A.S. TOPACIO CONSTRUCTION CORPORATION AND SPOUSES AUGUSTO S.

TOPACIO AND ANTOINETTA B. TOPACIO, petitioner vs PCI LEASING AND

FINANCE INC. (NOW BDO LEASING AND FINANCE, INC.), respondent.
G.R. No. 227520 | June 17, 2019 | No Mention (First Division)

Nature of the action: Complaint for collection of sum of money

Facts: A.S. Topacio Construction Corporation (ASTCC) is a domestic corporation engaged in

general construction while the Spouses Topacio, are the President and Corporate Secretary of
ASTCC.

On May 20, 1997, PCI Leasing and Finance, Inc., now BDO Leasing and Finance, Inc., (PCI) and
ASTCC, through Augusto, entered into a lease contract denominated as Lease Agreement No.
023 (Lease Agreement) covering chattels/personal properties (subject equipment). The terms and
conditions of the lease contract are specified in the Lease Schedules. Later, the Spouses Topacio
executed in favor of PCI a Continuing Guaranty of Lease Obligation (CGLO) and bound
themselves to be jointly and severally liable for the entire obligation under the said continuing
guaranty.

ASTCC failed to pay several installments of rentals due under the lease. This led PCI to demand
payment of the entire unpaid balance of the obligation, which, as of January 18, 1999, amounted
to P3,226,513.41 plus penalty charges of P244,878.51. PCI alleged that the Lease Agreement and
Lease Schedules expressly provided that in case of default or failure to pay any installment and/or
interest and other charges provided therein or any violation of the terms and conditions of the
lease contract and schedules, the entire obligation shall become due and payable without notice to
or demand on the corporation. It further claimed that ASTCC agreed to voluntarily surrender and
deliver possession of the subject equipment, in case of default.

PCI subsequently sold the said properties for P1,490,000.00, thereby leaving a deficiency
obligation in the amount of P1,066,498.99 as of November 30, 2000. PCI then demanded from
ASTCC and the Spouses Topacio the payment of the deficiency obligation. Respondent sent a
Final Demand letter dated January 9, 2001to petitioners. However, petitioners failed and refused
to pay the said obligation.

As a result, PCI instituted an action for collection of sum of money before the Regional Trial
Court. The Spouses Topacio moved to dismiss the complaint as against them. They claimed that
they were not real parties in interest because they merely acted in their capacity as officers of the
corporation.

RTC ruled in favor of PCI and ordered petitioners to jointly and severally pay the latter the
unpaid deficiency obligation with interest. CA affirmed the RTC decision, hence, this petition.

Issue: Whether the transaction is that of a loan secured by chattel mortgage whereby PCI is
entitled to the payment of the deficiency obligation. YES

Held: YES. Petitioners claim that the provisions on pledge/mortgage apply to the transaction it
entered into with respondent. In particular, they argue that their obligation to respondent was
extinguished when respondent sold the subject equipment. Further, they contend that respondent
is barred from recovering the deficiency by virtue of Article 2115 of the Civil Code.

Article 2115 applies to the contract of pledge. Petitioners appear to have based their argument on
its applicability in the instant case on Article 2140 of the Civil Code, which provides that if the
movable is not recorded in the Chattel Mortgage Register but is delivered to the creditor or third
person, the contract is deemed a pledge and not a chattel mortgage. Petitioners' logic seems to be
that, since they delivered the subject equipment to respondent and the chattel mortgage was not
recorded in the Chattel Mortgage Register, the contract became a pledge. This is patently
erroneous.

The delivery contemplated in Article 2140 of the Civil Code, for a chattel mortgage to become a
pledge, is a delivery to the mortgagee of the chattel subject of the mortgage at the time of the
execution of the contract. Respondent should have been placed in possession of the subject
equipment at the time of the execution of the Lease Agreement and its Schedules for the
mortgage to have become a pledge. This is evident in Article 2093 of the Civil Code, which states
that it is necessary that the thing pledged be placed in the possession of the creditor, or a third
person, in order to constitute the contract of pledge. Without delivery, there can be no pledge.

In the instant case, ASTCC did not deliver possession of the subject equipment to respondent
upon execution of the Lease Agreement and its Schedules. It retained possession of the subject
equipment and used it for its own purposes. No pledge was constituted.

Article 2115, in relation to Article 2141, is not applicable to chattel mortgages. The Court has
previously held that the provisions of Article 2115 may not be applied to chattel mortgages as it is
contrary to the provisions of the Chattel Mortgage Law regarding the effects of foreclosure of
chattel mortgage, viz.:

Section 14 of Act No. 1508, as amended, or the Chattel Mortgage Law, states:
xxx
The officer making the sale shall, within thirty days thereafter, make in writing a return of his doings
and file the same in the office of the Registry of Deeds where the mortgage is recorded, and the Register
of Deeds shall record the same. The fees of the officer for selling the property shall be the same as the
case of sale on execution as provided in Act Numbered One Hundred and Ninety, and the amendments
thereto, and the fees of the Register of Deeds for registering the officer's return shall be taxed as a part
of the costs of sale, which the officer shall pay to the Register of Deeds. The return shall particularly
describe the articles sold, and state the amount received for each article, and shall operate as a discharge
of the lien thereon created by the mortgage. The proceeds of such sale shall be applied to the payment,
first, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation
secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in
their order, and the balance, after paying the mortgage, shall be paid to the mortgagor or persons
holding under him on demand." (Emphasis supplied)

It is clear from the above provision that the effects of foreclosure under the Chattel Mortgage Law run
inconsistent with those of pledge under Article 2115. Whereas, in pledge, the sale of the thing pledged
extinguishes the entire principal obligation, such that the pledgor may no longer recover proceeds of
the sale in excess of the amount of the principal obligation, Section 14 of the Chattel Mortgage Law
expressly entitles the mortgagor to the balance of the proceeds, upon satisfaction of the principal
obligation and costs. Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the
excess of the sale proceeds there is a corollary obligation on the part of the debtor-mortgagee to pay
the deficiency in case of a reduction in the price at public auction.

To recapitulate, the transaction entered into by the parties is a loan secured by a chattel mortgage.
Considering it is a chattel mortgage, the Chattel Mortgage Law and jurisprudence interpreting said law
apply. Jurisprudence is clear that the mortgagee in a chattel mortgage is entitled to recover any
deficiency after an extrajudicial foreclosure of the property mortgaged.
Applying the foregoing to the instant case, respondent is entitled to the payment of the deficiency
obligation resulting from the sale of the subject equipment. Further, since the Spouses Topacio's
solidary liability has been settled with finality by the May 21, 2004 Decision of the CA, respondent is
entitled to such payment from ASTCC, Augusto, and Antoinetta, jointly and severally. The CA did
not err when it affirmed the RTC's ruling in the wise.

Fallo: WHEREFORE, the petition is DENIED. The June 13, 2016 Decision and October 5, 2016
Resolution of the Court of Appeals in CA-G.R. CV No. 103853 are AFFIRMED. SO ORDERED."