Mortgage covering future loans

In Marquez v. Elisan Credit (G.R. No. 194642, April 06, 2015), the Supreme Court held that the chattel mortgage could not validly cover the second loan of the debtor. The order for foreclosure, therefore, was without legal and factual basis. In Acme Shoe, Rubber and Plastic Corp. v. Court of Appeals,[1] the debtor executed a chattel mortgage, which had a provision to this effect:
"In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the former note, as an extension thereof, or as a new loan, or is given any other kind of accommodations such as overdrafts, letters of credit, acceptances and bills of exchange, releases of import shipments on Trust Receipts, etc., this mortgage shall also stand as security for the payment of the said promissory note or notes and/or accommodations without the necessity of executing a new contract and this mortgage shall have the same force and effect as if the said promissory note or notes and/or accommodations were existing on the date thereof."[2] [Emphasis supplied.]
In due time, the debtor settled the loan covered by the chattel mortgage. Subsequently, the debtor again borrowed from the creditor. Due to financial constraints, the subsequent loan was not settled at maturity.

On the issue whether the chattel mortgage could be foreclosed due to the debtor's failure to settle the subsequent loan, we held that,
"[c]ontracts of security are either personal or real, x x x In contracts of real security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property — in pledge, the placing of movable property in the possession of the creditor; in chattel mortgage, by the execution of the corresponding deed substantially in the form prescribed by law; x x x — upon the essential condition that if the principal obligation becomes due and the debtor defaults, then the property encumbered can be alienated for the payment of the obligation, but that should the obligation be duly paid, then the contract is automatically extinguished proceeding from the accessory character of the agreement. As the law so puts it, once the obligation is complied with, then the contract of security becomes, ipso facto, null and void."[3]

While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately described, a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law. Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute an act of default on the part of the borrower of the financing agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed."[4] [Emphasis supplied.]
It was mentioned and noted by the High Court that the Chattel Mortgage Law[5] requires the parties to the contract to attach an affidavit of good faith and execute an oath that -
" x x x (the) mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purposes, and that the same is a just and valid obligation, and one not entered into for the purposes of fraud."[6]
It is obvious therefore that the debt referred in the law is a current, not an obligation that is yet merely contemplated.[7] The wording of the mortgage contract in the case of Marquez v. Elisan Credit was thus:[8]
"x x x in consideration of the credit accommodation granted by the MORTGAGEE to the MORTGAGOR(S) in the amount of FIFTY-THREE THOUSAND ONLY PESOS (P53,000.00) xxx and all other obligations of every kind already incurred or which may hereafter be incurred, for or accommodation of the MORTGAGOR(S), as well as the faithful performance of the terms and conditions of this mortgage x x x." [Emphasis supplied.]
The only obligation specified in the chattel mortgage contract was the first loan which the Petitioner Marquez later fully paid. By virtue of Section 3 of the Chattel Mortgage Law,[9] the payment of the obligation automatically rendered the chattel mortgage terminated; the chattel mortgage had ceased to exist upon full payment of the first loan. Being merely an accessory in nature, it cannot exist independently of the principal obligation.

The parties did not execute a fresh chattel mortgage nor did they amend the chattel mortgage to comply with the Chattel Mortgage Law which requires that the obligation must be specified in the affidavit of good faith. Simply put, there no longer was any chattel mortgage that could cover the second loan upon full payment of the first loan. The order to foreclose the motor vehicle therefore had no legal basis.
[1] 329 Phil 531 (1996).

[2] Id. at 536.

[3] Id. at 538-539.

[4] Id. at 539.

[5] Act 1508 as amended dated July 2, 1906.

[6] 329 Phil 531 (1996), at p. 540.

[7] Id.

[8] G.R. No. 194642, April 06, 2015.

[9]Sec. 3. Chattel mortgage defined. — A chattel mortgage is a conditional sale of personal property as security for the payment of a debt, or the performance of some other obligation specified therein, the condition being that the sale shall be void upon the seller paying to the purchaser a sum of money or doing some other act named. If the condition is performed according to its terms the mortgage and sale immediately become void, and the mortgagee is thereby divested of his title. [Emphasis supplied.]

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