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iversity of Sto. Tomas, Graduate School February 12, 2013 ACT 1508 The Chattel Mortgage Law Maria Elsa J. Sabularse Legal Aspects of Tax and Business MBA 6:00 – 9:00 PM February 19, 2013 Atty. Leopoldo San Buenaventura Professor
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Page 1: Report on Chattel Mortgage Law_Final

University of Sto. Tomas, Graduate School February 12, 2013

ACT 1508The Chattel Mortgage Law

Maria Elsa J. SabularseLegal Aspects of Tax and Business MBA 6:00 – 9:00 PMFebruary 19, 2013

Atty. Leopoldo San BuenaventuraProfessor

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Agenda

• Purpose of Chattel Mortgage• Chattel Mortgage Definition• Nature of Chattel Mortgage• Difference between Chattel Mortgage and Pledge• Essential Requisites to Chattel Mortgage• Proper Subject Matter of Chattel Mortgage• Liabilities and Remedies of the Creditor • Deficiency Judgement • Recto Law• Case Analysis: Colarina vs. Magna Financial Services

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Purpose of Chattel Mortgage Law

• To promote business and trade• To foster economic development of the

country

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What is Chattel Mortgage?

• Article 2140. By chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. If the movable , instead of being recorded , is delivered to a creditor or a third person, the contract is a pledge and not a chattel mortgage.

• Article 2141. The provisions of this Code on pledge, insofar as they are not in conflict with the Chattel Mortgage Law shall be applicable to the Chattel Mortgages.

• Governed by Civil Code and Act 1508 entitled the “Chattel Mortgage Law”

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Nature of Chattel Mortgage• A Security– The Chattel Mortgage Law provides for the

recording of a personal property in the Chattel Mortgage Registry as a security for the performance of an obligation

– Not a conditional sale of a personal property given as a security for the payment of a debt according to the Code of Commission

– Chattel Mortgage is a security arrangement to support a primary contract

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Personal Property vs. Real Property

• Personal Property– Possessions other than real estate or buildings– Is movable and includes tangible (e.g. appliances, car, furniture, jewelry) and– Intangibles (e.g. bonds, shares or stocks) items whose ownership belongs to

individuals.– Also called chattels

• Real Property– Land or anything fixed, immovable or permanently attached to it such as

buildings, fences, fixtures, improvements, roads, shrubs, structures, utility systems and walls.

– Title includes title to air rights, mineral rights, and surface rights which can be bought, leased, sold, or transferred together or separately.

Ref: http:/www.businessdictionary.com

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Real Nature of A Mortgage

• Art 2126: Creates real right following the property– In case of transfer of property by the mortgagor, transferee

must respect the mortgage– A registered mortgage lien cannot be separated from the

property

• Art 2129: Mortgage property can still be foreclosed despite its transfer– Even if property is in possession of the debtor, creditor is

protected by way of registration

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What happens if Chattel is not registered?

• Mortgage between immediate parties remains valid and effective

• In the case of 3rd parties, mortgage is void if unregistered

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Essential Requisites to the contracts of pledge and mortgage

• Involves personal property• Constituted to secure the fulfilment of a principal

obligation• Pledger or mortgagor be the absolute owner of the

thing pledged or mortgaged• Persons constituting the pledge or mortgage have

free disposal of their property or legally authorized for the purpose

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Chattel Mortgage vs. Pledge

Chattel Mortgage• Refers to personal

property• Accessory to contracts• Debtor retains possession

of property mortgaged• there can be recovery of

deficiency in judgement

Pledge• Refers to personal

property• Accessory to contracts• Creditor takes possession

of property pledged• No recovery of deficiency

in judgement

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Formal Requirements in the preparation and execution of the Chattel Mortgage?

• Substantial compliance with the form prescribed in Section 5 Act 1508

• Chattel Mortgages must be signed in the presence of at least 2 witnesses

• Affidavit of good faith• Certificate of Oath/notarial acknowledgement • Sufficiency of description

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Proper Subject Matter of Chattel Mortgage

Personal PropertyIP rights

Furniture, etc.

