ACT 1508 The Chattel Mortgage Law

Maria Elsa J. Sabularse Legal Aspects of Tax and Business MBA 6:00 9:00 PM February 19, 2013
Atty. Leopoldo San Buenaventura Professor

University of Sto. Tomas, Graduate School

February 12, 2013

Agenda
Purpose of Chattel Mortgage Chattel Mortgage Definition Nature of Chattel Mortgage Difference between Chattel Mortgage and Pledge Essential Requisites to Chattel Mortgage Proper Subject Matter of Chattel Mortgage Liabilities and Remedies of the Creditor Deficiency Judgement Recto Law Case Analysis: Colarina vs. Magna Financial Services

Purpose of Chattel Mortgage Law

To promote business and trade To foster economic development of the country

What is Chattel Mortgage?

Article 2140. By 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 a creditor or a third person, the contract is a pledge and not a chattel mortgage. Article 2141. The provisions of this Code on pledge, insofar as they are not in conflict with the Chattel Mortgage Law shall be applicable to the Chattel Mortgages. Governed by Civil Code and Act 1508 entitled the Chattel Mortgage Law

Nature of Chattel Mortgage

A Security
The Chattel Mortgage Law provides for the recording of a personal property in the Chattel Mortgage Registry as a security for the performance of an obligation Not a conditional sale of a personal property given as a security for the payment of a debt according to the Code of Commission Chattel Mortgage is a security arrangement to support a primary contract

Personal Property vs. Real Property

Personal Property
Possessions other than real estate or buildings Is movable and includes tangible (e.g. appliances, car, furniture, jewelry) and Intangibles (e.g. bonds, shares or stocks) items whose ownership belongs to individuals. Also called chattels

Real Property
Land or anything fixed, immovable or permanently attached to it such as buildings, fences, fixtures, improvements, roads, shrubs, structures, utility systems and walls. Title includes title to air rights, mineral rights, and surface rights which can be bought, leased, sold, or transferred together or separately. Ref: http:/www.businessdictionary.com

Real Nature of A Mortgage

Art 2126: Creates real right following the property
In case of transfer of property by the mortgagor, transferee must respect the mortgage A registered mortgage lien cannot be separated from the property

Art 2129: Mortgage property can still be foreclosed despite its transfer
Even if property is in possession of the debtor, creditor is protected by way of registration

What happens if Chattel is not registered?

Mortgage between immediate parties remains valid and effective In the case of 3rd parties, mortgage is void if unregistered

Essential Requisites to the contracts of pledge and mortgage

Involves personal property Constituted to secure the fulfilment of a principal obligation Pledger or mortgagor be the absolute owner of the thing pledged or mortgaged Persons constituting the pledge or mortgage have free disposal of their property or legally authorized for the purpose

Chattel Mortgage vs. Pledge

Chattel Mortgage Refers to personal property Accessory to contracts Debtor retains possession of property mortgaged there can be recovery of deficiency in judgement

Pledge Refers to personal property Accessory to contracts Creditor takes possession of property pledged No recovery of deficiency in judgement

Formal Requirements in the preparation and execution of the Chattel Mortgage?

Substantial compliance with the form prescribed in Section 5 Act 1508 Chattel Mortgages must be signed in the presence of at least 2 witnesses Affidavit of good faith Certificate of Oath/notarial acknowledgement Sufficiency of description

Proper Subject Matter of Chattel Mortgage

Movables by Contractual Obligation
Personal Property IP rights Furniture, etc. Growing Crops (Sec 6 Act 150)

Machinery Permanently affixed to a building

House Built on another persons land

Case: Tsai v. Court of Appeals 366 SCRA 324(2011)

Facts: To secure an obligation, parties executed chattel mortgage over equipment and machinery which were permanently affixed to the plant. The security contract covers lien of after-sales contract Issue: Can after acquired equipment and machinery be foreclosed under principles of Real Estate Mortgage, since they constitute Real Property rather than personal property subject to Chattel Mortgage? Ruling: No. Because a chattel mortgage shall be deemed to cover only the property described and not the substituted property acquired by mortgagor and placed in the same depository as the property originally mortgaged.

QUESTIONS:
Question: Can future or after-acquired property be the subject of Chattel Mortgage? Answer: Yes. Conditions:
1. After-acquired property is in renewal, or in substitution for good on hand when the mortgage was executed 2. Purchased with the proceeds of the sale of such goods

Torres V. Limjap 56 Phil. 141 GR No.34386 , Sept. 21, 1931

Facts:
On 16 April 1930, Torres raised cases against Limjap before the Court of First Instance to secure the possession of 2 drug stores located in the city of Manila, covered by two chattel mortgage executed by the deceased John B. Henson in favor of the plaintiff In the first case the plaintiffs alleged that Jose B. Henson, had executed in their favor, a chattel mortgage on his drug store at Nos. 101-103 Calle Rosario, known as Farmacia Henson, to secure a loan of P7,000, although it was made to appear in the instrument that the loan was for P20,000. In the second case the plaintiffs alleged that they were the heirs of the late Don Florentino Torres; and that Jose B. Henson executed in favor of Don Florentino Torres a chattel mortgage on his three drug stores known as Henson's Pharmacy, Farmacia Henson and Botica Hensonina, to secure a loan of P50,000, which was later reduced to P26,000, and for which, Henson's Pharmacy at Nos. 71-73 Escolta, remained as the only security by agreement of the parties. In both cases the plaintiff argues that the defendant had violated the terms of the mortgage, thus, they have the right to take in possession and foreclose the chattel mortgage

