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CHATTEL MORTGAGE

What is a Chattel?
An item of personal property that is movable; it may be animate or
inanimate.

What is a Chattel Mortgage?

Article 2140, NCC provides:


By a chattel mortgage, personal property is recorded in the Chattel
Mortgage Register as a security for the performance of an obligation.
If the movable, instead of being recorded, is delivered to the creditor
or a third person, the contract is a pledge and not a chattel mortgage.

Old Definition under Section 3, Act. No. 1508


A chattel mortgage is a conditional sale of personal property as security
for payment of a debt, or the 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 thereby divested
of his title.

- This definition is considered inaccurate by the Code Commission.

What are the characteristics of a Chattel Mortgage?

1. Accessory Contract
2. Formal Contract
3. Unilateral Contract
4. Nominate Contract

Who are Parties to the Contract?


Mortgagor and Mortgagee.
The Mortgagor must be the absolute owner of the thing. He must also
have a free disposal of their property, or is legally authorized for the purpose.
What are the Essential Requisites of the Contract?
Article 1318 provides that there must be:

1. Consent of the contracting parties;

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2. Object certain which is the subject matter of the contract; and
3. Cause of the obligation which is established

Article 2085 also provides that:

1. The chattel mortgage must be constituted to secure the fulfillment of a


principal obligation.
2. The mortgagor must be the absolute owner of the thing mortgaged.
3. The mortgagor must have free disposal of the property mortgaged, or that
he is legally authorized for the purpose.

What are the governing laws?


Article 2141, NCC provides:
The provisions of this Code on pledge, insofar as they are not in
conflict with the Chattel Mortgage Law, shall be applicable to chattel
mortgages.

1. Act. No. 1508 enacted on July 2, 1906.


2. New Civil Code
3. Administrative Code
4. Revised Penal Code
5. Ship Mortgage Decree P.D. No. 1521

Applicability of the provisions of pledge


The provisions on pledge applies suppletorily to chattel mortgage as long
as these are not in conflict with any provisions of the Chattel Mortgage Law.
The provisions of the latter will prevail.

Special Requisites of Chattel Mortgage

1. It can cover only personal or movable property in general.


2. Registration of the mortgage with the Chattel Mortgage Register where
the mortgagor resides.
3. Description of the property as would enable the parties or other persons
to identify the same after reasonable investigation and inquiry.
4. Accompanied by an affidavit for the purpose of transforming an already
valid mortgage to a preferred mortgage.
5. It can cover only obligations at the time the mortgage is constituted.

What are the distinctions between Chattel Mortgage and Pledge?


Similarities

1. Both are executed to secure performance of a principal obligation


2. Both are constituted only on personal property
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3. Both are indivisible
4. Both constitute a lien on the property
5. In both cases, the creditor cannot appropriate the property to himself in
payment of the debt
6. In both cases, when the debtor defaults, the property must be sold for
the payment of the creditor
7. Both are extinguished by the fulfillment of the principal obligation or by
the destruction of the property pledged or mortgaged

Distinctions

Chattel Mortgage Pledge


Is Delivery Necessary?
No. Yes
Is Registration Necessary?
Yes, registration in the Chattel No, registration in the Registry of
Mortgage Register is required by law. Property is not necessary.
Procedure?
It is found in Section 14, Act. No. IT IS FOUND IN Article 2112, NCC.
1508
What if the property is foreclosed?
The excess over the amount due goes If the property is sold, the debtor is
to the debtor. not entitled to excess unless it is
otherwise agreed or except in case of
legal pledge,
What if the property is foreclosed and there is deficiency?
The creditor is entitled to recover the The creditor is not entitled to recover
deficiency from the debtor except if the deficiency notwithstanding any
the chattel mortgage is a security for stipulation to the contrary.
the purchase of personal property in
installments.

What is the subject matter of chattel mortgage?

- It must always be personal or movable property.

The following are held to be morttgageable Under the Chattel Mortgage Law

1. Shares of Stock in a corporation


2. Interest in a business
3. Machinery treated by the parties as personal property.

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4. Vessels
5. Motor vehicles
6. House of mixed materials
7. House intended to be demolished
8. House built on rented land
9. House of strong materials
10. Machinery which is movable in its nature and becomes
immobilized only by destination or purpose

Mortgage of Improvements on Land


For purposes of the law, both growing crops and large cattle are
personal property although considered as immovable under Article 415,
NCC.
Subject matter of to be described and identified
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, otherwise, the mortgage is invalid.

Extent of Chattel Mortgage


Section 7, paragraph 4 of Act No. 1508 provides:
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 in the same depositary as the property originally
mortgaged, anything in the mortgage to the contrary notwithstanding.

- The coverage extends only to property described therein


- A stipulation including after-acquired property is valid and binding.
o In Renewal of or in substitution for goods on hand
o Purchased with the proceeds of the sale of such goods

Is Chattel Mortgage limited to existing obligations?


