Notes on Chattel Mortgage Law

NOTES OF JEDYL E. J AMACA -U -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 Del Deliver ivery y of of the the per perso sona nall pro prope pert rty y is nece necess ssar ary y 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 L AWS GOVERNING CHATTEL MORTGAGE 1. Chattel Mortgage Law (Act No. 1508, as amended); 2. Civil Code; 3. Revi Revise sed d Admi Admini nist stra rati tive ve Code Code;; and and 4. Revised Pe Penal Co Code 1

Pledge Deli elivery very is a requ requis isit itee Registration is not necessary Procedure is found in Article 2112 of the Civil Code 2 Debt Debtor or is not not enti entitl tled ed to the the exce excess ss UN UNLE LESS SS othe otherw rwis isee provid provided ed or exce except pt in case case of a lega legall 4 pledge . If the property is sold and there is a deficiency, the credit creditor or is not entitled entitled to recove recoverr the defici deficienc ency y notwithstanding any stipulation to the contrary. 6

* The Ship Mortgage Decree of 1978 (PD No. 1521) 1521) gover governs ns the mortga mortgage ge of vessel vesselss of domestic ownership.

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

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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.

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Section 14, Chattel Mortgage Law

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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 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)

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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)


O WNERSHIP 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) 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 ( Article 319, Revised Penal Code) Code ) * The mortgagor mortgagor is not relieved relieved from criminal criminal liability liability even if the mortgage indebtednes indebtednesss 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 M ATTER 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. Interes Interestt in Busines Businesss 7 3. Machinery treated by the parties as personal property 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 Mixed Materials 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 mortgaged although although they would be considered considered as immovable immovable property 9 under certain conditions . 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)

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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. 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)


A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted proper property ty therea thereafter fter acquired acquired by the mortgago mortgagorr and placed placed them them in the same same deposi depositar tary y as the propert property y 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 A FTER -A CQUIRED FTER -A CQUIRED 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 A FTER -INCURRED OBLIGATIONS FTER -I 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 chattel mortgage mortgage agreement covering a newly contracted contracted debt is executed executed either by concludin concluding g a fresh chatte chattell mortga mortgage ge or by amendi amending ng the old contra contract ct confor conformab mably ly with with eh form form prescri prescribed bed by the Chatte Chattell 11 Mortgage Law. EFFECTS OF R EGISTRATION EGISTRATION 1. Creates Creates a real right 2. Adds no nothing to to mortgage

A chattel mortgage may be alienated or assigned to third persons but but ther theree is no law law expr expres essl sly y requ requir irin ing g the the reco record rdin ing g of the the assignment of mortgage.

A FFIDAVIT FFIDAVIT OF GOOD F AITH 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. R IGHT IGHT OF R EDEMPTION EDEMPTION 1. When the condi condition tion of the the chattel chattel mortgage mortgage is broken broken,, the followi following ng may redeem: redeem: Mortgagor: redemption from buyer is only the purchase price a. b. Pers erson ho holding a subsequent ent mo mortg rtgage c. A subsequent at attaching creditor 2. An attaching attaching creditor creditor whom whom so redeems redeems shall be subroga subrogated ted to the rights rights of the mortgage mortgage and and entitled 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 ( Northern vs. Herrera, 49 SCRA 392) 392 ) R IGHTS IGHTS A CQUIRED CQUIRED BY SECOND MORTGAGEE AND SUBSEQUENT PURCHASER 1.Before payment of debt 10

Northern Motors Inc vs. Coquia, 66 SCRA 415

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Acme Shoe Rubber and Plastic Corp vs. Court of Appeals 260 SCRA 714

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Section 13, Chattel Mortgage Law


