Act 1508: Chattel Mortgage

Thursday, February 21, 2013

in Civil, Commercial, Law
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This is an old law (it dates to pre-commonwealth times) but is still relevant today. Chattel
mortgage is the rule and the Recto law is the exception. Like the Recto law, it covers movables.

A chattel mortgage is not a conditional sale (Serra vs. Rodriguez, 56 SCRA 538.) Its a security;
an accessory contract where personal property is mortgaged as security for the performance of an
obligation (Art. 2140, Civil Code.)

After-acquired Property

It can only cover property that has been expressly described; substitutes and similar property
(after-acquired property) wont do (Tsai vs. CA, 366 SCRA 324) unless the after-acquired
property in question pertains to stores open to the public. Obviously, it would be ridiculous if you
wouldnt allow the storeowner to replace goods that were bought by his customers. Instead, the
storeowner must be allowed to substitute the goods that were sold (Northern Motors vs. Coquia,
66 SCRA 415.)

After-incurred Obligations

The chattel mortgage covers only those obligations that existed when the mortgage was
constituted. The only time after-incurred obligations can be included in the agreement is if the
old contract is amended or a new one is drawn up. The amendment or new contract must be
made observing the formalities of a chattel mortgage.

Can a chattel mortgage be constituted on a building? Ordinarily, the answer would be no.
However, if both parties entered into a chattel mortgage contract over a piece of real estate, they
are now in estoppeland the contract becomes effective (Tumulad vs. Vicencio, 41 SCRA 143.) A
chattel mortgage on a building may be valid between the parties, but not against third persons
(Evangelista vs. Alto Surety, 103 Phil. 401.) Also, a piece of equipment attached to the building
such as when bolted to the floor- ordinarily forms part of the building. But if the contracting
parties treat it as chattel, then once again chattel mortgage takes effect (Tsai vs. CA, see above &
Davao Sawmill vs. Castillo 61 Phil. 709.)

Additional Stuff on Registration

If the mortgage is constituted over a vehicle, it must also be made with the LTO (if a private
vehicle) or LTFRB (if its a public vehicle.) If its a ship, its made with the MARINA.

If a chattel mortgage is constituted over shares of stock, it doesnt need to be registered in the
stock and transfer book.

Formalities

1.) Registration
Registration should be with the Register of Deeds in the place where the owner of the property
lives or where the property in question is located. If the owners address is different from that of
the property in question, registration will have to be done in both RDs.

Registration is in rem and therefore binding against third persons. If the property isnt registered,
only the contracting parties will be bound but third persons wont (Filipinas Marble vs. IAC, 142
SCRA 180.)

2.) Affidavit of Good Faith

The parties must swear that the mortgage is solely for the purpose of securing the obligation in
the principal contract, that it is a just and valid, for no other purpose whatsoever, and not entered
into in order to commit fraud.

The affidavit gives the mortgage a preferred status. If there is no affidavit, the contract is still
binding between the parties but not on third persons (Phil. Refining vs. Jarque, 61 Phil. 229.)

Right of Equity of Redemption

If the condition of the mortgage is broken, the following may redeem:

1.) The mortgagor

2.) A person holding a subsequent mortgage
3.) A subsequent attaching creditor

Redemption cant be exercised, however, after the foreclosure sale. And since a chattel mortgage
is just a security, a foreclosure wont prevent the mortgagee from recovering any deficiency from
the foreclosure sale (theres a prescriptive period of 10 years from accrual of a cause of action.)
The exception is a sale of personal property. In that case, the Recto law will apply.

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. Noticeat 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

These two laws are relevant and are very often the issue of many court cases.
Both laws govern the sale of property by installments. The Recto Law, which
forms part of the Civil Code, covers installment sales of personal property while
the Maceda Law governs installment sales of real property.

The Recto Law

The Recto Law comprises Articles 1484 to 1486 of the Civil Code. It was added
to the Civil Code to prevent abuses in the foreclosure of chattel mortgages, such
as when mortgagee-creditors foreclosed mortgaged property, bought them at a
low price (on purpose,) then prosecuted the mortgagor-debtors to recover the
deficiencies.

In the event a buyer of personal property defaults by failing to pay two or more
of the agreed installments, the seller can do any of the following:

1.) Demand that the buyer pay (a.k.a. specific performance)

2.) Cancel or rescind the sale

3.) Foreclose the mortgage on the property bought (if there ever was a chattel
mortgage)

Regarding no. 3, this happens when a person takes a loan to buy something and
he mortgages the thing he bought to ensure the creditor that he will pay the
loan. Remember: If you choose one remedy, you can't choose the others. These
remedies, believe it or not, are also available to the buyer. You also can't use all
or any of them at the same time. The Recto Law also won't apply to a straight
sale (i.e. a sale where there is a downpayment and the balance is payable in the
future in a single payment only.) The seller can also assign his credit to another
person, making that person the new creditor.

If the buyer refuses to surrender the items to the seller, he becomes a perverse
buyer-mortgagor. When that happens, the seller can recover expenses and
attorney's fees.

The Recto Law also covers leases with the option to purchase.

INSTALLMENT SALES LAW

What is the Installment Sales Law?

Commonly known as the Recto Law. It is embodied in Art. 1484 of the NCC which provides for the
remedies of a seller in the contracts of sale of personal property by installments.

Note: Art. 1484 of the NCC incorporates the provisions of Act No. 4122 passed by the Philippine
Legislature on Dec. 9, 1939, known as the "Installment Sales Law" or the "Recto Law," which then
amended Art. 1454 of the Civil Code of 1889.

To what does the Recto Law apply?

This law covers contracts of sale of personal property by installments (Act No. 4122). It is also
applied to contracts purporting to be leases of personal property with option to buy, when the lessor
has deprived the lessee of the possession or enjoyment of the thing. (PCI Leasing and Finance Inc.
v. Giraffe-X Creative Imaging, Inc., G.R. No. 142618, July 12, 2007)

What are the alternative remedies in case of sale of personal property in installments?

1. Specific Performance: Exact fulfillment should the buyer fail to pay

General Rule: If availed of, the unpaid seller cannot anymore choose other remedies;

Exception: if after choosing, it has become impossible, rescission may be pursued

2. Rescission: Cancel the sale if buyer fails to pay 2 or more installments Deemed chosen when:

a. Notice of rescission is sent

b. Takes possession of subject matter of sale

 c. Files action for rescission

3. Foreclosure: Foreclose on chattel mortgage if buyer fails to pay 2 or more installments

General Rule: Actual foreclosure is necessary to bar recovery of balance - Extent of barring effect:
purchase price

Exception: Mortgagor refuses to deliver property to effect foreclosure; expenses incurred in attorneys
fees, etc.