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 void 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/.

Chattel Mortgage

Pledge

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Section 3, Act No. 1508 also known as the Chattel Mortgage Law

1. Delivery of the personal property is

NOT necessary 2. Registration is necessary for validity 3. Procedure for sale if found in Sec. 14 of Act No.1508 4. If the property is foreclosed, the excess over the amount due goes to the debtor3/.

1. Delivery is a requisite 2. Registration is not necessary 3. Procedure is found in Article 2112 of the Civil Code2/

4. Debtor is not entitled to the excess

UNLESS otherwise provided or except in case of a legal pledge 5. If the property is sold and there is a deficiency, the creditor is not entitled to recover the deficiency notwithstanding any stipulation to the contrary6/.

5. 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 installments5/.

CHARACTERISTICS OF CHATTEL MORTGAGE

1. Accessory Contract 2. Formal Contract: registration is indispensable 3. Unilateral Contract: obligation on the creditor to free the thing
mortgaged from the encumbrance

LAWS GOVERNING CHATTEL MORTGAGE 1.

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Chattel Mortgage Law (Act No. 1508, as amended)

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.
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Section 14, Chattel Mortgage Law

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)
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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 vendees failure to pay cover two or more installments; (3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendees 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)
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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)
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2. 3.
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Civil Code Revised Administrative Code; and

Revised Penal Code * The Ship Mortgage Decree of 1978 (PD No. 1521) governs the mortgage of vessels of domestic ownership.

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

2. 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; 3. 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 mortgagorseller 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 mortgagor lays himself open to criminal prosecution. SUBJECT MATTER OF THE CHATTEL MORTGAGE

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Shares of Stocks: Recorded at the principal office of business of the corporation and at the residence of the mortgagor Interest in Business Machinery treated by the parties as personal property 7/

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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

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Vessels: It is essentially the mortgage accorded in the office of the Philippine Coast Guard of the port of documentation of the vessels. 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 thereof8/ House of Mixed Materials 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. 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/.

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7.

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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. 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.

impresses upon the properties the character determined by the properties who must be held in estoppel. (Peoples Bank and Trust Co. vs Dahican Lumber, 20 SCRA 84)
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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.
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(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)
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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 goods10/. CHATTEL MORTGAGE OF AFTER-INCURRED OBLIGATIONS A pledge, real estate mortgage or antichresis may exceptionally secure afterincurred 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 Law11/. EFFECTS OF REGISTRATION 1. 2. Creates a real right Adds nothing to mortgage

A chattel mortgage may be alienated or assigned to third persons but there is no law expressly requiring the recording of the 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.
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Northern Motors Inc vs. Coquia, 66 SCRA 415 Acme Shoe Rubber and Plastic Corp vs. Court of Appeals 260 SCRA 714

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 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

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12 Section 13, Chattel Mortgage Law

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 creditors 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 creditors 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. 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 mortgage13/. 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 obligated 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
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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)
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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)
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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 point15/. 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 he 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; 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
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However, if the proceeds from the foreclosure of the chattel mortgage should exceed the amount due to the mortgagee, excess shall be for mortgagors account. (Francisco vs. Blanco, 307 SCRA 241)
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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)
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