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VII.

REAL MORTGAGE

A.

Definition

Real Mortgage is a contract whereby the debtor secures to the creditor the fulfillment of a principal
obligation, specially subjecting to such security immovable property or real rights over immovable property
in case the principal obligation is not complied with at the time stipulated.
B.

Characteristics

1.

It is an accessory and subsidiary contract.

2.
It is also unilateral because it creates only an obligation on the part of the creditor who must free
the property from the encumbrance once the obligation is fulfilled.
3.
The mortgagor, as a general rule, retains possession of the property mortgaged as security for the
payment of the sum borrowed from the mortgagee, and pays the latter a certain percent thereof as
interest on his principal by way of compensation for his sacrifice in depriving himself of the use of said
money and the enjoyment of its fruits, in order to give them to the mortgagor.
4.
The objects of a real mortgage are immovable (Article 415) and alienable real rights imposed upon
immovables.
Note: While a mortgage of land necessarily includes, in the absence of stipulation, the
improvements thereon, a building by itself may be mortgaged apart from the land on which it is built.
Possessory rights over said property before title is vested on the grantee may be validly transferred or
conveyed as in a deed of mortgage. (prudential Bank vs. Panis, 153 SCRA 390 [1967]); Nartales vs. GSIS,
156 SCRA 205 [1987]).
5.
In order that a mortgage may be validly constituted, it must appear in a public document duly
recorded in the Registry of Property (see Gaotian vs. Gaffud, 24 SCRA 706 [1969])
Note: If the instrument of mortgage is not recorded, the mortgage is nevertheless binding
between the parties.
6.
A mortgage creates a real right (see Tuazon vs. Grosco, 5 Phil. 596 [1905]), a lien inseparable from
the property mortgaged, which is enforceable against the whole world. Until discharged, it follows the
property wherever it goes and subsists notwithstanding changes of ownership.
Note:
a.)
If the mortgagor sells the mortgaged property, the property remains subject to the
fulfillment of the obligation secured by it. (see Bonnevie vs. Court of Appeals, 125 SCRA 122 [1983]) All
subsequent purchasers of the property must respect the mortgage, whether the transfer to them be with
or without the consent of the mortgagee. But the mortgage must be registered (Article 2125) or, if not
registered, the buyer must know of its existence. (see Phil. National Bank & Trust Corp. vs. Court of
Appeals, 193 SCRA 158 [1991]) The mortgagor may not be the principal debtor (Article 2085, 2 nd par.).
b.)
The right or lien of an innocent mortgagee for value upon the mortgaged property must be
respected and protected, even if the mortgagor obtained his title through fraud. The remedy of the
persons prejudiced is to bring an action for damages against the person who caused the fraud and if the
latter is insolvent, an action against the Treasurer of the Philippines may be filed for the recovery of
damages against the Assurance Fund (Philippine National Bank vs. Court of Appeals, 187 SCRA 735 [1990])
C. Effect of Mortgage
1.
The only right of a mortgagee in case of non-payment of a debt secured by real mortgage would be
to foreclose the mortgage and have the encumbered property sold to satisfy the outstanding indebtedness
(Guanzon vs. Argel, 33 SCRA 474 [1970])
2. The mortgagors default does not operate to vest in the mortgagee the ownership of the encumbered
property. His failure to redeem the property does not automatically vest ownership of the property to the
mortgagee which would grant the latter the right to appropriate the property or dispose of it for such effect
is against public policy as enunciated by Article 2088. (Reyes vs. Sierra, 93 SCRA 472 [1979]).
Adlawan vs. Torres
(233 SCRA 645)
By mortgaging a piece of property, a debtor merely subjects it to a lien but ownership
thereof is not parted with.

D.

Extent of Mortgage

General Rule:
A mortgage constituted on immovable property is not limited to the property
itself but also extends to all its accessions, improvements, growing fruits and rents or income (see Article
2102) as well as to the proceeds of insurance should the property be destroyed of the expropriation value
of the property should it be expropriated.
Exception:
E.

