G.R. No. L-47784; April 18, 1941
LEVY HERMANOS, INC., plaintiff-appellant, vs. PACIFIC COMMERCIAL CO., MANUEL DUMDUM y ROSARIO PEDRO, defendants. MANUEL DUMDUM y ROSARIO PEDRO, appellees.

FACTS

On November 28, 1936, defendants Manuel Dumdum and his wife Rosario Pedro entered into a contract with plaintiff Levy Hermanos, Inc. for the installment purchase of six new Dodge motor cars for the price of P13,600. To secure payment, the defendants executed a mortgage (Exhibit A) in favor of the plaintiff. The mortgage covered not only the six motor cars purchased but also a parcel of land located in Jaro, Iloilo, and a house of strong materials located at the corner of Jones-Quezon and Delgado streets in Iloilo. The defendants made an initial payment of P4,600 but failed to pay the remaining balance despite demands. The outstanding debt, including interest and other charges, amounted to P12,029.36. The plaintiff filed an action in the Court of First Instance of Iloilo to recover this amount and sought the sale of all mortgaged properties (the six cars, the land, and the house) at public auction to satisfy the obligation. The trial court granted the plaintiff’s claim but ruled that the mortgage contract was invalid insofar as it subjected the land and house to the mortgage lien. The court ordered payment of the P9,000 principal balance plus interest and other charges, and authorized the sale at public auction of only the six motor cars to satisfy the debt. The plaintiff appealed, arguing the trial court erred in excluding the land and house from the mortgage’s coverage and in applying Act No. 4122 .

ISSUE

Whether the chattel mortgage contract, which included the defendants’ land and house as additional security for the installment purchase of movable property (motor cars), is valid in its entirety or is void as to the immovable properties under Act No. 4122 , which amended Article 1454 of the Civil Code.

RULING

The Supreme Court affirmed the trial court’s decision. The mortgage contract is invalid with respect to the inclusion of the land and house as security for the installment sale of the motor cars. Act No. 4122 (amending Article 1454 of the Civil Code) was enacted precisely to prevent the seller of a movable property sold on installments from having, in addition to the right to demand fulfillment of the obligation or to resolve the sale and retake the movable property (forfeiting prior installment payments if so stipulated), the further right to execute the mortgage and then obtain a writ of execution to collect any remaining deficiency from the buyer’s other properties. Under the law, the seller of a movable on installments has three options: 1) demand specific performance of the obligation, disregarding the chattel mortgage; 2) resolve the contract of sale and retake the movable property; or 3) foreclose the chattel mortgage on the movable property sold. If the seller opts for foreclosure, he must be content with the proceeds from the sale at public auction of the mortgaged movable property and cannot demand payment of any deficiency from the buyer’s other properties. Including the land and house in the mortgage to better secure payment for the motor cars frustrates the true purpose and policy of Act No. 4122 , as it would allow the seller to obtain execution against properties entirely distinct from those sold on installments, which the law prohibits. Therefore, the trial court correctly excluded the land and house from the effects of the mortgage and ordered only the sale of the six motor cars. The appealed judgment was confirmed in all respects.