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CHATTEL MORTGAGE LAW (Act 1508)

1. Chattel Mortgage Defined By chattel mortgage, personal property is recorded in the Chattel Mortgage Registry as security for the performance of an obligation. (Art. 2140, Civil Code.) The old definition under Sec. 3 of Act No. 1508 which considered a chattel mortgage as a conditional sale was considered inaccurate by the Code Commission. (Serra v. Rodriguez, 56 SCRA 538 [1974]).
NOTE: The Ship Mortgage Decree of 1978 (Pres. Decree No. 1521) governs the mortgage of vessels of domestic ownership.

NOTE: Even if the property mortgaged is in the possession of the debtor, creditors are protected in that the chattel mortgage is made effective against third persons by the process of registration, to protect creditors against possible disposal of the property by the debtor.

Land Settlement & Dev. Corp. v. Carlos (1968) Should the creditor bring an action on the principal obligation, like suing on the promissory note, this amounts to a discharge of the chattel mortgage so that the debtor may now dispose of the personal property given in a chattel mortgage without the necessity of a release of the mortgage. The debtor does not thereby commit estafa. Movido v. RFC (1959) A mortgagee who sues and obtains a personal judgement against a mortgagor upon his credit waives thereby his right to enforce the mortgage securing it. (Also Serra v. Rodriguez, 56 SCRA 538 [1974]). Southern Motors v. Moscoso (1961) The complaint is an ordinary civil action for recovery of the remaining unpaid balance due on the promissory note. The plaintiff had not adopted the procedure or methods outlined by Sec. 14 of the Chattel Mortgage Law but those prescribed for ordinary civil actions. Since herein appellee has chosen to exact the fulfillment of the appellant's obligation, it may enforce execution of the judgment that may be favorably rendered hereon, on all personal and real properties of the latter not exempt from execution sufficient to satisfy such judgment.

2.

Comparison with Pledge: CHATTEL PLEDGE MORTGAGE both refer to personal property Property remains Creditor takes in possession of possession of prop debtor Can recover No recovery of deficiency deficiency. judgment Excess of Debtor not proceeds from entitled to excess, foreclosure goes unless stipulated to persons holding subsequent mortgages, then to mortgagor (S14) Debtor can No redemption redeem before the sale, when the condition of the chattel mortgage is broken. (Sec. 13) Mortgagor can sell Pledgor can sell property thing with consent mortgaged, of pledgee subject to the mortgage

3.

Proper Subject Matter Sec. 2, read with Sec. 7: Only personal property may be subject of chattel mortgage (personal property as defined by the Civil Code). Exceptions: (a) By exercising the freedom to contract that the law gives them, parties may stipulate that as between them, real property, such as building, may be considered personal for purposes of the chattel mortgage law. But this cannot affect third persons. (Navarro v. Pineda, 9 SCRA 631 [1963]: Tumulad v. Vicencio, 41 SCRA 143 [1971]).

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BUT: It shall still be executed as a real property and subject to the rules on foreclosure of real estate mortgage. (b) Section 6: a chattel mortgage can be executed on growing crops (which under the Civil Code are real property). BUT: If the creditor wants to attach growing crops, the procedure is still the same as in attachment of real property. Piansay vs David (1964) Regardless of the validity of a contract constituting a chattel mortgage on a house, as between the parties to said contract, the same cannot and does not bind third persons, who are not parties to the aforementioned contract or their privies Tumalad vs Vicencio (1971) The house on rented land is not only expressly designated as Chattel Mortgage; it specifically provides that "the mortgagor ... voluntarily CEDES, SELLS and TRANSFERS by way of Chattel Mortgage the property together with its leasehold rights over the lot on which it is constructed and participation." Moreover, the subject house stood on a rented lot to which defendats-appellants merely had a temporary right as lessee, and although this can not in itself alone determine the status of the property, it does so when combined with other factors to sustain the interpretation that the parties, particularly the mortgagors, intended to treat the house as personalty. Makati Leasing v. Wearever Textile (1983) Although machineries permanently affixed to a building are classified as real property under the Civil Code, the parties may validly subject such machineries to a chattel mortgage and shall be found by the validity therefore by the doctrine of estoppel. Such an arrangement however cannot prejudice the rights of third parties to whom the machineries would still be treated as real property. 5. Exception: Where the debtor gives as security, the stock or merchandise in his store and it is the intention of the parties that the mortgage shall cover the stock that will take its place in the course of the business. (Torres v. Limjap, 56 Phil. 141 [1931]). Torres v. Limjap (1931) The provision of Sec. 7 is deemed not to apply to stores open to the public for retail business where the goods are constantly sold and substituted with new stock, such as drug stores, grocery stores, dry goods stores, etc. A stipulation in the mortgage extending its coverage to properties acquired after its constitution is valid and binding where the afteracquired 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.