contrary stipulation

Alienation or Assignment of Mortgage

1.
Said assignment is valid and assignee may foreclose the mortgage in case of nonpayment of the
mortgage indebtedness. (Santiago vs. Pioneer Savings and Loan Bank, 157 SCRA 100 [1988]).
2.
The fact that the mortgagor has transferred the mortgaged property to a third person does not
relieve him from his obligation to pay the debt to the mortgage creditor in the absence of novation
(McCallough & Co. vs. Sierra, 41 Phil. 1 [1921]).
3.
The mortgage credit being a real right which follows the property, the creditor may demand from
any possessor the payment of the credit secured by said property. It is necessary, however, that prior
demand for payment must have been made on the debtor and the latter failed to pay. (Bank of the Phil.
Island vs. Concepcion & Hijos, Inc., 53 Phil. 906 [1929])
4.
An assignee cannot acquire greater rights than those pertaining to an assignor (Koa vs. Court of
Appeals, 219 SCRA 541).
F.
Stipulation Forbidding Alienation of Mortgaged Property
1.
Such a stipulation is void. However, if the mortgagor alienates the property, the transferee is
bound to respect the encumbrance because being a real right, the property remains subject to the
fulfillment of the obligation for whose guaranty it was constituted (Article 2126).
G.

Foreclosure of Mortgages

1.

Judicial foreclosure governed by Rule 68 of the Rules of Court.

2.
Extrajudicial Foreclosure governed by Act. No. 3135 as amended, if and when the mortgagee is
given a specific power or express authority to do so.
a.

Public auction must be conducted in the province where the property is situated.

b.

Posting of notice of sale in at least 3 public places therein

c.

Publication in a newspaper of general circulation

d.

Personal notice to mortgagor is not required (Bonnevie vs. Court of Appeals, 125 SCRA 122
[1983]; GSIS vs. Court of Appeals, 170 SCRA 533 [1989]).

e.

Debtor has the right to redeem the property sold within the term of one year from and after
the date of the sale (Section 6). The reckoning date in case of registered land is from the
registration of the certificate of sale since it is only from such date that the sale takes effect
as a conveyance. (Jose vs. Blue, 42 SCRA 351, [1971]; Gorospe vs. Santos, 69 SCRA 191
[1976]; General vs. Barrameda, 60 SCRA 162 [1976]. Every conveyance of lands acquired
under the free patent or homestead provisions, when proper, shall be subject to repurchase
by the applicant, his widow or legal heirs, within a period of five years from the date of the
conveyance. (Section 119, C.A. No. 141 [Public Land Law], as amended) or foreclosure sale
(Tupas vs. Damasco, 132 SCRA 593 [1984]).

Note: Cerna vs. CA (220 SCRA 517): The filing of a collection suit bars the foreclosure of mortgage.
H. Right of Mortgagee to Recover Deficiency
1.
If there be a balance due to the mortgagee after applying the proceeds of the sale, the mortgagee
is entitled to recover the deficiency. (Development Bank of the Philippines vs. Mirang, 66 SCRA 141
[1975]. In judicial foreclosure, the Rules of Court specifically gives the mortgagee the right to claim for
deficiency in case a deficiency exists (Section 6, Rule 70). While Act No. 3135 governing extrajudicial
foreclosures of mortgage does not give a mortgagee the right to recover deficiency after the public auction
sale, neither does it expressly or impliedly prohibit such recovery.

Note: This right to recover deficiency had been categorically resolved in State Investment vs. Court of
Appeals (217 SCRA 32 [1993]). Ergo, the mortgagee is entitled to recover the deficiency in case the sale
proceeds are not sufficient to cover the debt in extrajudicial foreclosures.
2.
The action to recover a deficiency after foreclosures prescribes after ten (10) years from the time
the right of action accrues as provided in Article 1144(2) of the Civil Code (Development Bank of the
Philippines vs. Tomeldan, 101 SCRA 171 [1980].
I.

Waiver of Security by Creditor

1.
The mortgagee may waive the right to foreclose his mortgage and maintain a personal action for
recovery of the indebtedness. There is no statutory provision in our jurisdiction prohibiting a personal
action to recover a sum of money even though a mortgage has been given as security for the payment of
the same. (Hijos de I. de la Rama vs. Sajo, 45 Phil. 703 [1924]; Solomon and Lachica vs. Dantes, 63 Phil.
522 [1937]).
2.
The mortgagee cannot have both remedies. He has only one cause of action, i. e., non-payment of
the mortgage debt; hence, he cannot split up his cause of action by filing a complaint for payment of the
debt and another complaint for foreclosure. (Caltex Phils. Vs. Intermediate Appellate Court, 176 SRCA 741
[1989]).
J.

