G.R. No. L-25951 June 30, 1969
FILIPINAS INVESTMENT & FINANCE CORPORATION, plaintiff-appellant, vs. JULIAN R. VITUG, JR. and SUPREME SALES & DEVELOPMENT CORPORATION, defendants-appellees.

FACTS

Plaintiff-appellant Filipinas Investment & Finance Corporation filed an amended complaint to recover a deficiency from defendant-appellee Supreme Sales & Development Corporation. The deficiency arose after the foreclosure and public auction of a car originally sold by appellee to defendant Julian R. Vitug, Jr. Vitug executed a promissory note for the purchase price of a Ford Consul sedan, secured by a chattel mortgage on the vehicle. Appellee then assigned this promissory note and chattel mortgage to appellant on a “with recourse” basis, meaning appellant retained the right to seek payment from appellee if Vitug defaulted. Vitug defaulted on multiple installments. Appellant, after obtaining possession of the car (initially via a writ of replevin, but later through Vitug’s voluntary surrender), foreclosed the chattel mortgage and sold the car at public auction. The sale proceeds were insufficient to cover the outstanding balance, leaving a deficiency of P8,349.35 plus interest. Appellant sought to recover this deficiency from appellee based on the “with recourse” agreement. Appellee moved to dismiss, citing Article 1484 of the Civil Code (the Recto Law), arguing the appellant had no cause of action. The lower court granted the motion to dismiss, holding that by foreclosing the chattel mortgage, appellant (standing in the vendor’s shoes) lost the right to recover any unpaid balance from the purchaser and, consequently, from the appellee-assignor.

ISSUE

Whether Article 1484 of the Civil Code (the Recto Law), which prohibits a vendor who forecloses a chattel mortgage from recovering any unpaid balance from the vendee, also prohibits the assignee of the vendor’s credit (the appellant) from recovering a deficiency from the vendor-assignor (the appellee) based on a separate “with recourse” agreement between them.

RULING

No. The Supreme Court reversed the order of dismissal and remanded the case. The Court held that Article 1484 of the Civil Code was not applicable to the transaction between the appellant (assignee-finance company) and the appellee (vendor-assignor). The Recto Law is designed to protect installment buyers from vendors who, upon foreclosure, might still seek deficiency judgments against them. The remedy sought by appellant was not against the buyer (Vitug) but against the seller (appellee) based on their independent “with recourse” discounting agreement. This agreement, whereby appellee negotiated the note to appellant with a guarantee of payment, was a separate commercial transaction not intended to be impaired by the Recto Law. The law does not prohibit a vendor from utilizing its credit commercially, provided the buyer is not burdened beyond what the law allows. The Court distinguished this case from Cruz v. Filipinas Investment, where recovery from a third-party guarantor was barred because it would ultimately burden the buyer. Here, the recourse was against the original seller-assignor under their specific agreement, which did not violate the policy behind Article 1484.