Chattel Mortgage Lawsimplified

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.) Its 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) wont 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 wouldnt allowthe 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 estoppeland 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 its a public vehicle.) If its a ship, its made with the MARINA.If a chattel mortgage is constituted over shares of stock, it doesnt 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 owners 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 isnt registered, only the contracting parties will be bound but third persons wont (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 mortgagor2.) A person holding a subsequent mortgage3.) A subsequent attaching creditor

Redemption cant be exercised, however, after the foreclosure sale. And since a chattel mortgage is just a security, a foreclosure wont prevent the mortgagee from recovering any deficiency from the foreclosure sale (theres 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.

** Recto Law (Act 4122)Article 1484 of the Civil Code provides for the remedies of a seller in contracts of sale of personal property by installments, and incorporates the provisions of Act No. 4122, known as the Installment Sales Law or the Recto Law, which then amended Article 1454 of the Civil Code of 1889.

RATIONALE the object of Recto Law was to remedy the abuses committed in connection with theforeclosure of chattel mortgages and was meant to prevent mortgagees from seizing the mortgagedproperty, buying it at foreclosure sale for a low price and then bringing suit against the mortgagor for adeficiency judgment.

Under Article 1484 of the New Civil Code, in a contract of sale of personal property the price ofwhich is payable in installments, the vendor may exercise any of the following REMEDIES:1. Exact fulfillment of the obligation, should the buyer fail to pay any installment;2. Cancel the sale, should the buyers failure to pay cover two or more installments;3. Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the buyers failure to pay cover two or more installments.

The remedies have been recognized as alternative, not cumulative, in that the exercise of one would also bar the exercise of the others. They cannot also be pursued simultaneously.

If the seller should foreclose on the mortgage constituted on the thing sold, he shall have nofurther action against the purchaser to recover any unpaid balance of the price. Any agreementto the contrary shall be void.

The provisions of Recto Law are applicable to financing transactions derived or arising fromsales of movables on installments, even if the underlying contract at issue is a loan because thepromissory note has been assigned or negotiated by the original seller.