ACT NO.

1508 AN ACT PROVIDING FOR THE MORTGAGING OF PERSONAL PROPERTY AND FOR THE REGISTRATION OF THE MORTGAGES SO EXECUTED SECTION 1. The short title of this Act shall be The Chattel Mortgage Law. SECTION 2. All personal property shall be subject to mortgage, agreeably to the provisions of this Act, and a mortgage executed in pursuance thereof shall be termed chattel mortgage. SECTION 3. Chattel mortgage defined. A chattel mortgage is a conditional sale of personal property as security for the payment of a debt, or the performance of some other obligation specified therein, the condition being that the sale shall be void upon the seller paying to the purchaser a sum of money or doing some other act named. If the condition is performed according to its terms the mortgage and sale immediately become void, and the mortgagee is thereby divested of his title. SECTION 4. Validity. A chattel mortgage shall not be valid against any person except the mortgagor, his executors or administrators, unless the possession of the property is delivered to and retained by the mortgagee or unless the mortgage is recorded in the office of the register of deeds of the province in which the mortgagor resides at the time of making the same, or, if he resides without the Philippine Islands, in the province in which the property is situated: Provided, however, That if the property is situated in a different province from that in which the mortgagor resides, the mortgage shall be recorded in the office of the register of deeds of both the province in which the mortgagor resides and that in which the property is situated, and for the purposes of this Act the city of Manila shall be deemed to be a province. SECTION 5. Form. A chattel mortgage shall be deemed to be sufficient when made substantially in accordance with the following form, and shall be signed by the person or persons executing the same, in the presence of two witnesses, who shall sign the mortgage as witnesses to the execution thereof, and each mortgagor and mortgagee, or, in the absence of the mortgagee, his agent or attorney, shall make and subscribe an affidavit in substance as hereinafter set forth, which affidavit, signed by the parties to the mortgage as above stated, and the certificate of the oath signed by the authority administering the same, shall be appended to such mortgage and recorded therewith. FORM OF CHATTEL MORTGAGE AND AFFIDAVIT. This mortgage made this ____ day of ______19____ by _______________, a resident of the municipality of ______________, Province of ____________, Philippine Islands mortgagor, to ____________, a resident of the municipality of ___________, Province of ______________, Philippine Islands, mortgagee, witnesseth: That the said mortgagor hereby conveys and mortgages to the said mortgagee all of the following-described personal property situated in the municipality of ______________, Province of ____________ and now in the possession of said mortgagor, to wit:

(Here insert specific description of the property mortgaged.) This mortgage is given as security for the payment to the said ______, mortgagee, of promissory notes for the sum of ____________ pesos, with (or without, as the case may be) interest thereon at the rate of ___________ per centum per annum, according to the terms of __________, certain promissory notes, dated _________, and in the words and figures following (here insert copy of the note or notes secured). (If the mortgage is given for the performance of some other obligation aside from the payment of promissory notes, describe correctly but concisely the obligation to be performed.) The conditions of this obligation are such that if the mortgagor, his heirs, executors, or administrators shall well and truly perform the full obligation (or obligations) above stated according to the terms thereof, then this obligation shall be null and void. Executed at the municipality of _________, in the Province of ________, this _____ day of 19_____ ____________________ (Signature of mortgagor.) In the presence of _________________ _________________ (Two witnesses sign here.) FORM OF OATH. We severally swear that the foregoing 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 a just and valid obligation, and one not entered into for the purpose of fraud. FORM OF CERTIFICATE OF OATH. At ___________, in the Province of _________, personally appeared ____________, the parties who signed the foregoing affidavit and made oath to the truth thereof before me. _____________________________ (Notary public, justice of the peace, or other officer, as the case may be.) SECTION 6. Corporations. When a corporation is a party to such mortgage the affidavit required may be made and subscribed by a director, trustee, cashier, treasurer, or manager thereof, or by a person authorized on the part of such corporation to make or to receive such mortgage. When a partnership is a party to the mortgage the affidavit may be made and subscribed by one member thereof.

SECTION 7. Descriptions of property. The description of the mortgaged property shall be such as to enable the parties to the mortgage, or any other person, after reasonable inquiry and investigation, to identify the same. If the property mortgaged be large cattle, as defined by section one of Act Numbered Eleven and forty-seven, and the amendments thereof, the description of said property in the mortgage shall contain the brands, class, sex, age, knots of radiated hair commonly known as remolinos, or cowlicks, and other marks of ownership as described and set forth in the certificate of ownership of said animal or animals, together with the number and place of issue of such certificates of ownership. If growing crops be mortgaged the mortgage may contain an agreement stipulating that the mortgagor binds himself properly to tend, care for and protect the crop while growing, and faithfully and without delay to harvest the same, and that in default of the performance of such duties the mortgage may enter upon the premises, take all the necessary measures for the protection of said crop, and retain possession thereof and sell the same, and from the proceeds of such sale pay all expenses incurred in caring for, harvesting, and selling the crop and the amount of the indebtedness or obligation secured by the mortgage, and the surplus thereof, if any shall be paid to the mortgagor or those entitled to the same. A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding. SECTION 8. Failure of mortgagee to discharge the mortgage. If the mortgagee, assign, administrator, executor, or either of them, after performance of the condition before or after the breach thereof, or after tender of the performance of the condition, at or after the time fixed for the performance, does not within ten days after being requested thereto by any person entitled to redeem, discharge the mortgage in the manner provided by law, the person entitled to redeem may recover of the person whose duty it is to discharge the same twenty pesos for his neglect and all damages occasioned thereby in an action in any court having jurisdiction of the subject-matter thereof. SECTION 13. When the condition of a chattel mortgage is broken, a mortgagor or person holding a subsequent mortgage, or a subsequent attaching creditor may redeem the same by paying or delivering to the mortgagee the amount due on such mortgage and the reasonable costs and expenses incurred by such breach of condition before the sale thereof. 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 by the terms of this Act. SECTION 14. Sale of property at public auction; Officers return; Fees; Disposition of proceeds. The mortgagee, his executor, administrator, or assign, may, after thirty days from the time of condition broken, cause the mortgaged property, or any part thereof, to be sold at public auction by a public officer at a public place in the municipality where the mortgagor resides, or where the property is situated, provided at least ten days notice of the time, place, and purpose of such sale has been posted at two or more public places in such municipality, and the