After-Incurred Obligations While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately described, a chattel mortgage can only cover obligations existing at the time the mortgage is constituted. Therefore, although a promise expressed in the chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with form prescribed by the Chattel Mortgage Law. This ruling is due to the requirement in the Affidavit of Good Faith which must contain an oath that the mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud which makes it obvious that the debt referred to in the law is current, not an obligation that is yet merely contemplated. (Acme Shoe, Rubber & Plastic Corp. v. Court of Appeals, 73 SCAD 410, 260 SCRA 714 [1996]).

4.

After-Acquired Properties The chattel mortgage shall cover only the property described in the deed and not any other like or substituted property. (Sec. 7).

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Transportation Office. (Borlough v. Fortune Enterprises, 100 Phil. 1063 [1957]). Otherwise, the failure of the mortgagee to report the mortgage executed in his favor has the effect of making said mortgage ineffective against a purchaser in good faith who registers his purchase in the motor vehicle office. (d) Vessels 1. 2. Register with Coastguard the Philippine

6.

Registration Requirements to Make Chattel Mortgage Binding Against Third Parties Under Sec. 4, a chattel mortgage leaves the property in the possession of the debtor. Hence, this section lays down the requisites which must be complied with in order to make a chattel mortgage affect third parties for the protection of the creditor. (a) General Rule: The chattel mortgage must be registered with the Register of Deeds where the debtor resides in order to bind third persons. (Sec. 4). If mortgagor resides abroad, must be registered in the province where the property is located

Must also be registered in the Bureau of Customs in Manila (if in Manila) or in the Office of the Collector of Customs in the port of entry (if outside Manila)

But note: Art 2125 of the Civil Code says that a chattel mortgage is binding between the mortgagor and mortgagee even if not registered (Filipinas Marble Corp vs. IAC, 142 SCRA 180, 1986) (b) Share of Stock: 1. 2. Must be registered with the Register of Deeds where the debtor resides: and (ii) Must also be registered with the Register of Deeds where the corporation has its principal office.

(e)

Motor vehicle which is public utility and loan is not repayable within 1 year Register with the Transportation Franchising Regulatory Board Land and

7.

Affidavit of Good Faith It is an oath wherein the parties severally swear that the mortgage is made for the purpose of securing the obligations specified in the conditions thereof and for no other purposes and that the same is a just and valid obligation and one not entered into for the purpose of fraud. (Sec. 5). Under Sec. 5, the absence of the affidavit vitiates a mortgage as against third parties without notice, like creditors and subsequent lienholders; but not as between the parties thereto, which remains valid as to them. (Lilius v. Manila Railroad Co., 62 [1935]). Where a corporation is a party, the affidavit of good faith must be subscribed by an authorized officer. (Sec. 6).

NOTE: Registration in the stock and transfer book of the corporation is not necessary. (Chua Guan v. Samahang Magsasaka, 62 Phil. 472 [1935]).

(c)

Motor Vehicles: 1. 2. Register with the Register of Deeds where the debtor resides; Register with the Register of Deeds where the motor vehicle is located; and the Motor now Vehicle Land

Register with Commission,

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8. Other Formal Requirements Must be signed in the presence of at least 2 witnesses Certificate of oath / Notarial acknowledgment without the consent of the mortgagee written on the back of the mortgage and duly recorded in the Chattel Mortgage Register.
Note: Mortgagor remains owner of the property. He can therefore validly sell the chattel, although he will be criminally liable if he did not get consent of mortgagee.

Additional Material : Sec. 198 of the RAC "Sec. 198. Registration of chattel mortgages and fees collectible in connection therewith. Every register of deeds shall keep a primary entry book and a registration book for chattel mortgages. The recording of a mortgage shall be effected by making an entry, setting forth the names of the mortgages and the mortgagor, the sum or obligation guaranteed, date of the instrument, name of the notary before whom it was sworn to or acknowledged, and a note that the property mortgaged, as well as the terms and conditions of the mortgage, is mentioned in detail in the instrument filed, giving the proper file number thereof. The register of deeds shall also certify the officer's return of sale upon any mortgage, and a reference of such return on the record of the mortgage itself, and give a certified copy thereof;