Torres V. Limjap 56 Phil. 141 GR No.34386 , Sept. 21, 1931

Issue: Should Torres camp be allowed to take possession of the drugstores? Lower Court Decision: In favor of Torres Higher Court Decision: Affirmed Reasons:
A stipulation in the mortgage, extending its scope and effect to afteracquired 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, etc. (11 C.J., p. 436.)

Source: http://www.lawphil.net/judjuris/juri1931/sep1931/gr_34385_1931. html

QUESTIONS:
Question: Can chattel mortgage cover afterincurred (future) obligations or debts subsequently contracted? Answer: No Reason: Chattel mortgage can only cover obligations existing at the time the mortgage is constituted

Affidavit of Good Faith

An oath 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 void obligation and one not entered into for the purpose of fraud. debt or obligation referred to is current not a condition that is being anticipated or may exist in the future

Registration Requirements
General Rule: Chattel Mortgage must be registered with Register of Deeds where debtor resides to bind third persons However: Pursuant to Art. 2125 of Civil Code, chattel mortgage is binding between mortgagor and mortgagee even if not registered Place of Registration
Place of residence of mortgagor (if residing in Phils.) Province where the property is located (if living abroad) In both place of residence of mortgagor, if residence and location of property are different

Registration Requirements to make chattel mortgage binding against 3rd parties:

Shares of Stock
Double Registration: Register of Deeds where 1) debtor resides and 2) corporation has its principal office

Motor Vehicle
Triple Registration: Register of Deeds where 1) debtor resides, 2) where the motor vehicle is located 3) with LTO

Sea Vessels
Philippine Coast Guard Bureau of Customs in Manila (if in Manila) Office of the Collector of Customs in the port of entry (if outside Manila) Registration is governed by Ship Mortgage Decree (P.D. 1521, 1978)

Liabilities
Where debtor performs and creditor refuses to release the mortgage, debtor may go to court for relief Art 319 of the Revised Penal Code on Crimes on Chattel Mortgage
Knowingly removing any personal property mortgage under Chattel Mortgage Law to any province or city other than where it was located when the mortgage was executed without written consent of the mortgagee Selling or pledging personal property already mortgaged without the consent of the mortgagee and duly recorded in the Chattel Mortgage Register

Remedies of Creditor
Extrajudicial Foreclosure
Presupposes a voluntary surrender to sheriff of personal property by debtor; Creditor then files an affidavit outlining right to possession and sale through public auction or private sale (depending on agreement between parties)

Should Debtor Refuse to Surrender Property

Creditor may take preliminary step of replevin and once he has possession, proceed to public auction

Remedies of Creditor
Creditor cannot forcibly take possession of the chattel, but must seek court remedy to obtain possession mortgage cannot just take possession and appropriate the chattel, since that would constitute pactum commissorium, his remedy is to foreclose

Procedure for Foreclosure of Chattel Mortgages

30 days after the mortgage is broken, the mortgagee may sold the mortgaged property at public auction At least 10 days before the sale, the mortgagor must be informed in writing on time, place and purpose of the sale. The notice of sale must be posted in at least 2 public places - in the municipality where the mortgagor resides or where the property is situated The mortgagor or owner may bid with the right to match the highest bidder. The mortgagee may also bid, but his offer shall not be valid if he is the only bidder (Art 2113 Civil Code)

Deficiency Judgement
General Rule:
Creditor shall always be entitled to collect the deficiency judgment (Case: G.R. No. 106435, July 14, 1999) When the proceeds of the sale property is insufficient to cover the debts in extrajudicial foreclosure, the mortgagee may claim deficiency judgement 10 years prescriptive period (Art. 1142)

Exceptions
If mortgagor failed to pay 2 or more instalments and unpaid creditor decides to foreclose the mortgage, no deficiency judgement under the Recto Law (Art 1484 of the Recto Law

Pameca Wood Treatment Plant V. DBP GR106

Facts:
On April 17, 1980, Pameca Wood Treatment Plant, Inc. obtained a loan of US$267, 881.67 or Php2M from DBP PAMECA through its President, Hermiginio Teves, excuted a promissory note for said amount, promising to pay the loan by instalment A chattel mortgage was executed over PAMECAs property in Dumaguete City including inventories, furniture and equipment to cover the whole value of the loan PAMECA failed to pay, thus, on Jan. 18, 1984 ; DBP had foreclosed the chattel mortgage and as the sole bidder, purchased the foreclosed properties for PhP322, 350. On June 29, 1984, DBP filed a complaint for the collection of the balance of Php4,366,332.46 at Regional Trial Court in Makati City against petitioner PAMECA and the private petitioners

