Published — March 24, 2021
The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.
Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
Aside from Recto Law, learn more about mortgage: Repossession of mortgaged automobiles
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Recto Law applies only to sale of personal property on installment basis
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The seller may cancel the contract of sale in case the buyer fails to pay two or more installments
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In case the buyer fails to pay two or more installments, the seller may foreclose the mortgage if one has been constituted
May a seller collect the balance due from the buyer after foreclosing the mortgage?
For a better understanding let us take the case of Spouses Alfredo and Brigida Rosario vs. PCI Leasing and Finance, Inc., (G.R. No. 139233, November 11, 2005).
In this case, the spouses Rosario purchased an Isuzu Elf Pick-up Utility vehicle from Car Merchants, Inc. The transaction was covered by a Purchase Agreement whereby the spouses undertook to make a downpayment of the total purchase price. The spouses then applied for a loan with PCI Leasing to pay the balance.
Upon approval of their loan application, the spouses Rosario executed a Promissory Note in favor of PCI Leasing (PCI) covering the amount of loan. The spouses undertook to pay the loan in monthly installments payable on the 29th day of each month at 22.10% annual interest. The spouses also agreed that in case of default, the payment of the outstanding sum with interest shall immediately become due and payable. To secure the payment of the loan, they executed, on the same day, a chattel mortgage in favor of PCI. The motor vehicle was delivered to the spouses and it was registered in their names.
Despite demands, the spouses failed to pay the amortizations on their loan to PCI. PCI then filed a complaint for “Sum of Money with Damages with a Prayer for a Writ of Replevin”. Later, the subject motor vehicle was turned over to PCI Leasing.
In their Answer to the complaint, the spouses said that the chattel mortgage they executed in favor of PCI covering the motor vehicle was in effect a contract of sale of personal property, payable in installments and is governed by Recto Law. They further alleged that since PCI opted to foreclose the chattel mortgage, it can no longer collect the balance of their account under the promissory note and chattel mortgage.
What is Recto Law?
The law says:
Recto Law covers sales of personal property on installment basis. Recto Law falls Article 1484 the Civil Code of the Philippines which is stated in the following manner:
“Article 1484. In a contract of sale of personal property, the price of which is payable in installments, the vendor may exercise any of the following remedies:
- Exact fulfillment of the obligation, should the vendee fail to pay;
- Cancel the sale, should the vendee’s failure to pay cover two or more installments;
- Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee’s failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.”
Going back to the case, are the spouses correct in saying that PCI can no longer collect the balance of their account under the promissory note and chattel mortgage because the PCI have already opted to foreclose the chattel mortgage?
The Supreme Court said:
The rule is: If there has been no foreclosure of the chattel mortgage or a foreclosure sale, then the prohibition against further collection of the balance of the price does not apply. This is also the answer to the first question above.
In this case, the spouses were not able to sufficiently prove that PCI foreclosed the mortgage. Thus, PCI can still collect the balance due from the spouses.
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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