ACME Shoe, Rubber & Plastic Corp. v. CA (1996) Vitug, J.Petitioner: Acme Shoe, Rubber & Plastic Corporation and Chua PacRespondent: CA, Producers bank of the Philippines and Regional Sheriff of Caloocan CityConcept: Chattel Mortgage: Obligations SecuredContracts Involved: (a) Contract of Loan: between Acme and Producers 1st: P3-M (FULLY PAID) with chattel mortgage 2nd: P2.7-M (FULLY PAID) 3rd: P1-M (NOT FULLY PAID)(b) Chattel Mortgage: between Chua Pac and Producers, in favor of Acme covering the P3-M

Brief Facts: Acme obtained a loan worth P3-M from Producers Bank, with Chua Pac executing a Chattel Mortgage Agreement to secure said loan. In the Agreement, there was a stipulation providing for the mortgage securing subsequent/future loans. Later, Acme obtained 2 more loans from Producers, fully paying the first and defaulting in the second. The Bank applied for the extrajudicial foreclosure of the mortgage, which was opposed by Acme.

Doctrine: A chattel mortgage can only cover obligations existing at the time the mortgage is constituted. A promise to include debts yet to be contracted can be a binding commitment that can be compelled upon, but the security itself does not come into existence until a new chattel mortgage is created or the old one is amended conformably with the Chattel Mortgage Law.

FACTS:1. Acme Shoe, Rubber & Plastic Corporation had a corporate loan of P3-M from Producers Bank of the Philippines2. June 27, 1978: Chua Pac, president and GM of Acme executed a chattel mortgage in favor of Producers Bank as security for the P3-M corporate loan A provision in the chattel mortgage agreement (providing for the chattel mortgage securing subsequent/future obligations):(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform the full obligation or obligations above-stated according to the terms thereof, then this mortgage shall be null and void. x x x."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. This mortgage shall also stand as security for said obligations and any and all other obligations of the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations have been contracted before, during or after the constitution of this mortgage.

3. Acme paid the P3-M loan in due time4. 1981: Acme obtained an additional financial accommodation amounting to P2.7-M, which was also fully paid5. Jan. 10 and 11, 1984: bank extended a loan to Acme of P1-M covered by 4 promissory notes for P250K each this was not settled at maturity, so Producers applied for an extrajudicial foreclosure of the chattel mortgage6. Acme filed an action for injunction, with damages and a prayer for a writ of preliminary injunction before the RTC of Caloocan

RTC Caloocan: Dismissed the complaint and ordered the foreclosure of the chattel mortgage Acme is bound by the stipulations of the chattel mortgage Appeal to the CA

CA: Affirmed in all respects MR denied instant petition (initially denied) but second MR granted

ISSUE:WON Producers could validly foreclose the chattel mortgage executed by Acme (NO)

RATIO: NO, Producers could not validly foreclose the chattel mortgage because the chattel mortgage ceased to exist coincidentally with the payment of the P3-M loan. Contracts of security are either personal or real:a. Contracts of personal security: the faithful performance of the obligation by the principal debtor is secured by the personal commitment of another Guarantor secures the guaranty Surety secures the suretyshipb. Contracts of real security: the fulfillment of the obligation is secured by an encumbrance of property In pledge, the movable property is placed in the possession of the creditor In a chattel mortgage, a corresponding deed is executed substantially in the form prescribed by law In real estate mortgage, a public instrument is executed encumbering the real property covered In antichresis, a written instrument grants the creditor the right to receive the fruits of an immovable property with the obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal of his credit In all the abovementioned, the essential condition is 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 Once the obligation is complied with, the contract of security becomes, ipso facto, null and void 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 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 (Act No. 1508) Refusal on the part of the borrower to execute the agreement to cover the after-incurred obligation can constitute an act of default on the pat of the borrower (whereon the promise is written) BUT 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 A chattel mortgage must comply substantially with the form prescribed in the Chattel Mortgage Law Affidavit of good faith (Sec. 5), but if not appended, would still be valid between the parties Parties must execute an oath that xxx(the) mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud Civil Code by Aquino & Grio-Aquino Debt referred to in the law is a current, not an obligation that is yet merely contemplated SC: The only obligation specified in the chattel mortgage contract was the P3-M loan which Acme has fully paid By virtue of Sec. 3 of the Chattel Mortgage Law, the payment of the obligation rendered the chattel mortgage void or terminated Belgian Catholic Missionaries, Inc. v. Magallanes Press, Inc. et al.: A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage. Since the 1978 mortgage ceased to exist coincidentally with the full payment of the P3-MM loan, there was no longer any chattel mortgage that could cover the new loans that were concluded thereafter

DISPOSITIVE: Decisions of 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. No costs.