NOTES OF JEDYL E.

JAMACA-UNO|1

THE CHATTEL MORTGAGE LAW

Act No. 1508, as amended

CHATTEL MORTGAGE
It is a conditional sale of personal property as security for payment of a debt or performance of some other
obligation specified therein, the condition being that the sale shall be viod upon the seller paying to the
purchaser a sum of money or doing some other act named. If the condition is performed according to its terms
the mortgage and sale immediately become void and the mortgagee is hereby divested of his title.1

CHARACTERISTICS OF CHATTEL MORTGAGE

 Accessory Contract
 Formal Contract: registration is indispensable
 Unilateral Contract: obligation on the creditor to free the thing mortgaged from the encumbrance

Chattel Mortgage Pledge

Delivery of the personal property is necessary
Registration is necessary for validity
Procedure for sale if found in Sec. 14 of Act No.
1508
If the property is foreclosed, the excess over the
amount due goes to the debtor.3
If property is foreclosed and there is deficiency, the
creditor is entitled to recover the deficiency from
the debtor except if the mortgage is a security for
the purchase of a personal property on
installments.5
Delivery is a requisite
Registration is not necessary
Procedure is found in Article 2112 of the Civil Code2
Debtor is not entitled to the excess UNLESS
otherwise provided or except in case of a legal
pledge4.
If the property is sold and there is a deficiency, the
creditor is not entitled to recover the deficiency
notwithstanding any stipulation to the contrary.6

LAWS GOVERNING CHATTEL MORTGAGE

1. Chattel Mortgage Law (Act No. 1508, as amended); * The Ship Mortgage Decree of 1978 (PD No.
2. Civil Code; 1521) governs the mortgage of vessels of
3. Revised Administrative Code; and domestic ownership.
4. Revised Penal Code
1
Section 3, Act No. 1508 also known as the Chattel Mortgage Law
2
The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to sale of the thing pledged.
This sale shall be made at a public auction, and with notification to the debtor and the owner of the thing pledged in a proper case,
stating the amount for which the public sale in to be held. If at the first auction, the thing is not sold, a second one with the same
formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In this case
hr shall be obliged to give an acquittance for his entire claim.
3
Section 14, Chattel Mortgage Law
4
Pledges created by operation of law, such as those referred to in Articles 546, 1731 and 1994, are governed by the foregoing articles
on the possession, care and sale of the thing as well as on termination of the pledge. However, after payment of the debt and
expenses, the remainder of the price of the sale shall be delivered to the obligor. (Article 2121, Civil Code)
5
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: (1) Exact fulfillment of the obligation, should the vendee fail to pay; (2) Cancel the sale, should the vendee’s failure to pay
cover two or more installments; (3) 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 purchases to recover any unpaid
balance of the price. Any agreement to the contrary shall be void. (Article 1484, Civil Code)
6
The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount
of principal obligation, interest and expenses in proper cases. If the price of the sale is more that the said amount, the debtor shall not
be entitled to the excess, unless it is otherwise provided. If the price of the sale is less, neither shall the creditor be entitled to recover
the deficiency, notwithstanding any stipulations to the contrary. (Article 2115, Civil Code)
 NOTES OF JEDYL E. JAMACA-UNO|2

OWNERSHIP OF THE MORTGAGED PROPERTY

The accessory contract of chattel mortgage has no legal effect whatsoever where the mortgagor is not the
absolute owner of the property mortgaged, ownership of the mortgagor being an essential requirement of a
valid mortgage contract. The manifestations of ownership are control and enjoyment over the thing owned.
(Union vs. Court of Appeals, 361 SCRA 506)

OFFENSES INVOLVING CHATTEL MORTGAGE

1. Knowingly removing any personal property mortgaged under Chattel Mortgage to any province or city
other than the one in which it was located at the time of the execution of the mortgage without the
written consent of the mortgagee;
2. Selling or pledging personal property already mortgaged, or any part thereof, under the terms of the
Chattel Mortgage Law without the consent of the mortgagee written on the bank of the mortgage and
duly recorded in the Chattel Mortgage Registry. (Article 319, Revised Penal Code)

* The mortgagor is not relieved from criminal liability even if the mortgage indebtedness is thereafter
paid in full or the mortgagor-seller informed the purchaser that the thing sold had been mortgaged.
* The sale is valid although no written consent was obtained from the mortgagee but the mortgagpr lays
himself open to criminal prosecution.

