HANDOUT 6: CHATTEL MORTGAGE
J-Culajara
ATENEO DE ZAMBOANGA UNIVERSITY
School of Management and Accountancy
Accountancy Department
CHATTEL MORTGAGE
It is a contract by virtue of which personal property
is recorded in the Chattel Mortgage Register as a security
for the performance of an obligation.
Note: 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.
CHARACTERISTICS (AFUN)
1. Accessory – it is for the purpose of securing the
performance of a principal obligation.
2. Formal – registration in the Chattel Mortgage
Register is indispensable for its validity.
3. Unilateral – it produces only obligations on the
part of the creditor to free the thing from the
encumbrance upon fulfillment of the obligation.
4. Nominate – it is given a specific name by the Civil
Code.
REQUISITES OF CHATTEL MORTGAGE
1. That it be constituted to secure the fulfillment of a
principal obligation;
2. That the mortgagor be the absolute owner of the
thing mortgaged;
3. That the person constituting the mortgage must
have the free disposal of his property, and in the
absence thereof, that he be legally authorized for
the purpose;
4. That the document in which the mortgage appears
to be recorded in the Chattel Mortgage Register
where the mortgagor resides. Note: This
requirement is not necessary for the validity of
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the chattel mortgage since registration thereof
is part of the definition of the contract.
(Filipinas Marble Corp. v. Intermediate
Appellate Court 142 SCRA 180 [1986])
5. 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. Note: A real property may be
considered as a 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.
Once the parties so agreed, they are already
estopped from claiming otherwise.
6. Description of the property as would enable the
parties or other persons to identify the same after
reasonable investigation and inquiry.
7. Accompanied by an affidavit for the purpose of
transforming an already valid mortgage to a
“preferred mortgage”. Note: The absence of the
affidavit vitiates a mortgage only as against
third persons without notice like creditors and
subsequent encumbrancers. This is not
necessary for validity of mortgage.
8. It can cover only obligations existing at the time
the mortgage is constituted.
OBJECT OF CHATTEL MORTGAGE
Only personal property, such as:
1. Movables susceptible of appropriation which are
not included in the list immovables;
2. Real property which by provision of law is
considered as personalty;
3. Forces of nature which are brought under control
by science;
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Instructor: K.
4. All things which can be transported from place to
place without impairment of the real property to
which they are fixed;
5. Obligations and actions which have for their
objects movables or demandable sums;
6. Shares of stock of agricultural, commercial and
industrial entities although they may have real
estate.
FORM OF CHATTEL MORTGAGE
Between the parties – The mortgage must be recorded in
the Chattel Mortgage Register of the province where the
mortgagor resides and also of the province where the
property is located, if it is different from the residence of
the mortgagor. Note: If the mortgagor is domiciled
outside the Philippines, the same must be registered in
the province where the property is located. Note
further: Registration is required for the validity of the
chattel mortgage between the parties.
As regards third persons – An affidavit of good faith must
be appended to the Deed of Chattel Mortgage and recorded
therewith in the Chattel Mortgage Register.
OTHER MATTERS
• 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.
• The provisions on pledge, insofar as they are not in
conflict with the Chattel Mortgage Law shall be
applicable to Chattel Mortgage.
FORECLOSURE OF CHATTEL MORTGAGE
Grounds for foreclosure
HANDOUT 6: CHATTEL MORTGAGE
• When the principal obligation is not paid when
due;
• When there is any violation of any condition,
stipulation or warranty by the mortgagor.
Kinds of foreclosure of chattel mortgage
• Judicial foreclosure
• Extra-judicial foreclosure
Note: There is nothing illegal for the private
sale of the personal properties covered by the chattel
mortgage.
Period to foreclose mortgage
The mortgagee may, after 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 the minimum period after
violation of the mortgage condition for the mortgage
creditor to cause the sale at public auction, with at least 10-
days notice to the mortgagor and posting of public notice of
time, place, and purpose of such sale, and is a grace period
for the mortgagor to discharge the mortgage obligation.
Distribution of proceeds of foreclosure sale
• The costs of sale;
• Claim of the person foreclosing the mortgage;
• Claims of persons holding subsequent mortgages in
their order;
• Balance, if any, shall be paid to the mortgagor.
EFFECT OF SALE WHEN THERE ARE TWO OR
MORE MORTGAGES
• On senior mortgagees – Foreclosure and sale by a
junior mortgage do not affect the rights of persons
holding prior encumbrances. The purchaser
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acquires the property subject to the right of
foreclosure of a senior mortgagee. The junior
mortgagee may, however, redeem the thing.
• On junior mortgagees – Foreclosure and sale by a
senior mortgagee will extinguish all subsequent
mortgages.
DEFICIENCY JUDGMENT
If the proceeds of sale are not sufficient to satisfy
the claim of the creditor, the creditor may institute a court
action to recover the deficiency, except in the case of
foreclosure of a chattel mortgage constituted on personal
property which is sold at a price payable in installments.
EQUITY OF REDEMPTION
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. The law allows the would-be
redemptioner to redeem the mortgage property only before
the sale. Upon the sale of personal property at the
foreclosure (or execution) sale, all rights of ownership leave
the mortgagor (judgment debtor) and become vested in the
purchaser. There is no more right to redeem personal
property. (Lee v. Trocino 561 SCRA 178 [2008])