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, however, can only cover obligations existing at
the time the mortgage is constituted.

Creation of a Chattel Mortgage

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- The law provides for only one way: the registration of the personal
property in the Chattel Mortgage Register as security for the performance
of an obligation.
- If the property is situated in a different province from that in which the
mortgagor resides, the registration must be in both registers otherwise
the chattel mortgage is void.

Recording as a requirement for validity


Two views:

1. Recording required
2. Recording is not required

Period within which registration should be made


There is no specific time.
Venue of Registration

Where does he reside? Where will he register?


If he resides in the Philippines In the office of the Register of Deeds
of the province in which the
mortgagor resides at the time of the
making of the chattel mortgage.
If he does not reside in the In the province in which the property
Philippines is located
If the property is situated in the There must be double registration
province different from that in which the mortgage must be recorded in
the mortgagor resides both provinces

Effects of Registration

1. It Creates Real Right


- The registration gives the mortgagee symbolical possession.
2. It Adds nothing to the mortgage
- The registration adds nothing to the instrument, considered as a source
of title and affects nobodys rights except as a special notice.

Duty of Register of Deeds ministerial


Affidavit of Good Faith
What is an Affidavit of Good Faith?
It 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 purposes and that the
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same is a just and valid obligation and one not entered into for the purpose
of fraud. (Sec. 5, Act No. 1508.)

1. Effect of Absence It vitiates the mortgage only as against third persons


without notice like creditors and encumbrancers. The special affidavit is
required only for the purpose of transforming an already valid mortgage
into preferred mortgage.
2. Where the mortgage includes debt thereafter to be contracted

Registration of Assignment of Mortgage not Required

Financial Leasing Under the Financing Company Act of 1998

Liability of Third Person with the debtor

Equity of Redemption

1. When the condition of a chattel mortgage is broken the following may


redeem:
a. The mortgagor
b. A person holding a subsequent mortgage; or
c. A subsequent attaching creditor
2. An attaching creditor who redeems shall be subrogated to the rights of
the mortgagee and entitled to foreclose the mortgage in the same manner
that the mortgagee could foreclose it.
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.

Right acquired by second mortgagee and subsequent purchaser

1. Before payment of debt


2. After payment of debt

Right of mortgagee to possession

1. After default
2. Before default
3. Where mortgagor refuses to surrender possession
4. Where the right of mortgage conceded/disputed
5. Where third party claims title
6. Where claimant is an unpaid seller

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Foreclosure of Chattel Mortgage

1. Public Sale
- If the mortgagor defaultsin 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. He is permitted
only to recover his credit from the proceeds of the sale of the property at
a public auction through a public officer in the manner prescribed.
2. Private Sale
- There is nothing illegal, immoral or against public order in the agreement
for the private sale of the personal properties covered by the chattel
mortgage. The mortgagor is in estoppel to question it except on the
ground of fraud or duress.

Matters to be established to Effect Foreclosure

1. The existence of the chattel mortgage


2. The mortgagors default on the obligation

Civil Action to Recover credit

1. Independent action for enforcement not required


2. Mortgage lien deemed abandoned by obtaining a personal judgment

Period to Foreclose Mortgage


Section 14 of Act No. 1508 provides that the mortgagee may, after 30
days from the time the condition is broken, cause the mortgaged property to be
sold at public auction by a public officer.

Application of proceeds of sale

1. Costs and expenses of keeping and sale


2. Payment of obligation secured by mortgagee
3. Claims of persons holding subsequent mortgages in their order
4. The balance, if any, shall be paid to the mortgagor, or person holding
under him

Ordinary Action to recover possession of chattel


Action for replevin as a remedy

1. Nature of remedy
2. Where right of possession is not disputed
3. Where right of possession disputed
4. Inclusion of other parties
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5. Matters to be established

Right of Mortgagee to recover deficiency

1. Where mortgage foreclosed


2. Where mortgage constituted as security for purchase of personal
property in installments
3. Where mortgage property subsequently attached and sold

Right of mortgagor to balance of process

What are the offenses involving Chattel Mortgage?

A chattel mortgage does not transfer ownership of the property form the
mortgagor to the mortgagee, the mortgagor can still use the property, unless
there is a stipulation to the contrary.
Under the Revised Penal Code, the following acts are punishable:
(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 back of the mortgage and duly recorded in the
Chattel Mortgage Register. (Art. 319, Revised Penal Code.)
An essential element common to the two acts punished under Article 319
of the Revised Penal Code is that the property removed or repledged, as the
case may be, should be the same or identical property that was
mortgaged or pledged before such removal or pledging. The mortgagor is
not relieved of criminal liability even if the mortgage indebtedness is
thereafter paid in full, or the mortgagor-seller informed the purchaser that
the thing sold had been mortgaged. But the sale is valid although no written
consent was obtained from the mortgagee but the mortgagor lays himself
open to criminal prosecution.