SUBJECT MATTER OF THE CHATTEL MORTGAGE

1. Shares of Stocks: Recorded at the principal office of business of the corporation and at the residence of
the mortgagor
2. Interest in Business
3. Machinery treated by the parties as personal property7
4. Vessels: It is essentially the mortgage accorded in the office of the Philippine Coast Guard of the port of
documentation of the vessels.
5. Motor Vehicles: Recorded with the LTO where the vehicle is registered, the place where the property
may be found and the residence of the owner thereof.8
6. House of Mixed Materials
7. House Built on Rented Land: It does not form part of the land. It is treated merely as an object placed
only a land by one who had a temporary right to the same.
8. House of Strong Materials may be considered as personal property for purposes of executing a chattel
mortgage as long as the parties to the contract so agrees and no innocent third party will be prejudiced
thereby.

* For purposes of the Chattel Mortgage Law, both growing crops and large cattles are personal property
and therefore, capable of being mortgaged although they would be considered as immovable property
under certain conditions9.

DESCRIPTION OF THE OBJECT OF CHATTEL MORTGAGE

Section 7 of the Chattel Mortgage Law does not demand a minute and specific description of every chattel
mortgaged in the deed of mortgage, but it only requires that the description of the mortgaged property be such
as to enable the parties to the mortgage or any person to identify the same after a reasonable investigation and
inquiry.

7
Where parties had treated the “after-acquired properties” as real property by expressly agreeing that the shall automatically become
subject to the lien of the real estate mortgage, this characterization impresses upon the properties the character determined by the
properties who must be held in estoppel. (People’s Bank and Trust Co. vs Dahican Lumber, 20 SCRA 84)
8
Registration is only essential in order to affect third parties. Non-compliance thereof does not affect the validity of the mortgage, as
between the parties.
9
(2)Trees, plants and growing fruits, while they are attached to the land or form an integral part of an immovable; (6) Animal houses,
pigeon-houses, beehives, fishponds or breeding places of similar nature, in case their owner has placed them or preserves them with
intention to have them permanently attached to the land, and forming a permanent part of it; the animals in these places are included.
(Article 415, Civil Code)
 NOTES OF JEDYL E. JAMACA-UNO|3
A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted
property thereafter acquired by the mortgagor and placed them in the same depositary as the property
originally mortgaged, anything in the mortgage to the contrary notwithstanding. However, this does not apply
to stores open to the public for retail business where the goods are constantly sold and substituted with new
stock.

CHATTEL MORTGAGE OF AFTER-ACQUIRED OBLIGATIONS

A stipulation in the mortgage, extending its scope and effect to after-acquired property is valid and binding
where the after-acquired property is valid and binding, where the after-acquired property is in renewal of, or in
substitution for, goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale
of such goods. 10

CHATTEL MORTGAGE OF AFTER-INCURRED OBLIGATIONS

A pledge, real estate mortgage or antichresis may exceptionally secure after-incurred obligations so long as
these future debts are accurately described. However, a chattel mortgage can only cover obligations existing at
the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include future
debts can be binding that can be compelled upon, the security itself does not come into existence or arise until
after a chattel mortgage agreement covering a newly contracted debt is executed either by concluding a fresh
chattel mortgage or by amending the old contract conformably with eh form prescribed by the Chattel
Mortgage Law. 11

EFFECTS OF REGISTRATION A chattel mortgage may be alienated or assigned to third persons

1. Creates a real right but there is no law expressly requiring the recording of the
2. Adds nothing to mortgage assignment of mortgage.

AFFIDAVIT OF GOOD FAITH

It is an oath in the contract of chattel mortgage wherein the parties “severally swear that the mortgage is made
for the purpose of securing the obligation specified in the conditions thereof and for no other purposes and that
the same is just and valid obligations and not entered into for the purpose of fraud.”

This special affidavit is required only for the purpose of transforming an already valid mortgage into “preferred
mortgage.” The absence of it vitiates a mortgage only as against third persons without notice like creditors and
subsequent encumbrances.

