of replevin for the purpose of extrajudicial
foreclosure, or if a mortgage creditor who has elected to foreclose but who subsequently
desists from proceeding with the auction sale, without gaining any advantage or benefit,
and without causing any disadvantage or harm to the vendee-mortgagor, is not barred
from suing on the unpaid account (Radiowealth, Inc. vs. Lavin, et al., G.R. No. L-18563,
April 27, 1963 [7 SCRA 804, 807]), there is no reason why a mortgage creditor should be
barred from accepting, before a foreclosure sale, payments voluntarily tendered by the
debtor-mortgagor who admits a subsisting indebtedness.
PREMISES CONSIDERED, the judgment appealed from is modified by setting aside the
portion thereof which orders plaintiff-appellant to pay defendant-appellee Sapinoso the
sum of P1,250.00, with costs in this instance against the said defendant-appellee.
G.R. No. L-24772
May 27, 1968
RUPERTO G. CRUZ, ET AL. vs. FILIPINAS INVESTMENT and FINANCE
CORPORATION

2. That on July 15, 1963, plaintiff Ruperto G. Cruz purchased on installments,


from the Far East Motor Corporation, one (1) unit of Isuzu Diesel Bus, described
in the complaint, for P44,616.24, Philippine Currency, payable in installments of
P1,487.20 per month for thirty (30) months, beginning October 22, 1963, with 12
% interest per annum, until fully paid. As evidence of said indebtedness, plaintiff
Cruz executed and delivered to the Far East Motor Corporation a negotiable
promissory note in the sum of P44,616.24, ...;
3. That to secure the payment of the promissory note, Annex "A", Cruz executed
in favor of the seller, Far East Motor Corporation, a chattel mortgage over the
aforesaid motor vehicle...;
4. That as no down payment was made by Cruz, the seller, Far East Motor
Corporation, on the very improvements thereon, in San Miguel, Bulacan...; same
date, July 15, 1963, required and Cruz agreed to give, additional security for his
obligation besides the chattel mortgage, Annex "B"; that said additional security
was given by plaintiff Felicidad Vda. de Reyes in the form of SECOND
MORTGAGE on a parcel of land owned by her, together with the building and
5. That said land has an area of 68,902 square meters, more or less, and
covered by Transfer Certificate of Title No. 36480 of the Registry of Deeds of
Bulacan in the name of plaintiff Mrs. Reyes; and that it was at the time
mortgaged to the Development Bank of the Philippines to secure a loan of
P2,600.00 obtained by Mrs. Reyes from that bank;

Appeal interposed by Filipinas Investment & Finance Corporation from the decision of
the Court of First Instance of Rizal (Quezon City) in Civil Case No. Q-7949.

6. That also on July 15, 1963, the Far East Motor Corporation for value received
indorsed the promissory note and assigned all its rights and interest in the Deeds
of Chattel Mortgage and in the Deed of Real Estate Mortgage (Annexes "A", "B"
and "B-l") to the defendant, Filipinas Investment & Finance Corporation, with due
notice of such assignment to the plaintiffs...;

In the action commenced by Ruperto G. Cruz and Felicidad V. Vda. de Reyes in the
Court of First Instance of Rizal (Civil Case No. Q-7949), for cancellation of the real estate
mortgage constituted on the land of the latter 1 in favor of defendant Filipinas Investment
& Finance Corporation (as assignee of the Far East Motor Corporation), the parties
submitted the case for decision on the following stipulation of facts:

7. That plaintiff Cruz defaulted in the payment of the promisory note (Annex "A") ;
that the only sum ever paid to the defendant was Five Hundred Pesos (P500.00)
on October 2, 1963, which was applied as partial payment of interests on his
principal obligation; that, notwithstanding defendant's demands, Cruz made no
payment on any of the installments stipulated in the promissory note;

1. Their personal circumstances and legal capacities to sue and be sued;

8. That by reason of Cruz's default, defendant took steps to foreclose the chattel
mortgage on the bus; that said vehicle had been damaged in an accident while in
the possession of plaintiff Cruz;

1vvphi1.nt

15
9. That at the foreclosure sale held on January 31, 1964 by the Sheriff of Manila,
the defendant was the highest bidder, defendant's bid being for Fifteen Thousand
Pesos (P15,000.00)...;
10. That the proceeds of the sale of the bus were not sufficient to cover the
expenses of sale, the principal obligation, interests, and attorney's fees, i.e., they
were not sufficient to discharge fully the indebtedness of plaintiff Cruz to the
defendant;
11. That on February 12, 1964, preparatory to foreclosing its real estate
mortgage on Mrs. Reyes' land, defendant paid the mortgage indebtedness of
Mrs. Reyes to the Development Bank of the Philippines, in the sum of P2,148.07,
the unpaid balance of said obligation...;
12. That pursuant to a provision in the real estate mortgage contract, authorizing
the mortgagee to foreclose the mortgage judicially or extra-judicially, defendant
on February 29, 1964 requested the Provincial Sheriff of Bulacan to take
possession of, and sell, the land subject of the Real Estate Mortgage, Annex "B1", to satisfy the sum of P43,318.92, the total outstanding obligation of the
plaintiffs to the defendant, as itemized in the Statement of Account, which is
made a part hereof as Annex "F"...;
13. That notices of sale were duly posted and served to the Mortgagor, Mrs.
Reyes, pursuant to and in compliance with the requirements of Act 3135...;
14. That on March 20, 1964, plaintiff Reyes through counsel, wrote a letter to the
defendant asking for the cancellation of the real estate mortgage on her land, but
defendant did not comply with such demand as it was of the belief that plaintiff's
request was without any legal basis;
15. That at the request of the plaintiffs, the provincial Sheriff of Bulacan held in
abeyance the sale of the mortgaged real estate pending the result of this action.
Passing upon the issues which, by agreement of the parties, were limited to (1)
"Whether defendant, which has already extrajudicially foreclosed the chattel mortgage
executed by the buyer, plaintiff Cruz, on the bus sold to him on installments, may also
extrajudicially foreclose the real estate mortgage constituted by plaintiff Mrs. Reyes on
her own land, as additional security, for the payment of the balance of Cruz' Obligation,
still remaining unpaid"; and (2) whether or not the contending parties are entitled to
attorney's fees the court below, in its decision of April 21, 1965, sustained the

plaintiffs' stand and declared that the extrajudicial foreclosure of the chattel mortgage on
the bus barred further action against the additional security put up by plaintiff Reyes.
Consequently, the real estate mortgage constituted on the land of said plaintiff was
ordered cancelled and defendant was directed to pay the plaintiffs attorney's fees in the
sum of P200.00. Defendant filed the present appeal raising the same questions
presented in the lower court.
There is no controversy that, involving as it does a sale of personal property on
installments, the pertinent legal provision in this case is Article 1484 of the Civil Code of
the Philippines, 2 which reads:
ART. 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 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.
The aforequoted provision is clear and simple: should the vendee or purchaser of a
personal property default in the payment of two or more of the agreed installments, the
vendor or seller has the option to avail of any one of these three remedies either to
exact fulfillment by the purchaser of the obligation, or to cancel the sale, or to foreclose
the mortgage on the purchased personal property, if one was constituted. These
remedies have been recognized as alternative, not cumulative, 3 that the exercise of one
would bar the exercise of the others. 4 It may also be stated that the established rule is to
the effect that the foreclosure and actual sale of a mortgaged chattel bars further
recovery by the vendor of any balance on the purchaser's outstanding obligation not so
satisfied by the sale. 5 And the reason for this doctrine was aptly stated in the case
of Bachrach Motor Co. vs. Millan, supra, thus:
Undoubtedly the principal object of the above amendment 6 was to remedy the
abuses committed in connection with the foreclosure of chattel mortgages. This
amendment prevents mortgagees from seizing the mortgaged property, buying it
at foreclosure sale for a low price and then bringing suit against the mortgagor for

16
a deficiency judgment. The almost invariable result of this procedure was that the
mortgagor found himself minus the property and still owing practically the full
amount of his original indebtedness. Under this amendment the vendor of
personal property, the purchase price of which is payable in installments, has the
right to cancel the sale or foreclose the mortgage if one has been given on the
property. Whichever right the vendor elects he need not return to the purchaser
the amount of the installments already paid, "if there be in agreement to that
effect". Furthermore, if the vendor avails himself of the right to foreclose the
mortgage the amendment prohibits him from bringing an action against the
purchaser for the unpaid balance.
It is here agreed that plaintiff Cruz failed to pay several installments as provided in the
contract; that there was extrajudicial foreclosure of the chattel mortgage on the said
motor vehicle; and that defendant-appellant itself bought it at the public auction duly held
thereafter, for a sum less than the purchaser's outstanding obligation. Defendantappellant, however, sought to collect the supported deficiency by going against the real
estate mortgage which was admittedly constituted on the land of plaintiff Reyes as
additional security to guarantee the performance of Cruz' obligation, claiming that what is
being withheld from the vendor, by the proviso of Article 1484 of the Civil Code, is only
the right to recover "against the purchaser", and not a recourse to the additional security
put up, not by the purchaser himself, but by a third person.

made before a tribunal; an assertion in a court of justice of a right given by law; a


demand or legal proceeding in a court of justice to secure one's rights; the
prosecution of some demand in a court of justice; the means by which men
litigate with each other; the means that the law has provided to put the cause of
action into effect;.... (Gutierrez Hermanos vs. De la Riva, 46 Phil. 827, 834-835).
Considering the purpose for which the prohibition contained in Article 1484 was intended,
the word "action" used therein may be construed as referring to any judicial or
extrajudicial proceeding by virtue of which the vendor may lawfully be enabled to exact
recovery of the supposed unsatisfied balance of the purchase price from the purchaser
or his privy. Certainly, an extrajudicial foreclosure of a real estate mortgage is one such
proceeding.
The provision of law and jurisprudence on the matter being explicit, so that this litigation
could have been avoided, the award by the lower court of attorney's fees to the plaintiff's
in the sum of P200.00 is reasonable and in order.
However, we find merit in appellant's complaint against the trial court's failure to order the
reimbursement by appellee Vda. de Reyes of the amount which the former paid to the
Development Bank of the Philippines, for the release of the first mortgage on the land of
said appellee. To the extent that she was benefited by such payment, plaintiff-appellee
Vda. de Reyes should have been required to reimburse the appellant.

There is no merit in this contention. To sustain appellant's argument is to overlook the


fact that if the guarantor should be compelled to pay the balance of the purchase price,
the guarantor will in turn be entitled to recover what she has paid from the debtor vendee
(Art. 2066, Civil Code) ; so that ultimately, it will be the vendee who will be made to bear
the payment of the balance of the price, despite the earlier foreclosure of the chattel
mortgage given by him. Thus, the protection given by Article 1484 would be indirectly
subverted, and public policy overturned.

WHEREFORE, the decision appealed from is modified, by ordering plaintiff-appellee


Felicidad Vda. de Reyes to reimburse to defendant-appellant Filipinas Investment &
Finance Corporation the sum of P2,148.07, with legal interest thereon from the finality of
this decision until it is fully paid. In all other respects, the judgment of the court below is
affirmed, with costs against the defendant-appellant.

Neither is there validity to appellant's allegation that, since the law speaks of "action", the
restriction should be confined only to the bringing of judicial suits or proceedings in court.

G.R. No. 106418 July 11, 1996


DANIEL L. BORBON II AND FRANCISCO L. BORBON vs. SERVICEWIDE
SPECIALISTS, INC. & HON. COURT OF APPEALS

The word "action" is without a definite or exclusive meaning. It has been invariably
defined as
... the legal demand of one's right, or rights; the lawful demand of one's rights in
the form given by law; a demand of a right in a court of justice; the lawful demand
of one's right in a court of justice; the legal and formal demand of ones rights
from another person or party, made and insisted on in a court of justice; a claim

From the decision of the Court of Appeals in CA-G.R. CV No. 30693 which affirmed that
of the Regional Trial Court, NCJR, Branch 39, Manila, in Civil Case No. 85-29954,
confirming the disputed possession of a motor vehicle in favor of private respondent and
ordering the payment to it by petitioners of liquidated damages and attorney's fees, the
instant appeal was interposed.
The appellate court adopted the factual findings of the court a quo, to wit:

17
The plaintiff's evidence shows among others that on December 7, 1984,
defendants Daniel L. Borbon and Francisco Borbon signed a promissory note
(Exh. A) which states among others as follows:
PROMISSORY NOTE
Acct. No. 115008276
Makati, Metro Manila,
Philippines
December 7, 1984

shall not be considered as extending the time for the payment or any of the
conditions hereof. Nor shall the failure of the holder hereof to exercise any of its
right under this note constitute or be deemed as a waiver of such rights.
"Maker:
(S/t) DANIEL L. BORBON, II
Address: 14 Colt St., Rancho Estate I,
Concepcion Dos, Marikina, MM

"P122,856.00

(S/t) FRANCISCO BORBON

"For value received (installment price of the chattel/s purchased), I/We jointly and
severally promised to pay Pangasinan Auto Mart, Inc. or order, at its office at NMI
Bldg., Buendia Avenue, Makati, MM the sum of One Hundred Twenty Two
Thousand Eight Hundred Fifty Six only (P122,856.00), Philippine Currency, to be
payable without need or notice or demand, in installments of the amounts
following and at the dates hereinafter set forth, to wit: P10,238.00 monthly for
Twelve (12) months due and payable on the 7th day of each month starting
January, 1985, provided that at a late payment charge of 3% per month shall be
added on each unpaid installment from due date thereof until fully paid.

Address: 73 Sterling Life Home


Pamplona, Las Pias, MM
WITNESSES
(illegible) (illegible)

"PAY TO THE ORDER OF
FILINVEST CREDIT CORPORATION

xxx xxx xxx


"It is further agreed that if upon such default, attorney's services are availed of,
an additional sum, equal to twenty five percent (25%) of the total sum due
thereon, which shall not be less than five hundred pesos, shall be paid to the
holder hereof for attorney's fees plus an additional sum equivalent to twenty five
percent (25%) of the total sum due which likewise shall not be less than five
hundred pesos for liquidated damages, aside from expenses of collection and the
legal costs provided for in the Rules of Court.
"It is expressly agreed that all legal actions arising out of this note or in
connection with the chattel(s) subject hereof shall only be brought in or submitted
to the jurisdiction of the proper court either in the City of Manila or in the
province, municipality or city where the branch of the holder hereof is located.
"Acceptance by the holder thereof of payment of any installment or any part
hereof of payment of any installment or any part thereof after due dated (sic)

without recourse, notice, presentment and


demand waived
PANGASINAN AUTO MART, INC.
BY:
(S/T) K.N. DULCE
Dealer"
To secure the Promissory Note, the defendants executed a Chattel mortgage
(Exh. B) on

18
"One (1) Brand new 1984 Isuzu
KCD 20 Crew Cab (Conv.)
Serial No. KCD20D0F 207685
Key No. 5509

Despite communications with the Pangasinan Auto Mart, Inc. the latter was not
able to replace the vehicle until the vehicle delivered was seized by order of this
court. the defendants argue that an asignee stands in the place of an assignor
which, to the mind of the court, is correct. The asignee exercise all the rights of
the assignor (Gonzales vs. Rama Plantation Co., C.V. 08630, Dec. 2, 1986).

