THE CHATTEL MORTGAGE LAW

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. 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

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CHATTEL MORTGAGE Delivery of the personal property is necessary Registration is necessary for validity Procedure for sale if found in Sec. 14 of Act No. 1508 If the property is foreclosed, the excess over the amount due goes to the debtor 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

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PLEDGE Delivery is a requisite Registration is not necessary Procedure is found in Article 2112 of the Civil Code Debtor is not entitled to the excess UNLESS otherwise provided or except in case of a legal pledge If the property is sold and there is a deficiency, the creditor is not entitled to recover the deficiency notwithstanding any stipulation to the contrary

LAWS GOVERNING CHATTEL MORTGAGE 1. Chattel Mortgage Law (Act No. 1508, as amended); 2. Civil Code; 3. PD 1529

SUBJECT MATTER OF THE CHATTEL MORTGAGE

1. Shares of Stocks: Recorded at the principal office of business of the corporation and at the residence of the mortgagor 2. Interest in Business 3. Machinery treated by the parties as personal 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. 6. House of Mixed Materials 7. House Built on Rented Land: It does not form part of the land. It is treated merely as an object placed only a land by one who had a temporary right to the same. 8. House of Strong Materials may be considered as personal property for purposes of executing a chattel mortgage as long as the parties to the contract so agrees and no innocent third party will be prejudiced thereby. * For purposes of the Chattel Mortgage Law, both growing crops and large cattles are personal property and therefore, capable of being mortgaged although they would be considered as immovable property under certain 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. A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor and placed them in the same depositary as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding. However, this does not apply to stores open to the public for retail business where the goods are constantly sold and substituted with new stock. CHATTEL MORTGAGE OF AFTER-ACQUIRED OBLIGATIONS A stipulation in the mortgage, extending its scope and effect to after-acquired property is valid and binding where the after-acquired property is valid and binding, where the after-acquired property is in renewal of, or in substitution for, goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods. 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 Law.

Registration of Chattel Mortgage (process) 1. Execution of document 2. Present the document together with the affidavit of good faith 3. Payment of fees 4. ROD enters in the Day Book (primary process) 5. ROD thereafter enters in a more detailed form the essential contents of the instrument in the Chattel Mortgage Register (Sec. 115, PD 1529) EFFECTS OF REGISTRATION 1. Creates a real right 2. Creates a lien that attaches to the property in favor of the mortgagee
3. Constructive notice of his interest in the property to the whole world

Effects of failure to register 1. Valid between the parties but void against third persons 2. If instead of registration, it is delivered, it shall be apledge not a mortgage (if no chattel
mortgage deed executed)

AFFIDAVIT OF GOOD FAITH It is an oath in the contract of chattel mortgage wherein the parties severally swear that the mortgage is made for the purpose of securing the obligation specified in the conditions thereof and for no other purposes and that the same is just and valid obligations and not entered into for the purpose of fraud. This special affidavit is required only for the purpose of transforming an already valid mortgage into preferred mortgage. The absence of it vitiates a mortgage only as against third persons without notice like creditors and subsequent encumbrances. RIGHT OF REDEMPTION 1. When the condition of the chattel mortgage is broken, the following may redeem: a. Mortgagor: redemption from buyer is only the purchase price b. Person holding a subsequent mortgage c. A subsequent attaching creditor 2. An attaching creditor whom so redeems shall be subrogated to the rights of the mortgage and entitled to foreclose the mortgage. 3. The redemption is made by paying or delivering to the mortgagee the amount due on such mortgage and the costs and expenses incurred by such breach of condition before the sale thereof. 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 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 mortgage. 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. 2. Real Estate Mortgage In case of judicial foreclosure, the grace period for the mortgagor to pay the amount is not less than 90 days but not more than 120 days from the entry of judgment on foreclosure. In default of such payment, the property shall be sold at public auction to satisfy judgment. (Section 2, Rule 68 of Rules of Court) CIVIL ACTION TO RECOVER CREDIT 1. The mortgagee is not 0bligated to file an independent action for the enforcement of his credit. To do otherwise would defeat the purpose of the chattel mortgage, which is to give him preference over the mortgaged chattels for the satisfaction of his credit. (Northern Motors, Inc. vs.Coquia, supra) 2. A mortgagee who sues and obtains a personal judgment against a mortgagor upon his credit waives thereby his right to enforce the mortgage securing it. (Movido vs. Rehabilitation Finance Corp., 105 Phil 886) RIGHT OF MORTGAGOR TO RECOVER DEFICIENCY 1. Where mortgage foreclosed The creditor may maintain an action for recovery although the Chattel Mortgage Law is silent onthis point.15 The reason is that a chattel mortgage is only given as a security and not the payment ofloan in case of non-payment. The action may be brought within ten (10) years from the time thecause of action accrues. 2. Where the mortgage constituted as security for purchase of personal property payable ininstallments 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. 3. Where the mortgaged property subsequently attached and sold The chattel mortgagee is entitled to the deficiency judgment in an action for specific performance where the mortgaged property is specifically attached and sold. The execution of the sale is not a foreclosure sale. (Industrial Finance Corp. vs. Ramirez, 232 SCRA 714) APPLICATION OF PROCEEDS OF SALE 1. Costs and expenses of keeping sale; 2. Payment of obligations secured by the mortgage; 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 (process) 1. File a suit for the purpose; 2. Court orders payment of mortgage debt within a period of not less than 90 days but not more than 120 days from the entry of judgment; 3. If mortgagor fails to pay, the court shall order the sale in public auction; 4. Confirmation of Sale: by order of the court which operates to divest the rights of all parties to the action and to vest their rights to the buyer subject to the right of redemption Before confirmation, the court retains control of the proceeding by exercising sound discretion whether to confirm or not 5. Execution of judgment; 6. Application of Proceeds; and 7. Execution of Sheriffs certificate