CHATTEL MORTGAGE

What is a chattel mortgage?

In a chattel mortgage, personal property is recorded in the Chattel Mortgage

Registry as security for the performance of an obligation. (Art. 2140, Civil Code. Note
that the definition in Sec. 3, Act 1508 describing chattel mortgage as a "conditional sale"
is not accurate.)

What law governs chattel mortgages?

Primarily Act No. 1508, and the provisions of the Civil Code on pledge insofar as
they do not conflict with Act No. 1508.

What is the purpose of the chattel mortgage law?

The purpose of the chattel mortgage law is to promote business and trade and to
give impetus to the economic development of the country. (Torres v. Limjap, 56 Phil.
141; 1931)

What are the essential requisites of a chattel mortgage?

(1) Involves personal property (Note however the case of Tumalad v. Vicencio, 41
SCRA 143; 1971);
(2) Constituted to secure the fulfillment of the principal obligation;
(3) Mortgagor is absolute owner of the thing mortgaged;
(4) Persons constituting the mortgage have the free disposal of the property, or in the
absence thereof, are legally authorized for the purpose.

Note that recording of the chattel mortgage with the Register of Deeds, while necessary
to bind 3rd persons, is not an essential requisite.

What formal requirements must be observed in the preparation and execution of a

chattel mortgage?

(1) Substantial compliance with the form prescribed in Sec. 5 of Act No. 1508;

(2) The chattel mortgage must be signed in the presence of at least 2 witnesses;

(3) Affidavit of good faith;

The affidavit of good faith states that:

"We (the parties) severally swear that the foregoing 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." (Sec. 5)
 (4) Certificate of oath / Notarial acknowledgment;

(5) Sufficiency of description

PROPERTY COVERED BY CHATTEL MORTGAGE

What kind of property can be the subject of a chattel mortgage?

As a general rule, only personal property can be the subject of a chattel

mortgage. However, the following kinds of property, although not personalty, have been
deemed validly covered by a chattel mortgage:

Growing crops (Sec. 6, Act 1508);

House built on another person's land (Tumalad v. Vicencio, 41 SCRA
143; 1971)
Machinery permanently affixed to a building, under the doctrine of
estoppel (Makati Leasing v. Wearever Textile, 122 SCRA 296; 1983)

Can future or after-acquired property be the subject of chattel mortgage?

Yes, provided that the after-acquired property is either (1) in renewal of, or in
substitution for, goods on hand when the mortgage was executed, or (2) purchased with
the proceeds of the sale of such goods. (Torres v. Limjap, 56 Phil. 141; 1931)

Can like or substituted property be deemed covered by a chattel mortgage?

No. Sec. 7 of Act 1508 expressly provides that a chattel mortgage covers only
the property described therein and not like or substituted property thereafter acquired by
the mortgagor and placed in the same depository as the property originally mortgaged,
anything in the mortgage to the contrary notwithstanding.

Note however that this provision does not apply to drug stores, bazaars and all
other stores in the nature of a revolving and floating business, i.e. one that deals with the
sale of either perishable goods, "rolling" goods, or goods subject to wear and tear.
(Torres v. Limjap, 56 Phil. 141; 1931)

Can a chattel mortgage cover after-incurred obligations or debts subsequently

contracted?

No. A chattel mortgage can only cover obligations existing at the time the
mortgage is constituted. (Acme Shoe, et al. V. CA, G.R. 103576, Aug. 22, 1996)

REGISTRATION

In what place should a chattel mortgage be registered?

If residing in Philippines: place of residence of mortgagor

If residing abroad: province where the property is located

 If residence and location of
property are different: In both place of residence of mortgagor
and location of property

Exception: If the amount of the mortgage is > P 500,000.00, the parties

to the mortgage contract may agree to have the mortgagee
registered only in the place where the property is located,
and that shall be sufficient. (Sec. 198, Revised
Administrative Code)

In addition to the foregoing, in what other registry or register should a chattel

mortgage be registered or recorded?

Motor vehicles: Land Transportation Office where vehicle is

Registered

Shares of stock: Register of Deeds where the corporation has its

principal office. Note: There is no need for notation
in the books of the corporation. (Chua Guan v.
Samahang Magsasaka, 62 Phil. 472; 1935)

Vessels: Philippine Coastguard

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)

Motor vehicle which is Land Transportation Franchising and Regulatory

public utility and loan Board (LTFRB)
is not repayable within
1 year:

When should a chattel mortgage be registered?

Act No. 1508 does not prescribe any period within which a chattel mortgage must
be registered.