(Exhs. A and B, p. 2 tsn, September 10, 1985)


The rights of Pangasinan Auto mart, Inc. was later assigned to Filinvest Credit
Corporation on December 10, 1984, with notice to the defendants (Exh. C, p. 10,
Record).

The defendants further claim that they are not in default of their obligation
because the Pangasinan Auto Mart was first guilty of not fulfilling its obligation in
the contract. the defendants claim that neither party incurs delay if the other does
not comply with his obligation. (citing Art. 1169, N.C.C.) 1

On March 21, 1985, Filinvest Credit Corporation assigned all its rights, interest
and title over the Promissory Note and the chattel mortgage to the plaintiff (Exh.
D; p. 3, tsn, Sept. 30, 1985).

In sustaining the decision of the court a quo, the appellate court ruled that the petitioners
could avoid liability under the promissory note and the chattel mortgage that secured it
since private respondent took the note for value and in good faith.

The promissory note stipulates that the installment of P10,238.00 monthly should
be paid on the 7th day of each month starting January 1985, but the defendants
failed to comply with their obligation (p. 3, tsn, Sept. 30, 1985).

In their appeal to this Court, petitioners merely seek a modification of the decision of the
appellate court insofar as it has upheld the court a quo in the award of liquidated
damages and attorney's fees in favor of private respondent. Petitioners invoke the
provisions of Article 1484 of the Civil Code which reads:

Because the defendants did not pay their monthly installments, Filinvest
demanded from the defendants the payment of their installments due in January
29, 1985 by telegram (Exh. E; pp. 3-4, tsn, Sept. 30, 1985).

Art. 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:

After the accounts were assigned to the plaintiff, the plaintiff attempted to collect
by sending a demand letter to the defendants for them to pay their entire
obligation which, as of March 12, 1985, totaled P185,257.80 (Exh. H; pp. 3-4,
tsn, Sept. 30, 1985).

(1) Exact fulfillment of the obligation, should the vendee fail to pay;

For their defense, the defendants claim that what they intended to buy from
Pangasinan Auto mart was a jeepney type Isuzu K. C. Cab. The vehicle they
bought was not delivered (pp. 11-12, tsn, Oct. 17, 1985). Instead, through
misinterpretation and machination, the Pangasinan Motor Inc. delivered an Isuzu
crew cab, as this is the unit available at their warehouse. Later the representative
of Pangasinan Auto mart, Inc. (assignor) told the defendants that their available
stock is an Isuzu Cab but minus the rear body, which the defendants agreed to
deliver with the understanding that the Pangasinan Auto Mart, Inc. will refund the
defendants the amount of P10,000.00 to have the rear body completed (pp. 1234, Exhs. 2 to 3-3A).

(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.

(2) Cancel the sale, should the vendee's failure to pay cover two or more
installments;

The remedies under Article 1484 of the Civil Code are not cumulative but alternative and
exclusive, 2 which means, as so held in Nonato vs. Intermediate Appellate Court and
Investor's Finance Corporation, 3 that
. . . Should the vendee or purchaser of a personal property default in the
payment of two or more of the agreed installments, the vendor or seller has the
option to avail of any of these three remedies either to exact fulfillment by the

19
purchaser of the obligation, or to cancel the sale, or to foreclose the mortgage on
the purchased personal property, if one was constituted. These remedies have
been recognized as alternative, not cumulative, that the exercise of on e would
bar the exercise of the others. 4
When the seller assigns his credit to another person, the latter is likewise bound by the
same law. Accordingly, when the assignee forecloses on the mortgage, there can be no
further recovery of the deficiency, 5 and the seller-mortgagee is deemed to have renounced
any right thereto. 6 A contrario, in the event of the seller-mortgagee first seeks, instead, the
enforcement of the additional mortgages, guarantees or other security arrangements, he
must be then be held to have lost by waiver or non-choice his lien on the chattel mortgage of
the personal property sold by and mortgaged back to him, although, similar to an action for
specific performance, he may still levy on it.
In ordinary alternative obligations, a mere choice categorically an unequivocally made
and then communicated by the person entitled to exercise the option concludes the
parties. The creditor may not thereafter exercise any other option, unless the chosen
alternative proves to be innefectual or unavailing due to no fault on his part. This rule, in
essence, is the difference between alternative obligations, on the one hand, and
alternative remedies, upon the other hand, where, in the latter case, the choice generally
becomes conclusive only upon the exercise of the remedy. For instance, in one of the
remedies expressed in Article 1484 of the Civil Code, it is only when there has been a
foreclosure of the chattel mortgage that the vendee-mortgagor would be permitted to
escape from a deficiency liability. Thus, if the case is one for specific performance, even
when this action is selected after the vendee has refused to surrender the mortgaged
property to permit an extrajudicial foreclosure, that property may still be levied on
execution and an alias writ may be issued if the proceeds thereof are insufficient to
satisfy the judgment
credit. 7 So, also, a mere demand to surrender the object which is not heeded by the
mortgagor will not amount to a foreclosure, 8 but the repossession thereof by the vendormortgagee would have the effect of a foreclosure.
The parties here concede that the action for replevin has been instituted for the
foreclosure of the vehicle in question (now in the possession of private respondent). The
sole issue raised before us in this appeal is focused on the legal propriety of the
affirmance by the appellate court of the awards made by the court a quo of liquidated
damages and attorney's fees to private respondent. Petitioners hold that under Article
1484 of the Civil Code, aforequoted, the vendor-mortgagee or its assignees loses any
right "to recover any unpaid balance of the price" and any "agreement to the contrary
(would be) void.

The argument is aptly made. In Macondray & Co. vs. Eustaquio, 9 we have said that the
phrase "any unpaid balance" can only mean the deficiency judgment to which the mortgagee
may be entitled to when the proceeds from the auction sale are insufficient to cover the "full
amount of the secured obligations which . . . include interest on the principal, attorney's fees,
expenses of collection, and the costs." In sum, we have observed that the legislative intent is
not to merely limit the proscription of any further action to the "unpaid balance of the principal"
but, as so later ruled inLuneta Motor Co. vs. Salvador, 10 to all other claims that may be
likewise be called in for in the accompanying promissory note against the buyer-mortgagor or
his guarantor, including costs and attorney's fees.
In Filipinas Investment & Finance Corporation vs. Ridad 11 while we reiterated and
expressed our agreement on the basic philosophy behind Article 1484, we stressed,
nevertheless, that the protection given to the buyer-mortgagor should not be considered to be
without circumscription or as being preclusive of all other laws or legal principles. Hence,
borrowing from the examples made in Filipinas Investment, where the mortgagor unjustifiably
refused to surrender the chattel subject of the mortgage upon failure of two or more
installments, or if he concealed the chattel to place it beyond the reach of the mortgagee, that
thereby constrained the latter to seek court relief, the expenses incurred for the prosecution
of the case, such as attorney's fees, could rightly be awarded.
Private respondent bewails the instant petition in that petitioners have failed to
specifically raise the issue on liquidated damages and attorney's fees stipulated in the
actionable documents. In several cases, we have ruled that as long as the questioned
items bear relevance and close relation to those specifically raised, the interest of justice
would dictate that they, too, must be considered and resolved and that the rule that only
theories raised in the initial proceedings may be taken up by a party thereto on appeal
should only refer to independent, not concomitant matters, to support or oppose the
cause of action. 12
Given the circumstances, we must strike down the award for liquidated damages made
by the court a quobut we uphold the grant of attorney's fees which we, like the appellate
court, find it to be reasonable. Parenthetically, while the promissory note may appear to
have been a negotiable instrument, private respondent, however, clearly cannot claim
unawareness of its accompanying documents so as to thereby gain a right greater than
that of the assignor.
WHEREFORE, the appealed decision is MODIFIED by deleting therefrom the award for
liquidated damages; in all other respects, the judgment of the appellate court is
AFFIRMED. No costs.

20
G.R. No. L-43683
July 16, 1937
MACONDRAY AND CO., INC. vs. URBANO EUSTAQUIO
This is an appeal taken by the plaintiff corporation from the judgment of the Court of First
Instance of Manila dismissing its complaint, without costs.
The plaintiff brought the action against the defendant to obtain the possession of an
automobile mortgaged by the latter, and to recover the balance owing upon a note
executed by him, the interest thereon, attorney's fees, expenses of collection, and the
costs. The defendant was duly summoned, but he failed to appear or file his answer,
wherefore he was declared in default and the appealed judgment was rendered
accordingly.
The plaintiff sold the defendant a De Soto car, Sedan, for the price of which, P595, he
executed in its favor the note of May 22, 1934. Under this note, the defendant undertook
to pay the car in twelve monthly installments, with 12 percent interest per annum, and
likewise agreed that, should he fail to pay any monthly installment together with interest,
the remaining installment would become due and payable, and the defendant shall pay
20 per cent upon the principal owning as attorney's fees, expenses of collection which
the plaintiff might incur, and the costs. To guarantee the performance of his obligation
under the note, the defendant on the same date mortgaged the purchased car in favor of
the plaintiff, and bound himself under the same conditions stipulated in the note relative
to the monthly installments, interest, attorney's fees, expenses of collection, and costs.
The mortgage deed was registered on June 11, 1934, in the office of the register of
deeds of the Province of Rizal. On the 22d of the same month, the defendant paid
P43.75 upon the first installment, and thereafter failed to pay any of the remaining
installments. In accordance with the terms of the mortgage, the plaintiff called upon the
sheriff to take possession of the car, but the defendant refused to yield possession
thereof, whereupon, the plaintiff brought the replevin sought and thereby succeeded in
getting possession of the car. The car was sold at public auction to the plaintiff for P250,
the latter incurring legal expenses in the amount of P10.68, According to the liquidation
filed by the plaintiff, the defendant was still indebted in the amount of P342.20, interest at
12 per cent from November 20, 1934, P110.25 as attorney's fees, and the costs.
I. The plaintiff's first assignment of error is addressed to the appealed judgment in so far
as it applied Act No. 4122 and dismissed the complaint, notwithstanding the fact that the
defendant waived his rights under said law by not making any appearance, by having
been declared in default, by not interposing any special defense, and not asking for any
positive relief.

Under section 128 of our Civil Procedure, the judgment by default against a defendant
who has neither appeared nor filed his answer does not imply a waiver of right except
that of being heard and of presenting evidence in his favor. It does not imply admission
by the defendant of the facts and causes of action of the plaintiff, because the codal
section requires the latter to adduce his evidence in support of his allegation as an
indispensable condition before final judgment could be given in his favor. Nor could it be
interpreted as an admission by the defendant that the plaintiff's causes of action find
support in the law or that latter is entitled to the relief prayed for. (Chaffin vs. Mac
Fadden, 41 Ark., 42; Johnson vs. Peirce, 12 Ark., 599; Mayden vs. Johnson, 59 Ga., 105;
Peo. vs. Rust, 292 Ill., 412; Madison County vs. Smith, 95 Ill., 328; Keen vs. Krempel,
166 Ill. A., 253.) For these reason, we hold that the defendant did not waive the applicant
by the court of Act No. 4122, and that the first assignment of error is untenable.
II. The plaintiff contends in its second assignment of error that Act No. 4122 is invalid
because it takes property without due process of law, denies the equal protection of the
laws, and impairs the obligations of contract, thereby violating the provisions of section 3
of the Act of the United States Congress of August 29, 1916, known as the Jones Law.
This is not the first time that the constitutionality of the said law has been impugned for
like reasons. InManila Trading and Supply Co. vs. Reyes (64 Phil. 461), the validity of the
said law was already passed upon when it was questioned for the same reason here
advanced. In resolving the question in favor of the validity of the law, we then held:
"2. Liberty of contract, class legislation, and equal protection of the laws. The question
of the validity of an act is solely one of constitutional power. Questions of expediency, of
motive or of results are irrelevant. Nevertheless it is not improper to inquire as to the
occasion for the enactment of a law. The legislative purpose thus disclosed can then
serve as a fit background for constitution inquiry.
Judge Moran in fact instances had the following to say relative to the reason for
the enactment of Act No. 4122:
"Act No. 4122 aims to correct a social and economic evil, the inordinate
love for luxury of those who, without sufficient means, purchase personal
effects, and the ruinous practice of some commercial houses of
purchasing back the goods sold for a nominal price besides keeping a
part of the price already paid and collecting the balance, with stipulated
interest, costs, and attorney's fees. For instance, a company sells a truck
for P6,500. The purchaser makes a down payment of P500, the balance
to be paid in twenty-four equal installments of P250 each. Pursuant to the
practice before the enactment of Act No. 4122, if the purchaser fails to
pay the first two installments, the company takes possession of the truck

21
and has it sold at public auction at which sale it purchases the truck for a
nominal price, at most P500, without prejudice to its right to collect the
balance of P5,500, plus interest, costs. and attorney's fees. As a
consequence, the vendor does not only recover the goods sold, used
hardly two months perhaps with only slight wear and tear, but also
collects the entire stipulated purchase price, probably swelled up fifty per
cent including interest, costs, and attorney's fees. This practice is worse
than usurious in many instances. And although, of course, the purchaser
must suffer the consequences of his imprudence and lack of foresight,
the chastisement must not be to the extent of ruining him completely and,
on the other hand, enriching the vendor in a manner which shocks the
conscience. The object of the law is highly commendable. As to whether
or not the means employed to do away with the evil above mentioned are
arbitrary will be presently set out."
In a case which reached this court, Mr. Justice Goddard, interpreting Act No.
4122, made the following observations:
"Undoubtedly the principal object of the above amendment was to
remedy the abuses committed in connection with the foreclosure of
chattel mortgages. This amendment prevents mortgagees from seizing
the mortgaged property, buying it at foreclosure sale for a low price and
then bringing suit against the mortgagor for a deficiency judgment. The
almost invariable result of this procedure was that the mortgagor found
himself minus the property and still owing practically the full amount of his
original indebtedness. Under this amendment the vendor of personal
property, the purchase price of which is payable in installments, has the
right to cancel the sale or foreclose the mortgage if one has been given
on the property. Whichever right the vendor elects he need not return to
the purchaser the amount of the full installment already paid, "if there be
an agreement to that effect." Furthermore, if the vendor avails himself of
the right from foreclose the mortgage this amendment prohibits him from
bringing an action against the purchaser for the unpaid balance."
"In other words, under this amendment, in all proceedings for the
foreclosure of chattel mortgages, executed on chattels which have been
sold on the installment plan, the mortgagee is limited to the property
included in the mortgage" (Bachrach Motor Co. vs. Millan [1935]. 61 Phil.,
409.).

