The Chattel Mortgage Law (Act 1508 in rel. to Arts. 1484, 1485, 2140

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The Chattel Mortgage Law (Act 1508 in rel. to Arts. 1484, 1485, 2140 and 2141 of the Civil Code)
A chattel mortgage is an accessory contract by virtue of which personally property is recorded in the
Chattel Mortgage Register as security for the performance of an obligation. (Art. 2140, NCC)
Subject Matter of a 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)
Personal or movable property
1. Shares of stock;
2. Interest in business;
3. Machinery treated as personal property subsequently installed on leased land (Davao
Sawmill v. Castillo, 61 Phil. 709).
4. Vessels recorded in the office of the Philippine Coast Guard to be effective as to third persons; not
necessary to be recorded in the Office of the Register of Deeds;
5. Motor Vehicles mortgage registered in the LTO (for vehicles used for public services)
6. House of Mixed Materials;
7. House intended to be demolished;
8. House built on rented land.
GR: Immovable property.
E: treated as movable by estoppel of parties.
9. House of strong materials is personal property for purposes of executing a chattel mortgage as
between the parties to the contract if parties so agree and no innocent third party will be prejudiced.
General Rule: chattel mortgages cannot cover debts subsequently contracted.
Furthermore, the following must be remembered:
1. Chattel mortgages must be registered in place where mortgagor resides and where
property (chattel) is located. If mortgagor resides abroad, it must be registered in place
where property is located.
2. With respect to growing fruits, they may be secured by a chattel mortgage but they may
not be pledged.
3. With respect to machineries placed on plant or building owned by another, they can be
the object of chattel mortgage.
4. With respect to shares of stock: place of domicile of corporation and shareholder. No
need for notation in books of corporation.
1. Essential requisites
1. It must be constituted to secure the fulfillment of principal obligation. (Art. 2085, NCC)
2. The mortgagor must be the absolute owner of the thing mortgaged. (Art. 2085, NCC)
3. The persons constituting the mortgage have the free disposal of the property and in the
absence thereof, they be legally authorized for the purpose. (Art. 2085, NCC)
4. Must be recorded in the Chattel Mortgage Register in order to bind third persons.
The first three requirements pertain to the requirements of any valid mortgage under the Civil
Code.
2. Formal requisites
Requirements under the chattel mortgage law for the validity 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
Requisites to bind Third Person
1. Affidavit of good faith
2. Contract must be registered
Contents required in the Affidavit of Good Faith
1. Where the parties severally swear that the mortgage is made for the purpose of securing the
obligation specified and for no other purpose and that the same is a just and valid obligation and not
one entered into for fraud; and,
2. Property given in chattel mortgage must be described to enable the parties or any other
person after reasonable inquiry and investigation to identify it.
3. Registration, when and where
4. After-acquired property
5. After-incurred obligation
6. Right of junior mortgagee
7. Foreclosure procedure
8. Redemption
There is no right of redemption in Chattel Mortgage. There is only an equity of redemption.
The following may redeem if the condition of the mortgage is broken:
1. mortgagor
2. a person holding subsequent mortgage
3. a subsequent attaching creditor (sec. 13, Act 1508)
9. Claim for deficiency
a) General rule
b) Exception
c) Article 1484
RULE ON RECOVERY OF DEFICIENCY AFTER FORECLOSURE
There is recovery of deficiency in all mortgages(chattel or real).
Reason: Mortgages as accessory contracts serve only as securities and not for the satisfaction of the
principal obligation.
Prescriptive Period: 10 years, under Article 1142, NCC (DBP v. Tomelda, 101 SCRA 171).
Exception: When the transaction secured is sale of personal property on installment basis under Article
1484 of the New Civil Code otherwise known as Recto Law.
Acts, which provide for criminal liability under the Chattel Mortgage Law: (Art. 319, RPC)
1. Removal of chattel to another city or province without written consent of mortgagee,
2. Selling property already pledged, or mortgaged without written consent of mortgagee
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
B. Real Estate Mortgage Law (Act 3135, as amended by R.A. 4118)
1. Coverage
2. Remedies available to mortgagee upon default of the mortgagor
3. Need for special power of attorney
4. Authority to foreclose extrajudicially
5. Procedure
a) Where to file
b) Where to sell
c) Posting requirement
d) Publication requirement
(i) Sufficiency of newspaper publication
(ii) Need for republication in case of postponement
(iii) Personal notice to the mortgagor when and when not needed
6. Possession by purchaser of foreclosed property
7. Remedy of debtor if foreclosure is not proper
8. Redemption
a) Who may redeem
b) Amount of redemption price
c) Period for redemption
d) Effect of pendency of action for annulment of sale
9. Writ of possession
a) Ministerial duty of the court
b) Enforcement against third parties
c) Pendency of action for annulment of sale
10. Annulment of sale
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