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 150);

� 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 65

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 27

CHATTEL MORTGAGE

(ARTICLES 2140-2141, CHATTEL MORTGAGE LAW) Art. 2140. 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. (n)

CHATTEL MORTGAGE > Contract by virtue of which personal property is recorded in the Chattel Mortgage Register as security for the performance of an obligation

CHARACTERISTICS 1. Accessory contract 2. Formal contract

WHAT MAKES IT DIFFERENT FROM A PLEDGE? 1. Delivery of the personal property to the mortgagee is not necessary 2. The registration in the Register is required by law 3. Procedure for the sale of the thing is different

4. If the property is foreclosed and there is excess, the amount goes to the debtor 5. If there is deficiency, the creditor may recover the deficiency

WHEN DO YOU DO A Chattel Mortgage OR PLEDGE? > When property needs to be retained by the debtor, then opt for a chattel mortgage Art. 2141. 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. (n)

LAWS GOVERNING CHATTEL MORTGAGE 1. Chattel mortgage law, Act 1508 2. Civil Code provisions 3. Revised Administrative Code 4. Revised Penal Code

OFFENSES INVOLVING CHATTEL MORTGAGE 1. Knowingly removing personal property mortgaged 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 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 mortgage written on the back of the mortgage and duly recorded in the CM Register

REGISTRATION > Registration shall be done in the Register of Deeds where the mortgagor resides

> And when the property is situated somewhere else, it needs to be registered also in the Register of Deeds of the area where the property is situated > Chattel mortgage would not be valid and binding as against third persons absent any registration > If what is mortgaged is a car, registration with the LTO is also needed. Absent this, again, it would not be binding and invalid as against third persons

FORM OF CONTRACT AS STATED IN THE LAW. > Theoretically, the mortgagor may sign the contract alone but practically, the mortgagee must sign also given that they both need to sign the affidavit of good faith

AFFIDAVIT OF GOOD FAITH > Part of the chattel mortgage contract wherein it is stated that the chattel mortgage has been constituted to secure a principal obligation and not meant for fraud or any ill purpose > It is possible to defraud using mortgage. You can take away property through mortgage from an unsecured creditor.

FORMAL REQUIREMENT OF DESCRIPTION OF PROPERTY > Attach a description or schedule of the properties mortgaged > There is also the requirement of payment of registration fees and documentary stamp taxes

FORECLOSURE (SIMILAR BUT NOT IDENTICAL WITH REM) SECTION 14, CHATTEL MORTGAGE LAW 1. There is a 30-day cooling off period before the public auction, from the time the condition is broken

2. Notice—at least 10 days notice of the time, day, place, and purpose of such sale has been posted at 2 or more public places in such municipality. Personal notice or mail shall also be given to the mortgagor or person holding under him and the persons holding subsequent mortgages of the time and place of sale. 3. Sheriff should possess the property as he needs to deliver the same to the winning bidder. If the mortgagor refuses to do so, the mortgagee can seek the help of the court. There could also be a stipulation in the contract as well. But if the debtor is not willing and able, the loss is with the creditor. 4. There is a 30-day equity of redemption period (payment of obligation) 5. After foreclosure, there could be recovery of deficiency, but there is Recto Law (1484) pertaining to sale of personal property in installments and there is a Chattel Mortgage to secure payment of price.

AN ACTION FOR SPECIFIC PERFORMANCE IS TANTAMOUNT TO THE ABANDONMENT OF RIGHTS OF MORTGAGEE

APPLICATION OF PROCEEDS OF FORECLOSURE 1. Costs 2. Obligation itself. Pay first the interest and then the principal. If there is penalty, then pay it first. 3. Junior encumbrances 4. Owner