Public policy having thus had in view the objects just outlined, we should next
examine the law to determine if notwithstanding that policy, it violates any of the
constitutional principles dealing with the three general subjects here to be
considered.
In an effort to enlighten us, our attention has been directed to certain authorities,
principally one coming from the state of Washington and another from the State
of Oregon. For reason which will soon appear we do not think that either decision
is controlling.
In 1897, an Act was passed in the State of Washington which provided "that in all
proceedings for the foreclosure of mortgages hereafter executed or on judgments
rendered upon the debt thereby secured the mortgagee or assignee shall be
limited to the property included in the mortgage." It was held by a divided court of
three to two that the statute since limiting the right to enforce a debt secured by
mortgage to the property mortgaged whether realty or chattles, was an undue
restraint upon the liberty of a citizen to contract with respect to his property right.
But as is readily apparent, the Washington law and the Philippine law are
radically different in phraseology and in effect. (Dennis vs. Moses [1898], 40 L. R.
A., 302.)
In Oregon, in a decision of a later date, an Act abolishing deficiency judgment
upon the foreclosure of mortgages to secure the unpaid balance of the purchase
price of real property was unanimously sustained by the Supreme Court of that
State. The importance of the subject matter in that jurisdiction was revealed by
the fact that four separate opinions were prepared by the justices participating, in
one of which Mr. Justice Johns, shortly thereafter to become a member of this
court, concurred. However, it is but fair state that one of the reasons prompting
the court to uphold the law was the financial depression which had prevailed in
that State. While in the Philippines the court take judicial notice of the stringency
of finance that presses upon the people we have no reason to believe that this
was the reason which motivated the enactment of Act 4122. (Wright vs.
Wimberley [1919], 184 Pac., 740.)
While we are on the subject of the authority, we may state that we have
examined all of those obtainable, including some of recent date but have not
been enlightened very much because as just indicated, they concerned different
state of facts and different laws. We gain the most help from the case of Bronzon
vs. Kinzie ([1843], 1 How., 311), decided by the Supreme Court of the United
State. It had under consideration a law passed in the State of Illinois, which

22
provide that the equitable estate of the mortgagor should not be extinguished for
twelve months after sale on decree, and which prevented any sale of the
mortgaged property unless two-thirds of the amount at which the property had
been valued by appraisers should be bid therefor. The court, by Mr. Chief Justice
Taney declared: "Mortgages made since the passage of these laws must
undoubtedly be governed by them; for every State has power to describe the
legal and equitable obligation of a contract to be made and executed within it
jurisdiction. It may exempt any property it thinks proper from sale for the payment
of a debt; and may imposed such conditions and restriction upon the creditor as
its judgment and policy may dictate. And all future contracts would be subject to
such provisions; and they would be obligatory upon the parties in the provisions;
and they would be obligatory upon the parties in the courts of the United States,
as well as in those of the state."
As we understand it, parties have no vested right in particular remedies or modes
of procedure, and the legislature may change existing remedies or modes of
procedure without impairing the obligation of contracts, provided an efficacious
remedy for enforcement. But changes in the remedies available for the
enforcement of a mortgage may not, even when public policy is invoked as an
excuse, be pressed so far as to cut down the security of a mortgage without
moderation or reason or in a spirit of oppression. (Brotherhood of American
Yeoman vs. Manz [1922], 206 Pac., 403; Oshkosh Waterworks Co. vs. Oshkosh
[1908], 187 U. S., 437; W. B. Worthen Co. vs. Kavanaugh [1935], 79 U. S.
Supreme Court Advance Opinions, 638.)
In the Philippines, the Chattel Mortgage Law did not expressly provide for a
deficiency judgment upon the foreclosure of a mortgage. Indeed, it required
decisions of this court to authorize such a procedure. (Bank of the Philippine
Island vs. Olutanga Lumber Co., [1924], 47 Phil., 20; Manila Trading and Supply
Co. vs. Tamaraw Plantation Co., supra.) But the practice became universal
enactment regarding procedure. To a certain extent the Legislature has now
disauthorized this practice, but has left a sufficient remedy remaining.
Three remedies are available to the vendor who has sold personal property on
the installment plan. (1) He may elect to exact the fulfillment of the obligation.
(Bachrach Motor Co. vs. Milan, supra.) (2) If the vendee shall have failed to pay
two or more installments, the vendor may cancel the sale. (3) If the vendee shall
have failed to pay two or more installments, the vendor may foreclose the
mortgage, if one has been given on the property. The basis of the first option is
the Civil Code. The basis of the last two option is Act No. 4122, amendatory of

the Civil Code. And the proviso to the right to foreclose is, that if the vendor has
chosen this remedy, he shall have no further action against the purchaser for the
recovery of any unpaid balance owing by the same. In other words, as we see it,
the Act does no more than qualify the remedy.
Most constitutional issues are determined by the court's approach to them. The
proper approach in cases of this character should be to resolve all presumptions
in favor of the validity of an act in the absence of a clear conflict between it and
the constitution. All doubts should be resolved in its favor.
The controlling purpose of Act No. 4122 is revealed to be to close the door to
abuses committed in connection with the foreclosure of chattel mortgages when
sales were payable in installments. The public policy, obvious from the statute,
was defined and established by legislative authority. It is for the courts to
perpetuate it.
We are of the opinion that the Legislative may change judicial methods and
remedies for the enforcement of contracts, as it has done by the enactment of
Act No. 4122, without unduly interfering with the obligation of the contract,
without sanctioning class legislation, and without a denial of the equal protection
of the laws. We rule that Act No. 4122 is valid and enforceable. As a
consequence, the errors assigned by the appellant are overruled, and the
judgment affirmed, the costs of this instance to be taxed against the losing party.
In his brief counsel for the plaintiff advances no new arguments which have not already
been considered in theReyes case, and we see no reason for reaching a different
conclusion now. The law seeks to remedy an evil which the Legislature wished to
suppress; this legislative body has power to promulgate the law; the law does not
completely deprive vendors on the installment basis of a remedy, but requires them to
elect among three alternative remedies; the law, on the other hand, does not completely
exonerate the purchasers, but only limits their liabilities and, finally, there is no vested
right when a procedural law is involved, wherefore the Legislature could enact Act No.
4122 without violating the aforesaid organic law.
III. In its last assignment of error plaintiff contends that, even granting that Act No. 4122
is valid, the court should have ordered the defendant to pay at least the stipulated
interest, attorney's fees, and the costs. This question involves the interpretation of the
pertinent portion of the law, reading: "However, if the vendor has chosen to foreclose the
mortgage he shall have no further action against the purchaser for the recovery of any
unpaid balance owing by the same, and any agreement to the contrary shall be null and

23
void." This paragraph, as its language shows, refers to the mortgage contract executed
by the parties, whereby the purchaser mortgages the chattel sold to him on the
installment basis in order to guarantee the payment of its price, and the words "any
unpaid balance" should be interpreted as having reference to the deficiency judgment to
which the mortgagee may be entitled where, after the mortgaged chattel is sold at public
auction, the proceeds obtained therefrom are insufficient to cover the full amount of the
secured obligations which, in the case at bar as shown by the note and by the mortgage
deed, include interest on the principal, attorney's fees, expenses of collection, and the
costs. The fundamental rule which should govern the interpretation of laws is to ascertain
the intention and meaning of the Legislature and to give effect thereto. (Sec. 288, Code
of Civil Procedure; U. S. vs. Toribio, 15 Phil., 85; U. S. vs. Navarro, 19 Phil., 134; De
Jesus vs. City of Manila, 29 Phil., 73; Borromeo vs. Mariano, 41 Phil., 322; People vs.
Concepcion, 44 Phil., 126.) Were it the intention of the Legislature to limit its meaning to
the unpaid balance of the principal, it would have so stated. We hold, therefore, that the
assignment of error is untenable.

extrajudicial foreclosure proceedings, as a result of which, on December 22, 1965, the


car was sold at public auction with the appellee as the highest bidder and purchaser.

In view of the foregoing, the appealed judgment is affirmed, with the costs of this
instance to the plaintiff and appellant. So ordered.

The trial court on September 5, 1966, rendered judgment for the appellee, as follows:

G.R. No. L-27645


November 28, 1969
FILIPINAS INVESTMENT & FINANCE CORPORATION vs. LOURDES RIDAD and
LUIS RIDAD
Appeal by the spouses Lourdes V. Ridad and Luis Ridad from the decision of the Court
of First Instance of Manila in civil case 64288, a replevin suit, awarding to the appellee
Filipinas Investment and Finance Corporation the amount of P163.65 representing actual
expenses and P300 as attorney's fees.
The spouses Ridad bought from the Supreme Sales & Development Corporation, the
appellee's assignor-in-interest, a Ford Consul sedan for the total price of P13,371.40.
The sum of P1,160 was paid on delivery, the balance of P12,211.50 being payable in
twenty-four equal monthly installments, with interest at 12% per annum, secured by a
promissory note and a chattel mortgage on the car executed on March 19, 1964. The
spouses thereafter failed to pay five consecutive installments on a remaining balance of
P5,274.53. On October 13, 1965 the appellee instituted a replevin suit in the city court of
Manila for the seizure of the car (par. 7 of the complaint alleged "unjustifiable failure and
refusal of the defendants . . . to surrender possession of the . . . motor vehicle for the
purpose of foreclosure"), or the recovery of the unpaid balance in case delivery could not
be effected. The car was then seized by the sheriff of Manila and possession thereof was
awarded to the appellee. During the progress of the case, the appellee instituted

Meanwhile, in view of the failure of the defendants-spouses to appear at the scheduled


hearing of the case, allegedly due to non-receipt of the summons, they were declared in
default. The default judgment ordered them to pay to the appellee the sum of P500 as
attorney's fees, and P163.65 representing actual expenses relative to the seizure of the
car, plus costs.
Their motion to set aside his order of default and the decision having been denied, they
appealed to the Court of First Instance of Manila.
When the case was called for pre-trial, the CFI advanced the opinion that there was no
need for the parties to adduce evidence and that the case could be decided on the basis
of the pleadings submitted by the parties.

As stated in the pre-trial order of this Court dated May 27, 1966, the only issue
remaining to be resolved is whether the plaintiff is entitled to receive P500.00 as
attorney's fees and P163.65 for expenses incurred by the plaintiff in the seizure
of the car which was the object of the chattel mortgage executed by the
defendants in favor of the plaintiff.
Upon consideration of the circumstances of the case, the court holds that the
plaintiff is entitled to recover the amount of P163.65 which represents the
expenses incurred by the plaintiff in the seizure of the car involved in this case.
Considering that the plaintiff had recovered the car involved in the case while it is
still in the lower court, and considering further that the defendants did not resist
the case and the only question said defendants raised before this court is the
amount of attorney's fees, the court in the exercise of its equitable jurisdiction
reduces the attorney's fees granted to the plaintiff by the lower court to P300.00.
In this appeal, the appellants contend that the trial court erred: (1) in rendering a decision
which does not state the facts and the law on which it is based; (2) in condemning the
appellants to pay P300 for attorney's fees and P163.65 for expenses incurred in the
seizure of the car which was the object of the chattel mortgage executed by them in favor
of the appellee; and (3) in not dismissing the appellee's complaint.

24
1. We uphold the appellee's contention that the disputed decision of the lower court
complies substantially with the requirements of law because it referred to the pre-trial
order it issued on May 27, 1966 which contains substantial findings of facts. For although
settled is the doctrine that a decree with absolutely nothing to support it is a nullity, the
law, however, merely requires that a decision state the "essential ultimate facts upon
which the court's conclusion is drawn."1 There being an express reference to the pre-trial
order, the latter must be considered and taken as forming part of the decision. The claim,
therefore, that the judgment clearly transgresses the legal precept 2 because it does not
state the facts of the case and the law on which it is based and hence, is a nullity, finds
no justification here.

mortgage contract; that even in the absence of such stipulation, the award of attorney's
fees is discretionary on the part of the court pursuant to par. 2, art. 2208, new Civil Code;
and that the said award could likewise be made by the lower court on the basis of the
general prayer in the complaint for the award of whatever relief that the lower court may
deem just and equitable in the premises.

2. The appellants theorize that the action of the appellee is for the payment of the unpaid
balance of the purchase price with a prayer for replevin. When, therefore, the appellee
seized the car, extrajudicially foreclosed the mortgage, had the vehicle sold, and bought
the same at public auction as the highest bidder, it thereby renounced any and all rights
which it might have under the promissory note as well as the payment of the unpaid
balance, and, consequently, what it would otherwise be entitled under and by virtue of
the present action, including attorney's fees and costs of suit, pursuant to article 1484 of
the new Civil Code.

This article recites that

On the other hand, the appellee maintains that it is entitled to an award of attorney's fees
and actual expenses and costs of suit by virtue of the unjustifiable failure and refusal of
the appellants to comply with their obligations (one of which is the surrender of the
chattel to the mortgagee upon the latter's demand), contending that what is prohibited in
art. 1484, par. 3 of the new Civil Code relied upon by the appellants is the recovery of the
unpaid balance of the purchase price by means of an action other than a suit for replevin;
that Luneta Motor Co. vs. Salvador, et al., (L-13373, July 26, 1960) is inapplicable to the
present case because the remedy sought in that case was in the conjunctive and not in
the alternative, such that, necessarily, when the appellee therein foreclosed the
mortgage on the motor vehicle during the progress of the action, the other action for a
sum of money had to be dismissed since the same could not prosper as it would
constitute a separate action for the recovery of the unpaid balance contemplated in
article 1484; and that in the present case, however, the court awarded attorney's fees,
costs of suit and expenses incurred in relation to the seizure of the motor vehicle by
virtue of the writ of replevin in the same action because the appellee was compelled to
institute the same on account of the appellants' unjustifiable failure and refusal to comply
with the former's demands.
The appellee further argues that the award of attorney's fees and the costs of suit
together with expenses incurred, was stipulated both in the promissory note and chattel

It is true that the present action is one for replevin, but because it culminated in the
foreclosure of the chattel mortgage and the sale of the car at public auction, it is our view
that the provisions of art. 1484 of the Civil Code (Recto Law) must govern the resolution
of the issue here presented.