Kinds of Redemption

1.
Equity of redemption or the right of the mortgagor to redeem the mortgaged property after his
default in the performance of the conditions of the mortgagee but before the sale of the mortgaged
property or confirmation of the sale (see Top-Rate International Services, Inc. vs. Intermediate Appellate
Court, 142 SRCA 467 [1986]). The mortgagors equity of redemption is simply the right of the mortgagor
to extinguish the mortgage and retain ownership of the property by paying the secured debt within the 90day period after the judgment becomes final, in accordance with Section 2, Rule 68 of the Rules of Court or
even after the foreclosure sale but prior to its confirmation. (Limpin vs. Intermediate Appellate Court, 166
SCRA 87 [1988]).
2.
Right of redemption or the right of the mortgagor to redeem the mortgaged property within a
certain period(1 yr) after it was sold for the satisfaction of the mortgaged debt.
K.

Right of Redemption

1.
In all cases of extrajudicial sale, the mortgagor may redeem the property at any time within the
term of one year from and after the date of registration of the sale (see Section 6, Act No. 3135; Reyes vs.
Tolentino 42 SCRA 365 [1971]).
2.
In judicial foreclosure of real estate mortgage, there is a right of redemption which he can exercise
at any time after service of judgment of foreclosure and within the 90-day period and even thereafter
provided he does so before the foreclosure sale is confirmed by the court. (Anderson vs. Reyes, 54 Phil
944). Confirmation of the sale of mortgaged real property cuts off all the rights or interests of the
mortgagor and of the mortgage and persons holding under him, and with them the equity of redemption in
the property and vests them in the purchaser. Confirmation retroacts to the date of the sale. It is a final
order, not interlocutory. (Ocampo vs. Domalanta, 20 SRCA 1136 [1967]; Binalbagan Estate, Inc. vs.
Gatuslao, 76 Phil. 128 [1946]; Villar vs. Javier, 97 Phil 604 [1955]; Lonzome vs. Amores, 134 SCRA 380
[1985].
Exception:

L.

However, if the property has been mortgaged in favor of the DBP (CA 459) Philippine
National Bank (RA 1300), banks, banking and credit institutions (RA 337, or the General
Banking Act) or rural banks (RA 2670), redemption is allowed within one year from the
registration of the sale. (Conzales vs. Phil. National Bank, 48 Phil. 824 [1926]). The
redemption must be made within one year after the sale if the mortgagee is a bank, banking
or credit institution (Section 78, R. A. No. 337; Piano vs. Cayanog, supra). Under the Revised
charter of the PNB, the period is one year from the registration of the foreclosure sale.

Requisites for Valid Redemption

1.
The redemption must be made within 12 months from the time of the registration of the sale.
2.
Payment of the purchase price of the property plus 1% interest per month together with the taxes
thereon, if any, paid by the purchaser with the same rate of interest computed from the date of
registration of the sale; and

3.
Written notice of the redemption must be served on the officer who made the sale and a duplicate
filed with the proper Register of Deeds. (Rosales vs. Yboa, 120 SCRA 869 [1983]).
Ramirez vs. Court of Appeals
(219 SCRA 598)
Acceptance of redemption price after the expiration of the statutory period for
redemption is deemed a waiver of the one-year period to redeem foreclosed property.
M.

Recent Jurisprudence on Real Mortgages


Noel vs. Court of Appeals
(240 SCRA 78)
In the absence of proof of gross inadequacy of the price, the fact that the sale was
made with what might appear as an inadequate consideration does not make the contract
one of mortgage.
Mercado vs. Court of Appeals
(240 SCRA 616)
A co-owner does not lose his part ownership of a co-owned property where his share
is mortgaged by another co-owner without the formers knowledge and consent.
Tarnate vs. Court of Appeals
(241 SCRA 254)
It is a settled rule that a mortgagee may recover any deficiency in the
mortgage account which is not realized in a foreclosure sale and that the action for recovery
of that deficiency may be filed even during the redemption period.
Olea vs. Court of Appeals
(247 SCRA 274)
a.)

A stipulation that the ownership of the property would automatically pass to the
vendee in case no redemption is effected within a stipulated period is void for being a
pactum commissorium which enables the mortgagee to acquire ownership of the
mortgaged property without need of foreclosure.

b.)

