Law on Chattel

Mortgage
Business Laws and
Regulations
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Chattel Mortgage (Act. 1508, as amended)
Definition
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 (Art. 2140)
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Chattel Mortgage (Act. 1508, as amended)
Characteristics as a Contract
a. Accessory
b. Unilateral
c. Formal contract
d. If the chattel mortgage (or real mortgage) is not recorded, the
mortgagee acquires the right to demand registration of the contract
(Art. 2125)
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Chattel Mortgage (Act. 1508, as amended)
Laws principally governing chattel mortgages:
a. Chattel Mortgage Law (Act. 1506
b. Civil Code
c. Revised Administrative Code; and
d. Revised Penal Code
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Chattel Mortgage (Act. 1508, as amended)
Similarities between pledge and chattel mortgage
a. Both are executed to secure performance of a principal obligation
b. Both are constituted only on personal property
c. Both are indivisible
d. Both constitute a lien on the property
e. In both cases, the creditor cannot appropriate the property to himself in payment
of the debt
f. In both cases, when the debtor defaults, the property must be sold for the
payment of the creditor; and
g. Both are extinguishments by the fulfillment of the principal obligation and by the
destruction of the property pledged or mortgaged.
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Chattel Mortgage (Act. 1508, as amended)
Distinguish chattel mortgage from pledge
a. In chattel mortgage, the delivery of the personal property to the mortgagee is not
necessary, while in pledge, such delivery is necessary
b. In chattel mortgage, the registration of the same in the Chattel Mortgage Register
is necessary for its validity, while in pledge, registration in the Registry of Property
is not necessary.
c. The procedure for the sale of the thing given as a security is different. In chattel
mortgage, the procedure is found in Section 14 of Act No. 1508, as amended,
while in pledge, it is found in Article 2112 of the Civil Code
d. In chattel mortgage, the excess over the amount due after foreclosure goes to the
debtor (Art. 1508, Section 14), while in pledge, if the property is sold, the debtor is
not entitled to the excess unless it is otherwise agreed (Art. 2115) or except in the
case of a legal pledge (Art. 2121); and
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Chattel Mortgage (Act. 1508, as amended)
Distinguish chattel mortgage from pledge
e. In chattel mortgage, the creditor is entitled to recover any deficiency except if the
chattel mortgage is a security for the purchase of personal property in installments,
while in pledge, the creditor is not entitled, any stipulation to the contrary
notwithstanding (Art. 2115)
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Chattel Mortgage (Act. 1508, as amended)
Object of Chattel Mortgage Contract
Only movable or personal properties such as:
a. Shares of stock (mortgage to be registered both in Chattel Mortgage Registries of
the province where the mortgagor resides, and the province where the
corporation has its principal business)
b. Interest in business
c. Growing crops
d. Large cattle
e. Vehicles (the mortgage to be registered also with the Land Transportation Office)
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Chattel Mortgage (Act. 1508, as amended)
Object of Chattel Mortgage Contract
Only movable or personal properties such as:
f. Vessels (the mortgage to be registered with the Office of the Philippine Coast Guard
of the Port of Documentation of such vessels. (Pres. Decree No. 1521, Sec. 3 9a)
g. House built on rented land but as between the parties only under the doctrine of
estoppel
h. House to be demolished and portable nipa huts for what really mortgaged in this
case are the materials thereof and there are, therefore, personal property
Note: Growing crops and large cattle are considered personal property under the
Chattel Mortgage Law (Art 1508 Sec7). They cannot, however, be the object of a
contract of pledge because they are considered immovable under the Civil Code,
which principally governs pledge.
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Chattel Mortgage (Act. 1508, as amended)
Extent or scope of Chattel Mortgage
It covers only property described in the contract, and excludes like or substituted
property thereafter acquired by the mortgagor, notwithstanding any thing in the
contract to the contrary (Art 1508 Sec. 7).

Exception: In this case of stock or merchandise contained in drugstores, grocery

stores, etc. which are constantly sold and substituted with new stock.
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Chattel Mortgage (Act. 1508, as amended)
What is an Affidavit of Good Faith?
It 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 purpose and that the same is just and valid
obligation and one not entered into for the purpose of fraud (Sec. 5)

Note: The absence of the affidavit vitiates a mortgage only as against third persons
without notice, like creditors and subsequent encumbrances.
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Chattel Mortgage (Act. 1508, as amended)
Who may exercise right of redemption when condition of the chattel mortgage is
broken:
a. The mortgagor;
b. The person holding a subsequent mortgage;
c. A subsequent attaching creditor

The redemption is made by paying or delivering to the mortgage the amount due on
such mortgage and the costs and expenses incurred by such breach of condition
before the sale thereof. (Section 13)
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Chattel Mortgage (Act. 1508, as amended)
Kinds of Foreclosure of Chattel Mortgage
a. Judicial Foreclosure – the mortgagee institutes an action in court;
b. Extra-Judicial Foreclosure – the sale is made by the mortgagee himself when
authorized by the Chattel mortgage contract or by special law.
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Chattel Mortgage (Act. 1508, as amended)
How may proceeds of the foreclosure be applied?
To the payment of the following in their order:
a. Costs and expenses of keeping and sale;
b. Payment of the obligation secured by the mortgage;
c. Claims of persons holding subsequent mortgages in their order; and
d. The balance, if any, shall be paid to the mortgagor, or in person holding under him
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Chattel Mortgage (Act. 1508, as amended)
Effect of sale when there are two or more mortgages
1. On senior mortgagees – foreclosure and sale by a junior mortgagee do not affect
the rights of persons holding prior encumbrances. The purchaser acquires the
property subject to the right of foreclosure of a senior mortgagee. The junior
mortgagee may however redeem the thing.
2. On junior mortgagees – foreclosure and sale by a senior mortgagee will extinguish
all subsequent mortgages.
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Chattel Mortgage (Act. 1508, as amended)
Deficiency judgment
If the proceeds of the 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 chattel mortgage constituted on personal property which is sold at a
price payable in installments. (Art. 1484)
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Chattel Mortgage (Act. 1508, as amended)
Criminal Liability
1. Any person who shall knowingly remove any personal property mortgaged under
the Chattel Mortgage Law to any province or city other than which it was located
at the time of the execution of the mortgage without written consent of the
mortgagee or his executors, administrators or assignees (Art. 319, par. 1)
2. Any mortgagor who shall sell or pledge personal already covered by the chattel
mortgage without consent of the mortgagee (Art. 319 par. 2)