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 article was reproduced from the old art. 1454-A, which in turn was inserted by Act
4122 (Recto Law). "Three remedies are available to the vendor who has sold personal
property on the installment plan: (1) He may elect to exact the fulfillment of the obligation.
(Bachrach Motor Co. vs. Millan, 61 Phil. 409) (2) If the vendee shall have failed to pay
two or more installments, the vendor may cancel the sale. (3) If the vendee shall have
failed to pay two or more installments, the vendor may foreclose the mortgage, if one has
been given on the property. The basis of the first option is the Civil Code. The basis of
the last two options is Act 4122 (inserted in the Spanish Civil Code as art. 4154-A and
now reproduced in arts. 1484 and 1485), amendatory of the Civil Code. And the proviso
to the right to foreclose is that if the vendor has chosen this remedy, he shall have no
further action against the purchaser for the recovery of any unpaid balance owing by the
same. In other words, as we see it, the Act does no more than qualify the remedy." 3

25
The legal issue which is the core of the controversy in the case at bar was resolved
in Macondray & Co. vs. Eustaquio,4 as follows:
The plaintiff brought the action against the defendant to obtain the possession of
an automobile mortgaged by the latter, and to recover the balance owing upon a
note executed by him, the interest thereon, attorney's fees, expenses of
collection, and the costs. The defendant was duly summoned, but he failed to
appear or file his answer, wherefore, he was declared in default and the
appealed judgment was rendered accordingly.
The plaintiff sold to the defendant a De Soto car, Sedan, for the price of which,
P595, he executed in its favor the note of May 22, 1934. Under this note, the
defendant undertook to pay the car in twelve monthly installments, with 12 per
cent interests per annum, and likewise agreed that, should he fail to pay any
monthly installment together with interest, the remaining installments would
become due and payable, and the defendant shall pay 20 per cent upon the
principal owing as attorney's fees, expenses of collection which the plaintiff might
incur, and the costs. To guarantee the performance of his obligations under the
note, the defendant on the same date mortgaged the purchased car in favor of
the plaintiff, and bound himself under the same conditions stipulated in the note
relative to the monthly installments, interest, attorney's fees, expenses of
collection, and costs. The mortgage deed was registered on June 11, 1934, in the
office of the register of deeds of the Province of Rizal. On the 22nd of the same
month, the defendant paid P43.75 upon the first installment, and thereafter failed
to pay any of the remaining installments. In accordance with the terms of the
mortgage, the plaintiff called upon the sheriff to take possession of the car, but
the defendant refused to yield possession thereof, whereupon, the plaintiff
brought the replevin sought and thereby succeeded in getting possession of the
car. The car was sold at public auction to the plaintiff for P250, the latter incurring
legal expenses in the amount of P10.68. According to the liquidation filed by the
plaintiff, the defendant was still indebted in the amount of P342.20, interest at 12
per cent from November 20, 1934, P110.25 as attorney's fees, and the costs.
xxx

xxx

xxx

In its last assignment of error plaintiff contends that even granting that Act No.
4122 is valid, the court should have ordered the defendant to pay at least the
stipulated interest, Attorney's fees and the costs. This question involves the
interpretation of the pertinent portion of the law, reading: "However, if the vendor
has chosen to foreclose the mortgage he shall have no further action against the

purchaser for the recovery of any unpaid balance owing by the same, and any
agreement to the contrary shall be null and void." This paragraph, as its language
shows, refers to the mortgage contract executed by the parties, whereby the
purchaser mortgages the chattel sold to him on the installment basis in order to
guarantee the payment of its price, and the words "any unpaid balance" should
be interpreted as having reference to the deficiency judgment to which the
mortgagee may be entitled where, after the mortgaged chattel is sold at public
auction, the proceeds obtained therefrom are insufficient to cover the full amount
of the secured obligations which, in the case at bar as shown by the note and by
the mortgage deed, include interest on the principal, attorney's fees, expenses of
collection, and the costs. The fundamental rule which should govern the
interpretation of laws is to ascertain the intention and meaning of the Legislature
and to give effect thereto. (Sec. 288, Code of Civil Procedure; U.S. vs. Toribio, 15
Phil. 85; U.S. vs. Navarro, 19 Phil. 134; De Jesus vs. City of Manila, 29 Phil. 73;
Borromeo vs. Mariano, 41 Phil. 322; People vs. Concepcion, 44 Phil. 126.) Were
it the intention of the Legislature to limit its meaning to the unpaid balance of the
principal, it would have so stated. We hold, therefore, that the assignment of
error is untenable. (emphasis supplied)
In other words, under this amendment as above interpreted, in all proceedings for the
foreclosure of a chattel mortgage, executed on chattels which have been sold on the
installment plan, the mortgagee is limited to the property mortgaged 5 and is not entitled to
attorney's fees and costs of suit.
In a subsequent case6 where the vendor in a sale of personal property in installments,
upon failure of the vendee to pay his obligations, the vendor commenced, through court
action, to recover the unpaid balance of the purchase price, but later, during the progress
of the action, foreclosed the chattel mortgage constituted on the property, attorney's fees
and costs of suit were denied to the vendor. There the Supreme Court held:
Paragraph 3 of the above-quoted provision (article 1484, new Civil Code) is clear
that foreclosure of the chattel mortgage and recovery of the unpaid balance of
the price are alternative remedies and may not be pursued conjunctively. It
appearing in the case at bar that the vendor had already foreclosed the chattel
mortgage constituted on the property and had taken possession thereof, the
lower court acted rightly in dismissing the complaint filed for the purpose of
recovering the unpaid balance of the purchase price. By seizing the truck and
foreclosing the mortgage at the progress of the suit, the plaintiff renounced
whatever claim it may have had under the promissory note, and consequently, he
has no more cause of action against the promisor and the guarantor. And he has

26
no more right either to the costs and the attorney's fees that would go with the
suit.
This might be considered a reiteration of the ruling in Macondray.
A scrutiny of the doctrine enunciated in the above-cited cases will reveal that its ultimate
and salutary purpose is to prevent the vendor from circumventing the Recto Law.
Congress sought to protect the buyers on installment who more often than not have been
victimized by sellers who, before the enactment of this law, succeeded in unjustly
enriching themselves at the expense of the buyers, because aside from recovering the
goods sold, upon default of the buyer in the payment of two installments, still retained for
themselves all amounts already paid, and in addition, were adjudged entitled to
damages, such as attorney's fees, expenses of litigation and costs. Congress could not
have intended to impair much less do away with, the right of the seller to make
commercial use of his credit against the buyer, provided the buyer is not burdened
beyond what this law allows.7
It would appear from the emphasis and precision of the language employed in the
decisions already adverted to that in no instance whatsoever may the mortgagee recover
from the mortgagor any amount or sum after the foreclosure of the mortgage, for, as we
understand it, the philosophy of the Recto Law is that the underprivileged mortgagors
must be afforded full protection against the rapacity of the mortgagees.
But while we unconditionally concur in, and give our approval to, the basic philosophy of
the Recto Law, we view with no small amount of circumspection the implication,
necessarily drawn from the above discussion, that the mortgagee is not entitled to
protection against perverse mortgagors. Where the mortgagor plainly refuses to deliver
the chattel subject of the mortgage upon his failure to pay two or more installments, or if
he conceals the chattel to place it beyond the reach of the mortgagee, what then is the
mortgagee expected to do? It is part of conventional wisdom and the rule of law that no
man can take the law into his own hands; so it is not to be supposed that the Legislature
intended that the mortgagee should wrest or seize the chattel forcibly from the control
and possession of the mortgagor, even to the extent of using violence which is
unwarranted in law. Since the mortgagee would enforce his rights through the means
and within the limits delineated by law, the next step in such situations being the filing of
an action for replevin to the end that he may recover immediate possession of the chattel
and, thereafter, enforce his rights in accordance with the contractual relationship
between him and the mortgagor as embodied in their agreement, then it logically follows
as a matter of common sense, that the necessary expenses incurred in the prosecution
by the mortgagee of the action for replevin so that he can regain possession of the

chattel, should be borne by the mortgagor. Recoverable expenses would, in our view,
include expenses properly incurred in effecting seizure of the chattel and reasonable
attorney's fees in prosecuting the action for replevin. And we declare that in this case
before us, the amounts awarded by the court a quo to the mortgagee (appellee) are
reasonable.
To the extent that our pronouncement here conflicts with the ruling announced and
followed in the cases hereinbefore discussed, the latter must be considered pro
tanto qualified.
ACCORDINGLY, the judgment a quo is affirmed. No costs.
G.R. No. 142618
July 12, 2007
PCI LEASING AND FINANCE, INC vs. GIRAFFE-X CREATIVE IMAGING, INC
On a pure question of law involving the application of Republic Act (R.A.) No. 5980, as
amended by R.A. No. 8556 in relation to Articles 1484 and 1485 of the Civil Code,
petitioner PCI Leasing and Finance, Inc. (PCI LEASING, for short) has directly come to
this Court via this petition for review under Rule 45 of the Rules of Court to nullify and set
aside the Decision and Resolution dated December 28, 1998 and February 15, 2000,
respectively, of the Regional Trial Court (RTC) of Quezon City, Branch 227, in its Civil
Case No. Q-98-34266, a suit for a sum of money and/or personal property with prayer for
a writ of replevin, thereat instituted by the petitioner against the herein respondent,
Giraffe-X Creative Imaging, Inc. (GIRAFFE, for brevity).
The facts:
On December 4, 1996, petitioner PCI LEASING and respondent GIRAFFE entered into a
Lease Agreement,1whereby the former leased out to the latter one (1) set of Silicon High
Impact Graphics and accessories worthP3,900,00.00 and one (1) unit of Oxberry
Cinescan 6400-10 worth P6,500,000.00. In connection with this agreement, the parties
subsequently signed two (2) separate documents, each denominated as Lease
Schedule.2 Likewise forming parts of the basic lease agreement were two (2) separate
documents denominated Disclosure Statements of Loan/Credit Transaction (Single
Payment or Installment Plan)3 that GIRAFFE also executed for each of the leased
equipment. These disclosure statements inter alia described GIRAFFE, vis--vis the two
aforementioned equipment, as the "borrower" who acknowledged the "net proceeds of
the loan," the "net amount to be financed," the "financial charges," the "total installment
payments" that it must pay monthly for thirty-six (36) months, exclusive of the 36% per
annum "late payment charges." Thus, for the Silicon High Impact Graphics, GIRAFFE

27
agreed to pay P116,878.21 monthly, and for Oxberry Cinescan, P181.362.00 monthly.
Hence, the total amount GIRAFFE has to pay PCI LEASING for 36 months of the lease,
exclusive of monetary penalties imposable, if proper, is as indicated below:
P116,878.21 @ month (for the Silicon High
Impact Graphics) x 36 months =

P 4,207,615.56

-- PLUS-P181,362.00 @ month (for the Oxberry


Cinescan) x 36 months =

Total Amount to be paid by GIRAFFE


(or the NET CONTRACT AMOUNT)

P 6,529,032.00

P 10,736,647.56

By the terms, too, of the Lease Agreement, GIRAFFE undertook to remit the amount
of P3,120,000.00 by way of "guaranty deposit," a sort of performance and compliance
bond for the two equipment. Furthermore, the same agreement embodied a standard
acceleration clause, operative in the event GIRAFFE fails to pay any rental and/or other
accounts due.

a. Declaring the plaintiff entitled to the possession of the subject properties;


b. Ordering the defendant to pay the balance of rental/obligation in the total
amount of P8,248,657.47 inclusive of interest and charges thereon;
c. Ordering defendant to pay plaintiff the expenses of litigation and cost of suit.
(Words in bracket added.)
Upon PCI LEASINGs posting of a replevin bond, the trial court issued a writ of replevin,
paving the way for PCI LEASING to secure the seizure and delivery of the equipment
covered by the basic lease agreement.
Instead of an answer, GIRAFFE, as defendant a quo, filed a Motion to Dismiss, therein
arguing that the seizure of the two (2) leased equipment stripped PCI LEASING of its
cause of action. Expounding on the point, GIRAFFE argues that, pursuant to Article 1484
of the Civil Code on installment sales of personal property, PCI LEASING is barred from
further pursuing any claim arising from the lease agreement and the companion contract
documents, adding that the agreement between the parties is in reality a lease of
movables with option to buy. The given situation, GIRAFFE continues, squarely brings
into applicable play Articles 1484 and 1485 of the Civil Code, commonly referred to as
the Recto Law. The cited articles respectively provide:
ART. 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:

A year into the life of the Lease Agreement, GIRAFFE defaulted in its monthly rentalpayment obligations. And following a three-month default, PCI LEASING, through one
Atty. Florecita R. Gonzales, addressed a formal pay-or-surrender-equipment type of
demand letter4 dated February 24, 1998 to GIRAFFE.

(1) Exact fulfillment of the obligation, should the vendee fail to pay;

The demand went unheeded.

(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. (Emphasis added.)

Hence, on May 4, 1998, in the RTC of Quezon City, PCI LEASING instituted the instant
case against GIRAFFE. In its complaint,5 docketed in said court as Civil Case No. 9834266 and raffled to Branch 2276 thereof, PCI LEASING prayed for the issuance of a writ
of replevin for the recovery of the leased property, in addition to the following relief:
2. After trial, judgment be rendered in favor of plaintiff [PCI LEASING] and against the
defendant [GIRAFFE], as follows:

(2) Cancel the sale, should the vendee's failure to pay cover two or more
installments;

ART. 1485. The preceding article shall be applied to contracts purporting to be leases of
personal property with option to buy, when the lessor has deprived the lessee of the
possession or enjoyment of the thing.

28
It is thus GIRAFFEs posture that the aforequoted Article 1484 of the Civil Code applies
to its contractual relation with PCI LEASING because the lease agreement in question,
as supplemented by the schedules documents, is really a lease with option to buy under
the companion article, Article 1485. Consequently, so GIRAFFE argues, upon the seizure
of the leased equipment pursuant to the writ of replevin, which seizure is equivalent to
foreclosure, PCI LEASING has no further recourse against it. In brief, GIRAFFE asserts
in its Motion to Dismiss that the civil complaint filed by PCI LEASING is proscribed by the
application to the case of Articles 1484 and 1485, supra, of the Civil Code.

