Act 1508: Chattel Mortgage

This is an old law (it dates to pre-commonwealth times) but is still relevant today. Chattel mortgage is the rule and the Recto law is the exception. Like the Recto law, it covers movables.

A chattel mortgage is not a conditional sale (Serra vs. Rodriguez, 56 SCRA 538.) It’s a security; an accessory contract where personal property is mortgaged as security for the performance of an obligation (Art. 2140, Civil Code.)

After-acquired Property

It can only cover property that has been expressly described; substitutes and similar property (after-acquired property) won’t do (Tsai vs. CA, 366 SCRA 324) unless the after-acquired property in question pertains to stores open to the public. Obviously, it would be ridiculous if you wouldn’t allow the storeowner to replace goods that were bought by his customers. Instead, the storeowner must be allowed to substitute the goods that were sold (Northern Motors vs. Coquia, 66 SCRA 415.)

After-incurred Obligations

The chattel mortgage covers only those obligations that existed when the mortgage was constituted. The only time after-incurred obligations can be included in the agreement is if the old contract is amended or a new one is drawn up. The amendment or new contract must be made observing the formalities of a chattel mortgage.

Can a chattel mortgage be constituted on a building? Ordinarily, the answer would be no. However, if both parties entered into a chattel mortgage contract over a piece of real estate, they are now in estoppel and the contract becomes effective (Tumulad vs. Vicencio, 41 SCRA 143.) A chattel mortgage on a building may be valid between the parties, but not against third persons (Evangelista vs. Alto Surety, 103 Phil. 401.) Also, a piece of equipment attached to the building –such as when bolted to the floor- ordinarily forms part of the building. But if the contracting parties treat it as chattel, then once again chattel mortgage takes effect (Tsai vs. CA, see above & Davao Sawmill vs. Castillo 61 Phil. 709.)

Additional Stuff on Registration

If the mortgage is constituted over a vehicle, it must also be made with the LTO (if a private vehicle) or LTFRB (if it’s a public vehicle.) If it’s a ship, it’s made with the MARINA.

If a chattel mortgage is constituted over shares of stock, it doesn’t need to be registered in the stock and transfer book.

Formalities

1.) Registration

Registration should be with the Register of Deeds in the place where the owner of the property lives or where the property in question is located. If the owner’s address is different from that of the property in question, registration will have to be done in both RDs.

Registration is in rem and therefore binding against third persons. If the property isn’t registered, only the contracting parties will be bound but third persons won’t (Filipinas Marble vs. IAC, 142 SCRA 180.)

2.) Affidavit of Good Faith

The parties must swear that the mortgage is solely for the purpose of securing the obligation in the principal contract, that it is a just and valid, for no other purpose whatsoever, and not entered into in order to commit fraud.

The affidavit gives the mortgage a preferred status. If there is no affidavit, the contract is still binding between the parties but not on third persons (Phil. Refining vs. Jarque, 61 Phil. 229.)

Right of Equity of Redemption

If the condition of the mortgage is broken, the following may redeem:

1.) The mortgagor

2.) A person holding a subsequent mortgage

3.) A subsequent attaching creditor

Redemption can’t be exercised, however, after the foreclosure sale. And since a chattel mortgage is just a security, a foreclosure won’t prevent the mortgagee from recovering any deficiency from the foreclosure sale (there’s a prescriptive period of 10 years from accrual of a cause of action.) The exception is a sale of personal property. In that case, the Recto law will apply.