Where in a contract of sale with pacto de retro, the vendor remains in physical
possession of the land sold as lessee or otherwise, the contract should be considered
an equitable mortgage.

c.)

Where the contract contains a stipulation that upon payment by the vendor of the
purchase price within a certain period the document shall become null and void and
have no legal force and effect, the purported sale should be considered a mortgage
contract.

d.)

In case of doubt, a contract purporting to be sale with the right of purchase shall be
considered an equitable mortgage.

e.)

A mortgage action prescribes after 10 years.


DBP vs. Court of Appeals
(249 SCRA 331)

The fact that the annulment of the sale will also result in the invalidity of the
mortgage does not have an effect on the validity and efficacy of the principal obligation, for
even an obligation that is unsupported by any security of the debtor may also be enforced
by means of an ordinary action. Where a mortgaged is not valid, as where it is executed by
one who is not the owner of the property, or the consideration of the contract is simulated or
false, the principal obligation which it guaranteed is not thereby rendered null and void.
That obligation matures and becomes demandable in accordance with the stipulations
pertaining to it.
Gabonseng vs. Court of Appeals
(246 SCRA 472)

The application for foreclosure of mortgage is premature where the debtors have not
yet defaulted on the payment of either the principal or the interest on their loans.
Ajax Marketing & Development
Corporation Vs. Court of Appeals
(248 SCRA 222)
An action to foreclose a mortgage is usually limited to the amount mentioned in the
mortgage but where the intent of the contracting parties is manifest that the mortgaged
property shall also answer for future loans or advancements then the same in not improper
as it is valid and binding between the parties.
Filinvest Credit Corporation
Vs. Court of Appeals
(248 SCRA 549)
a.)

If the mortgagee cannot obtain possession of a mortgaged property for its sale on
foreclosure, it must bring a civil action either to recover such possession as a
preliminary step to the sale or to obtain judicial foreclosure.

b.)

Replevin is the appropriate action to recover possession preliminary to the


extrajudicial foreclosure of a chattel mortgage.
Philippine Bank of Communications
Vs. Court of Appeals
(253 SCRA 241)

Issue:
The mortgage contract provides:
This mortgage is given as security for the payment to the MORTGAGEE on demand or at
maturity, as the case may be, of all promissory notes, letters of credit, trust receipts, bills of
exchange, drafts, overdrafts and all other obligations of every kind already incurred or which
hereafter may be incurred .
Can the bank charge penalty based on said provision?
Held:
1.
The obligation in this case was not a series of indeterminate sums incurred over a
period of time, but two specific amounts procured in a single instance.
Thus, the
inapplicability of the ruling in Lim Julian vs. Lutero (49 Phil. 703) which pertains only to
mortgages securing future advancements. Instead, what applies here is the general rule
that an action to foreclose a mortgage must be limited to the amount mentioned in the
mortgage.
2.
The mortgage provision relied upon by the petitioner is known in American
Jurisprudence as a dragnet clause, which is specifically phrased to subsume all debts of
past or future origin. Such clauses are carefully scrutinized and strictly construed.
3.
The mortgage contract is also one of adhesion as it was prepared solely by the
petitioner and the only participation of the other party was the affixing of his signature or
adhesion thereto. Being a contract of adhesion, the mortgage is to be strictly construed
against the petitioner, the party which prepared the agreement.
4.
A reading, not only of the earlier quoted provision, but of the entire mortgage
contract yields no mention of penalty charges. Construing this silence strictly against the
petitioner, it can fairly be concluded that the petitioner did not intend to include the
penalties on the promissory notes in the secured amount. This explains the finding by the
trial court, as affirmed by the Court of Appeals, the penalties and charges are not due for
want of stipulation in the mortgage contract.
5.
Indeed, a mortgage must sufficiently describe the debt sought to be secured, which
description must not be such as to mislead or deceive, and an obligation is not secured by a
mortgage unless it comes fairly within the terms of the mortgage. In this case, the
mortgage contract provides that it secures notes and other evidences of indebtedness.
Under the rule of ejusdem generis, where a description of things of a particular class or kind
is accompanied by words of a generic character, the generic words will usually be limited to
things of a kindred nature with those particularly enumerated. A penalty charge does not
belong to the species of obligations enumerated in the mortgage, hence, the said contract
cannot be understood to secure the penalty.

