Chapter 8. Chattel Mortgage A.

General Concepts

Art. 2085. The following requisites are essential to the contracts of mortgage (1) That they be constituted to secure the fulfillment of a principal obligation; (2) That the pledgor be the absolute owner of the thing pledged; (3) That the persons constituting the pledge have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the mortgage consists may be alienated for the payment to the creditor. (1858) 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) 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)
Under the Chattel Mortgage Law (Act 1508) previously defined a chattel mortgage as: A conditional sale of personal property as security for the 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is thereby divested of his title; Originally, therefore, it was similar to a pacto de retro sale; However, the CC repealed this definition; Chattel mortgage: Real security transaction constituted to secure the fulfilment of a principal obligation by the absolute owner (mortgagor) of personal property who has free disposal of the property, and in the absence thereof, is legally authorized for the purpose; Perfected by the recording of the personal property in the Chattel Mortgage Register as a security; Subjects the collateral to the condition that when the principal obligation becomes due, the collateral may be alienated for payment to the creditor (mortgagee);

2140 adheres to the equitable concept of a chattel mortgage; nevertheless, the act of recording grants the chattel mortgage the symbolic possession of collateral; Purpose: greatly facilitates the sale of goods and merchandise in commercial transaction; sales would be sluggish and insubstantial if a chattel mortgage did not adequately protect sellers against the defaults and delinquencies of buyers;

B. Form of Chattel Mortgage C. Obligations Secured

Affidavit of Good Faith required by CML; states that the chattel mortgage is: 1. Made solely for the purpose of securing the obligation specified in the chattel mortgage; and 2. The principal obligation is a just and valid obligation, and one not entered into for the purpose of fraud; Unlike a pledge, a chattel mortgage can only cover obligations existing at the time the mortgage is constituted; It cannot secure after-incurred obligations even if these future debts were accurately described; stems from the fact that parties need to make an oath; Consequently, an increase or an extension of the chattel mortgage obligation becomes a new chattel mortgage in itself, and will take effect only from the date the same are made and not from the date of the original chattel mortgage;

Contract to Mortgage: Although a contract to mortgage includes future debts is a binding commitment, the contract of chattel mortgage itself is not perfected until after an agreement covering the newly contracted debt is executed conformably with the form prescribed by the CML; Refusal on the party of the debtor to execute the agreement so as to cover the after-incurred obligation may constitute and event of default of the contract to mortgage; But the remedy of foreclosure will only cover the debts existing at the time of constitution of the contract of chattel mortgage; ACME Shoe, Rubber and Plastic Corp v CA 1996 1. 1978, Chua Pac (then president and general manager of Acme) executed, for and in behalf of the company, a chattel mortgage in favour of the Producers Bank of the Philippines; The mortgage stood as security for the companys loan of 3 million pesos; A provision in the mortgage agreement provided that in case the mortgagor executes a subsequent

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promissory note or accommodation, the mortgage shall also stand as security for the payment of said promissory note or accommodation without executing a new contract; that the mortgage shall also stand as security for said obligations of whatever kind and nature, whether such obligations have been contracted before, during or after the constitution of the mortgage; In due time, the 3 million pesos loan was paid; Another loan was made worth 2.7 million pesos and was also duly paid; In 1984, another loan was extended by the bank for 1 million pesos covered by 4 promissory notes for 250k each; Due to financial constraints, the loan wasnt settled at maturity; The bank then applied for extrajudicial foreclosure: A complaint was filed by petitioner company but was dismissed; RTC then ordered the foreclosure of the chattel mortgage; CA affirmed.