RIGHT OF REDEMPTION
1. When the condition of the chattel mortgage is broken, the following may redeem:
a. Mortgagor: redemption from buyer is only the purchase price
b. Person holding a subsequent mortgage
c. A subsequent attaching creditor
2. An attaching creditor whom so redeems shall be subrogated to the rights of the mortgage and entitled to
foreclose the mortgage.
3. The redemption is made by paying or delivering to the mortgagee the amount due on such mortgage
and the costs and expenses incurred by such breach of condition before the sale thereof.12

Where mortgagor has breached the chattel mortgage contract, the mortgagee acquires the right to
possess the chattel starting from the date of said breach. (Northern vs. Herrera, 49 SCRA 392)

RIGHTS ACQUIRED BY SECOND MORTGAGEE AND SUBSEQUENT PURCHASER

1. Before payment of debt
10
Northern Motors Inc vs. Coquia, 66 SCRA 415
11
Acme Shoe Rubber and Plastic Corp vs. Court of Appeals 260 SCRA 714
12
Section 13, Chattel Mortgage Law
 NOTES OF JEDYL E. JAMACA-UNO|4
After a chattel mortgage is executed, there remains in the mortgagor a mere right of redemption and
only this right passes to the second mortgagee in case of the second mortgage. As between the first and
second mortgagees, therefore, the latter can only recover the property from the former by paying him
the mortgage debt.
2. After payment of debt
If the only leviable or attachable interest of a chattel mortgagor in a mortgaged property is his right of
redemption, it follows that the judgment or attaching creditor who purchased the property at the
execution sale could not acquire anything except such right of redemption. He is entitled to actual
possession and delivery without first paying the mortgage debt.

RIGHTS OF MORTGAGEE TO POSSESSION

1. When default occurs and the creditor desires to foreclose, the right of the creditor to take the
mortgage property is implied from the provision which gives him the right to sell.
2. Where the debtor refuses to yield the property, the creditor’s remedy is to institute an action
either to effect judicial foreclosure directly or to secure possession as preliminary to the sale
contemplated.
a. The creditor cannot lawfully take the property by force against the will of the debtor
because the creditor’s right of possession is conditioned upon the fact of default, and the
existence of this fact may naturally be a controversy.
b. Nor can the public officer, such as a sheriff, upon whom the law places the responsibility
of conducting the sale, seize the property where the creditor could not, as it is manifest that such
officer proceeding under the authority of Section 14 of Act No. 1508, becomes the mere agent of
the creditor.( Bachrach Motors Co. vs Summers, 42 Phil 3)
c. It is not required in case of such default and the mortgagor refuses upon demand to
surrender possession of the mortgaged chattel, for the mortgagee before he can file an action for
replevin or for judicial foreclosure, to first ask the sheriff to foreclose the mortgage or take
possession of the property.
d. Where the mortgagor plainly refuses to deliver the chattel subject of the mortgage upon
his failure to pay two or more installments or if he conceals the chattel to a place beyond the
reach of the mortgagor, it logically follows as a matter of common sense, that the necessary
expenses incurred in the prosecution by the mortgagee of an action for replevin so that he can
regain possession of the chattel should be borne by mortgagor.
3. Under Section 14, Rule 14 of the Rules of Court, a third party claimant to a property levied
upon by a writ of attachment must make an affidavit showing that he has title thereto or right to the
possession thereof. This provision excludes a chattel mortgage because a chattel mortgage is merely
a security for a loan and does not transfer title to the property mortgage and to the chattel mortgage.
(Serra vs. Rodriguez, 56 SCRA 538)
4. Where the right of the plaintiff to the possession of the specific is so conceded or evident, the
action need only be maintained against him who so possesses the property.
5. Neither is a chattel mortgagee entitled to the possession of the property upon the execution
of the chattel mortgage for otherwise, the contract become a pledge and ceases to be a chattel
mortgage.

FORECLOSURE OF CHATTEL MORTGAGE

After payment of the debt or the performance of the condition specified in the Chattel Mortgage, the mortgagee
must discharge the mortgage otherwise, he may be held liable for damages by any person entitled to redeem
the mortgage.

Public Sale – If the mortgagor defaults in the payment of the secured debt or otherwise fails to
comply with the conditions of the mortgage, the creditor has no right to appropriate to himself the
personal property because he is only permitted to recover his credit from the proceeds of the sale of
the property at the public auction.
 NOTES OF JEDYL E. JAMACA-UNO|5
Private Sale – There is nothing illegal, immoral or against public order in an agreement for the
private sale of personal properties covered by the chattel mortgage.13 The mortgagor is in estoppels
to question it except on the ground of fraud or duress.