Movables by Contractual Obligation

House Built on another

person’s land

Growing Crops

(Sec 6 Act 150)

Machinery Permanently affixed to a

building

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Case: Tsai v. Court of Appeals 366 SCRA 324(2011)

• Facts: To secure an obligation, parties executed chattel mortgage over equipment and machinery which were permanently affixed to the plant. The security contract covers lien of after-sales contract

• Issue: Can after acquired equipment and machinery be foreclosed under principles of Real Estate Mortgage, since they constitute Real Property rather than personal property subject to Chattel Mortgage?

• Ruling: No. Because a chattel mortgage shall be deemed to cover only the property described and not the substituted property acquired by mortgagor and placed in the same depository as the property originally mortgaged.

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QUESTIONS:

• Question: Can future or after-acquired property be the subject of Chattel Mortgage?

• Answer: Yes.• Conditions:

1. After-acquired property is in renewal, or in substitution for good on hand when the mortgage was executed

2. Purchased with the proceeds of the sale of such goods

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Torres V. Limjap 56 Phil. 141GR No.34386 , Sept. 21, 1931

• Facts: – On 16 April 1930, Torres raised cases against Limjap before the Court of First Instance to

secure the possession of 2 drug stores located in the city of Manila, covered by two chattel mortgage executed by the deceased John B. Henson in favor of the plaintiff

– In the first case the plaintiffs alleged that Jose B. Henson, had executed in their favor, a chattel mortgage on his drug store at Nos. 101-103 Calle Rosario, known as Farmacia Henson, to secure a loan of P7,000, although it was made to appear in the instrument that the loan was for P20,000.

– In the second case the plaintiffs alleged that they were the heirs of the late Don Florentino Torres; and that Jose B. Henson executed in favor of Don Florentino Torres a chattel mortgage on his three drug stores known as Henson's Pharmacy, Farmacia Henson and Botica Hensonina, to secure a loan of P50,000, which was later reduced to P26,000, and for which, Henson's Pharmacy at Nos. 71-73 Escolta, remained as the only security by agreement of the parties.

– In both cases the plaintiff argues that the defendant had violated the terms of the mortgage, thus, they have the right to take in possession and foreclose the chattel mortgage

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• Issue: Should Torres’ camp be allowed to take possession of the drugstores?

• Lower Court Decision: In favor of Torres• Higher Court Decision: Affirmed• Reasons:

– A stipulation in the mortgage, extending its scope and effect to after-acquired property, is valid and binding —

– . . . where the after-acquired property is in renewal of, or in substitution for, goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods, etc. (11 C.J., p. 436.)

• Source: http://www.lawphil.net/judjuris/juri1931/sep1931/gr_34385_1931.html

Torres V. Limjap 56 Phil. 141GR No.34386 , Sept. 21, 1931

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QUESTIONS:

• Question: Can chattel mortgage cover after-incurred (future) obligations or debts subsequently contracted?

• Answer: No• Reason: Chattel mortgage can only cover

obligations existing at the time the mortgage is constituted

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Affidavit of Good Faith

• An oath 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 just and void obligation and one not entered into for the purpose of fraud.”

• debt or obligation referred to is current not a condition that is being anticipated or may exist in the future

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Registration Requirements

• General Rule: Chattel Mortgage must be registered with Register of Deeds where debtor resides to bind third persons

• However: Pursuant to Art. 2125 of Civil Code, chattel mortgage is binding between mortgagor and mortgagee even if not registered

• Place of Registration– Place of residence of mortgagor (if residing in Phils.)– Province where the property is located (if living abroad)– In both place of residence of mortgagor, if residence and

location of property are different

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Registration Requirements to make chattel mortgage binding against 3rd parties:

• Shares of Stock – Double Registration: Register of Deeds where 1) debtor resides

and 2) corporation has its principal office• Motor Vehicle

– Triple Registration: Register of Deeds where 1) debtor resides, 2) where the motor vehicle is located 3) with LTO

• Sea Vessels– Philippine Coast Guard– Bureau of Customs in Manila (if in Manila)– Office of the Collector of Customs in the port of entry (if outside

Manila)– Registration is governed by Ship Mortgage Decree (P.D. 1521,

1978)

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Liabilities

• Where debtor performs and creditor refuses to release the mortgage, debtor may go to court for relief

