CHATTEL MORTGAGE (Act. No.

1501)

Article 1484. 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:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;
(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's
failure to pay cover two 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 contrary shall be void.
Article 1485. The preceding article shall be 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.
Article 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.
Article 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.
DEFINITION OF CHATTEL MORTGAGE:

 CHATTEL MORTGAGE is a contract by virtue of which a personal property is recorded in the Chattel
Mortgage Register as security for the performance of an obligation.
 Section 3, Act 1508 (Chattel Mortgage Law )
 It is 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.

CHARACTERISTICS:
1) It is an accessory contract because it secures performance of a principal obligation.
2) It is a formal contract because it requires registration in the Chattel Mortgage Register for its validity
(but only as against third persons).
3) It is a unilateral contract because it produces only obligations on the part of the creditor to free the
thing from the encumbrance on fulfillment of the obligation.
4) The excess of the proceeds of the sale goes to the debtor or mortgagor.
5) Creditor or mortgagee can recover deficiency from the debtor or mortgagor, except if covered by the
Recto Law.

CHATTEL MORTGAGE DISTINGUISHED FROM PLEDGE:

Chattel Mortgage Pledge

1) Delivery of Personal Property

 Not required Delivery is required for validity

2) Registration in the Chattel Mortgage Register

Necessary for validity of the CM against Not necessary; Public document is
third persons enough to bind third persons

3) Right to Excess of Proceeds of Sale

The excess goes to the debtor/ mortgagor The excess goes to the
pledgee/creditor, unless otherwise stipulated

4) Right to Recover Deficiency

Creditor/ mortgagee can recover from Creditor/ mortgagee is not entitled to
the debtor/ mortgagor, except if covered by recover any deficiency after the property is
Recto Law sold, notwithstanding contrary stipulation

A. ESSENTIAL REQUISITES:

1) It is constituted to secure the fulfillment of a principal obligation.

2) The mortgagor must be the absolute owner of the thing mortgaged.
3) The persons constituting the mortgage have the free disposal of their property, and in the absence
thereof, that they be legally authorized for the purpose.
4) It cannot exist without a valid obligation.
5) It must be registered.

B. FORMAL REQUISITES:

(1) It should substantially comply with the form prescribed by law;

(2) It should be signed by the person/s executing the same in the presence of two witnesses who shall sign the
mortgage as witnesses to the execution thereof; and
(3) Each mortgagor and mortgagee or, in the absence of the mortgagee, his agent or attorney, shall make and
subscribe an affidavit in the form prescribed by law, which affidavit, signed by the parties to the mortgage and
the two witnesses and the certificate of the oath signed by the person authorized to administer an oath shall be
appended to such mortgage and recorded therewith. [Sec. 5, Act 1508]
a) Affidavit of good faith is required, and it states that the chattel mortgage is—
i. Made solely for the purpose of securing the obligation specified in the chattel mortgage, and
ii. The principal obligation is a just and valid obligation, and one not entered into for the purpose
of fraud.

C. REGISTRATION OF CHATTEL MORTGAGE:

(1)When-before the mortgagor has complied with his principal obligation and no right of innocent
third persons is prejudiced.
(2)Where-
a) If the mortgagor resides in the Philippines – in the office of the register of deeds of the province in
which the mortgagor resides at the time of the making of the chattel mortgage.
b) If the mortgagor does not reside in the Philippines – in the province in which the property is situated.
 c) If the property is located in a different province – registration in both provinces is required.
(3)Effect-
a) It creates real rights which follow the chattel.
b) It is an effective and binding notice to other creditors.
c) It gives the mortgagee symbolical possession.

Effect of failure to register in the Chattel Mortgage Registry:

The mortgage is binding between the parties. However, the right of the person in whose favor the law
establishes a mortgage is to demand the execution and the recording of the instrument.

D. AFTER-ACQUIRED PROPERTY

GENERAL RULE: A chattel mortgage shall cover only the property described therein and not like or
substituted property thereafter acquired by the mortgagor. (Sec 7, Act 1508)

EXCEPTION: 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)

E. AFTER-INCURRED OBLIGATIONS

GENERAL RULE: Chattel mortgage shall be made for the purpose of securing the obligation
SPECIFIED IN THE CONDITIONS THEREOF, AND FOR NO OTHER PURPOSE. (Sec 3, Act 1508); A chattel
mortgage can only cover obligations existing at the time the mortgage is constituted (Acme Shoe, et al v CA,
GR No. 103576, August 22, 1996).