6.
A mortgage and a note secured by it are deemed parts of one transaction and are
construed together, thus, an ambiguity is created when the notes provide for the payment of
a penalty but the mortgage contract does not Construing the ambiguity against the
petitioner, it follows that no penalty was intended to be covered by the mortgage.
DBP vs. Court of Appeals
(253 SCRA 414)
Issue: Whether the land in dispute could have been validly mortgaged while still the
subject of a Free Patent Application with the government.
1.
Petitioner bank did not acquire valid title over the land in dispute because it was
public land when mortgaged to the bank. We cannot accept petitioners contention that the
lot in dispute was no longer public land when mortgaged to it since the Olidiana spouses had
been in open, continuous, adverse and public possession thereof for more than thirty (30)
years. In Visayan Realty, Inc. vs. Meer (86 Phil. 515), we ruled that the approval of a sales
application merely authorized the applicant to take possession of the land so that he could
comply with the requirements prescribed by law before a final patent could be issued in his
favor. Meanwhile the government still remained the owner thereof, as in fact the application
could still be canceled and the land awarded to another applicant should it be shown that
the legal requirements had not been complied with. What divests the government of title to
the land is the issuance of the sales patent and its subsequent registration with the Register
of Deeds. It is the registration and issuance of the certificate of title that segregate public
lands from the mass of public domain and convert it into private property. Since the
disputed lot in the case before us was still the subject of a Free Patent Application when
mortgaged to petitioner and no patent was granted to the Olidiana spouses, Lot No. 2029
(Pls-61) remained part of the public domain.
2.
With regard to the validity of the mortgage contracts entered into by the parties, Art.
2085, par. 2 of the New Civil Code specifically requires that the pledgor or mortgagor be the
absolute owner of the thing pledged or mortgaged. Thus, since the disputed property was
not owned by the Olidiana spouses when they mortgaged it to petitioner, the contracts of
mortgage and all their subsequent legal consequences as regards Lot No. 2029 (Pls-61) are
null and void. In a much earlier case (Vda. De Bautista vs. Marcos, 3 SCRA 434), we held
that it was an essential requisite for the validity of a mortgage that the mortgagor be the
absolute owner of a property mortgaged, and it appearing that the mortgage was
constituted before the issuance of the patent to the mortgagor, the mortgage in question
must of necessity be void and ineffective. For the law explicitly requires an imperative for
the validity of a mortgage that the mortgagor be the absolute owner of what is mortgaged.
State Investment House, Inc.
vs. Court of Appeals
(254 SCRA 368)
1.
STATEs registered mortgage right over the property is inferior to that of respondentspouses unregistered right. The unrecorded sale between respondents-spouses and SOLID
is preferred for the reason that if the original owner (SOLID, in this case) had parted with his
ownership of the thing sold then he no longer had ownership and free disposal of that thing
so as to be able to mortgage it again. Registration of the mortgage is of no moment since it
is understood to be without prejudice to the better right of third parties.
2.
As a general rule, where there is nothing in the certificate of title to indicate any
cloud or vice in the ownership of the property, or any encumbrance thereon, the purchaser
is not required to explore further than what the Torrens Title upon its face indicates in quest
for any hidden defect or inchoate right that may subsequently defeat his right thereto. This
rule, however, admits of an exception as where the purchaser or mortgagee has knowledge
of a defect or lack of title in his vendor, or that he was aware of sufficient facts to induce a
reasonably prudent man to inquire into the status of the title of the property in litigation. In
this case, petitioner was well aware that it was dealing with SOLID, a business entity
engaged in the business of selling subdivision lots. In fact, the OAALA found that at the
time the lot was mortgaged, respondent State Investment House, Inc., (now petitioner) has
been aware of the lots location and that said lot formed part of Capital Parks/Homes
Subdivision. In Sunshine Finance and Investment Corp. vs. Intermediate Appellate Court
(203 SCRA 210), the Court, noting petitioner therein to be a financing corporation, deviated
from the general rule that a purchaser or mortgagee of a land is not required to look further
than what appears on the face of the Torrens Title.