As in the court below, petitioner contends that the financial leasing arrangement it
concluded with the respondent represents a straight lease covered by R.A. No. 5980, the
Financing Company Act, as last amended by R.A. No. 8556, otherwise known as
Financing Company Act of 1998, and is outside the application and coverage of the
Recto Law. To the petitioner, R.A. No. 5980 defines and authorizes its existence and
business.

In its Opposition to the motion to dismiss, PCI LEASING maintains that its contract with
GIRAFFE is a straight lease without an option to buy. Prescinding therefrom, PCI
LEASING rejects the applicability to the suit of Article 1484 in relation to Article 1485 of
the Civil Code, claiming that, under the terms and conditions of the basic agreement, the
relationship between the parties is one between an ordinary lessor and an ordinary
lessee.

R.A. No. 5980, in its original shape and as amended, partakes of a supervisory or
regulatory legislation, merely providing a regulatory framework for the organization,
registration, and regulation of the operations of financing companies. As couched, it does
not specifically define the rights and obligations of parties to a financial leasing
arrangement. In fact, it does not go beyond defining commercial or transactional financial
leasing and other financial leasing concepts. Thus, the relevancy of Article 18 of the Civil
Code which reads:

In a decision7 dated December 28, 1998, the trial court granted GIRAFFEs motion to
dismiss mainly on the interplay of the following premises: 1) the lease agreement
package, as memorialized in the contract documents, is akin to the contract
contemplated in Article 1485 of the Civil Code, and 2) GIRAFFEs loss of possession of
the leased equipment consequent to the enforcement of the writ of replevin is "akin to
foreclosure, the condition precedent for application of Articles 1484 and 1485 [of the
Civil Code]." Accordingly, the trial court dismissed Civil Case No. Q-98-34266, disposing
as follows:
WHEREFORE, premises considered, the defendant [GIRAFFE] having relinquished any
claim to the personal properties subject of replevin which are now in the possession of
the plaintiff [PCI LEASING], plaintiff is DEEMED fully satisfied pursuant to the provisions
of Articles 1484 and 1485 of the New Civil Code. By virtue of said provisions, plaintiff is
DEEMED estopped from further action against the defendant, the plaintiff having
recovered thru (replevin) the personal property sought to be payable/leased on
installments, defendants being under protection of said RECTO LAW. In view thereof,
this case is hereby DISMISSED.
With its motion for reconsideration having been denied by the trial court in its resolution
of February 15, 2000,8petitioner has directly come to this Court via this petition for review
raising the sole legal issue of whether or not the underlying Lease Agreement, Lease
Schedules and the Disclosure Statements that embody the financial leasing arrangement
between the parties are covered by and subject to the consequences of Articles 1484
and 1485 of the New Civil Code.

The recourse is without merit.

Article 18. - In matters which are governed by special laws, their deficiency shall be
supplied by the provisions of this [Civil] Code.
Petitioner foists the argument that the Recto Law, i.e., the Civil Code provisions on
installment sales of movable property, does not apply to a financial leasing agreement
because such agreement, by definition, does not confer on the lessee the option to buy
the property subject of the financial lease. To the petitioner, the absence of an option-tobuy stipulation in a financial leasing agreement, as understood under R.A. No. 8556,
prevents the application thereto of Articles 1484 and 1485 of the Civil Code.
We are not persuaded.
The Court can allow that the underlying lease agreement has the earmarks or made to
appear as a financial leasing,9 a term defined in Section 3(d) of R.A. No. 8556 as a mode of extending credit through a non-cancelable lease contract under which the
lessor purchases or acquires, at the instance of the lessee, machinery, equipment,
office machines, and other movable or immovable property in consideration of the
periodic payment by the lessee of a fixed amount of money sufficient to amortize at least
seventy (70%) of the purchase price or acquisition cost, including any incidental
expenses and a margin of profit over an obligatory period of not less than two (2) years
during which the lessee has the right to hold and use the leased property but with no

29
obligation or option on his part to purchase the leased property from the owner-lessor at
the end of the lease contract.
In its previous holdings, however, the Court, taking into account the following mix: the
imperatives of equity, the contractual stipulations in question and the actuations of
parties vis--vis their contract, treated disguised transactions technically tagged as
financing lease, like here, as creating a different contractual relationship. Notable among
the Courts decisions because of its parallelism with this case is BA Finance Corporation
v. Court of Appeals10 which involved a motor vehicle. Thereat, the Court has treated a
purported financial lease as actually a sale of a movable property on installments and
prevented recovery beyond the buyers arrearages. Wrote the Court in BA Finance:
The transaction involved is one of a "financial lease" or "financial leasing," where a
financing company would, in effect, initially purchase a mobile equipment and turn
around to lease it to a client who gets, in addition, an option to purchase the property at
the expiry of the lease period. xxx.
xxx

xxx

xxx

The pertinent provisions of [RA] 5980, thus implemented, read:


"'Financing companies,' are primarily organized for the purpose of extending credit
facilities to consumers either by leasing of motor vehicles, and office machines
and equipment, and other movable property."
"'Credit' shall mean any loan, any contract to sell, or sale or contract of sale of
property or service, under which part or all of the price is payable subsequent to the
making of such sale or contract; any rental-purchase contract; .;"
The foregoing provisions indicate no less than a mere financing scheme extended by a
financing company to a client in acquiring a motor vehicle and allowing the latter to
obtain the immediate possession and use thereof pending full payment of the financial
accommodation that is given.
In the case at bench, xxx. [T]he term of the contract [over a motor vehicle] was for thirty
six (36) months at a "monthly rental" (P1,689.40), or for a total amount of P60,821.28.
The contract also contained [a] clause [requiring the Lessee to give a guaranty deposit in
the amount of P20,800.00] xxx

After the private respondent had paid the sum of P41,670.59, excluding the guaranty
deposit of P20,800.00, he stopped further payments. Putting the two sums together, the
financing company had in its hands the amount of P62,470.59 as against the total
agreed "rentals" of P60,821.28 or an excess of P1,649.31.
The respondent appellate court considered it only just and equitable for the guaranty
deposit made by the private respondent to be applied to his arrearages and thereafter to
hold the contract terminated. Adopting the ratiocination of the court a quo, the appellate
court said:
xxx In view thereof, the guaranty deposit of P20,800.00 made by the defendant should
and must be credited in his favor, in the interest of fairness, justice and equity. The
plaintiff should not be allowed to unduly enrich itself at the expense of the defendant. xxx
This is even more compelling in this case where although the transaction, on its face,
appear ostensibly, to be a contract of lease, it is actually a financing agreement, with the
plaintiff financing the purchase of defendant's automobile . The Court is constrained, in
the interest of truth and justice, to go into this aspect of the transaction between the
plaintiff and the defendant with all the facts and circumstances existing in this case,
and which the court must consider in deciding the case, if it is to decide the case
according to all the facts. xxx.
xxx

xxx

xxx

Considering the factual findings of both the court a quo and the appellate court, the only
logical conclusion is that the private respondent did opt, as he has claimed, to acquire
the motor vehicle, justifying then the application of the guarantee deposit to the balance
still due and obligating the petitioner to recognize it as an exercise of the option by the
private respondent. The result would thereby entitle said respondent to the ownership
and possession of the vehicle as the buyer thereof. We, therefore, see no reversible
error in the ultimate judgment of the appellate court. 11 (Italics in the original; underscoring
supplied and words in bracket added.)
In Cebu Contractors Consortium Co. v. Court of Appeals,12 the Court viewed and thus
declared a financial lease agreement as having been simulated to disguise a simple loan
with security, it appearing that the financing company purchased equipment already
owned by a capital-strapped client, with the intention of leasing it back to the latter.
In the present case, petitioner acquired the office equipment in question for their
subsequent lease to the respondent, with the latter undertaking to pay a monthly fixed
rental therefor in the total amount of P292,531.00, or a total of P10,531,116.00 for the

30
whole 36 months. As a measure of good faith, respondent made an up-front guarantee
deposit in the amount of P3,120,000.00. The basic agreement provides that in the event
the respondent fails to pay any rental due or is in a default situation, then the petitioner
shall have cumulative remedies, such as, but not limited to, the following: 13

was P8,100,000.00. Subtracting the acquisition cost of P8,100,000.00 from the total
amount, i.e., P13,530,372.00, creditable to the respondent, it would clearly appear that
petitioner realized a gross income ofP5,430,372.00 from its lease transaction with the
respondent. The amount of P5,430,372.00 is not yet a final figure as it does not include
the rentals in arrears, penalties thereon, and interest earned by the guaranty deposit.

1. Obtain possession of the property/equipment;


2. Retain all amounts paid to it. In addition, the guaranty deposit may be applied
towards the payment of "liquidated damages";
3. Recover all accrued and unpaid rentals;
4. Recover all rentals for the remaining term of the lease had it not been
cancelled, as additional penalty;
5. Recovery of any and all amounts advanced by PCI LEASING for GIRAFFEs
account xxx;
6. Recover all expenses incurred in repossessing, removing, repairing and
storing the property; and,
7. Recover all damages suffered by PCI LEASING by reason of the default.
In addition, Sec. 6.1 of the Lease Agreement states that the guaranty deposit shall be
forfeited in the event the respondent, for any reason, returns the equipment before the
expiration of the lease.
At bottom, respondent had paid the equivalent of about a years lease rentals, or a total
of P3,510,372.00, more or less. Throw in the guaranty deposit (P3,120,000.00) and the
respondent had made a total cash outlay ofP6,630,372.00 in favor of the petitioner. The
replevin-seized leased equipment had, as alleged in the complaint, an estimated residual
value of P6,900.000.00 at the time Civil Case No. Q-98-34266 was instituted on May 4,
1998. Adding all cash advances thus made to the residual value of the equipment, the
total value which the petitioner had actually obtained by virtue of its lease agreement with
the respondent amounts to P13,530,372.00 (P3,510,372.00 + P3,120,000.00
+ P6,900.000.00 = P13,530,372.00).
The acquisition cost for both the Silicon High Impact Graphics equipment and the
Oxberry Cinescan was, as stated in no less than the petitioners letter to the respondent
dated November 11, 199614 approving in the latters favor a lease facility,

As may be noted, petitioners demand letter15 fixed the amount of P8,248,657.47 as


representing the respondents "rental" balance which became due and demandable
consequent to the application of the acceleration and other clauses of the lease
agreement. Assuming, then, that the respondent may be compelled to
pay P8,248,657.47, then it would end up paying a total of P21,779,029.47
(P13,530,372.00 + P8,248,657.47 =P21,779,029.47) for its use - for a year and two
months at the most - of the equipment. All in all, for an investment of P8,100,000.00, the
petitioner stands to make in a years time, out of the transaction, a total
of P21,779,029.47, or a net of P13,679,029.47, if we are to believe its outlandish legal
submission that the PCI LEASING-GIRAFFE Lease Agreement was an honest-togoodness straight lease.
A financing arrangement has a purpose which is at once practical and salutary. R.A. No.
8556 was, in fact, precisely enacted to regulate financing companies operations with the
end in view of strengthening their critical role in providing credit and services to small and
medium enterprises and to curtail acts and practices prejudicial to the public interest, in
general, and to their clienteles, in particular.16 As a regulated activity, financing
arrangements are not meant to quench only the thirst for profit. They serve a higher
purpose, and R.A. No. 8556 has made that abundantly clear.
We stress, however, that there is nothing in R.A. No. 8556 which defines the rights and
obligations, as between each other, of the financial lessor and the lessee. In determining
the respective responsibilities of the parties to the agreement, courts, therefore, must
train a keen eye on the attendant facts and circumstances of the case in order to
ascertain the intention of the parties, in relation to the law and the written agreement.
Likewise, the public interest and policy involved should be considered. It may not be
amiss to state that, normally, financing contracts come in a standard prepared form,
unilaterally thought up and written by the financing companies requiring only the personal
circumstances and signature of the borrower or lessee; the rates and other important
covenants in these agreements are still largely imposed unilaterally by the financing
companies. In other words, these agreements are usually one-sided in favor of such
companies. A perusal of the lease agreement in question exposes the many remedies
available to the petitioner, while there are only the standard contractual prohibitions
against the respondent. This is characteristic of standard printed form contracts.