EXCEPTION: When:
1) The old contract is amended or a new chattel mortgage is made which stipulates an agreement
covering the newly contracted debt; AND
2) Such contract must observe the formalities prescribed by the Chattel Mortgage Law as mentioned in
Section 5.

F. RIGHT OF JUNIOR MORTGAGEE

The only right passes to junior mortgagee or the second mortgagee is 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.

GENERAL RULE: The rights of the first mortgagee over mortgaged properties are superior to those of
a subsequent attaching creditor and other junior mortgagees. In Chattel Mortgage the right is only an EQUITY
REDEMPTION.

Period within which equity of redemption may be exercised:

Right of redemption is exercised from the date the condition of chattel mortgage is broken but BEFORE
the foreclosure sale of collateral. The 30-day period to foreclose a chattel mortgage is the minimum period after
violation of the mortgage condition for the mortgage creditor to cause the sale at public auction of the
mortgaged chattel and is the period of grace for the mortgagor to discharge the mortgage obligation.
 Amount to be paid:
1) The amount due on such mortgagee; and
2) The costs and expenses incurred by such breach of condition before sale.

Persons entitled to redeem:

1) Mortgagor;
2) A person holding subsequent mortgagee;
3) A subsequent attaching creditor.

EFFECT OF TAKING POSSESSION OF MORTGAGED PROPERTY AS AGAINST A JUNIOR

MORTGAGEE:

In order to make a mortgaged property in a chattel mortgage to create a lien as against possible rights
of creditors, subsequent purchasers and encumbrancers in good faith, it is necessary that the possession of the
mortgaged chattels be transferred, or within reasonable time the instrument be filed or recorded. Hence, a first
chattel mortgage unregistered is absolutely void against a second or junior mortgagee taken in good faith; and
such junior mortgagee need not be recorded at all to give priority over such first mortgagee.

G. FORECLOSURE PROCEDURE
(Section 14, Chattel Mortgage Law)

1) Thirty (30) days after the condition of a chattel mortgage is broken, the mortgagee may cause the
mortgaged property or any part thereof to be sold at public auction by a public officer at a public place
in the municipality where the mortgagor resides or where the property is situated;
2) The application for the foreclosure of the mortgagee should be filed with the Executive Judge through
the Clerk of Court;
3) After receipt of the application, the Clerk of Court shall, among other duties:
i. Raffle the application among the Sheriffs; and
ii. Cause the posting of the notice of sale.

4) Notice of the time, place and purpose of such sale must be posted, at least ten (10) days before the date
of sale, at 2 or more public places in the property is situated;
5) The mortgagee shall notify the mortgagor and the persons holding subsequent mortgages of the time
and place of sale, at least 10 days before the sale, either by notice in writing directed to him or left at his
abode, if within the municipality, or sent by mail if he does not reside in such community;
6) The officer making the sale shall, within 30 days thereafter, make in writing a return of his doings and
file the same in the office of the registry of deeds where the mortgage is recorded, and the registry of
deeds shall record the same. The return shall particularly describe the articles sold and state the
amount received for each article.

DEFAULT AND FORECLOSURE:

The default of the mortgagor have no effect of vesting ownership of the mortgaged property on the
mortgagee. He is only permitted to recover his credit from proceeds of the sale of the property at public
auction through public officer in the manner prescribed in Sec. 14, Act No. 1508. PactumCommissorium is
prohibited.
H. REDEMPTION

Definition:
It is a transaction by which the mortgagor reacquires the property which may have passed under the
mortgage or divests the property of the lien which the mortgage may have created.

Kinds:

(a) Equity of redemption: A mortgagor’s total ownership value or rights in a mortgaged investment,
property or asset.

In judicial foreclosure of real estate mortgage under the ROC, it is the right of the mortgagor to redeem
the mortgaged property by paying the secured debt within the 120 day period from entry of judgment or after
the foreclosure sale, but before the sale of the mortgaged property or confirmation of sale

(b) Right of redemption: The right to disencumber property or to free it from a claim or lien,
specifically the right to free from encumbrance of a foreclosure or other judicial sale, or to recover the title
passing thereby by paying what is due with interests and costs.

In extrajudicial foreclosure of real estate mortgage, the right of the mortgagor to redeem the property
within a certain period after it was sold for the satisfaction of the debt.

