FACTS:

The case involves a chattel mortgage executed by petitioner Chua Pac, president and general manager of Acme Shoe, Rubber & Plastic Corporation, in favor of private respondent Producers Bank of the Philippines. The mortgage agreement covered a corporate loan of three million pesos (P3,000,000.00) and contained a provision stating that it would also cover any future obligations or loans contracted by the mortgagor. The initial loan was fully paid by the petitioner corporation. Subsequently, the corporation obtained additional financial accommodations from the bank, amounting to P2,700,000.00, which were also fully paid. However, in 1984, the bank extended another loan of one million pesos (P1,000,000.00) to the corporation, which was not settled at maturity. As a result, respondent bank filed for an extrajudicial foreclosure of the chattel mortgage. In response, the corporation filed an action for injunction before the Regional Trial Court. The trial court dismissed the complaint and ordered the foreclosure of the chattel mortgage, stating that the corporation was bound by the stipulations of the mortgage agreement. The corporation appealed to the Court of Appeals, which affirmed the trial court's decision. The corporation then filed a petition for review on certiorari before the Supreme Court. The Supreme Court initially denied the petition but later reinstated it, relaxing the procedural rules in the interest of justice and deciding to review the case.

ISSUES:

1. Is a clause in a chattel mortgage valid and effective if it purports to extend its coverage to obligations yet to be contracted or incurred?

RULING:

The Supreme Court ruled that a chattel mortgage can only cover obligations that exist at the time the mortgage is constituted. A promise within a chattel mortgage agreement to include debts that are yet to be contracted can be a binding commitment enforceable against the debtor. However, the security interest of the mortgage does not arise until a new chattel mortgage agreement is executed that specifically covers the new debt. Future obligations not yet in existence at the time the original chattel mortgage is executed are not covered under the security of the chattel mortgage until such an agreement is properly executed according to the requirements set out in the Chattel Mortgage Law. Therefore, the clause extending coverage to future obligations, without fulfilling the formality of executing a new contract to that effect, was invalid. Thus, the mortgage had become void upon full repayment of the initial loan, and it did not cover the new loans contracted thereafter.

PRINCIPLES:

1. Chattel Mortgage Scope Limitation: A chattel mortgage can only cover obligations existing at the time the mortgage is constituted.

2. Security Interest Arising in Chattel Mortgages: The security interest does not come into existence until a chattel mortgage agreement covering the newly contracted debt is executed either through a new or amended contract in accordance with the Chattel Mortgage Law.

3. Accessory Nature of Chattel Mortgages: The chattel mortgage is extinguished when the obligation it secures is fulfilled, following its accessory and contingent nature.

4. Contractual Commitment on Future Debts: While a contractual promise to include future debts in a chattel mortgage is a binding commitment, the security for such debts only arises upon the formal execution of a new or revised chattel mortgage conforming to legal standards.

5. Legal Compliance for Chattel Mortgages: Chattel mortgages need to substantially comply with the form prescribed by law, specifically the requirement of an affidavit of good faith, to be valid and enforceable.