property encumbered can be alienated for the payment of the obligation, but that should the obligation be duly paid, then the contract is automatically extinguished proceeding from the accessory character of the agreement; Chattel mortgage: While a pledge, real estate mortgage, or antichresis may exceptionally secure afterincurred obligations so long as these future debts are accurately described, 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 debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law; Refusal on the party of the debtor to execute the agreement so as to cover the after-incurred obligation may constitute and event of default of the contract to mortgage; But the remedy of foreclosure will only cover the debts existing at the time of constitution of the contract of chattel mortgage; Court rules: A chattel mortgage must comply with the form prescribed by the Chattel Mortgage Law itself; One of the requisites under section 5 thereof is an affidavit of good faith; While it is not doubted that if such an affidavit is not appended to the agreement, the chattel mortgage would still be valid between the parties (not against third persons acting in good faith), the fact, however, that the statue provided that the parties must execute an oath makes it obvious that the debt referred into the law is a current, not an obligation that is et merely contemplated; Here, the only obligation specified in the contract was the 3 million pesos loan which petitioner fully paid; By virtue of section 3 of the CML, the payment of such automatically rendered the mortgage void or terminated; Belgian Catholic Missionaries v Magallanes: a mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage; So, since the 1978 chattel mortgage already ceased, there no longer was any chattel mortgage that could cover the new loans that were concluded thereafter;

Issue: W/N the clause in the mortgage agreement that purports to likewise extend its coverage to obligations yet to be contracted or incurred valid. No. Ratio: Contracts of security are Either real or personal; Contracts of personal security: Guaranty or Suretyship; The faithful performance of the obligation by the principal debtor is secured by the personal commitment of another (the guarantor or surety); Contracts of real security: E.g. pledge, mortgage or antichresis; Fulfilment is secured by an encumbrance of property: o Pledge placing of movable property in the possession of the creditor; o Chattel mortgage execution of the corresponding deed substantially in the form prescribed by law; o Real estate mortgage execution of a public instrument encumbering the real property covered thereby; o Antichresis by a written instrument granting to the creditor the right to receive the fruits of an immovable property with the obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal of his credit; Essential condition: if the principal obligation becomes due and the debtor defaults, then the

CA DECISION SET ASIDE without prejudice to the appropriate legal recourse by private respondent. D. Object of Chattel Mortgage

Art. 2124 movables may be the object of a chattel mortgage. Art. 416. The following things are deemed to be personal property: 1. Those movables susceptible of appropriation which are not included in the preceding article; 2. Real property which by any special provision of law is considered as personal property; 3. Forces of nature which are brought under control by science; and 4. In general, all things which can be transported from place to place without impairment of the real property to which they are fixed. (335a) Art. 417. The following are also considered as personal property: 1. Obligations and actions which have for their object movables or demandable sums; and 2. Shares of stock of agricultural, commercial and industrial entities, although they may have real estate.
Act No. 1508, Sec. 2. All personal property shall be subject to mortgage, agreeably to the provisions of this Act, and a mortgage executed in pursuance thereof shall be termed chattel mortgage. Makati Leasing & Finance Corporation v Wearever Textile Mills, Inc & CA | 1983 To obtain financial accommodations from petitioner, Wearever Textile discounted and assigned several receivables to former under a Receivable Purchase Agreement. To secure the collection of such, WT executed a Chattel Mortgage over certain raw materials inventory as well as machinery described as Artos Aero Dryer Stentering Range. WT defaulted so petitioner filed for extrajudicial foreclosure of the properties mortgaged to it. However, the foreclosure attempt failed because the Deputy Sheriff failed to gain entry into WTs premises. Petitioner then filed a complaint for judicial foreclosure. The CFI issued a writ of seizure but its enforcement was restrained after WTs filing an MFR. After several incidents, the CFI finally ordered the lifting of the restraining order for the enforcement of the writ of seizure and also ordered to break open the premises of WT to enforce said writ. It denied WTs MFR. The sheriff enforcing the seizure order went to the WTs premises and removed the main drive motor of the subject machinery. WT went to CA which set aside the orders of the CFI and ordered the return of the machinery