(i) For natural persons – one year from the registration of the TCT
(ii) For juridical persons – three months from the foreclosure

Note: Formal offer to redeem must be with tender of redemption price to preserve right of redemption

When is equity of redemption may be exercised?

Equity of redemption may be exercised by the mortgagor after his default in the performance of his
obligation but before the sale of the mortgaged property or confirmation of sale.

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)

I. CLAIM FOR DEFICIENCY

General Rule: The mortgagee is entitled to recover deficiency.

Exception:
1) Recto Law;
2) In accommodation mortgages, the accommodation mortgagor is liable only to the extent of the value of
the mortgaged property;
3) Due to death of mortgagor. (Vda. De Jacob v. CA, G.R. No. 88602, Apr. 6, 1990)

Article 1484. 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:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;
 (3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's
failure to pay cover two 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 contrary shall be void.

Application of Recto Law:

1) Sale of personal property, the price of which is payable in two or more installments
2) Contracts purporting to be leases of personal property with option to buy (Art. 1485, NCC)
(Articles 1484 & 1485 of the Civil Code)

Requisites for the Sale to be covered under the Recto Law:

1) Sale of personal property
2) Payable in installments
3) CM constituted over the same property

Remedies of the Unpaid Seller under the Recto Law:

1) Exact fulfillment of the obligation, should the vendee fail to pay (action for specific performance)
2) Cancel the sale, should the vendee’s failure to pay cover two or more installments (rescission); or
3) Foreclose the chattel mortgage on the thing sold, should the vendee’s failure to pay cover 2 or more
installments.

UNION BANK OF THE PHILIPPINES VS. ALAIN JUNIAT, WINWOOD APPAREL, INC.,

G.R. NO. 171569 AUGUST 1, 2011

FACTS: Petitioner filed with the RTC of Makati, a Complaint with prayer for the issuance of ex-parte writs of
preliminary attachment and replevin against Juniat, and Nonwoven, the person in possession of the mortgaged
motorized sewing machines and equipment. Petitioner alleged that Juniat, acting for and in behalf of Winwood and
Wingyan, executed a promissory note and a Chattel over several motorized sewing machines and other allied
equipment. The loan remains unpaid; and that the mortgaged motorized sewing machines are insufficient to answer for
the obligation.
The RTC issued writs of preliminary attachment and replevin in favor of petitioner. The writs were served by
the Sheriff upon Nonwoven as it was in possession of the motorized sewing machines and equipment.
Nonwoven filed an Answer, contending that the unnotarized Chattel Mortgage executed in favor of petitioner
has no binding effect on Nonwoven and that it has a better title over the motorized sewing machines and equipment
because these were assigned to it by Juniat pursuant to their Agreement.

ISSUE: Whether Petitioner Union Bank had a better right over the machineries seized/levied upon in the
proceedings before the trial court and/or the proceeds of the sale thereof.

RULING: Yes. The fact that the Chattel Mortgage executed in favor of petitioner was not notarized does not affect
petitioner’s cause of action. Petitioner only needed to show that the loan of Juniat, Wingyan and Winwood remains
unpaid and that it is entitled to the issuance of the writs prayed for. Considering that writs of attachment and replevin
were issued by the RTC, Nonwoven had to prove that it has a better right of possession or ownership over the attached
properties. But it failed to do.
 A perusal of the Agreement between Juniat and Nonwoven clearly shows that the sewing machines, snap
machines and boilers were pledged to Nonwoven by Juniat to guarantee his obligation. However, under Article 2096 of
the Civil Code, a pledge shall not take effect against third persons if a description of the thing pledged and the date of the
pledge do not appear in a public instrument. Hence, just like the chattel mortgage executed in favor of petitioner, the
pledge executed by Juniat in favor of Nonwoven cannot bind petitioner.

PRINCIPLE/S:
1) Contracts of Security; Contracts of security are either personal or real. ). In contracts of real security,
such as a mortgage, that fulfillment is secured by an encumbrance of property -- in chattel mortgage by the
execution of the corresponding and substantially in the form prescribed by law-- upon the essential condition
that if the obligation becomes due and the debtor defaults, then the 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. As the law so puts it, once the
obligation is complied with, then the contract of security becomes, ipso facto, null and void.
2) The rule on after-incurred obligations; a chattel mortgage can only cover obligations existing at the
time the mortgage is constituted.

