G.R. No. 40062 & G.R. No. 40102 , May 3, 1989
MONTELIBANO ESGUERRA, petitioner, vs. HON. COURT OF APPEALS, G.A. MACHINERIES, INC., JOSE TINO and MANUEL DORE, respondents. (Consolidated with G.R. No. 40102 )

FACTS

Montelibano Esguerra purchased a Ford-Trader cargo truck, assuming the unpaid balance from the original buyers. To secure the obligation, he executed a promissory note and a chattel mortgage in favor of the seller, G.A. Machineries, Inc. (GAMI). Upon Esguerra’s default, the parties executed a new chattel mortgage covering the unpaid balance of P16,000.00, payable in monthly installments. Esguerra subsequently defaulted on these payments.
On June 3, 1966, agents of GAMI seized the truck from Esguerra’s driver. Esguerra filed a complaint for recovery of the truck and damages, alleging the taking was unlawful. GAMI countered that Esguerra had consented to the repossession on condition he could recover it upon paying his arrears. The trial court dismissed the complaint, ruling the repossession was lawful under the chattel mortgage contract and by Esguerra’s consent, applying Article 1484 of the Civil Code.

ISSUE

The core issue is whether GAMI’s act of repossessing the truck, without subsequently conducting a foreclosure sale, constitutes a valid exercise of its rights under the chattel mortgage and Article 1484 of the Civil Code, and what corresponding remedies or liabilities arise.

RULING

The Supreme Court affirmed the Court of Appeals with modification. The legal logic centers on the interpretation of Article 1484 of the Civil Code, which provides three alternative remedies for a vendor in an installment sale of personal property with chattel mortgage: exact fulfillment, cancel the sale, or foreclose the mortgage. These remedies are exclusive; the exercise of one bars the others.
The Court held that GAMI’s act of taking possession of the mortgaged vehicle, pursuant to a stipulation in the chattel mortgage and with the mortgagor’s consent, was a valid preliminary step for foreclosure. However, mere repossession does not equate to foreclosure. By choosing to repossess, GAMI was deemed to have elected the remedy of foreclosure. Consequently, it was obligated to complete the foreclosure process by selling the truck at public auction to liquidate the debt. Its failure to do so, while not characterized by bad faith warranting exemplary damages, meant it could not retain the truck indefinitely without following through with the statutory foreclosure procedure. Thus, GAMI was ordered to foreclose the chattel mortgage by public auction. The award of exemplary damages was deleted for lack of showing of wanton or oppressive conduct.