Compare with: If the mortgagee sells the credit, he only needs to notify the mortgagor, so mortgagor knows whom to pay (Servicewide Specialists vs. CA) 3rd party mortgage or accommodation chattel mortgage does not by itself make the mortgagee personally liable for the loan that he accommodated (Cerna vs. CA, 220 SCRA 517, 1993)

10. Remedies of Creditor (Sec. 13): (a) Extra-judicial Foreclosure presupposes voluntary surrender to sheriff of personal property by debtor. Creditor then files affidavitoutlining right to possession and sale. Posting of notice of sale must be made on two places in the Presidencia plus notice to debtor 10 days before the sale. (Mambulao Lumber v. PNB, 22 SCRA 359 [1968]). Place must be designated in the contract; otherwise the creditor is liable for conversion. Parties may agree on private sale rather than sale at public auction. (PNB v. Manila Investment, 38 SCRA 462 [1971]). Note SC Circular 7-2002 : GUIDELINES FOR THE ENFORCEMENT OF SC RESOLUTION OF DEC 14, 1999 IN A.M. 99-10-050 (RE: PROCEDURE IN EXTRAJUDICIAL FORECLOSURE OF MORTGAGE) Sec. 1. All applications for extra-judicial foreclosure of mortgage shall be filed with the Executive Judge, through the Clerk of Court.

9.

Liabilities: (a) Where the debtor performs and the creditor refuses to release the mortgage, debtor may go to court for relief. (Sec. 8). Secs. 9 to 12 have been repealed by Art. 319 of the Revised Penal Code on crimes on Chattel Mortgage: (i) Knowingly removing any personal property mortgaged under the Chattel Mortgage Law 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; (ii) Selling or pledging personal property already mortgaged,

(b)

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Sec. 2. The Clerk of Court shall: xxx c. Collect the appropriate filing fees and issues the corresponding official receipt. d. In case the application is for real estates and/or chattels in different locations covering one indebtedness, issue a certificate of payment indicating the amount of indebtedness, the filing fees collected, the mortgages sought to be foreclosed, the real estates and/or chattels mortgaged and their respective locations, for purposes of having the application docketed with the Clerks of Court in the places where the other properties are located. Sec. 4. The Sheriff shall: In case of foreclosure of a chattel mortgage, post the notice for at least 10 days in 2 or more public places in the municipality where the mortgagor resides or where the property is situated Sec. 5. Conduct of the extrajudicial foreclosure sale
a. the municipality where the mortgagor resides or where the property is situated

Sec. 6. The Clerk of Courts shall collect the appropriate fees, computed on the basis of the amount actually collected by him. This shall not be subject to a refund even if the foreclosed property is subsequently redeemed.. Sec. 7 & 8. The Sheriff shall, within 30 days from the sale, prepare a return and file the same in the Office of the Registry of Deeds where the mortgage is recorded. He shall report the name/s of the bidder/s to the Clerk of Court. Sec. 9. The Clerk of Court shall issue and sign the Certificate of Sale, subject to the approval of the Executive Judge. Prior to the issuance of such, the Clerk of court shall, in extra-judicial foreclosure conducted under the sheriff, collect P300.00; in sales conducted under a notary public, the appropriate fees pursuant to Rule 141, 20(e). Sec. 10. The Clerk of Court shall keep the complete records for a period of 1 year from the date of registration of the certificate of sale with the Register of Deeds, after which the records shall be archived. Juridical persons whose property is sold pursuant to an extra-judicial foreclosure shall have the right to redeem the property until, but not later than, the registration of the certificate of foreclosure sale which in no case shall be more than 3 months after foreclosure, whichever is earlier. In case the property is redeemed, the Clerk of Court shall assess the redemptioners fee as provided in Section 7 (k), Rule 141. If the property is not redeemed, the Clerk of Court shall, as a requisite for the issuance of the final Deed of Sale, assess the highest bidder the amount of P300.00.

b.

The bidding shall be made through sealed bids which must be submitted to the Sheriff who shall conduct the sale between 9 am and 4 pm. The property shall be awarded to the party submitting the highest bid ; in case of a tie, an open bidding shall be conducted between the highest bidders. Payments shall be made in cash or managers check, in Philippine currency, within 5 days from notice. The sale shall be made at a place in

