CREDIT TRANSACTIONS CASE DIGEST/ ACME SHOE, RUBBER & PLASTIC VS. COURT OF APPEALS, 260 SCRA 714, G.R. NO. 103576, 22 AUGUST 1996

ACME SHOE, RUBBER & PLASTIC VS. COURT OF APPEALS,

260 SCRA 714, G.R. NO. 103576, 22 AUGUST 1996

TOPIC/DOCTRINE

While a pledge, real estate mortgage, or antichre-sis 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.

FACTS

Petitioner Chua Pac, the president and general manager of co-petitioner “Acme Shoe, Rubber & Plastic Corporation,” executed on 27 June 1978, for and in behalf of the company, a chattel mortgage in favor of private respondent Producers Bank of the Philippines. The mortgage stood by way of security for petitioner’s corporate loan of three million pesos (P3,000,000.00). In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it obtained from respondent bank additional financial accommodations totalling P2,700,000.00.2 These borrowings were on due date also fully paid.

On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one million pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to financial constraints, the loan was not settled at maturity. Respondent bank thereupon applied for an extrajudicial foreclosure of the chattel mortgage, hereinbefore cited, with the Sheriff of Caloocan City, Ultimately, the court ordered the foreclosure of the chattel mortgage. It held petitioner corporation bound by the stipulations, aforequoted, of the chattel mortgage.

ISSUE

Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its coverage to obligations yet to be contracted or incurred?

RULING

No.

The court held that while a pledge, real estate mortgage, or antichre-sis 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.

Here, the court held that in the chattel mortgage here involved, the only obligation specified in the chattel mortgage contract was the P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void or terminated, there no longer was any chattel mortgage that could cover the new loans that were concluded thereafter. the questioned decisions of the appellate court and the lower court are set aside without prejudice to the appropriate legal recourse by private respondent as may still be warranted as an unsecured creditor.

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