PERIOD TO FORECLOSE MORTGAGE

1. Chattel Mortgage – The mortgagee may, after thirty (30) days from the time of the
condition broken, cause the mortgage property to be sold at public auction by a public officer.14
2. Real Estate Mortgage – In case of judicial foreclosure, the grace period for the mortgagor to
pay the amount is not less than 90 days but not more than 120 days from the entry of judgment on
foreclosure. In default of such payment, the property shall be sold at public auction to satisfy
judgment. (Section 2, Rule 68 of Rules of Court)

CIVIL ACTION TO RECOVER CREDIT

1. The mortgagee is not 0bligated to file an independent action for the enforcement of his
credit. To do otherwise would defeat the purpose of the chattel mortgage, which is to give him
preference over the mortgaged chattels for the satisfaction of his credit. (Northern Motors, Inc. vs.
Coquia, supra)
2. A mortgagee who sues and obtains a personal judgment against a mortgagor upon his credit
waives thereby his right to enforce the mortgage securing it. (Movido vs. Rehabilitation Finance
Corp., 105 Phil 886)

RIGHT OF MORTGAGOR TO RECOVER DEFICIENCY

1. Where mortgage foreclosed
The creditor may maintain an action for recovery although the Chattel Mortgage Law is silent on
this point.15 The reason is that a chattel mortgage is only given as a security and not the payment of
loan in case of non-payment. The action may be brought within ten (10) years from the time the
cause of action accrues.
2. Where the mortgage constituted as security for purchase of personal property payable in
installments
The vendor of the personal property is precluded from proceeding against the security put up by a third
person for if the latter should be compelled to pay the balance of the purchase pride, he will, in turn, be
entitled to recover what he has paid from the debtor-vendee.16

3. Where the mortgaged property subsequently attached and sold

The chattel mortgagee is entitled to the deficiency judgment in an action fro specific performance where
the mortgaged property is specifically attached and sold. The execution of the sale is not a foreclosure
sale. (Industrial Finance Corp. vs. Ramirez, 232 SCRA 714)

APPLICATION OF PROCEEDS OF SALE

1. Costs and expenses of keeping sale;

2. Payment of obligations secured by the mortgage;

13
The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they
are not contrary to law, morals, good customs, public order or public policy. (Article 1306, Civil Code)
14
The30-day period to foreclose a chattel mortgage is the minim period after violation of the mortgage condition for the mortgage
creditor to cause the sale at the public auction of the mortgage chattel with at least 10 days notice to the mortgagor and posting of
public notice.. After the sale of the chattel at the public auction, the right of redemption is no longer available to the mortgagor. (Cabral
vs. Evangelista, 28 SCRA 1000)
15
However, if the proceeds from the foreclosure of the chattel mortgage should exceed the amount due to the mortgagee, excess shall
be for mortgagor’s account. (Francisco vs. Blanco, 307 SCRA 241)
16
See Note 5. The remedies granted by Article 1484 are alternative, not cumulative, and exclusive, that is, the exercise of one would
bar the exercise of the others. (Borbon II vs. Servicewide Specialists, Inc., 258 SCRA 634) HOWEVER, the prohibition under the Recto
Law, does not apply to foreclosure of a chattel mortgage constituted to secure a loan and not originating from sale. (Bicol Savings and
Loan vs. Guinhawa, 188 SCRA 642)
 NOTES OF JEDYL E. JAMACA-UNO|6
3. Claims of persons holding subsequent mortgages in their order, and

4. The balance, if any, shall be paid to the mortgagor, or person holding under him.

JUDICIAL FORECLOSURE OF MORTGAGE

1. File a suit for the purpose;
2. Court orders payment of mortgage debt within a period of not less than 90 days but not
more than 120 days from the entry of judgment;
3. If mortgagor fails to pay, the court shall order the sale in public auction;
4. Confirmation of Sale: by order of the court which operates to divest the rights of all parties to
the action and to vest their rights to the buyer subject to the right of redemption
Before confirmation, the court retains control of the proceeding by exercising sound discretion
whether to confirm or not
5. Execution of judgment;
6. Application of Proceeds; and
7. Execution of Sheriff’s certificate