G.R. No. 150673; February 28, 2003
Superlines Transportation Company, Inc., and Manolet Lavides, petitioners, vs. ICC Leasing & Financing Corporation, respondent.

FACTS

Petitioner Superlines Transportation Company, Inc., through its President Manolet Lavides, obtained a loan from respondent ICC Leasing & Financing Corporation to purchase five new buses. The loan was secured by a chattel mortgage over the buses. The parties executed a deed of chattel mortgage containing a “special power of attorney” clause, authorizing ICC, as attorney-in-fact, to take possession and sell the mortgaged property extrajudicially upon Superlines’s default. After paying only seven monthly installments, Superlines defaulted. ICC extrajudicially foreclosed the mortgage, purchased the buses at the public auction as the highest bidder, and applied the bid price to the outstanding obligation. A deficiency balance remained.
ICC filed a complaint for collection of the deficiency amount. The Regional Trial Court dismissed the complaint, ruling that the chattel mortgage was an equitable mortgage and that ICC’s extrajudicial foreclosure and purchase of the property constituted a pactum commissorium, which is void. The Court of Appeals reversed this decision, prompting petitioners to elevate the case to the Supreme Court.

ISSUE

The core issue is whether the respondent is entitled to recover the deficiency judgment after extrajudicially foreclosing the chattel mortgage.

RULING

The Supreme Court denied the petition and affirmed the Court of Appeals’ decision, holding that respondent is entitled to recover the deficiency. The Court clarified that the contractual stipulation in the deed, appointing the mortgagee as attorney-in-fact to seize and sell the property upon default, is a valid “special power of attorney” recognized under the Chattel Mortgage Law, not a pactum commissorium. A pactum commissorium is a void stipulation automatically vesting ownership of the mortgaged property in the mortgagee upon default. Here, the mortgagee was merely granted a power to sell, not an automatic transfer of title; the sale still required a public auction. This distinction validates the foreclosure proceeding.
Furthermore, the Court ruled that a chattel mortgage is an accessory contract, and the foreclosure merely extinguishes the lien on the property. It does not extinguish the principal obligation to pay the debt. The proceeds of the foreclosure sale are applied to the obligation, and if a deficiency exists, the mortgagee retains the right to sue for its recovery. The law does not prohibit such a claim. Therefore, the respondent’s action to collect the unpaid balance after the extrajudicial foreclosure was proper and legally sound.