Pameca Wood Treatment Plant V. Hon. Court of Appeals and DBP

Issue: Should DBP, as the creditor, be allowed to Collect Deficiency Judgment? RTC Ruling:In favor of DBP PAMECA , Herminio Teves et. al, were ordered to pay on instalment basis the deficiency claim of Php4,366,332.46 as of March 31, 2013 Plus 21% interest per annum and other charges from April 1, 1984 until the whole amount is fully paid Costs incurred during the lawsuit Case was appealed to the Court of Appeals by Pameca on the following grounds: The public auction was tainted with fraud Failure to apply by analogy Art. 1484 and Art 2115 (Civil Code) Pameca merely signed the promissory note as a matter of practice by the banks CA Decision in favor of CA and DBP Supreme court affirmed the lower courts decision.

477 SCRA 538 Facts

On 11 June 1997, Elias Colarina bought on installment from Magna Financial Services Group, Inc., one (1) unit of Suzuki Multicab Colarina gave a down payment and executed a promissory note for the balance of P229,284.00 payable in thirty-six (36) equal monthly installments at P6,369.00 monthly, beginning 18 July 1997. Colarina executed an integrated promissory note and deed of chattel mortgage over the motor vehicle. But she failed to pay, despite reprimands, the monthly amortization, thus, accumulating an unpaid balance

477 SCRA 538 Facts continued

Magna Financial Services Group, Inc. filed a Complaint for Foreclosure of Chattel Mortgage with Replevin before the Municipal Trial Court in Cities (MTCC), Branch 2, Legaspi City, docketed as Civil Case No. 4822 . Upon the filing of a Replevin Bond, a Writ of Replevin was issued by the MTCC. On 27 December 2000, summons, together with a copy of the Writ of Replevin, was served on Colarina who voluntarily surrendered physical possession of the vehicle to the Sheriff, Mr. Antonio Lozano. On 02 January 2001, the aforesaid motor vehicle was turned over by the sheriff to Magna Financial Services Group, Inc. On 12 July 2001, Colarina was declared in default for having filed his answer after more than six (6) months from the service of summons upon him. Thereupon, the trial court rendered judgment based on the facts alleged in the Complaint.

MTC and RTC Ruling

In favor of Magna Financial Services Group As per court judgement Colarina was required to:
a) b) c) d) Pay the principal sum plus penalty charges Pay P10,000.00 for attorneys fees; and Pay the costs Pay money judgement within ninety (90) days from the entry of judgment. e) In case of default in such payment, the one (1) unit of Suzuki Multicab, subject of the writ of replevin and chattel mortgage, shall be sold at public auction to satisfy the said judgment.

Court of Appeals Ruling

In-favor of Colarina
CA found error in the previous courts judgement Pursuant to Art. 1484 of the Civil code, the defendant should not be required to pay the unpaid balance because it was inconsistent with the instant complaint which was for the foreclosure of its chattel mortgage The Supreme Court Affirmed the CA decision on January 21, 2003.

The Recto Law

Reflected in Articles 1484 1485 of the Civil Code Provides that in a contract of sale of personal property, the price of which is payable in instalments Vendor Remedies:
Exact fulfilment of the obligation, should the vendee fail to pay Cancel the sale, if vendee failed to pay 2 or more instalments; the vendor gets back the object sold and retains instalments paid, provided it was stipulated in the contract Foreclose the chattel mortgage on the thing sold should vendor failure to pay covers 2 or more instalments. No option to recover balance of the price. Any agreement to the contract is void.

Definition of Legal Terms

Pactum Commissorium
Stated in Article 2088 of the Civil Code Its a clause in the contract that gives the creditor automatic right to be the owner of the personal property mortgaged if the mortgagor fails to deliver to the terms payment for the mortgaged property. It is prohibited by law. (http://www.pinoy-reviews.com/2008/03/what-is-pactumcommissorium.html)

Deficiency of Judgement Court order associated with foreclosures Makes you personally liable for unpaid debt Occurs when the value of the foreclosed property is unable to pay off the loan (http://banking.about.com/od/loans/a/deficiencyjudg.html)

Definition of Legal Terms

Replevin
Rule 60 Complaint that seeks to claim or repossess personal property on mortgage (http://philippinelaw.info/supreme-courtissuances/rule60-replevin.html)

References
Villanueva, C,L., Commercial Law Review (2004) http://sc.judiciary.gov.ph/jurisprudence/2005/dec2005/15863 5.htm http://philippinelaw.info/supreme-court-issuances/rule60replevin.html http://attyalvinclaridades.wordpress.com/2012/06/21/chattel -mortgage-article-2085-to-2123-2140-to-2141-of-the-civilcode-act-no-1508-as-amended-with-affidavit-of-good-faith/ http://www.pinoy-reviews.com/2008/03/what-is-pactumcommissorium.html http://banking.about.com/od/loans/a/deficiencyjudg.html