31
There is more. In the adverted February 24, 1998 demand letter17 sent to the respondent,
petitioner fashioned its claim in the alternative: payment of the full amount
of P8,248,657.47, representing the unpaid balance for the entire 36-month lease period
or the surrender of the financed asset under pain of legal action. To quote the letter:
Demand is hereby made upon you to pay in full your outstanding balance in the amount
of P8,248,657.47 on or before March 04, 1998 OR to surrender to us the one (1) set
Silicon High Impact Graphics and one (1) unit Oxberry Cinescan 6400-10
We trust you will give this matter your serious and preferential attention. (Emphasis
added).
Evidently, the letter did not make a demand for the payment of the P8,248,657.47 AND
the return of the equipment; only either one of the two was required. The demand letter
was prepared and signed by Atty. Florecita R. Gonzales, presumably petitioners
counsel. As such, the use of "or" instead of "and" in the letter could hardly be treated as
a simple typographical error, bearing in mind the nature of the demand, the amount
involved, and the fact that it was made by a lawyer. Certainly Atty. Gonzales would have
known that a world of difference exists between "and" and "or" in the manner that the
word was employed in the letter.
A rule in statutory construction is that the word "or" is a disjunctive term signifying
dissociation and independence of one thing from other things enumerated unless the
context requires a different interpretation.18
In its elementary sense, "or", as used in a statute, is a disjunctive article indicating an
alternative. It often connects a series of words or propositions indicating a choice of
either. When "or" is used, the various members of the enumeration are to be taken
separately.19
The word "or" is a disjunctive term signifying disassociation and independence of one
thing from each of the other things enumerated.20

The demand could only be that the respondent need not return the equipment if it paid
the P8,248,657.47 outstanding balance, ineluctably suggesting that the respondent can
keep possession of the equipment if it exercises its option to acquire the same by paying
the unpaid balance of the purchase price. Stated otherwise, if the respondent was not
minded to exercise its option of acquiring the equipment by returning them, then it need
not pay the outstanding balance. This is the logical import of the letter: that the
transaction in this case is a lease in name only. The so-called monthly rentals are in truth
monthly amortizations of the price of the leased office equipment.
On the whole, then, we rule, as did the trial court, that the PCI LEASING- GIRAFFE
lease agreement is in reality a lease with an option to purchase the equipment. This has
been made manifest by the actions of the petitioner itself, foremost of which is the
declarations made in its demand letter to the respondent. There could be no other
explanation than that if the respondent paid the balance, then it could keep the
equipment for its own; if not, then it should return them. This is clearly an option to
purchase given to the respondent. Being so, Article 1485 of the Civil Code should apply.
The present case reflects a situation where the financing company can withhold and
conceal - up to the last moment - its intention to sell the property subject of the finance
lease, in order that the provisions of the Recto Law may be circumvented. It may be, as
petitioner pointed out, that the basic "lease agreement" does not contain a "purchase
option" clause. The absence, however, does not necessarily argue against the idea that
what the parties are into is not a straight lease, but a lease with option to purchase. This
Court has, to be sure, long been aware of the practice of vendors of personal property of
denominating a contract of sale on installment as one of lease to prevent the ownership
of the object of the sale from passing to the vendee until and unless the price is fully
paid. As this Court noted in Vda. de Jose v. Barrueco:21
Sellers desirous of making conditional sales of their goods, but who do not wish openly
to make a bargain in that form, for one reason or another, have frequently resorted to the
device of making contracts in the form of leases either with options to the buyer to
purchase for a small consideration at the end of term, provided the so-called rent has
been duly paid, or with stipulations that if the rent throughout the term is paid, title shall
thereupon vest in the lessee. It is obvious that such transactions are leases only in
name. The so-called rent must necessarily be regarded as payment of the price in
installments since the due payment of the agreed amount results, by the terms of the
bargain, in the transfer of title to the lessee.
In another old but still relevant case of U.S. Commercial v. Halili,22 a lease agreement
was declared to be in fact a sale of personal property by installments. Said the Court:

32
. . . There can hardly be any question that the so-called contracts of lease on which the
present action is based were veritable leases of personal property with option to
purchase, and as such come within the purview of the above article [Art. 1454-A of the
old Civil Code on sale of personal property by installment]. xxx
Being leases of personal property with option to purchase as contemplated in the above
article, the contracts in question are subject to the provision that when the lessor in such
case "has chosen to deprive the lessee of the enjoyment of such personal property," "he
shall have no further action" against the lessee "for the recovery of any unpaid balance"
owing by the latter, "agreement to the contrary being null and void."
In choosing, through replevin, to deprive the respondent of possession of the leased
equipment, the petitioner waived its right to bring an action to recover unpaid rentals on
the said leased items. Paragraph (3), Article 1484 in relation to Article 1485 of the Civil
Code, which we are hereunder re-reproducing, cannot be any clearer.
ART. 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:
xxx

xxx

xxx

(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.
ART. 1485. The preceding article shall be applied to contracts purporting to be leases of
personal property with option to buy, when the lessor has deprived the lessee of the
possession or enjoyment of the thing.

As we articulated in Elisco Tool Manufacturing Corp. v. Court of Appeals,23 the remedies


provided for in Article 1484 of the Civil Code are alternative, not cumulative. The exercise
of one bars the exercise of the others. This limitation applies to contracts purporting to be
leases of personal property with option to buy by virtue of the same Article 1485. The
condition that the lessor has deprived the lessee of possession or enjoyment of the thing
for the purpose of applying Article 1485 was fulfilled in this case by the filing by petitioner
of the complaint for a sum of money with prayer for replevin to recover possession of the
office equipment.24 By virtue of the writ of seizure issued by the trial court, the petitioner
has effectively deprived respondent of their use, a situation which, by force of the Recto
Law, in turn precludes the former from maintaining an action for recovery of "accrued
rentals" or the recovery of the balance of the purchase price plus interest. 25
The imperatives of honest dealings given prominence in the Civil Code under the
heading: Human Relations, provide another reason why we must hold the petitioner to its
word as embodied in its demand letter. Else, we would witness a situation where even if
the respondent surrendered the equipment voluntarily, the petitioner can still sue upon its
claim. This would be most unfair for the respondent. We cannot allow the petitioner to
renege on its word. Yet more than that, the very word "or" as used in the letter conveys
distinctly its intention not to claim both the unpaid balance and the equipment. It is not
difficult to discern why: if we add up the amounts paid by the respondent, the residual
value of the property recovered, and the amount claimed by the petitioner as sued upon
herein (for a total of P21,779,029.47), then it would end up making an instant killing out
of the transaction at the expense of its client, the respondent. The Recto Law was
precisely enacted to prevent this kind of aberration. Moreover, due to considerations of
equity, public policy and justice, we cannot allow this to happen. Not only to the
respondent, but those similarly situated who may fall prey to a similar scheme.
1avvphil.zw+

WHEREFORE, the instant petition is DENIED and the trial courts decision is
AFFIRMED. Costs against petitioner. SO ORDERED.
G.R. No. L-26578 January 28, 1974
LEGARDA HERMANOS and JOSE LEGARDA vs. FELIPE SALDAA and COURT OF
APPEALS
The Court, in affirming the decision under review of the Court of Appeals, which holds
that the respondent buyer of two small residential lots on installment contracts on a tenyear basis who has faithfully paid for eight continuous years on the principal alone
already more than the value of one lot, besides the larger stipulated interests on both
lots, is entitled to the conveyance of one fully paid lot of his choice, rules that the
judgment is fair and just and in accordance with law and equity.

33
The action originated as a complaint for delivery of two parcels of land in Sampaloc,
Manila and for execution of the corresponding deed of conveyance after payment of the
balance still due on their purchase price. Private respondent as plaintiff had entered into
two written contracts with petitioner Legarda Hermanos as defendant subdivision owner,
whereby the latter agreed to sell to him Lots Nos. 7 and 8 of block No. 5N of the
subdivision with an area of 150 square meters each, for the sum of P1,500.00 per lot,
payable over the span of ten years divided into 120 equal monthly installments of P19.83
with 10% interest per annum, to commence on May 26, 1948, date of execution of the
contracts. Subsequently, Legarda Hermanos partitioned the subdivision among the
brothers and sisters, and the two lots were among those allotted to co-petitioner Jose
Legarda who was then included as co-defendant in the action.
It is undisputed that respondent faithfully paid for eight continuous years about 95 (of the
stipulated 120) monthly installments totalling P3,582.06 up to the month of February,
1956, which as per petitioners' own statement of account, Exhibit "1", was applied to
respondent's account (without distinguishing the two lots), as follows:
To interests P1,889.78

been considered as rents paid and as payment for damages suffered by your
failure," 2 and "Said cancellation being in order, is hereby confirmed."
From the adverse decision of July 17, 1963 of the trial court sustaining petitioners'
cancellation of the contracts and dismissing respondent's complaint, respondent
appellate court on appeal rendered its judgment of July 27, 1966 reversing the lower
court's judgment and ordering petitioners "to deliver to the plaintiff possession of one of
the two lots, at the choice of defendants, and to execute the corresponding deed of
conveyance to the plaintiff for the said lot," 3 ruling as follows:
During the hearing, plaintiff testified that he suspended payments because the
lots were not actually delivered to him, or could not be, due to the fact that they
were completely under water; and also because the defendants-owners failed to
make improvements on the premises, such as roads, filling of the submerged
areas, etc., despite repeated promises of their representative, the said Mr.
Cenon. As regards the supposed cancellation of the contracts, plaintiff averred
that no demand has been made upon him regarding the unpaid installments, and
for this reason he could not be declared in default so as to entitle the defendants
to cancel the said contracts.

To principal 1,682.28
Total P3,582.06 1
It is equally undisputed that after February, 1956 up to the filing of respondent's
complaint in the Manila court of first instance in 1961, respondent did not make further
payments. The account thus shows that he owed petitioners the sum of P1,317.72 on
account of the balance of the purchase price (principal) of the two lots (in the total sum of
P3,000.00), although he had paid more than the stipulated purchase price of P1,500.00
for one lot.
Almost five years later, on February 2, 1961 just before the filing of the action,
respondent wrote petitioners stating that his desire to build a house on the lots was
prevented by their failure to introduce improvements on the subdivision as "there is still
no road to these lots," and requesting information of the amount owing to update his
account as "I intend to continue paying the balance due on said lots."
Petitioners replied in their letter of February 11, 1961 that as respondent had failed to
complete total payment of the 120 installments by May, 1958 as stipulated in the
contracts to sell, "pursuant to the provisions of both contracts all the amounts paid in
accordance with the agreement together with the improvements on the premises have

The issue, therefore, is: Under the above facts, may defendants be compelled, or
not, to allow plaintiff to complete payment of the purchase price of the two lots in
dispute and thereafter to execute the final deeds of conveyance thereof in his
favor?
xxx xxx xxx
Whether or not plaintiffs explanation for his failure to pay the remaining
installments is true, considering the circumstances obtaining in this case, we
elect to apply the broad principles ofequity and justice. In the case at bar, we find
that the plaintiff has paid the total sum of P3,582.06including interests, which is
even more than the value of the two lots. And even if the sum applied to
the principal alone were to be considered, which was of the total of P1,682.28,
the same was already more than the value of one lot, which is P1,500.00. The
only balance due on both lots was P1,317.72, which was even less than the
value of one lot. We will consider as fully paid by the plaintiff at least one of the
two lots, at the choice of the defendants. This is more in line with good
conscience than a total denial to the plaintiff of a little token of what he has paid
the defendant Legarda Hermanos. 4

34
Hence, the present petition for review, wherein petitioners insist on their right of
cancellation under the "plainly valid written agreements which constitute the law between
the parties" as against "the broad principles of equity and justice" applied by the
appellate court. Respondent on the other hand while adhering to the validity of the
doctrine of the Caridad Estates cases 5 which recognizes the right of a vendor of land under
a contract to sell to cancel the contract upon default, with forfeiture of the installments paid as
rentals, disputes its applicability herein contending that here petitioners-sellers were equally
in default as the lots were "completely under water" and "there is neither evidence nor a
finding that the petitioners in fact cancelled the contracts previous to receipt of respondent's
letter." 6
The Court finds that the appellate court's judgment finding that of the total sum of
P3,582.06 (including interests of P1,889.78) already paid by respondent (which
was more than the value of two lots), the sum applied by petitioners to the principal
alone in the amount of P1,682.28 was already more than the value ofone lot
of P1,500.00 and hence one of the two lots as chosen by respondent would be
considered as fully paid, is fair and just and in accordance with law and equity.
As already stated, the monthly payments for eight years made by respondent were
applied to his account without specifying or distinguishing between the two lots subject of
the two agreements under petitioners' own statement of account, Exhibit "1". 7 Even
considering respondent as having defaulted after February 1956, when he suspended
payments after the 95th installment, he had as of the already paid by way
of principal(P1,682.28) more than the full value of one lot (P1,500.00). The judgment
recognizing this fact and ordering the conveyance to him of one lot of his choice while also
recognizing petitioners' right to retain the interests of P1,889.78 paid by him for eight years
on both lots, besides the cancellation of the contract for one lot which thus reverts to
petitioners, cannot be deemed to deny substantial justice to petitioners nor to defeat their
rights under the letter and spirit of the contracts in question.

The Court's doctrine in the analogous case of J.M. Tuason & Co. Inc. vs. Javier 8 is fully
applicable to the present case, with the respondent at bar being granted lesser benefits,
since no rescission of contract was therein permitted. There, where the therein buyerappellee identically situated as herein respondent buyer had likewise defaulted in completing
the payments after having religiously paid the stipulated monthly installments for almost eight
years and notwithstanding that the seller-appellant had duly notified the buyer of the
rescission of the contract to sell, the Court upheld the lower court's judgment denying judicial
confirmation of the rescission and instead granting the buyer an additional grace period of
sixty days from notice of judgment to pay all the installment payments in arrears together with
the stipulated 10% interest per annum from the date of default, apart from reasonable
attorney's fees and costs, which payments, the Court observed, would have the plaintiff-seller
"recover everything due thereto, pursuant to its contract with the defendant, including such
damages as the former may have suffered in consequence of the latter's default."
In affirming, the Court held that "Regardless, however, of the propriety of applying said
Art. 1592 thereto, We find that plaintiff herein has not been denied substantial justice, for,
according to Art. 1234 of said Code: 'If the obligation has been substantially
performed in good faith, the obligor may recover as though there had been a strict and
complete fulfillment, less damages suffered by the obligee,'" and "that in the interest
ofjustice and equity, the decision appealed from may be upheld upon the authority of
Article 1234 of the Civil Code." 9
ACCORDINGLY, the appealed judgment of the appellate court is hereby affirmed.
Without pronouncement as to costs.
G.R. No. 167452
January 30, 2007
JESTRA DEVELOPMENT AND MANAGEMENT CORPORATION vs. DANIEL PONCE
PACIFICO, represented by his attorney-in-fact Jordan M. Pizarras
On June 5, 1996, Daniel Ponce Pacifico (Pacifico) signed a Reservation Application 1 with
Fil-Estate Marketing Association for the purchase of a house and lot located at Lot 28,
Block 3, Phase II, Jestra Villas, Barangay La Huerta, Municipality of Paraaque, Metro
Manila (the property), and paid the reservation fee of P20,000.
Under the Reservation Application, the total purchase price of the property
was P2,500,000, and the down payment equivalent to 30% of the purchase price
or P750,000 was to be paid interest-free in six monthly installments due every fifth of the
month starting July 1996 until December 1996. As the P20,000 reservation fee formed
part of the down payment, the monthly installment on the down payment was fixed
at P121,666.66.