after ruling that the machinery cannot be subject of replevin, much less of a chattel mortgage, because it is a real property pursuant to 415, the same being attached to the ground by means of bolts. CA rejected petitioners argument that WT is estopped from claiming that the machine is real property by constituting a chattel mortgage thereon. Issue: W/N the subject machinery is real property. No. Ratio: Personal property by intention of the parties. In Tumulad v Vicencio (JBL Reyes): although there is no specific statement referring to the subject house as personal property, yet by ceding, selling or transferring a property by way of a chattel mortgage defendantsappellants could only have meant to convey the house as chattel, or at least, intended to treat the same as such, so that they should not now be allowed to make an inconsistent by claiming otherwise; Also, the lot was a rented lot to which defendants-appellants merely had a temporary right as lessee; (this fact alone does not determine the status of the property but it does when combined with other factors); Here, the mortgagors themselves are attacking the validity of the mortgage; doctrine of estoppel therefore applies; At case: SC finds no reason to exclude the present case from the aforesaid ruling; If a house of strong materials may be considered personal property for purposes of executing a chattel mortgage thereon as long as the parties to the contract so agree and no innocent third party will be prejudiced thereby, there is no reason why a machine(immobilized by destination) may not be treated as such; estoppel applies; CA: Tumalad doctrine does not apply since the lot did not belong to the owner of the house; SC disagrees because the law makes no distinction with respect to the ownership of the land on which the house is built; The characterization of the subject machinery as chattel by WT is indicative of intention and impresses upon the property the character determined by the parties; Standard Oil v Jaramillo: it is undeniable that the parties to a contract may by agreement treat as personal property that which by nature would be real property, as long as no interest of third parties would be prejudiced thereby; WT: estoppel doesnt apply since it was petitioner who required and dictated it to sign a printed form of chattel mortgage which was in a blank form at the time of signing;

No, the status of the machinery as movable or immovable was never placed in issue before the CFI and CA except in a supplemental memo; Moreover, even if the charge is true, it does not render a contract void ab initio, but only a ground for rendering said contract voidable or annullable (1390) by a proper action in court; there is nothing on record to show that the mortgage has been annulled; neither were there steps to annul the same; On the other hand, WT benefited from the contract; equity dictates that one should not benefit at the expense of another;

The mortgagor is obliged under the pain of penal liability, to secure the written consent of the mortgagee;

CA REVERSED. 1. Reasonable Description Rule the description of the properties mortgaged must enable the parties or any third person, after reasonable inquiry and investigation, to identify the collateral;

Act 1508 Section 7 does not require a minute and specific description of the collateral but only requires compliance with the reasonable description rule; 2. After Acquired Properties

General Rule: a chattel mortgage covers only the property described therein and does not cover property thereafter acquired; Exception: a stipulation in a chattel mortgage authorizing the mortgagor to sell the property covered by the chattel mortgage, and to replace, renew or substitute them with other property thereafter acquired is valid and binding; Last paragraph of Section 7 of CML, despite its clear wording, does not apply to retail stores, where the property is constantly sold and substituted with new stock, such as drugstores, grocery stores, dry goods stores and bazaars; Otherwise, it would be impossible to constitute a chattel mortgage on such stores without closing them (contrary to purpose of CML, that is, the promotion of business and economic development); But the contract of chattel mortgage must expressly stipulate that such after acquired properties are included in the mortgage, extending its effects, for example, to all goods, stock in trade, furniture and fixtures hereafter purchased by the mortgagor;

