G.R. No. 44671 ; November 26, 1938
MACONDRAY and CO., INC., plaintiff-appellant, vs. ANTONIO E. RUIZ and ERNESTO CUISIA, defendants-appellees.

FACTS

Plaintiff Macondray sold an automobile to defendant Ruiz on installment, secured by a mortgage and promissory notes jointly executed by Ruiz and Borromeo. After partial payments, the parties executed a new contract on March 14, 1934, replacing the debtors with Ruiz and Cuisia for the reduced balance and retaining the mortgage. Upon default, plaintiff foreclosed the mortgage, purchased the car at auction for P500, and sued for the deficiency balance.

ISSUE

1. Whether the original contract was novated by the subsequent agreement.
2. Whether Act No. 4122 (prohibiting deficiency judgments after foreclosure of a chattel mortgage on installment sales) applies to bar plaintiff’s action for the deficiency.

RULING

1. Yes, novation occurred. The second contract substantially altered the principal conditions by changing the debtors and the amount owed, making it incompatible with the first, thereby extinguishing the original obligation under the Civil Code.
2. Yes, Act No. 4122 applies. The law was already in effect when the second contract was executed. The promissory note and mortgage, though not a new sale, originated from the original installment sale of the automobile, making the transaction fall within the law’s coverage. Thus, plaintiff’s election to foreclose the mortgage precludes any further action to recover the deficiency balance. The appealed judgment absolving defendants is affirmed.

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