CREDIT TRANSACTIONS –TITLE XVI - Pledge, Mortgage and Antichresis CHAPTER 5

Chattel mortgage (5) In chattel mortgage, if the property is foreclosed and

there is a deficiency, the creditor is entitled to recover
Article 2140. By a chattel mortgage, personal property is
the deficiency from the debtor except if the chattel
recorded in the Chattel Mortgage Register as a security
mortgage is a security for the purchase of personal
for the performance of an obligation. If the movable,
property in installments. (see Art. 1484.)
instead of being recorded, is delivered to the creditor or
a third person, the contract is a pledge and not a chattel In pledge, if the property is sold, and there is a
mortgage. deficiency, the creditor is not entitled to recover the
deficiency notwithstanding any stipulation to the
contrary. (Art. 2115.)
Definition of chattel mortgage.

Chattel mortgage is that contract by virtue of which

Similarities between chattel mortgageand pledge.
personal property is recorded in the Chattel Mortgage
Register as a security for the performance of an (1) Both are executed to secure performance of a
obligation. principal obligation;

Characteristics of chattel mortgage. (2) Both are constituted only on personal property;

(1) an accessory contract because it is for the purpose (3) Both are indivisible;
of securing the performance of a principal obligation;
(4) Both constitute a lien on the property;
(2) a formal contract because of its validity, registration
(5) In both cases, the creditor cannot appropriate the
in the Chattel Mortgage Register is indispensable
property to himself in payment of the debt;
(3) a unilateral contract because it produces only
(6) In both cases, when the debtor defaults, the
obligations on the part of the creditor to free the thing
property must be sold for the payment of the creditor;
from the encumbrance on fulfillment of the obligation.
and

(7) Both are extinguished by the fulfillment of the

Chattel mortgage and pledge distinguished. principal obligation or by the destruction of the
property pledged or mortgaged.
(1) In chattel mortgage, the delivery of the personal
property to the mortgagee is not necessary, while in
pledge, such delivery is necessary;
Article 2141. The provisions of this Code on pledge,
(2) In chattel mortgage, the registration of the same in insofar as they are not in conflict with the Chattel
the Chattel Mortgage Register is required by law, while Mortgage Law shall be applicable to chattel mortgages.
in pledge, registration in the Registry of Property is not
necessary;
Laws governing chattel mortgage.
(3) The procedure for the sale of the thing given as
security is different. In chattel mortgage, the procedure The laws principally governing chattel mortgages are:
is found in Section 14 of Act No. 1508, as amended,
while in pledge, it is found in Article 2112 of the Civil (1) the Chattel Mortgage Law, Act No. 1508, as
Code; amended (see Appendix 5.);

(4) In chattel mortgage, if the property is foreclosed, the
excess over the amount due goes to the debtor (Sec. 14,
Act No. 1508.), while in pledge, if the property is sold,
the debtor is not entitled to the excess unless it is
otherwise agreed (Art. 2125.) or except in the case of a
legal pledge (Art. 2121.); and
(2) the Civil Code (see Phil. National Bank vs. Manila
Investment & Construction, Inc., 38 SCRA 462 [1971];
Garrido vs. Tuazon, 24 SCRA 727 [1968].);
(3) the Revised Administrative Code; and
(4) the Revised Penal Code.
CREDIT TRANSACTIONS –TITLE XVI - Pledge, Mortgage and Antichresis CHAPTER 5
(5) The Ship Mortgage Decree of 1978 (Pres. Decree No.
1521.) governs the mortgage of vessels of domestic
ownership. (see Appendix 7.)
Offenses involving chattel mortgage.
Under the Revised Penal Code, the following acts are
punishable:
(1) Knowingly removing any personal property
mortgaged under the Chattel Mortgage Law 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 of the mortgagee; and
(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
mortgagee written on the back of the mortgage and
duly recorded in the Chattel Mortgage Register. (Art.
319, Revised Penal Code.)
Subject matter of chattel mortgage.
The subject matter of chattel mortgage must always be
personal or movable property. (Art. 2140; Sec. 2, Act
No. 1508.)
Creation of a chattel mortgage.
The law as it now stands provides for only one way for
executing a valid chattel mortgage, i.e., the registration
of the personal property in the Chattel Mortgage
Register as security for the performance of an
obligation.4 (Art. 2140; see Art. 2085.)
Under the Chattel Mortgage Law, if the property is
situated in a different province from that in which the
mortgagor resides, the registration must be in both
registers (Sec. 4, Act No. 1508.); otherwise, the chattel
mortgage is void.
It has been ruled that if the chattel mortgage is not
recorded, it is nevertheless binding between the parties.
Affidavit of good faith required.
The affidavit of good faith is an 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, Ibid.)
The Chattel Mortgage Law, in Section 5, in describing
what shall be deemed sufficient to constitute a good
chattel mortgage, includes the requirement of an
affidavit of good faith appended to the mortgage and
recorded therewith. But the absence of the affidavit
vitiates a mortgage only as against third persons
without notice like creditors and subsequent
encumbrancers.
Foreclosure of chattel mortgage.
After payment of the debt or the performance of the
condition specified in the Chattel Mortgage (Sec. 3, Act
No. 1508.), the mortgagee must discharge the mortgage
in the manner provided by law otherwise, he may be
held liable for damages by any person entitled to
redeem the mortgage. (Sec. 8, Ibid.)
If the mortgagor defaults in the payment of the secured
debt or otherwise fails to comply with the conditions of
the mortgage, the creditor has no right to appropriate
to himself the personal property (Arts. 2141, 2088.)
because he is permitted only 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 Section 14 of Act No. 1508.
Right of mortgagee to recover deficiency.
(1) Where mortgage foreclosed. — The creditor may
maintain an action for the deficiency although the
Chattel Mortgage Law is silent on this point. The reason
is that a chattel mortgage is only given as a security and
not as payment for the debt in case of failure of
payment. The action may be brought within ten (10)
years from the time the cause of action accrues, even if
it is not upon a written contract because the obligation
of the mortgagor to pay the deficiency is one created by
law (see Art. 1144[1, 2], Civil Code.), and furthermore,
the action is in the nature of a mortgage action (see Art.
1142, Ibid.) because its purpose is precisely to enforce
the mortgage contract.
CREDIT TRANSACTIONS –TITLE XVI - Pledge, Mortgage and Antichresis CHAPTER 5
(2) Where mortgage constituted as security for
purchase of personal property payable in installments.
— If the chattel mortgage is constituted, whether by the
debtor-vendee or a third person, as security for the
purchase of personal property payable in installments,
no deficiency judgment can be asked and any
agreement to the contrary shall be void. (Art. 1484.6)

Application of proceeds of sale.

The proceeds of the sale are to be applied to the

payment of the following:

(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; and

(4) The balance, if any, shall be paid to the mortgagor,

or person holding under him. (Sec. 14, Act No. 1508.)

Right of redemption.

(1) When the condition of a chattel mortgage is broken

the following may redeem:

(a) the mortgagor;

(b) a person holding a subsequent mortgage; or

(c) a subsequent attaching creditor.

(2) 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.

(3) 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.) 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 right to redeem
personal property.