Perfecto Dy v CA, Gelac Trading and Antonio Gonzales In 1979, Wilfredo Dy bought a truck and a farm tractor thru financing extended by Libra Finance. Both were mortgaged to Libra as security for the loan. Perfecto (brother of Wilfredo) wanted to buy the tractor from his brother so he wrote a letter to Libra requesting that he be allowed to purchase from Wilfredo the said tractor and assume the mortgage debt of the latter. In a letter (Aug 27), Libra thru its mananger Ares approved Perfectos request. Thus, Wilfredo executed a deed of absolute sale (September 4, 1979) in favour of Perfect over the tractor. At this time, the tractor was with Libra due to Wilfredos failure to pay the amortizations. Despite the full offer of payment by Perfecto for the tractor, the immediate release could not be effected because Wilfredo had obtained financing not only for said tractor but also for a truck, and Libra insisted full payment for both. Perfecto then convinced his sister Carol to purchase the truck. A PNB check in the amount of 22k was issued in favour of Libra, thus settling Wilfredos debt. Payment having been effected thru an out-of-town check, Libra insisted that it be clear first before Libra could release the chattels in question. Meanwhile, in a civil case to recover around 12k from Wilfredo by Gelac Trading was pending in Cebu. Upon a writ of execution (Dec 27, 1979), the provincial sheriff was able to seize and levy on the tractor in the premises of Libra. The tractor was sold at auction and Gelac was the lone bidder. It later sold the tractor Antonion Gonzales (one of its stockholders). It was only after the check was cleared when Perfecto learned about Gelac having already taken custody of the tractor. Perfecto then filed an action to recover the tractor against Gelac. RTC favoured Perfecto. CA reversed. IT held that the tractor still belonged to Wilfredo when it was seized. Petitioner then went to SC. Respondents argue that at the time of the execution of the deed of sale, no constructive delivery was effected since the consummation of the sale depended upon the clearance and encashment of the check which was issued in payment of the tractor. W/N the sale was valid. Yes. Ratio: In Servicewide Specialists v IAC, the Court held: Settled: chattel mortgagor continues to be the owner of the property, and therefore has the power to alienate the same;

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Ownership of Collateral Mortgagors right to alienate the collateral is restricted by the requirements imposed by law;

However, he is obliged under pain of penal liability, to secure the written consent of the mortgagee; The absence of the written consent of the mortgagee to the sale in favour of a third person affects not the validity of the sale but only the penal liability of the mortgagor under the RPC (319 pa. 2) and the binding effect of such sale on the mortgagee under the Deed of Chattel Mortgage;

So, at time of levy, tractor no longer owned by Wilfredo; levy extends only to properties by judgment debtor;

At case: Wilfredo could sell Consent of Libra was obtained; The sale between the brothers was therefore valid and binding between them and to the mortgagee as well; In re: constructive delivery: 1496 states that the ownership of the thing sold is acquired by the vendee from the moment it is delivered to him in any ways specified in 1497 to 1501 or in any other manner signing an agreement that the possession is transferred from the vendor to the vendee; At case: Actual delivery could not be made; however, there was constructive delivery already upon the execution of the public instrument pursuant to 1498 and upon the consent or agreement of the parties when the thing sold cannot be immediately transferred to the possession of the vendee; CA: vendor must first have control and possession of the thing before he could transfer ownership by constructive delivery; here the tractor was with Libra; SC: while it is true that Wilfredo was not in actual possession and control, his right of ownership was not divested from him upon his default; neither could it be said that Libra was the owner because the mortgagee cannot become appropriate the thing mortgaged; Undeniably, Libra gave consent to the sale and was aware of the transfer of rights; When a third person buys the mortgaged property, he automatically steps into the shoes of the original mortgagor; his right of ownership shall be subject to the mortgage of the thing sold to him; at case: petitioner was aware of the existing mortgage and in fact he obtained consent from Libra; The payment of the check was actually indented to extinguish the mortgage; not intended as payment for the purchase price; the clearing of the check was not determinative of the consummation of the sale; sale between the brothers distinct from the transaction between Libra and Wilfredo; The sale was consummated upon the execution of the public instrument on September 4; at this time, constructive delivery was already affected;

Others: Respondents claim: no one protested or filed third party claim when sheriff levied; Court: there are legal remedies; No fraud by brothers; relationship is not a badge of fraud; it is Gelac who is guilty of violating human relations; it sold the tractor despite the summons based on the replevin suit. CA DECISION SET ASIDE F. A G.