• Art 319 of the Revised Penal Code on Crimes on Chattel Mortgage– Knowingly removing any personal property mortgage under

Chattel Mortgage Law to any province or city other than where it was located when the mortgage was executed without written consent of the mortgagee

– Selling or pledging personal property already mortgaged without the consent of the mortgagee and duly recorded in the Chattel Mortgage Register

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Remedies of Creditor

• Extrajudicial Foreclosure– Presupposes a voluntary surrender to sheriff of

personal property by debtor; – Creditor then files an affidavit outlining right to

possession and sale through public auction or private sale (depending on agreement between parties)

• Should Debtor Refuse to Surrender Property– Creditor may take preliminary step of replevin and

once he has possession, proceed to public auction

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Remedies of Creditor

• Creditor cannot forcibly take possession of the chattel, but must seek court remedy to obtain possession

• mortgage cannot just take possession and appropriate the chattel, since that would constitute “pactum commissorium”, his remedy is to foreclose

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Procedure for Foreclosure of Chattel Mortgages

• 30 days after the mortgage is broken, the mortgagee may sold the mortgaged property at public auction

• At least 10 days before the sale, the mortgagor must be informed in writing on time, place and purpose of the sale.

• The notice of sale must be posted in at least 2 public places - in the municipality where the mortgagor resides or where the property is situated

• The mortgagor or owner may bid with the right to match the highest bidder.

• The mortgagee may also bid, but his offer shall not be valid if he is the only bidder (Art 2113 Civil Code)

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Deficiency Judgement• General Rule:

– Creditor shall always be entitled to collect the deficiency judgment (Case: G.R. No. 106435, July 14, 1999)

– When the proceeds of the sale property is insufficient to cover the debts in extrajudicial foreclosure, the mortgagee may claim deficiency judgement

– 10 years prescriptive period (Art. 1142)• Exceptions

– If mortgagor failed to pay 2 or more instalments and unpaid creditor decides to foreclose the mortgage, no deficiency judgement under the Recto Law (Art 1484 of the Recto Law

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Pameca Wood Treatment Plant V. DBPGR106

• Facts:– On April 17, 1980, Pameca Wood Treatment Plant, Inc. obtained a loan of

US$267, 881.67 or Php2M from DBP– PAMECA through its President, Hermiginio Teves, excuted a promissory

note for said amount, promising to pay the loan by instalment– A chattel mortgage was executed over PAMECA’s property in Dumaguete

City including inventories, furniture and equipment to cover the whole value of the loan

– PAMECA failed to pay, thus, on Jan. 18, 1984 ; DBP had foreclosed the chattel mortgage and as the sole bidder, purchased the foreclosed properties for PhP322, 350.

– On June 29, 1984, DBP filed a complaint for the collection of the balance of Php4,366,332.46 at Regional Trial Court in Makati City against petitioner PAMECA and the private petitioners

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Pameca Wood Treatment Plant V. Hon. Court of Appeals and DBP

• Issue: Should DBP, as the creditor, be allowed to Collect Deficiency Judgment?• RTC Ruling:In favor of DBP

– PAMECA , Herminio Teves et. al, were ordered to pay on instalment basis the deficiency claim of Php4,366,332.46 as of March 31, 2013

– Plus 21% interest per annum and other charges from April 1, 1984 until the whole amount is fully paid

– Costs incurred during the lawsuit• Case was appealed to the Court of Appeals by Pameca on the following grounds:

– The public auction was tainted with fraud– Failure to apply by analogy Art. 1484 and Art 2115 (Civil Code)– Pameca merely signed the promissory note as a matter of practice by the

banks• CA Decision – in favor of CA and DBP• Supreme court affirmed the lower court’s decision.

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CASE ANALYSIS: MAGNA FINANCIAL

SERVICES GROUP VS. COLARINA 477

SCRA 245 (2005)

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477 SCRA 538 Facts• On 11 June 1997, Elias Colarina bought on installment

from Magna Financial Services Group, Inc., one (1) unit of Suzuki Multicab

• Colarina gave a down payment and executed a promissory note for the balance of P229,284.00 payable in thirty-six (36) equal monthly installments at P6,369.00 monthly, beginning 18 July 1997.

