G.R. No. L-50449. January 30, 1982.
FILINVEST CREDIT CORPORATION, plaintiff-appellee, vs. PHILIPPINE ACETYLENE, CO., INC., defendant-appellant.

FACTS

Defendant-appellant Philippine Acetylene Co., Inc. purchased a vehicle from Alexander Lim, executing a promissory note and a chattel mortgage to secure the balance. Lim assigned his rights under these instruments to Filinvest Finance Corporation, which later merged into plaintiff-appellee Filinvest Credit Corporation. Upon appellant’s default on nine installments, appellee, through counsel, sent a demand letter giving appellant five days to either pay the full amount or return the mortgaged vehicle. Appellant chose the latter, returning the vehicle with a “Voluntary Surrender with Special Power of Attorney To Sell” document, which appellee’s vice-president confirmed.
Subsequently, appellee discovered substantial unpaid taxes on the vehicle, rendering a sale impractical. Appellee then wrote to appellant, requesting payment of the arrears and later offered to return the vehicle, which appellant refused. Appellee filed a collection suit. Appellant contended its obligation was extinguished by the return of the vehicle, which constituted appellee’s election of a remedy under Article 1484 of the Civil Code, barring any further action for the unpaid balance.

ISSUE

Whether the voluntary return of the mortgaged vehicle by the debtor extinguished the obligation, precluding the creditor from filing an action for the recovery of the unpaid balance.

RULING

The Supreme Court ruled that the obligation was not extinguished, and appellee could still sue for the unpaid balance. The legal logic is anchored on the interpretation of the remedies under Article 1484 of the Civil Code and the nature of the parties’ acts. Article 1484 provides the vendor with three alternative remedies: exact fulfillment, cancel the sale, or foreclose the chattel mortgage. The Court held that the demand letter offering two options—pay or return the property—did not constitute a final and exclusive election of the remedy of exact fulfillment. The return of the vehicle, coupled with the “Voluntary Surrender” document authorizing its sale, was deemed a mere preliminary step for a possible foreclosure, not a consummated act of foreclosure itself. Since foreclosure did not materialize due to the discovery of the tax lien, appellee was not precluded from shifting to the remedy of exact fulfillment by filing a collection suit. The Court further clarified that the unpaid taxes, being a burden on the property, remained the responsibility of the mortgagor-appellant, not the assignee-appellee, as the assignment transferred only rights under the credit, not the underlying warranties from the original vendor unless expressly assumed. Thus, the lower court’s judgment for the unpaid balance was affirmed.