i. Transactions Covered

Rationale of Recto Law

To remedy the abuses committed in connection with the foreclosure of chattel mortgages and to prevent mortgagees from seizing the mortgaged property, buying it at a foreclosure sale for a low price, and then bringing suit against the mortgagor for a deficiency judgment.

Effect of filing an action for specific performance in case of default in the payment of an installment sale secured by a chattel mortgage on the subject of the sale

The seller can collect from the buyer for the sum of money the buyer failed to pay. In case the sum collected is insufficient, the court can still order for the levy of the property subject of the sale transaction to cover the balance. Moreover, if the action instituted is for specific performance and the mortgaged property is subsequently attached and sold, the sale thereof does not amount to a foreclosure of the mortgage. Hence, the seller-creditor is entitled to a deficiency judgment. (Industrial Finance Corporation v. Ramirez, G.R. No. L-43821, May 26, 1977)

Q: A mortgaged a diamond ring to M as a security for a loan which was to be paid 2 years thereafter. Since A failed to pay M, M foreclosed the chattel mortgage. However, it turned out that the proceeds of the sale were insufficient, thus, M filed an action for specific performance. A contends that this is a violation of the Recto law since the foreclosure of the chattel bars subsequent recovery. Is this correct?

A: NO. A is not correct in invoking the Recto law since it is only applicable in case of sale of personal property through installment. In the given case, the amount being claimed by M was to be paid 2 years thereafter as a lump sum, not through installments. Moreover, the transaction is a loan not a sale.