GR 103576; (August, 1996) (Digest)
G.R. No. 103576 August 22, 1996
ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners, vs. HON. COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS and REGIONAL SHERIFF OF CALOOCAN CITY, respondents.
FACTS
Petitioner corporation, through its president Chua Pac, executed a chattel mortgage on June 27, 1978, to secure a P3,000,000.00 loan from respondent bank. The mortgage contained a clause stating it would also secure future obligations, including new loans, without the need for a new contract. The initial loan was fully paid. Subsequently, the corporation obtained and fully paid additional loans in 1981. In 1984, it obtained another loan of P1,000,000.00, which it defaulted on.
Respondent bank sought to extrajudicially foreclose the 1978 chattel mortgage to satisfy the 1984 loan. Petitioners filed an injunction suit, arguing the mortgage could not secure the later obligation. The trial court dismissed the complaint and ordered foreclosure, ruling the stipulation bound the petitioners. The Court of Appeals affirmed the decision.
ISSUE
Whether a chattel mortgage can validly secure future or after-incurred obligations based solely on a stipulation within the original mortgage contract.
RULING
No. The Supreme Court reversed the appellate and trial court decisions. The Court held that a chattel mortgage, as a contract of real security, is accessory in nature; it secures a principal obligation and becomes null and void once that obligation is extinguished. While a contractual promise to include future debts in a mortgage may be binding, the security interest itself does not automatically attach to after-incurred obligations.
Under the Chattel Mortgage Law ( Act No. 1508 ), a chattel mortgage can only cover obligations existing at the time of its constitution. For it to secure a subsequent debt, a new chattel mortgage must be executed, or the original one must be amended, in accordance with the formalities prescribed by law. The stipulation in the 1978 mortgage was merely a commitment to provide security for future loans, but it did not itself create a mortgage lien over the properties for the 1984 loan absent the execution of the proper security agreement for that new debt. Consequently, the foreclosure based on the 1978 mortgage was invalid. The bank’s remedy was to proceed as an unsecured creditor for the 1984 loan. The Court also admonished petitioners’ counsel for disrespectful language toward the Court of Appeals.