G.R. No. 147950; December 11, 2003
California Bus Lines, Inc. vs. State Investment House, Inc.

FACTS

Petitioner California Bus Lines, Inc. (CBLI) purchased buses from Delta Motors Corporation on installment, executing promissory notes and chattel mortgages to secure payment. Delta later assigned five of these promissory notes to respondent State Investment House, Inc. (SIHI) as part of security for its own loan obligations. When CBLI defaulted, Delta initiated foreclosure proceedings. Crucially, CBLI and Delta subsequently entered into a compromise agreement in a separate injunction case (Civil Case No. 0023-P), which was approved by the Pasay RTC. This agreement stipulated that Delta would extrajudicially foreclose the chattel mortgages on the buses. CBLI contended this compromise constituted full settlement of all its obligations to Delta, including the assigned promissory notes. SIHI, as assignee of the notes, filed a collection suit against CBLI after its demand for payment was refused.

ISSUE

Whether the compromise agreement between CBLI and Delta, which provided for foreclosure of the chattel mortgages, extinguished CBLI’s liability on the promissory notes assigned to SIHI.

RULING

No, the compromise agreement did not extinguish CBLI’s liability on the assigned notes. The Supreme Court affirmed the Court of Appeals’ decision holding CBLI liable. The legal logic rests on the nature of the assignment and the distinct remedies available under Article 1484 of the Civil Code. SIHI, as assignee, stepped into the shoes of Delta as creditor of the notes. The compromise agreement, to which SIHI was not a party, could not bind the assignee. More fundamentally, the Court clarified that the foreclosure of the chattel mortgage and the enforcement of the promissory note are separate and cumulative remedies under the law. Article 1484 provides that a seller may either (1) exact fulfillment (sue on the note) or (3) foreclose the chattel mortgage, but if it forecloses, it loses the right to recover any unpaid balance. This election of remedies, however, pertains only to the vendor (Delta) and its privies. The foreclosure by Delta, pursuant to the compromise, constituted its election of remedy, barring it from further action against CBLI for the deficiency. This election did not, however, extinguish the debt itself represented by the promissory notes. SIHI, as an assignee of the credit evidenced by the notes, acquired a right independent of the chattel mortgage security. It was not seeking a deficiency claim after foreclosure but was enforcing the primary obligation itself. Since SIHI did not participate in the foreclosure, it was not bound by Delta’s election of remedy. Therefore, CBLI remained liable to SIHI on the assigned promissory notes.