ACME SHOE, RUBBER & PLASTIC CORPORATION vs. CA

G.R. No. 103576 August 22, 1996

FACTS: Petitioner Chua Pac, president and general manager of Acme Shoe, Rubber and Plastic Corporation,
executed a chattel mortgage in favor of Producers Bank of the Philippines, as a security for a corporate loan in
the amount of P3,000,000.00. The chattel mortgage contained a clause that provided for the mortgage to stand
as security for all other obligations contracted before, during and after the constitution of the mortgage.

The P3,000,000.00 was paid. Subsequently, the corporation obtained additional financial
accommodations totalling P2,000,000.00. This was also paid on the due date. Again, the bank extended another
loan to the corporation in the amount of P1,000,000.00, covered by four promissory notes. However, the
corporation was unable to pay this at maturity. Thereupon, the bank applied for an extra-judicial foreclosure
of mortgage.

For its part, the corporation filed an action for injunction with prayer for damages. The lower court
ultimately dismissed the case and ordered the extra-judicial foreclosure of mortgage. Hence, this appeal.

ISSUE: Whether a clause in a chattel mortgage that purports to extend its coverage to obligations yet to be
contracted or incurred is valid and effective.

HELD: No. While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred
obligations so long as these future debts are accurately described, a chattel mortgage, however, 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
part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute an act
of default on the part of the borrower of the financing agreement whereon the promise is written but, of
course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life
of the chattel mortgage sought to be foreclosed.

SERVICEWIDE SPECIALISTS, INC vs. CA

G.R. No. 110048 November 19, 1999

FACTS: Leticia Laus purchased on credit a Colt Galant from Fortune Motors (Phils.) Corporation
and executed a promissory note for the amount of P56,028.00, inclusive of 12% annual interest, payable within
a period of 48 months. In case of default in the payment of any installment, the total principal sum, together
with the interest, shall become immediately due and payable.

As a security for the promissory note, a chattel mortgage was constituted over the said motor vehicle,
with a deed of assignment incorporated therein such that the credit and mortgage rights were assigned by
Fortune Motors Corp. in favor of Filinvest Credit Corporation with the consent of the mortgagor-debtor Laus.

Filinvest in turn assigned the credit in favor of Servicewide Specialists, Inc.

Laus failed to pay the monthly installment for April 1977 and the succeeding 17 months. Servicewide
demanded payment of the entire outstanding balance with interests but Laus failed to pay despite formal
demands.

As a result of Laus’ failure to settle her obligation, or at least to surrender possession of the motor
vehicle for foreclosure, Servicewide instituted a complaint for replevin, impleading Hilda Tee and John Dee in
whose custody the vehicle was believed to be at the time of the filing of the suit. Plaintiff alleged, among
others, that it had superior lien over the mortgaged vehicle. The court approved the replevin bond.

Alberto Villafranca filed a third party claim contending that he is the absolute owner of the subject
motor vehicle after purchasing it from a certain Remedios Yang free from all lien and emcumbrances; and that
on July 1984, the said automobile was taken from his residence by Deputy Sheriff Bernardo Bernabe pursuant
to the seizure order issued by the court a quo.

ISSUE:Whether or not a case for replevin may be pursued against the defendant, Alberto Villafranca, without
impleading the absconding debtor-mortgagor.

HELD: No. Rule 60 of the Revised Rules of Court requires that an applicant for replevin must show that he is
the owner of the property claimed, particularly describing it, or is entitled to the possession thereof. Where the
right of the plaintiff to the possession of the specified property is so conceded or evident, the action need only
be maintained against him who so possesses the property.

However, in case the right of possession on the part of the plaintiff, or his authority to claim such
possession or that of his principal, is put to great doubt (a contending party may contest the legal bases for
plaintiff’s cause of action or an adverse and independent claim of ownership or right of possession may be
raised by that party), it could become essential to have other persons involved and impleaded for a complete
determination and resolution of the controversy.

In a suit for replevin, a clear right of possession must be established. The conditions essential for
foreclosure of chattel mortgage would be to show, firstly, the existence of the chattel mortgage and, secondly,
the default of the mortgagor. Since the mortgagee’s right of possession is conditioned upon the actual fact of
default which itself may be controverted, the inclusion of other parties, like the debtor or the mortgagor
himself, may be required in order to allow a full and conclusive determination of the case. Laus, being an
indispensable party, should have been impleaded in the complaint for replevin and damages. An
indispensable party is one whose interest will be affected by the court’s action in the litigation, and without
whom no final determination of the case can be had.