35
Also under the Reservation Application, upon full payment of the 30% down payment by
Pacifico, he was to sign a contract to sell with the owner and developer of the property,
Joprest Development and Management Corporation (now Jestra Development and
Management Corporation, hereafter Jestra). And the 70% balance on the purchase price
or P1,750,000 was to be payable in 10 years, to bear interest at 21% per annum, at a
monthly installment ofP34,982.50. When the payment of the installments on the 70%
balance should commence, the Reservation Application was silent.
Unable to comply with the schedule of payments, Pacifico requested Jestra to allow him
to make periodic payments on the down payment "in an amount that he could afford," to
which Jestra acceded provided that late payment penalties/surcharges 2 are paid.
With still a remaining balance of P260,000 on the down payment, Pacifico and Jestra
executed on March 6, 1997, Contract to Sell No. 833 over the property. The said contract
was silent on the unsettled balance on the down payment.
Under the Contract to Sell, Pacifico should have had on November 5, 1996, or one
month prior to the deadline stated under the Reservation Application, fully paid the 30%
down payment, and that the 120 monthly installments for the 70% balance or P1,750
should have had commenced on December 7, 1996, viz:
SECTION 2. TERMS OF PAYMENT. The PURCHASER agrees to pay the aforecited
purchase price [of P2,500,000.00] in the following manner, namely:
2.1 The total amount of SEVEN HUNDRED FIFTY THOUSAND PESOS ONLY
(P750,000.00) Philippine Currency as down payment on or before November 5, 1996.
2.2 The balance of ONE MILLION SEVEN HUNDTED FIFTY THOUSAND PESOS ONLY
(P1,750,00.00), Philippine Currency, shall be paid in One Hundred Twenty (120) equal
monthly installments at THIRTY FOUR THOUSAND NINE HUNDRED EIGHT THREE
PESOS ONLY (P34,983.00) Philippine Currency, to commence on December 7, 1996,
with interest at the rate of Twenty One Percent (21%) per annum. The PURCHASER
shall issue One Hundred Twenty (120) postdated checks in favor of the
OWNER/DEVELOPER for each of the monthly installments, which checks shall be
delivered to the latter upon signing of this CONTRACT. The PURCHASER shall be
subject to the pre-qualification requirements of COCOLIFE for the Mortgage Redemption
Insurance (MRI) and the Building Insurance on the UNIT. Interest re-pricing shall be
effected on the 6th Year, to commence on December 7, 2001.
x x x x (Underscoring supplied)

By letter4 of November 12, 1997, Pacifico requested Jestra that "the balance be
restructured" in light of the "present business condition."
By November 27, 1997, Pacifico had fully paid the 30% down payment, and by
December 4, 1997, he had paid a total of P846,600, P76,600 of which Jestra applied as
penalty charges for the belated settlement of the down payment.
By letter of December 11, 1997, Jestra, through counsel, sent Pacifico a final demand for
the payment ofP444,738.885 representing the total of 11 installments due on the 70%
balance of the purchase price, inclusive of 21% interest per annum and add-on interest
at the rate of P384.81 per day, counted from January 7, 1997. Further, Jestra demanded
the payment of P73,750 representing "penalties for the [belated settlement of the] down
payment." And it reminded Pacifico that "as provided in Section 5 of the said contract,
[Jestra] reserves its right to automatically cancel or rescind the same on account of [his]
failure/refusal to comply with the terms thereof."6
Pacifico later requested Jestra, by letter of November 12, 1997, for a restructuring of his
unsettled obligation. His request was granted on the condition that the interest for the
period from December 1996 to November 1997 amounting to P224,396.37 would be
added to the 70% balance on the purchase price; and that Pacifico issue 12 postdated
checks beginning each year to cover his amortization payments.
In light of the restructured scheme, the monthly amortization on the 70% balance was
from P34,982.50 increased to P39,468, to commence on January 5, 1998.
Pacifico thus issued to Jestra 12 postdated Security Bank checks to cover his monthly
amortizations from January to December 1998. The checks for January and February
1998 were, however, dishonored due to insufficiency of funds.7
By letter of March 24, 1998, Pacifico informed Jestra that due to sudden financial
difficulties, he was suspending payment of his obligation during the 10-month period, and
that he wanted to dispose of the property to recover his investment. 8 And he requested
that the postdated checks he issued be returned to him.
Jestra, by letter9 of March 31, 1998, denied Pacificos request to suspend payment and
for the return of the postdated checks. It, however, gave him until April 15, 1998 to sell
the property failing which it warned him that it would be constrained to re-open it for sale.

36
Thereafter, Jestra sent Pacifico a notarial Notice of Cancellation, dated May 1, 1998,
notifying him that it was, within 30 days after his receipt thereof, exercising its right to
cancel the Contract to Sell. Pacifico received the notice on May 13, 1998.
In a separate move, Jestra through its Credit and Collection Manager sent Pacifico a
letter dated May 27, 1998, demanding payment of the total amount of P209,377.75
covering monthly amortizations from January 30 to May 30, 1998 inclusive of penalties.
And it gave him until June 1, 1998 to settle his account, failing which the Contract to Sell
would be automatically cancelled and it would re-open the property for sale. 10
On February 24, 1999, Pacifico filed a complaint before the Housing and Land Use
Regulatory Board (HLURB) against Jestra, docketed as HLURB Case No. REM-12249910378, claiming that despite his full payment of the down payment, Jestra failed to
deliver to him the property within 90 days as provided in the Contract to Sell dated March
6, 1997, and Jestra instead sold the property to another buyer in October of 1998. 11
Pacifico further claimed in his complaint that upon learning of the double sale, he,
through his lawyer, demanded that Jestra deliver the property to him but it failed to do so
without just and valid cause.
Pacifico thus prayed that, among others things, judgment be rendered declaring the
second sale a nullity, ordering Jestra to deliver the property to him and to pay
him P11,000 a month from July 1997 until delivery.
By Decision12 of March 15, 2000, the Housing and Land Use Arbiter held Jestra liable for
failure to comply with Section 3 of Republic Act (RA) No. 6552 (Realty Installment Buyer
Protection Act) requiring payment by the seller of the cash surrender value of the buyers
payments and Section 17 of Presidential Decree No. 957 (REGULATING THE SALE OF
SUBDIVISION LOTS AND CONDOMINIUMS, PROVIDING PENALTIES FOR
VIOLATIONS THEREOF) requiring it to register the Contract to Sell in the Office of the
Register of Deeds.
The Arbiter found that while Pacifico had paid a total amount of P846,600 which is "more
or less equivalent to 24 monthly installments under the contract to sell . . . wherein the
monthly amortization is P34,983,"13 he could no longer demand the delivery of the
property, its title having already been transferred in the name of another buyer.

WHEREFORE, premises considered, judgment is hereby rendered in favor of the


complainant and ordering respondent:
1. To pay and/or reimburse to the complainant the total payments made
amounting to Eight Hundred Forty Six Thousand Six Hundred Pesos
(P846,600.00) with interest thereon at twelve percent (12%) per annum to be
computed from the filing of the complaint on 24 February 1999 until fully paid;
and
2. To pay complainant the amount of Fifty Thousand Pesos (P50,000.00) as
damages and attorneys feesplus the costs of litigation.14 (Underscoring supplied)
On appeal, the Board of Commissioners of the HLURB modified the decision of the
Arbiter by deleting the award ofP50,000 damages and ordering Jestra to pay P20,000 as
attorneys fees and P10,000 administrative fine for failure to register the Contract to Sell
in the Office of the Register of Deeds.
By Resolution of January 27, 2003, the HLURB Board of Commissioners
denied15 Jestras motion for reconsideration.
By Order16 of December 9, 2003, the Office of the President (OP), to which the case was
elevated, adopted "by reference the findings of facts and conclusions of law" contained in
the HLURB Board Resolution of January 27, 2003. And by Order17 dated March 18, 2004,
it denied Jestras motion for reconsideration.
On Jestras petition for review under Rule 43 of the Rules of Court, the Court of Appeals
(CA), by Decision18 dated January 31, 2005, affirmed the Orders of the OP.
Its motion for reconsideration having been denied by CA Resolution 19 of March 16, 2005,
Jestra (hereafter petitioner) comes before this Court on a petition for review, faulting the
appellate court for:
I. . . . adopting the OPs conclusion that penalty payments should be included in
computing the total number of installment payments made by a buyer (in relation
to the payment of a cash surrender value upon cancellation of a contract to sell)
in spite of its exclusion from the items to be included in computing the two (2)
years installment payments as provided in RA 6552

Thus the Arbiter disposed:


II. . . . adopting the OPs conclusion that petitioner failed to deliver possession of
the subject property to respondent upon his full payment of the downpayment

37
[sic] and that petitioners act of canceling the contract to sell was unconscionable
despite being allowed under RA 6552.
RA No. 6552 was enacted to protect buyers of real estate on installment against onerous
and oppressive conditions. While the seller has under the Act the option to cancel the
contract due to non-payment of installments, he must afford the buyer a grace period to
pay them and, if at least two years installments have already been paid, to refund the
cash surrender value of the payments. Thus Section of the Act provides:
SECTION 3. In all transactions or contracts involving the sale or financing of real estate
on installment payments, including residential condominium apartments but excluding
industrial lots, commercial buildings and sales to tenants under Republic Act Numbered
Thirty-eight hundred forty-four, as amended by Republic Act Numbered Sixty-three
hundred eighty-nine, where the buyer has paid at least two years of installments, the
buyer is entitled to the following rights in case he defaults in the payment of succeeding
installments:
(a) To pay, without additional interest, the unpaid installments due within the total
grace period earned by him which is hereby fixed at the rate of one month grace
period for every one year of installment payments made: Provided, That this right
shall be exercised by the buyer only once in every five years of the life of the
contract and its extensions, if any.
(b) If the contract is cancelled, the seller shall refund to the buyer the cash
surrender value of the payments on the property equivalent to fifty per cent of the
total payments made, and, after five years of installments, an additional five per
cent every year but not to exceed ninety per cent of the total payments made:
Provided, That the actual cancellation of the contract shall take place after thirty
days from receipt by the buyer of the notice of cancellation or the demand for
rescission of the contract by a notarial act and upon full payment of the cash
surrender value to the buyer.
Down payments, deposits or options on the contract shall be included in the computation
of the total number of installment payments made.
As the records indicate, the total payments made by Pacifico (hereafter respondent)
amounted to P846,600. The appellate court, in concluding that respondent paid at least
two years of installments, adopted the formula used by the HLURB by dividing the
amount of P846,600 by the monthly amortization of P34,983 to thus result to a quotient
of 24.2 months.

Petitioner contests the computation, however. It claims that the amount of P76,600
represents penalty payment and is a separate item to answer for its lost income as a
seller due to the delay in the payment20 of the 30% down payment. It thus submits that
the amount of P76,600 does not form part of the purchase price and should thus be
excluded in determining the total number of installments made.
Petitioner likewise claims that the proper divisor is not P34,983 but P39,468 since the
parties agreed to restructure the amortizations owing to respondents inability to comply
with the schedule of payments previously agreed upon in the Contract to Sell, and that if
respondents total payments less the penalty is to be divided by P39,468, the total
installments paid would only cover 19.5 months, hence, it was not obliged under RA No.
6552 to pay the cash surrender value of such total payments.
This Court finds that neither of the parties computations is in order.
The total purchase price of the property is P2,500,000. As provided in the Reservation
Application, the 30% down payment on the purchase price or P750,000 was to be paid in
six monthly installments of P121,666.66. Under the Contract to Sell, the 70% balance
of P1,750,000.00 on the purchase price was to be paid in 10 years through monthly
installments of P34,983, which was later increased to P39,468 in accordance with the
agreement to restructure the same.
While, under the above-quoted Section 3 of RA No. 6552, the down payment is included
in computing the total number of installment payments made, the proper divisor is
neither P34,983 nor P39,468, but P121,666.66, the monthly installment on the down
payment.
The P750,000 down payment was to be paid in six monthly installments. If the down
payment of P750,000 is to be deducted from the total payment of P846,600, the
remainder is only P96,600. Since respondent was able to pay the down payment in full
eleven (11) months after the last monthly installment was due, and the sum of P76,600
representing penalty for delay of payment is deducted from the remaining P96,600, only
a balance of P20,000 remains.
As respondent failed to pay at least two years of installments, he is not, under abovequoted Section 3 of RA No. 6552, entitled to a refund of the cash surrender value of his
payments. What applies to the case instead is Section 4 of the same law, viz:

38
SECTION 4. In case where less than two years of installments were paid, the seller shall
give the buyer a grace period of not less than sixty days from the date the installment
became due.
If the buyer fails to pay the installments due at the expiration of the grace period, the
seller may cancel the contract after thirty days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by a notarial act. (Underscoring
supplied)
In Fabrigas v. San Francisco del Monte, Inc.,21 this Court described the cancellation of
the contract under Section 4 as a two-step process. First, the seller should extend the
buyer a grace period of at least sixty (60) days from the due date of the installment.
Second, at the end of the grace period, the seller shall furnish the buyer with a notice of
cancellation or demand for rescission through a notarial act, effective thirty (30) days
from the buyer's receipt thereof.
Respondent admits that under the restructured scheme, the first installment on the 70%
balance of the purchase price was due on January 5, 1998. While he issued checks to
cover the same, the first two were dishonored due to insufficiency of funds.
While respondent was notified of the dishonor of the checks, he took no action thereon,
hence, the 60 days grace period lapsed. Respondent made no further payments
thereafter. Instead, he requested for suspension of payment and for time to dispose of
the property to recover his investment.
Respondent admits that petitioner was justified in canceling the contract to sell via the
notarial Notice of Cancellation which he received on May 13, 1998. The contract was
deemed cancelled22 30 days from May 13, 1998 or on June 12, 1998.
WHEREFORE, the petition is GRANTED. The assailed Decision and Resolution dated
January 31, 2005 and March 16, 2005 of the Court of Appeals are hereby REVERSED
and SET ASIDE. The complaint of respondent, Daniel Ponce Pacifico, is DISMISSED.
SO ORDERED.

IN VIEW OF THE FOREGOING PREMISES, the petition for certiorari and


mandamus is hereby GRANTED and the Orders of respondent court dated
November 21 and 27 both 1980 are hereby nullified and set aside and
respondent Judge is ordered to order private respondent to accept petitioner's
Pacific Banking Corporation certified manager's Check No. MC-A-000311 dated
November 17, 1980 in the amount of P76,059.71 in full settlement of petitioner's
obligation, or another check of equivalent kind and value, the earlier check
having become stale.
On February 28, 1977, petitioner Luisa F. McLaughlin and private respondent Ramon
Flores entered into a contract of conditional sale of real property. Paragraph one of the
deed of conditional sale fixed the total purchase price of P140,000.00 payable as follows:
a) P26,550.00 upon the execution of the deed; and b) the balance of P113,450.00 to be
paid not later than May 31, 1977. The parties also agreed that the balance shall bear
interest at the rate of 1% per month to commence from December 1, 1976, until the full
purchase price was paid.
On June 19, 1979, petitioner filed a complaint in the then Court of First Instance of Rizal
(Civil Case No. 33573) for the rescission of the deed of conditional sale due to the failure
of private respondent to pay the balance due on May 31, 1977.
On December 27, 1979, the parties submitted a Compromise Agreement on the basis of
which the court rendered a decision on January 22, 1980. In said compromise
agreement, private respondent acknowledged his indebtedness to petitioner under the
deed of conditional sale in the amount of P119,050.71, and the parties agreed that said
amount would be payable as follows: a) P50,000.00 upon signing of the agreement; and
b) the balance of P69,059.71 in two equal installments on June 30, 1980 and December
31, 1980.
As agreed upon, private respondent paid P50,000.00 upon the signing of the agreement
and in addition he also paid an "escalation cost" of P25,000.00.