3.
The above-enunciated rule should apply in this case as petitioner admits of being a
financing institution. We take judicial notice of the uniform practice of financing institutions
to investigate, examine and assess the real property offered as security for any loan
application especially where, as in this case, the subject property is a subdivision lot located
at Quezon City, M. M. It is a settled rule that a purchaser or mortgagee cannot close its eyes
to facts which should put a reasonable man upon his guard, and then claim that he acted in
good faith under the belief that there was no defect in the title of the vendor or mortgagor .
Petitioners constructive knowledge of the defect in the title of the subject property, or lack
of such knowledge due to its negligence, takes the place of registration of the rights of
respondents spouses. Respondent court thus correctly ruled that petitioner was not a
purchaser or mortgagee in good faith hence, petitioner can not solely rely on what merely
appears on the face of the Torrens Title.

VII.

ANTICHRESIS

1.

Definition

Antichresis is a contract whereby the creditor acquires the right to receive the fruits of an
immovable of his debtor, with the obligation to apply them to the payment of the interest, if owing and
thereafter to the principal of his credit.
B.

Characteristics

1.

It is an accessory contract because it secures the performance of a principal obligation.

2.
It is a formal contract because the amount of the principal and of the interest must both be in
writing, otherwise the contract of antichresis is void.
Note:
1.
Delivery of the property to the creditor is required only in order that the creditor may receive the
fruits and not for the validity of the contract.
2.
It is not essential that the loan should earn interest in order that it can be guaranteed with a
contract of antichresis. Antichresis is susceptible of guaranteeing all kinds of obligations, pure or
conditional. (Javier vs. Valliser, (CA) N. 2648-R, April 29, 1950; Sta. Rosa vs. Noble, 35 O.G. 27241).
3.
The fruits of the immovable which is the object of the antichresis must be appraised at their actual
market value at the time of the application. (see Article 2138)
4.
The property delivered stands as a security for the payment of the obligation of the debtor in
antichresis. Hence, the debtor cannot demand its return until the debt is totally paid.
5.
A stipulation authorizing the antichretic creditor to appropriate the property upon the non-payment
of the debt within the period agreed upon is void. (see Article 2038).
C.

Distinctions between Antichresis and Pledge


Antichresis

Pledge

1.

Refers to real property

1.

Refers to personal property

2.

Perfected by mere consent

2.

Perfected by delivery

3.

Consensual contract

3.

Real contract

D.

Distinctions between Antichresis and Real Mortgage


Antichresis

Real Mortgage

1.

Property is delivered to the


creditor

1.

Debtor
usually
retains
possession of the property

the

2.

Creditor requires only the right


to receive the fruits of the
property; hence it does not
produce a real right

2.

Creditor does not have any right


to
receive
the
fruits,
but
mortgage creates a real right
over the property which is

3.

4.

E.

Creditor,
unless
there
is
stipulation to the contrary, is
obliged to pay the taxes and
charges upon the estate
(Article 2135)
Creditor given possession of
the property shall supply the
fruits thereof to the payment
of interest, if owing, and
thereafter to the principal of
the credit

enforceable against the whole


world
3.

Creditor has no such obligation

Mortgagee has no such obligation


4.

Obligations of Antichretic Creditor

1.
The creditor is obliged, unless there is a stipulation to the contrary, to pay the taxes and charges
upon the estate. If he does not pay the taxes, he is, by law (Article 1170), required to pay indemnity for
damages to the debtor. (Pando vs. Gimenez, 54 Phil. 459 [1930]).
2.
Another obligation of the creditor is to apply the fruits, after receiving them to the interest, if owing,
and thereafter to the principal (Article 2132) in accordance with the provisions of Article 2133 or 2138.
Hence, the duty of the creditor to render an account of said fruits to the debtor and the corresponding right
of the latter that the said fruits be applied to the debt. (Barretto vs. Barretto, 37 Phil. 234 [1917]; Diaz and
Rubillos vs. De Mendezona, 48 Phil. 666 [1926]; Macapilac vs. Gutierrez Recipe 43 Phil. 770 [1922]).
F.

Remedy of Creditor in Case of Default

1.

To bring an action for specific performance

2.
To petition for the sale of the real property as in a foreclosure of mortgages under Rule 68 of the
Rules of Court. The parties, however, may agree on an extrajudicial foreclosure in the same manner as
they are allowed in contracts of mortgage and pledge (see Article 1307; Tavera vs. El Hogar Filipino, Inc.
68 Phil. 712 [1939]).

IX.

CHATTEL MORTGAGE

A.