QUESTIONS AND ANSWERS

1)Distinguish a contract of chattel mortgage from a contract of pledge.

Answer: The following are the distinctions between a contract of chattel mortgage and a contract of pledge:

1) A chattel mortgage is a formal contract while a pledge is a real contract;

2) In a contract of Chattel Mortgage, possession belongs to the creditor, while in a contract of
pledge possession belongs to the debtor;
3) A contract of chattel mortgage must be recorded in a public instrument to bind third persons while a
contract of pledge must be in a public instrument containing description of the thing pledged and the
date thereof to bind third persons.

2) Juan constructed a building on a parcel of land he leased from Mario. He executed a chattel mortgage
over said building in favor of Pedro for a loan obtained from the latter. When he could not pay Pedro,
Pedro initiated foreclosure proceedings. Juan claimed that the building he had constructed on the leased
land cannot be validly foreclosed because the building was, by law, an immovable. Is Juan correct?
Answer: No, Juan is not correct. The Chattel Mortgage is void and cannot be foreclosed because the building is
an immovable and cannot be an object of a chattel mortgage.
However, If the building was intended and is built of light materials, the chattel mortgage may be considered
as valid as between the parties and it may be considered in respect to them as movable property, since it can be
removed from one place to another.

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

Answer:
General rule: Personal property only
Exception: Real property covered by chattel mortgage:
a. Growing crops (Sec 7 of Act 1508 or Chattel Mortgage Law)
b. House built on another person’s land (Tumalad v Vicencio, 41 SCRA 143, 1971)
c. Machinery permanently affixed to a building, under the doctrine of estoppel (Makati Leasing v
Wearever Textile, 122 SCRA 296, 1983)

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

Answer: Generally, NO because Sec 7 of Act 1508 expressly provides that only property described therein and
not like or substituted property thereafter acquired by a mortgagor may be covered by a chattel mortgage.
However, this provision does not apply to drug stores, bazaars and all other stores in the nature of a revolving
and floating business, ie. 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)

5) Is a promise expressing the inclusion of future debts in a chattel mortgage initially contracted valid and
enforceable?
Answer: It is valid but the security itself can’t be enforced or cannot exist/arise until after a chattel mortgage
agreement covering the newly contracted debt is executed either by concluding a fresh contract or by
amending the old one and provided that it conforms to the formalities prescribed by the Chattel Mortgage
Law.
6) What is the effect of a mortgagee, who does not have possession of the property but registered the
mortgage, to subsequent mortgagee?
Answer: The mortgagee has the right superior to the right of the subsequent mortgagee. The mortgage has the
force and effect of mortgage when registered. The mortgagee can enforce his right on the day on which it is
filed for record, or on which the property is delivered.
The mortgage then is given life and force as against all persons, second mortgagee or subsequent mortgage.

7) Can a chattel mortgagee sue for deficiency following foreclosure?

Answer: Yes. A chattel mortgagee can sue for a deficiency judgment following foreclosure.
Exception: The property sold in installments, the mortgagee can no longer take any action against the
purchaser to recover any unpaid balance of the price (Art 1484, Civil Code).
Where the mortgagee elects a remedy of foreclosure, the law requires the actual foreclosure of the
mortgaged chattel

8) Where the proceeds from the sale of mortgage property (chattel mortgage) do not fully satisfy the secured
debt, is the mortgagee entitled to recover the deficiency from the mortgagor? State the rule and exception if
any.
Answer: Generally, yes, the mortaggee is entitled to recover the deficiency from the mortgagor.(Ablazavs
Ignacio, L-11460, May 23,1958)
An exception to the aforementioned rule may be found in Article 1484 which speaks of a chattel mortgage as
security for the purchase of personal property payable in installments. Here, no deficiency judgment can be
asked. Any agreement to the contrary shall be void.

9) Can the unpaid seller avail of all remedies?

Answer: No, the remedies are alternative.

10) Is the mortgagee’s letter informing the mortgagor of his intent to foreclose is already considered a
foreclosure of the chattel?

Answer: No. A mere offer by the mortgagor to surrender the chattel, not accepted by the mortgagee, does not
preclude the mortgagee from bringing suit to recover the balance of the purchase price. (Industrial Finance
Corp v. Castor Tobias, G.R. No. L‐41555, July 27 1977)