CHATTEL MORTGAGE (Articles 21402141)

A contract by virtue of which personal property is recorded in the Chattel Mortgage

Register as a security for the performance of an obligation (Art 2140).

If not registered - PLEDGE

Characteristics

1. Accessory contract – it is for the purpose of securing the performance of a principal obligation

2. Formal contract – registration in the Chattel Mortgage Register is indispensable for its validity

3. Unilateral contract – it produces only obligations on the part of the creditor to free the thing from the
encumbrance on fulfilment of the obligation.

Chattel Mortgage VS Pledge

1. Delivery of the personal property to the mortgage is not necessary 1. Delivery of the thing pledged is
necessary

2. registration in the Chattel Mortgage Registry is necessary for its validity 2. registration not necessary
to be valid

3. If property is foreclosed, the excess over the amount due goes to the debtor 3. Debtor is not entitled
to excess unless otherwise agreed or except in case of legal pledge

4. If there is deficiency after foreclosure, creditor is entitled to recover the deficiency from the debtor,
except under Art. 1484

4. If there is deficiency, creditor is not entitled to recover notwithstanding any stipulation to the
contrary
SIMILARITIES

1. Secure performance
2. Only personal property
3. Indivisible
4. Lien on property
5. Creditor cannot appropriate property to himself in payment of debt
6. Incase of default – must be sold
7. Extinguishment – fulfilment or destruction

Offenses involving Chattel Mortgage

1. Knowingly removing the property mortgaged to any province or city other than the one in which
it was located at the time of execution of mortgage without the consent of the mortgagee
2. Selling or pledging personal property already mortgage without the consent of the mortgagee
and duly recorded in the Chattel Mortgage Registry

Common Essential Element

1. Property removed or repledge
2. Property wall already mortgage or pledged
3.

Special Requisites (in addition to the common essential requisites):

1. It can cover only personal or movable property in general; however, the parties may treat as personal
property that which by its nature would be real property;

2. Registration of the mortgage with the Chattel Mortgage Register where the mortgagor resides; if
property is located in a different province, registration in both provinces required;

3. Description of the property as would enable the parties or other persons to identify the same after
reasonable investigation and inquiry; and

4. Accompanied by an affidavit of good faith to bind third persons, but not for the validity of the
contract.

5. It can cover only obligations existing at the time the mortgage is constituted. NOTE: A mortgage
containing 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 (Jaca vs Davao Lumber Co., 113 SCRA 107)

Effect of registration:

Creates a real right

 The registration of the chattel mortgage is an effective and binding notice to other
creditors of its existence and creates a real right or a lien which, being recorded, follows the
chattel wherever it goes. The registration gives the mortgagee symbolical possession (Northern
Motors, Inc. vs. Coquia, 68 SCRA 374).

Effect of failure to register chattel mortgage in the chattel mortgage registry

Article 2140 makes the recording in the Chattel Mortgage Register an essential requisite
but if the instrument is not recorded, the mortgage is nevertheless binding between the parties.
But the person in whose favour the law establishes a mortgage has no other right than to
demand the execution and the recording of the document.

Subject matter of both is movable property

Affidavit of Good Faith  Oath in a contract of chattel mortgage wherein the parties "severally swear
that the mortgage is made for the purpose of securing the obligation specified in the conditions thereof
and for no other purposes and that the same is a just and valid obligation and one not entered into for
the purpose of fraud.” (Sec. 5, Chattel Mortgage Law)

Effect of absence The special affidavit is required only for the purpose of transforming an already valid
mortgage into “preferred mortgage.” Thus, it is not necessary for the validity of the chattel mortgage
itself but only to give it a preferred status. In other words, its absence vitiates the mortgage only as
against third persons without notice like creditors and subsequent encumbrancers.

Foreclosure of Chattel Mortgage NOTES:  Foreclosure sale in chattel mortgage is by public auction
under Act No. 1508, but the parties may stipulate that it be by private sale.  The mortgagee may, after
thirty (30) days from the time of the condition broken, cause the mortgaged property to be sold at
public auction by a public officer. The 30-day period is also a grace period for the mortgagor to discharge
the mortgage obligation. After the sale of the chattel at public auction, the right of redemption is no
longer available to the mortgagor (Cabral vs. Evangelista, 28 SCRA 1000).

Application of proceed of sale:

1. Costs and expenses of keeping and sale

2. Payment of the obligation secured by the mortgage

3. Claims of persons holding subsequent mortgages in their order

4. The balance, if any, shall be paid to the mortgagor or person holding under him

NOTES:  The creditor may maintain an action for the deficiency, except if the chattel mortgage is
constituted as security for the purchase of personal property payable in instalments (Art. 1484).  The
action for deficiency may be brought within ten (10) years from the time the cause of action accrues
(Arts 1141 and 1142).  Only equity of redemption is available to the mortgagor; the latter can no longer
redeem after the confirmation of the foreclosure sale.

Right of redemption  When the condition of a chattel mortgage is broken the following may redeem: a)
mortgagor; b) person holding a subsequent mortgage; or c) subsequent attaching creditor.  An
attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and entitled to
foreclose the mortgage in the same manner that the mortgagee could foreclose it.  The redemption is
made by paying or delivering to the mortgagee the amount due on such mortgage and the costs, and
expenses incurred by such breach of condition before the sale thereof (Sec 13, Act No. 1508).

Right to possession of foreclosed property 1. Real mortgage – After the redemption period has expired,
the purchaser of the property has the

right to a conveyance and to be placed in possession thereof.

NOTES:  Purchaser is not obliged to bring a separate suit for possession. He must invoke the aid of the
courts and ask for a WRIT OF POSSESSION.  Section 7 of Act No. 3135 allows the purchaser to take
possession of the foreclosed property during the period of redemption upon filing of an ex parte
application and approval of a bond.

2. Chattel mortgage – When default occurs and the creditor desires to foreclose, the creditor has the
right to take the property as a preliminary step for its sale. NOTE: Where the debtor refuses to yield the
property, the creditor’s remedy is to institute an action either to effect judicial foreclosure directly or to
secure possession (REPLEVIN) as a preliminary to the sale contemplated in Section 14 or Act. No. 1508