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(b) Should debtor refuse to surrender the property, creditor may take the preliminary step of replevin and once he has possession, proceed at public auction as in remedy No. 1.
Important: Creditor must seek court remedy to obtain possession (Filinvest Credit Corp vs. CA, 248 SCRA 549, 1995). Otherwise, that would be pactum commissorium (Esguerra vs. CA, 173 SCRA 1, 1989)

provides that 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: (a) Exact fulfillment of the obligation, should the vendee fail to pay (specific performance); Cancel the sale, should the vendee's failure to pay cover two or more installments (Note that this is not the same as rescission because here, the vendor gets back the object of the sale and retains the installments paid. However, this is not available in the absence of stipulation in the contract.); Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover 2 or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contract is void. (The principal object of this amendment was to remedy the abuses committed in connection with the foreclosure of chattel mortgages. This amendment prevents mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price, and then bringing the suit against the mortgagor for a deficiency judgment. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing practically the full amount of his original indebtedness.) These remedies are alternative, not cumulative. (Pacific Commercial Co. v. Dela Rama, 72 Phil. 380)

(b)

(c)

Judicial Foreclosure follow the same procedure as foreclosure of real estate mortgage under Sec. 8, Rule 68, Rules of Court. Sue on the Note waive the chattel mortgage; hence, one can levy on other properties. (Industrial Finance Corp. v. Ramirez, 77 SCRA 152 [1977]).

(c)

(d)

11. Deficiency Judgement: General Rule: Creditor shall always be entitled to collect the deficiency judgement. (Ablaza v. Ignacio, 103 Phil. 1151 [1958]). When the proceeds of the sale are insufficient to cover the debts in an extra-judicial foreclosure of chattel mortgage, the mortgagee is entitled to claim the deficiency from the debtor. (State Investment House, Inc. v. CA, 217 SCRA 32 [1993]). Prescriptive Period: Ten (10) years under Art, 1142 of the Civil Code. (DBP v. Tomeldan, 101 SCRA 171 [1980]). Exception: If the property was sold in installments, the mortgagee can no longer take any action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary is void. (Art. 1484, Civil Code, aka the Recto Law) What is the Recto law? The Recto law, which is now reflected in Articles 1484-1485 of the Civil Code, which

Filipinas Investement v. Vitug (1969) When the creditor can no longer recover from the maker of the note with chattel mortgage because the deficiency is covered by the Recto Law, after the foreclosure of the mortgage, said creditor can still recover balance from the endorse who endorsed with recourse.

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Cruz v. Filipinas Investment (1968) Facts: C sold to D a car payable on installments. The car was given as security by way of chattel mortgage to secure payment. In addition, the debtor put up a real estate mortgage as further security for the payment of the debt. D did not pay 2 or more installments and so C foreclosed the chattel mortgage. The proceeds therefrom were insufficient and so C wanted to get a deficiency judgment and satisfy it by foreclosing on the real estate mortgage. Held: The established rule is to the effect that the foreclosure and actual sale of a mortgaged chattel bars further recovery (whether by judicial or extra-judicial foreclosure) by the vendor, of any balance on the purchasers outstanding obligation not so satisfied by the public sale. To allow further recovery by the foreclosure of the real estate mortgage is contrary to public policy. Northern Motors v. Sapinoso (1970) Facts: Northern Motors sold a car to Sapinoso on installments. A chattel mortgage was executed on the car sold. When S failed to pay 2 or more installments, NM sought to foreclose the chattel mortgage and asked the court for a writ of replevin. Meantime, S made several payments while the replevin suit was pending. The lower court ruled that NM, by bringing the suit, was barred from accepting any further payments from S and ordered NM to reimburse the amount collected. Held: The court a quo erred in concluding that the legal effect of the filing of the action for replevin was to bar NM from accepting further payments on the promissory note. That the ultimate objective of the action was for the foreclosure of the chattel mortgage is of no moment, for it is the fact of foreclosure and actual sale at public auction of the mortgaged chattel that bars further recovery by the vendor of any balance on the buyers outstanding obligation not satisfied by the sale. Pascual v. Universal Motors (1974) When the seller imposes a double security by a chattel mortgage of the thing sold on installments and another mortgage on another property of the buyer, such is contrary to the public policy sought to be protected by the Recto Law, and the foreclosure of the chattel mortgage on the object of the sale bars recovery on any deficiency. Ridad vs Filipinas Investment (1983) The precise purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment, otherwise, the mortgagor-buyer would find himself without the property and still owing practically the full amount of his original indebtedness. The corporation elected to foreclose its mortgage upon default by the plaintiffs in the payment of the agreed installments. Having chosen to foreclose the chattel mortgage, and bought the purchased vehicles at the public auction as the highest bidder, it submitted itself to the consequences of the law as specifically mentioned. Bicol Savings and Loan Asso. v. Guinhawa (1990) The prohibition under the Recto Law against recovery does not apply to foreclosure of chattel mortgage constituted to secure a loan and not originating from a sales transaction.

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