• Colarina executed an integrated promissory note and deed of chattel mortgage over the motor vehicle.

• But she failed to pay, despite reprimands, the monthly amortization, thus, accumulating an unpaid balance

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477 SCRA 538 Facts – continued…• Magna Financial Services Group, Inc. filed a Complaint for Foreclosure

of Chattel Mortgage with Replevin before the Municipal Trial Court in Cities (MTCC), Branch 2, Legaspi City, docketed as Civil Case No. 4822 .

• Upon the filing of a Replevin Bond, a Writ of Replevin was issued by the MTCC.

• On 27 December 2000, summons, together with a copy of the Writ of Replevin, was served on Colarina who voluntarily surrendered physical possession of the vehicle to the Sheriff, Mr. Antonio Lozano.

• On 02 January 2001, the aforesaid motor vehicle was turned over by the sheriff to Magna Financial Services Group, Inc.

• On 12 July 2001, Colarina was declared in default for having filed his answer after more than six (6) months from the service of summons upon him. Thereupon, the trial court rendered judgment based on

the facts alleged in the Complaint.

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ISSUE: SHOULD THE COURT ORDER THE

DEFENDANT TO PAY MAGNA FINANCIAL

SERVICES THE UNPAID BALANCE?

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MTC and RTC Ruling• In favor of Magna Financial Services Group• As per court judgement Colarina was required

to:a) Pay the principal sum plus penalty charges b) Pay P10,000.00 for attorney’s fees; and c) Pay the costs d) Pay money judgement within ninety (90) days from the

entry of judgment. e) In case of default in such payment, the one (1) unit of

Suzuki Multicab, subject of the writ of replevin and chattel mortgage, shall be sold at public auction to satisfy the said judgment.

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Court of Appeals Ruling

• In-favor of Colarina– CA found error in the previous court’s judgement – Pursuant to Art. 1484 of the Civil code, the defendant

should not be required to pay the unpaid balance because it was inconsistent with the instant complaint which was for the foreclosure of its chattel mortgage

• The Supreme Court Affirmed the CA decision on January 21, 2003.

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The Recto Law• Reflected in Articles 1484 – 1485 of the Civil Code• Provides that in a contract of sale of personal property, the

price of which is payable in instalments• Vendor Remedies:

– Exact fulfilment of the obligation, should the vendee fail to pay

– Cancel the sale, if vendee failed to pay 2 or more instalments; the vendor gets back the object sold and retains instalments paid, provided it was stipulated in the contract

– Foreclose the chattel mortgage on the thing sold should vendor failure to pay covers 2 or more instalments. No option to recover balance of the price. Any agreement to the contract is void.

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Definition of Legal Terms

• Pactum Commissorium– Stated in Article 2088 of the Civil Code– It’s a clause in the contract that gives the creditor automatic right to be the

owner of the personal property mortgaged if the mortgagor fails to deliver to the terms payment for the mortgaged property. It is prohibited by law. (http://www.pinoy-reviews.com/2008/03/what-is-pactum-commissorium.html)

• Deficiency of Judgement– Court order associated with foreclosures– Makes you personally liable for unpaid debt– Occurs when the value of the foreclosed property is unable to

pay off the loan (http://banking.about.com/od/loans/a/deficiencyjudg.html)

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Definition of Legal Terms

• Replevin– Rule 60– Complaint that seeks to claim or repossess personal

property on mortgage – (http://philippinelaw.info/supreme-court-issuances/

rule60-replevin.html)

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References

• Villanueva, C,L., Commercial Law Review (2004)• http://sc.judiciary.gov.ph/jurisprudence/2005/dec2005/15863

5.htm• http://philippinelaw.info/supreme-court-issuances/rule60-rep

levin.html• http://attyalvinclaridades.wordpress.com/2012/06/21/chattel

-mortgage-article-2085-to-2123-2140-to-2141-of-the-civil-code-act-no-1508-as-amended-with-affidavit-of-good-faith/

• http://www.pinoy-reviews.com/2008/03/what-is-pactum-commissorium.html

• http://banking.about.com/od/loans/a/deficiencyjudg.html