JUNIOR MORTGAGEES

Can personal property already mortgaged be mortgaged again? In such a case,

what is the right of the subsequent or junior mortgagees?

Yes. In such a case, junior mortgagees have the right of redemption within the
period of redemption allowed by law, for as long as the mortgagor has not yet exercised
his right of redemption.
DEFAULT AND FORECLOSURE

Does the default of the mortgagor have the effect of vesting ownership of the
mortgaged property on the mortgagee? In other words, could he appropriate the
property to himself?

No. He is only permitted 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 Sec. 14 of
Act No. 1508. Pactum commissorium is prohibited.

What is the procedure for foreclosure of chattel mortgages?

(1) 30 days after the condition of the chattel mortgage is broken, the mortgagee
(or his executor, administrator or assign) may cause the mortgaged property
(or any part thereof) to be sold at public auction.
(2) At least 10 days before the sale, the mortgagor and all junior mortgagors
must be informed in writing of the time, place and purpose of the sale. The
notice of sale must likewise be posted in at least 2 public places in the
municipality where the mortgagor resides or where the property is situated.

Who may bid in the foreclosure sale?

At the public auction, the mortgagor or owner may bid. He shall, moreover, have
a better right if he should offer the same terms as the highest bidder. (This implies the
right to match.) The mortgagee may also bid, but his offer shall not be valid if he is the
only bidder. (Art. 2113, Civil Code)

DEFICIENCY

Can a chattel mortgagee sue for a deficiency following foreclosure?

As a general rule, yes, a chattel mortgagee can sue for a deficiency judgment following
foreclosure.

However, 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)

What is the Recto law?

The Recto law, which is now reflected in Articles 1484-1485 of the Civil Code, which
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);

(b) 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.);

(c) 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)

SPECIFIC PERFORMANCE

In sales on installments, where the action instituted is for specific performance

and the mortgaged property is subsequently attached and sold, the sale thereof does not
amount to a foreclosure of the mortgage. Hence, seller is entitled to a deficiency
judgment. (Southern Motors v. Moscoso, 2 SCRA 168; 1961)

REDEMPTION

What are the rules on redemption of property subject to chattel mortgage?

Since the Chattel Mortgage Law does not contain provisions similar to Sec. 6 & 7
of Act No. 3135 governing extra-judicial foreclosure of real estate mortgage, the
provisions of Rule 39 of the Rules of Court on redemption in case of execution sales will
apply. (IFC Service Leasing v. Nera, 19 SCRA 181)

(Please include short digests/ ratios of the following cases:

Levy Hermanos, Inc. v. Pacific Commercial, 71 Phil. 587

Cruz v. Filipinas Investment, 23 SCRA 791
Ridad v. Filipinas Investment, 205 Phil. 197
Filipinas Investment v. Vitug, 28 SCRA 658)
 Distinctions between pledge, chattel mortgage
and real estate mortgage

Pledge Chattel Mortgage Real Estate

Mortgage

Kind of Personal or movable Personal or movable Real or immovable

property property property property
involved

Consent Consent of pledgee need Consent of mortgagee to

not be in writing but may the sale of the thing must
be oral. be in writing and
annotated on the back of
the mortgage instrument.

Recording / Not recorded. Instead, the Must be recorded in the

Registration thing pledged (a movable) Chattel Mortgage
is delivered to the creditor. Register to bind 3rd
persons.

Formal Pledgor not required to Mortgagor must execute Affidavit of good faith not
requirements execute an affidavit of an affidavit of good faith, required.
good faith. in addition to the other
formal requirements.

Entitlement Pledgee is entitled to the Mortgagee is not entitled

to proceeds entire proceeds of the sale to the entire proceeds of
of sale in even if it exceeds the the sale but only to a
event of amount of the debt. portion thereof sufficient
foreclosure to pay the mortgage debt.

Recovery of Pledgee is not entitled to Generally, mortgagee is

deficiency by recover deficiency. entitled to recover
creditor deficiency.

Exception: sale of
personal property in
installments

Alienation of Mortgagor cannot alienate Mortgagor can alienate

thing the thing mortgaged the thing mortgaged
without the written without the consent of the
consent of the mortgagee mortgagee. Any
annotated on the back of stipulation prohibiting
the mortgage instrument. such alienation is void.