1avvphi1.net

G.R. No. L-57552 October 10, 1986


LUISA F. MCLAUGHLIN vs. CA and RAMON FLORES
This is an appeal by certiorari from the decision of the Court of Appeals, the dispositive
part of which reads as follows:

Under paragraph 3 of the Compromise Agreement, private respondent agreed to pay one
thousand (P l,000.00) pesos monthly rental beginning December 5, 1979 until the
obligation is duly paid, for the use of the property subject matter of the deed of
conditional sale.
Paragraphs 6 and 7 of the Compromise Agreement further state:

39
That the parties are agreed that in the event the defendant (private respondent)
fails to comply with his obligations herein provided, the plaintiff (petitioner) will be
entitled to the issuance of a writ of execution rescinding the Deed of Conditional
Sale of Real Property. In such eventuality, defendant (private respondent) hereby
waives his right to appeal to (from) the Order of Rescission and the Writ of
Execution which the Court shall render in accordance with the stipulations herein
provided for.
That in the event of execution all payments made by defendant (private
respondent) will be forfeited in favor of the plaintiff (petitioner) as liquidated
damages.
On October 15, 1980, petitioner wrote to private respondent demanding that the latter
pay the balance of P69,059.71 on or before October 31, 1980. This demand included not
only the installment due on June 30, 1980 but also the installment due on December 31,
1980.

On November 17, 1980, private respondent filed a motion for reconsideration tendering
at the same time a Pacific Banking Corporation certified manager's check in the amount
of P76,059.71, payable to the order of petitioner and covering the entire obligation
including the installment due on December 31, 1980. However, the trial court denied the
motion for reconsideration in an order dated November 21, 1980 and issued the writ of
execution on November 25, 1980.
In an order dated November 27, 1980, the trial court granted petitioner's ex-parte motion
for clarification of the order of execution rescinding the deed of conditional sale of real
property.
On November 28, 1980, private respondent filed with the Court of Appeals a petition for
certiorari and prohibition assailing the orders dated November 21 and 27, 1980.
As initially stated above, the appellate court nullified and set aside the disputed orders of
the lower court. In its decision, the appellate court ruled in part as follows:

On October 30, 1980, private respondent sent a letter to petitioner signifying his
willingness and intention to pay the full balance of P69,059.71, and at the same time
demanding to see the certificate of title of the property and the tax payment receipts.

The issue here is whether respondent court committed a grave abuse of


discretion in issuing the orders dated November 21, 1980 and November
27,1980.

Private respondent states on page 14 of his brief that on November 3, 1980, the first
working day of said month, he tendered payment to petitioner but this was refused
acceptance by petitioner. However, this does not appear in the decision of the Court of
Appeals.

The general rule is that rescission will not be permitted for a slight or casual
breach of the contract, but only for such breaches as are substantial and
fundamental as to defeat the object of the parties in making the agreement.
(Song Fo & Co. vs. Hawaiian-Philippine Co., 47 Phil. 821)

On November 7, 1980, petitioner filed a Motion for Writ of Execution alleging that private
respondent failed to pay the installment due on June 1980 and that since June 1980 he
had failed to pay the monthly rental of P l,000.00. Petitioner prayed that a) the deed of
conditional sale of real property be declared rescinded with forfeiture of all payments as
liquidated damages; and b) the court order the payment of Pl,000.00 back rentals since
June 1980 and the eviction of private respondent.

In aforesaid case, it was held that a delay in payment for a small quantity of
molasses, for some twenty days is not such a violation of an essential condition
of the contract as warrants rescission for non-performance.

On November 14, 1980, the trial court granted the motion for writ of execution.

In the case at bar, McLaughlin wrote Flores on October 15, 1980 demanding that
Flores pay the balance of P69,059.71 on or before October 31, 1980. Thus it is
undeniable that despite Flores' failure to make the payment which was due on
June 1980, McLaughlin waived whatever right she had under the compromise
agreement as incorporated in the decision of respondent court, to demand
rescission.

In Universal Food Corp. vs. Court of Appeals, 33 SCRA 1, the Song Fo ruling
was reaffirmed.

40
xxx xxx xxx
It is significant to note that on November 17, 1980, or just seventeen (17) days
after October 31, 1980, the deadline set by McLaughlin, Flores tendered the
certified manager's check. We hold that the Song Fo ruling is applicable herein
considering that in the latter case, there was a 20-day delay in the payment of
the obligation as compared to a 17-day delay in the instant case.

In the analogous case of De Guzman vs. Court of Appeals, this Court sustained the order
of the respondent judge denying the petitioners' motion for execution on the ground that
the private respondent had substantially complied with the terms and conditions of the
compromise agreement, and directing the petitioners to immediately execute the
necessary documents transferring to the private respondent the title to the properties
(July 23, 1985, 137 SCRA 730). In the case at bar, there was also substantial compliance
with the compromise agreement.

Furthermore, as held in the recent case of New Pacific Timber & Supply Co., Inc.
vs. Hon. Alberto Seneris, L-41764, December 19, 1980, it is the accepted
practice in business to consider a cashier's or manager's check as cash and that
upon certification of a check, it is equivalent to its acceptance (Section 187,
Negotiable Instrument Law) and the funds are thereby transferred to the credit of
the creditor (Araneta v. Tuason, 49 O.G. p. 59).

Petitioner invokes the ruling of the Court in its Resolution of November 16, 1978 in the
case of Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., to the effect that
Republic Act 6552 (the Maceda Law) "recognizes and reaffirms the vendor's right to
cancel the contract to sell upon breach and non-payment of the stipulated installments
but requires a grace period after at least two years of regular installment payments ... . "
(86 SCRA 305, 329)

In the New Pacific Timber & Supply Co., Inc. case, the Supreme Court further
held that the object of certifying a check is to enable the holder thereof to use it
as money, citing the ruling in PNB vs. National City Bank of New York, 63 Phil.
711.

On the other hand, private respondent also invokes said law as an expression of public
policy to protect buyers of real estate on installments against onerous and oppressive
conditions (Section 2 of Republic Act No. 6552).

In the New Pacific Timber case, it was also ruled that the exception in Section 63
of the Central Bank Act that the clearing of a check and the subsequent crediting
of the amount thereof to the account of the creditor is equivalent to delivery of
cash, is applicable to a payment through a certified check.
Considering that Flores had already paid P101,550.00 under the contract to sell,
excluding the monthly rentals paid, certainly it would be the height of inequity to
have this amount forfeited in favor McLaughlin. Under the questioned orders,
McLaughlin would get back the property and still keep P101,550.00.

Section 4 of Republic Act No. 6552 which took effect on September 14, 1972 provides as
follows:
In case where less than two years of installments were paid, the seller shall give
the buyer a grace period of not less than sixty days from the date the installment
became due. If the buyer fails to pay the installments due at the expiration of the
grace period, the seller may cancel the contract after thirty days from receipt by
the buyer of the notice of the cancellation or the demand for rescission of the
contract by a notarial act.
Section 7 of said law provides as follows:

Petitioner contends that the appellate court erred in not observing the provisions of
Article No. 1306 of the Civil Code of the Philippines and in having arbitrarily abused its
judicial discretion by disregarding the penal clause stipulated by the parties in the
compromise agreement which was the basis of the decision of the lower court.
We agree with the appellate court that it would be inequitable to cancel the contract of
conditional sale and to have the amount of P101,550.00 (P l48,126.97 according to
private respondent in his brief) already paid by him under said contract, excluding the
monthly rentals paid, forfeited in favor of petitioner, particularly after private respondent
had tendered the amount of P76,059.71 in full payment of his obligation.

Any stipulation in any contract hereafter entered into contrary to the provisions of
Sections 3, 4, 5 and 6, shall be null and void.
The spirit of these provisions further supports the decision of the appellate court. The
record does not contain the complete text of the compromise agreement dated
December 20, 1979 and the decision approving it. However, assuming that under the
terms of said agreement the December 31, 1980 installment was due and payable when
on October 15, 1980, petitioner demanded payment of the balance of P69,059.71 on or
before October 31, 1980, petitioner could cancel the contract after thirty days from

41
receipt by private respondent of the notice of cancellation. Considering petitioner's
motion for execution filed on November 7, 1980 as a notice of cancellation, petitioner
could cancel the contract of conditional sale after thirty days from receipt by private
respondent of said motion. Private respondent's tender of payment of the amount of
P76,059.71 together with his motion for reconsideration on November 17, 1980 was,
therefore, well within the thirty-day period grants by law..
The tender made by private respondent of a certified bank manager's check payable to
petitioner was a valid tender of payment. The certified check covered not only the
balance of the purchase price in the amount of P69,059.71, but also the arrears in the
rental payments from June to December, 1980 in the amount of P7,000.00, or a total of
P76,059.71. On this point the appellate court correctly applied the ruling in the case of
New Pacific Timber & Supply Co., Inc. vs. Seneris (101 SCRA 686, 692-694) to the case
at bar.
Moreover, Section 49, Rule 130 of the Revised Rules of Court provides that:
An offer in writing to pay a particular sum of money or to deliver a written
instrument or specific property is, if rejected, equivalent to the actual production
and tender of the money, instrument, or property.
However, although private respondent had made a valid tender of payment which
preserved his rights as a vendee in the contract of conditional sale of real property, he
did not follow it with a consignation or deposit of the sum due with the court. As this Court
has held:
The rule regarding payment of redemption prices is invoked. True that
consignation of the redemption price is not necessary in order that the vendor
may compel the vendee to allow the repurchase within the time provided by law
or by contract. (Rosales vs. Reyes and Ordoveza, 25 Phil. 495.) We have held
that in such cases a mere tender of payment is enough, if made on time, as a
basis for action against the vendee to compel him to resell. But that tender does
not in itself relieve the vendor from his obligation to pay the price when
redemption is allowed by the court. In other words, tender of payment is sufficient
to compel redemption but is not in itself a payment that relieves the vendor from
his liability to pay the redemption price. " (Paez vs. Magno, 83 Phil. 403, 405)
On September 1, 1986, the Court issued the following resolution

Considering the allegation in petitioner's reply brief that the Manager's Check
tendered by private respondent on November 17, 1980 was subsequently
cancelled and converted into cash, the Court RESOLVED to REQUIRE the
parties within ten (10) days from notice to inform the Court whether or not the
amount thereof was deposited in court and whether or not private respondent
continued paying the monthly rental of P1,000.00 stipulated in the Compromise
Agreement.
In compliance with this resolution, both parties submitted their respective manifestations
which confirm that the Manager's Check in question was subsequently withdrawn and
replaced by cash, but the cash was not deposited with the court.
According to Article 1256 of the Civil Code of the Philippines, if the creditor to whom
tender of payment has been made refuses without just cause to accept it, the debtor
shall be released from responsibility by the consignation of the thing or sum due, and
that consignation alone shall produce the same effect in the five cases enumerated
therein; Article 1257 provides that in order that the consignation of the thing (or sum) due
may release the obligor, it must first be announced to the persons interested in the
fulfillment of the obligation; and Article 1258 provides that consignation shall be made by
depositing the thing (or sum) due at the disposal of the judicial authority and that the
interested parties shall also be notified thereof.
As the Court held in the case of Soco vs. Militante, promulgated on June 28, 1983, after
examining the above-cited provisions of the law and the jurisprudence on the matter:
Tender of payment must be distinguished from consignation. Tender is the
antecedent of consignation, that is, an act preparatory to the consignation, which
is the principal, and from which are derived the immediate consequences which
the debtor desires or seeks to obtain. Tender of payment may be extrajudicial,
while consignation is necessarily judicial, and the priority of the first is the attempt
to make a private settlement before proceeding to the solemnities of
consignation. (8 Manresa 325). (123 SCRA 160,173)
In the above-cited case of De Guzman vs. Court of Appeals (137 SCRA 730), the vendee
was released from responsibility because he had deposited with the court the balance of
the purchase price. Similarly, in the above-cited case of New Pacific Timber & Supply
Co., Inc. vs. Seneris (101 SCRA 686), the judgment debtor was released from
responsibility by depositing with the court the amount of the judgment obligation.

42
In the case at bar, although as above stated private respondent had preserved his rights
as a vendee in the contract of conditional sale of real property by a timely valid tender of
payment of the balance of his obligation which was not accepted by petitioner, he
remains liable for the payment of his obligation because of his failure to deposit the
amount due with the court.

P76,059.71 and the rentals in arrears, private respondent shall be entitled to a deed of
absolute sale in his favor of the real property in question.

In his manifestation dated September 19, 1986, private respondent states that on
September 16, 1980, he purchased a Metrobank Cashier's Check No. CC 004233 in
favor of petitioner Luisa F. McLaughlin in the amount of P76,059.71, a photocopy of
which was enclosed and marked as Annex "A- 1;" but that he did not continue paying the
monthly rental of Pl,000.00 because, pursuant to the decision of the appellate court,
petitioner herein was ordered to accept the aforesaid amount in full payment of herein
respondent's obligation under the contract subject matter thereof.

(a) Petitioner is ordered to accept from private respondent the Metrobank Cashier's
Check No. CC 004233 in her favor in the amount of P76,059.71 or another certified
check of a reputable bank drawn in her favor in the same amount;

However, inasmuch as petitioner did not accept the aforesaid amount, it was incumbent
on private respondent to deposit the same with the court in order to be released from
responsibility. Since private respondent did not deposit said amount with the court, his
obligation was not paid and he is liable in addition for the payment of the monthly rental
of Pl,000.00 from January 1, 1981 until said obligation is duly paid, in accordance with
paragraph 3 of the Compromise Agreement. Upon full payment of the amount of

(c) Petitioner is ordered to execute a deed of absolute sale in favor of private respondent
over the real property in question upon full payment of the amounts as provided in
paragraphs (a) and (b) above. No costs. SO ORDERED.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the following
modifications:

(b) Private respondent is ordered to pay petitioner, within sixty (60) days from the finality
of this decision, the rentals in arrears of P l,000.00 a month from January 1, 1981 until
full payment thereof; and