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 pa payment of of de 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. R IGHTS IGHTS OF MORTGAGEE TO POSSESSION When default occurs and the creditor desires to foreclose, the right of the creditor to take the 1. mortgage property is implied from the provision which gives him the right to sell. 2. Wher Wheree the deb debto torr refus refuses es to yie yield ld the the prope property rty,, the cred credit itor or’s ’s reme remedy dy is is to ins insti titu tute te an act actio ion n either either to effect effect judici judicial al forecl foreclosu osure re direct directly ly or to secure secure posses possessio sion n as prelimi preliminar nary y to the sale sale contemplated. The creditor cannot lawfully take the property by force against the will of the debtor a. becau because se the credit creditor’ or’ss right right of posses possessio sion n is condit condition ioned ed upon upon the fact fact of defaul default, t, and the existence of this fact may naturally be a controversy. Nor can the public officer, such as a sheriff, upon whom the law places the responsibility b. 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) 3) c. It is is not not requ requir ired ed in in case case of of such such def defau ault lt and and the the mor mortg tgag agor or ref refus uses es upo upon n dema demand nd to 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. Where the mortgagor plainly refuses to deliver the chattel subject of the mortgage upon d. 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. Under Section 14, Rule 14 of the Rules of Court, a third party claimant to a property levied 3. 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. Wher Wheree the rig right ht of of the pla plain inti tiff ff to the the poss posses essi sion on of of the spec specifi ificc is so conc conced eded ed or or evide evident nt,, the the action need only be maintained against him who so possesses the property. Neither is a chattel mortgagee entitled to the possession of the property upon the execution 5. 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 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 mortgage. 13 The mortgagor is in estoppels to question it except on the ground of fraud or duress. PERIOD TO FORECLOSE MORTGAGE Chattel Chattel Mortgage Mortgage – The The mort mortga gage geee may, may, afte afterr thir thirty ty (30) (30) days days from from the time of the the 1. 14 condition broken, cause the mortgage property to be sold at public auction by a public officer. Real Estate Mortgage – In case of judicial foreclosure, the grace period for the mortgagor to 2. 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 ( Section 2, Rule 68 of Rules of Court ) Court ) CIVIL A CTION CTION TO R ECOVER ECOVER CREDIT The mortgagee is not 0bligated to file an independent action for the enforcement of his 1. 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 ( Northern Motors, Inc. vs. Coquia, supra) supra) A mortgagee who sues and obtains a personal judgment against a mortgagor upon his credit 2. waives thereby his right to enforce the mortgage securing it. ( ( Movido vs. Rehabilitation Finance Corp., 105 Phil 886) 886 ) R IGHT IGHT OF MORTGAGOR TO R ECOVER ECOVER DEFICIENCY 1. Where mo mortgage fo 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. 2. Where Where the the mor mortg tgag agee cons consti titu tute ted d as secu securit rity y for pur purch chas asee of pers person onal al pro proper perty ty paya payabl blee 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. 3. Wher Wheree the the mort mortga gage ged d prop proper erty ty sub subse sequ quen entl tly y atta attach ched ed and and sol sold d 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 ) A PPLICATION PPLICATION OF PROCEEDS OF S ALE 1. Costs Costs and expens expenses es of keepin keeping g sale; sale; 2. Payment Payment of of obligat obligations ions secured secured by by the mortgage; 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)

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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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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)

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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)


3. Claims Claims of persons persons holding holding subsequent subsequent mortga mortgages ges in their order, order, and and 4. The balance, balance, if if any, shall shall be paid paid to the mortga mortgagor, gor, or person person holding holding under under him. him. JUDICIAL FORECLOSURE OF MORTGAGE 1. File a suit for the purpose; 2. Cour Courtt orde orders rs paym paymen entt of mort mortga gage ge deb debtt with within in a peri period od of of not not less less than than 90 90 days days but but not not more than 120 days from the entry of judgment; 3. If mortg mortgag agor or fai fails ls to to pay, pay, the the cour courtt shal shalll orde orderr the the sale sale in in pub publi licc auc aucti tion on;; 4. Confir Confirmat mation ion of Sale: Sale: by by orde orderr of the court court whic which h opera operates tes to divest divest the rights rights of all partie partiess 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 of Pr Proceeds; an and 7. Execu ecution of Sher heriff’s ff’s certific ficate

Notes on Chattel Mortgage Law

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