Redemption Redemption may be JUDICIAL SALE:

made only before the Property may be
sale thereof. redeemed after it is
judicially sold, but before
judicial confirmation of the
sale. (equity of
redemption)
EXTRAJUDICIAL SALE:
Within one year from and
after the date of sale.
(right of redemption)

Note, however, that in the

case of juridical persons,
the right of redemption
can only be exercised
within 3 months from the
date of sale. (RA 8791,
Sec. 47)
 EXTRAJUDICIAL FORECLOSURE OF REAL ESTATE
MORTGAGE

GOVERNING LAW

Act 3135, as amended by Act No. 4118 and Sec. 47, R.A. 8791 (General
Banking Law of 2000) governs sales made under a special power inserted in or attached
to any real estate mortgage made as security for the payment of money or the fulfillment
of any other obligation.

(Also, there is a SC circular that outlines the procedure for foreclosure of Real
Estate Mortgages. Unfortunately, hindi ko alam yung number. Please find it
nalang.)

FORECLOSURE SALE

TYPE OF SALE: Public auction

VENUE OF SALE: Province where the property is situated

If venue is subject to stipulation, such sale shall be made in said

place (i.e., the place so stipulated) or in the municipal building of
the municipality in which the property or part thereof is situated.

NOTICE: Notices of the sale are to be posted in at least 3

public places of the municipality or city where the
property is situated for not less than 20 days. Such
notice shall likewise be published once a week for
at least 3 consecutive weeks in a newspaper of
general circulation in the municipality or city.

TIME OF SALE: Between 9 AM and 4 PM

WHO MAY BID: The creditor;

The trustee;
Other persons authorized to act for the creditor;
Other bidders not privy to the mortgage or trust deed

PROCEDURE:

(1) The mortgagee files an application for foreclosure with the

Executive Judge through the Clerk of Court, who will receive
and docket the application and collect the appropriate filing
fees. (SC Circular)

(2) Notice of the sale is posted in at least 3 public places of the

municipality or city where the property is situated for not less
than 20 days and published once a week for at least 3
 consecutive weeks in a newspaper of general circulation in
the municipality or city. (Sec. 3, Act 3135)

(3) The auction sale is conducted under the direction of the

sheriff, the Executive Judge, or a notary public of the
municipality. (Sec. 4, Act 3135)

At the sale, the creditor, trustee, or other persons authorized

to act for the creditor may participate in the bidding and
purchase under the same conditions as any other bidder
unless the contrary has been expressly provided in the
mortgage or trust deed under which the sale is made. (Sec.
5, Act 3135)

There must be at least 2 participating bidders for the auction

sale to be valid. (SC Circular)

(4) Once the sale has been confirmed, the Clerk of Court issues a
certificate of sale to the winning bidder. (Confirm this!)

(5) After the date of the confirmation of the auction sale, the
winning bidder has the right to enter upon and take
possession of such property and administer the same in
accordance with law. (Sec. 47, R.A. 8791)

Within 30 days after the purchaser is given possession of the

property, the debtor may petition that the sale be set aside on
the ground that the mortgage was not violated or the sale was
not made in accordance with the provisions of Act 3135.
(Sec. 8, Act 3135)

(6) Upon failure of the debtor to redeem the property within the
period allowed him by the law, absolute ownership over the
purchased property vests in the winning bidder.

POSSESSION

The purchaser at the auction sale has the right to enter upon and take
possession of the property immediately after the date of the confirmation of the auction
sale and administer the same in accordance with law. (Sec. 47, R.A. 8791, amending
Sec. 7 of Act 3135)

REDEMPTION

WHO MAY REDEEM: (1) The debtor;

(2) The debtor's successors-in-interest;
(3) Any judicial creditor or judgment creditor of the
debtor;
 (4) Any person having a lien on the property
subsequent to the mortgage or deed of trust under
which the property is sold

PERIOD FOR REDEMPTION:

Natural persons: Within 1 year from and after the date of the sale
(Sec. 6, Act 3135)

Juridical persons: Until but not after the registration of the certificate
of foreclosure sale with the applicable Register of
Deeds, which in no case shall be more than 3
months after foreclosure, whichever is earlier.
(Sec. 47, R.A. 8791)

EFFECT OF INADEQUACY OF PRICE

When there is a right to redeem, inadequacy of price is of no moment for

the reason that the judgment debtor always has the chance to redeem and
reacquire the property. In fact, the property may be sold for less than its fair
market value precisely because the lesser the price the easier for the owner to
effect a redemption. (Valmonte v. CA, 303 SCRA 278, citing DBP v. Moll, 43
SCRA 82)

EFFECT OF REQUEST FOR EXTENSION OF TIME ON RIGHT TO QUESTION

VALIDITY OF FORECLOSURE SALE

The act of seeking an extension of the redemption period estops the

mortgagors from questioning the foreclosure sale thereafter. (Valmonte v. CA,
303 SCRA 278)