Definition
A chattel mortgage is

1.
an accessory contract because it is for the purpose of securing the performance of a principal
obligation;
2.
a formal contract because for its validity, registration in the Chattel Mortgage Register is
indispensable.
3.
a unilateral contract because it produces only obligations on the part of the creditor to free the
thing from the encumbrance upon fulfillment of the obligation.
Filipinas Marble Corporation vs.
Intermediate Appellate Court
(142 SCRA 180)
A mortgage is a mere accessory contract and thus, its validity would depend on the
validity of the loan secured by it. We however, reject the petitioners argument that since
the chattel mortgage involved was not registered, the same is null and void. Article 2125 of
the Civil Code clearly provides that the non-registration of the mortgage does not affect the
immediate parties. It states:
Article 2125. In addition to the requisites in Article 2085, it is indispensable, in order that a
mortgage may be validly constituted that the document in which it appears be recorded in
the Registry of Property. If the instrument is not recorded, the mortgage is nevertheless
binding between the parties.
xxx
xxx
xxx

The petitioner cannot invoke the above provision to nullify the chattel mortgage it
executed in favor of respondent DBP.
C.

Distinction between Chattel Mortgage and Pledge


Chattel Mortgage

Pledge

Delivery of personal property to


the mortgagee is not necessary

Delivery is necessary

Registration
in
the
Chattel
Mortgage Register is necessary for
its validity

Registration in the Registry of


Property is not necessary for its
validity

Procedure for sale of pledged thing is


found in Article 2112 of the Civil Code

If property is sold, the debtor is not


entitled to the excess
Exceptions:
a.) contrary
stipulation
(Article 2125)
b.) legal pledge (Article
2121)

Procedure
for
sale
of
the
mortgaged property is found in
Section 14 of
RA 1508, as
amended
If property is foreclosed, the
excess over the amount due goes
to the debtor

5
If property is foreclosed, creditor is
entitled to recover the deficiency
from the debtor
Exception: if chattel mortgage is a
security for the purchase of
personal property in installments
(Article 1484)

D.

If property is sold, creditor is not


entitled to recover the deficiency
notwithstanding any stipulation to
the contrary (Article 2115).

Offenses Involving Chattel Mortgage

1.
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; and
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 Register (Article 319, Revised Penal Code).
Note:
The mortgagor is not relieved of criminal liability even if the mortgage indebtedness
is thereafter paid in full (U.S. vs. Kilayko, 32 Phil. 61 [1915]), or the mortgagor-seller informed the
purchaser that the thing sold had been mortgaged. (People vs. Alvares, 45 Phil. 472 [1923]). But
the sale is valid although no written consent was obtained from the mortgagee but the mortgagor
lays himself open to criminal prosecution. (Servicewide Specialists, Inc. vs. Intermediate Appellate
Court, 174 SCRA 80 [1989]; Dy, Jr. vs. Court of Appeals, 198 SCRA 826 [1981]).
E.

Subject Matter of Chattel Mortgage


1.
2.
3.
4.
5.
6.
7.

Shares of stock in a corporation


Interest in business
Machinery and house of mixed materials treated by parties as personal property and
no innocent third person will be prejudiced thereby (Makati Leasing and Finance
Corporation vs. Weaver Textile Mills, Inc., 122 SCRA 296 [1983].
Vessels, the mortgage of which have been recorded with the Philippine Coast Guard
in order to be effective as to third persons
Motor vehicles, the mortgage of which had been registered both with the Land
Transportation Commission and the Chattel Mortgage Registry in order to affect third
persons
House which is intended to be demolished
Growing crops and large cattle (section 7, paragraphs 2 and 3, Act No. 1508)

Note:
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 only requires that the
description of the mortgaged property be such as to enable the parties to the mortgage or any
other person to identify the same after a reasonable investigation and inquiry (Saldana vs. Phil.
Guaranty Co., Inc., 106 Phil. 919 [1960]); otherwise, the mortgage is invalid.
F.

Creation of Chattel Mortgage

1.
The law as it now stands provides for only one way for executing a valid chattel mortgage,
i.e., the registration of the personal property in the Chattel Mortgage Register as security for the
performance of an obligation. (Article 2140; see Article 2085). Under the Chattel Mortgage Law, if
the property as situated in a different province from that in which the mortgagor resides, the
registration must be in both registers (Section 4, Act No. 1508); otherwise, the chattel mortgage is
void.
2.
It has been ruled however that if the chattel mortgage is not recorded, it is nevertheless
binding between the parties. (Filipinas Marble Corporation vs. Intermediate Appellate Court, 142
SCRA 180 [1986]; Article 2125).
G.

Effect of Registration

The registration of the chattel mortgage is an effective and binding notice to other creditors
of its existence and creates a real right or a lien which being recorded follows the chattel wherever
it goes. The registration gives the mortgagee the symbolical possession. (Northern Motors, Inc. vs.
Coquia, 68 SCRA 374 [1975]).
H.

Registration of Assignment and Mortgage Optional

1.
There is no law expressly requiring the recording of the assignment of a mortgage. While
such assignment may be recorded, the law is permissive and not mandatory.
2.
The assignee is subrogated to the rights and obligations of the assignor-mortgagee with
respect to the chattel mortgage constituted in favor of the latter. Consequently, the assignee is
bound by the terms and conditions of the chattel mortgage executed between the mortgagor and
the mortgagee. (BA Finance Corporation vs. Court of Appeals, 201 SCRA 157 [1991]).
I.

Affidavit of Good Faith

1.
The affidavit of good faith is an oath in a 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 purpose and that the same is just and valid obligation and
one not entered into for the purpose of fraud.
2.
Under Section 5 of the Chattel Mortgage Law, in describing what shall be deemed sufficient
to constitute a good chattel mortgage, includes the requirement of an affidavit of good faith
appended to the mortgage and recorded therewith. But the absence of the affidavit vitiates a
mortgage only as against third persons without notice like creditors and subsequent encumbrances.
(Lilius vs. Manila Railroad Co., 62 Phil. 50 [1935]; Phil. Refining Co. vs. Jarque, 61 Phil. 229 [1935];
Giberson vs. A. N. Jurreidini Bros., 44 Phil. 216 [1922]).
3.
A deed of chattel mortgage is void where it provides that the security stated therein is for
the payment of any and all obligations hereinbefore contracted and which may hereafter be
contracted by the mortgagor in favor of the mortgagee. A mortgage that contains a stipulation in
regard to future advances in the credit will take effect only from the date the same are made and
not from the date of the mortgage. (Jaca vs. Davao Lumber Co., 113 SCRA 107 [1982]).
J.

Foreclosure of Chattel Mortgage

1.
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 (Article 2141, 2088) because he is permitted only to recover his credit
from the proceeds of the sale of the property at public auction through a public officer in the
manner prescribed in Section 14 of Act No. 1508. (Mahoney vs. Tuason, 39 Phil. 951 [1919]);
Esguerra vs. Court of Appeals, 173 SCRA 1 [1989]).
2.

Private Sale if there is an express stipulation in the contract.


Exception: fraud or duress

Note:
1.
The mortgagee may, after thirty (30) days from the time of the condition broken, cause the
mortgaged property to be sold at public auction by a public officer (Section 14, Act No. 1508)
2.
The 30-day period to foreclose a chattel mortgage is the minimum period after violation of
the mortgage condition for the mortgage creditor with at least ten (10) days notice to the
mortgagor and posting of public notice of time, place and purpose of such sale, and is a period of
grace for the mortgagor, to discharge the mortgage obligation. After the sale of the chattel at
public auction, the right of redemption is no longer available to the mortgagor. (Cabral vs.
Evangelista, 28 SCRA 1000 [1969])
K.

Right of Mortgagee to Recover Deficiency

1.
The creditor may maintain an action for the deficiency although the Chattel Mortgage Law is
silent on this point (Ablaza vs. Ignacio, (unrep) 103 Phil. 1151 [1958]; Garrido vs. Tuason, 24 SCRA
727 [1968] Phil. National Bank vs. Manila Investment & Construction, Inc., supra; Bank of the
Philippine Isalnd vs. Olutanga Lumber Co., 47 Phil. 20 [1924]). The action may be sought within ten
(10) years from the time the cause of action accrues.
2.
If the chattel mortgage is constituted, whether by the debtor-vendee or a third person, as
security for the purchase of personal property payable in installments, no deficiency judgment can
be asked and any agreement to the contrary shall be void (Article 1484).
3.
The chattel mortgagee is entitled to deficiency judgment in an action for specific
performance (Article 1484 [1]) where the mortgaged property is subsequently attached and sold.
The execution sale in such case is not a foreclosure sale. (Industrial Finance Corporation vs.
Ramirez, 77 SCRA 152 [1977]).