mortgagee, his executor, administrator, or assign, shall notify the mortgagor or person holding under him and the persons holding subsequent mortgages of the time and place of sale, either by notice in writing directed to him or left at his abode, if within the municipality, or sent by mail if he does not reside in such municipality, at least ten days previous to the sale. The officer making the sale shall, within thirty days thereafter, make in writing a return of his doings and file the same in the office of the register of deeds where the mortgage is recorded, and the register of deeds shall record the same. The fees of the officer for selling the property shall be the same as in the case of sale on execution as provided in Act Numbered One hundred and ninety, and the amendments thereto, and the fees of the register of deeds for registering the officers return shall be taxed as a part of the costs of sale, which the officer shall pay to the register of deeds. The return shall particularly describe the articles sold, and state the amount received for each article, and shall operate as a discharge of the lien thereon created by the mortgage. The proceeds of such sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in their order, and the balance, after paying the mortgages, shall be paid to the mortgagor or person holding under him on demand. If the sale includes any large cattle, a certificate of transfer as required by section sixteen of Act Numbered Eleven hundred and forty-seven shall be issued by the treasurer of the municipality where the sale was held to the purchaser thereof. SECTION 16. This Act shall take effect on August first, nineteen hundred and six. Enacted, July 2, 1906.

CHATTEL MORTGAGE What is a chattel mortgage? In a chattel mortgage, personal property is recorded in the Chattel Mortgage Registry as security for the performance of an obligation. (Art. 2140, Civil Code. Note that the definition in Sec. 3, Act 1508 describing chattel mortgage as a "conditional sale" is not accurate.) What law governs chattel mortgages? Primarily Act No. 1508, and the provisions of the Civil Code on pledge insofar as they do not conflict with Act No. 1508. What is the purpose of the chattel mortgage law? The purpose of the chattel mortgage law is to promote business and trade and to give impetus to the economic development of the country. (Torres v. Limjap, 56 Phil. 141; 1931) What are the essential requisites of a chattel mortgage? 1. Involves personal property (Note however the case of Tumalad v. Vicencio, 41 SCRA 143; 1971); 2. Constituted to secure the fulfillment of the principal obligation; 3. Mortgagor is absolute owner of the thing mortgaged; 4. Persons constituting the mortgage have the free disposal of the property, or in the absence thereof, are legally authorized for the purpose. Note that recording of the chattel mortgage with the Register of Deeds, while necessary to bind 3rd persons, is not an essential requisite. What formal requirements must be observed in the preparation and execution of a chattel mortgage? 1. Substantial compliance with the form prescribed in Sec. 5 of Act No. 1508; 2. The chattel mortgage must be signed in the presence of at least 2 witnesses; 3. Affidavit of good faith; The affidavit of good faith states that: "We (the parties) severally swear that the foregoing 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 a just and valid obligation, and one not entered into for the purpose of fraud." (Sec. 5) 4. Certificate of oath / Notarial acknowledgment; 5. Sufficiency of description PROPERTY COVERED BY CHATTEL MORTGAGE What kind of property can be the subject of a chattel mortgage? As a general rule, only personal property can be the subject of a chattel mortgage. However, the following kinds of property, although not personalty, have been deemed validly covered by a chattel mortgage:

Growing crops (Sec. 6, Act 150) ; House built on another person's land (Tumalad v. Vicencio, 41 SCRA 143; 1971) Machinery permanently affixed to a building, under the doctrine of estoppel (Makati Leasing v. Wearever Textile, 122 SCRA 296; 1983)

Can future or after-acquired property be the subject of chattel mortgage? Yes, provided that the after-acquired property is either (1) in renewal of, or in substitution for, goods on hand when the mortgage was executed, or (2) purchased with the proceeds of the sale of such goods. (Torres v. Limjap, 56 Phil. 141; 1931)

Can like or substituted property be deemed covered by a chattel mortgage? No. Sec. 7 of Act 1508 expressly provides that a chattel mortgage covers only the property described therein and not like or substituted property thereafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding. Note however that this provision does not apply to drug stores, bazaars and all other stores in the nature of a revolving and floating business, i.e. one that deals with the sale of either perishable goods, "rolling" goods, or goods subject to wear and tear. (Torres v. Limjap, 56 Phil. 141; 1931)

Can a chattel mortgage cover after-incurred obligations or debts subsequently contracted? No. A chattel mortgage can only cover obligations existing at the time the mortgage is constituted. (Acme Shoe, et al. V. CA, G.R. 103576, Aug. 22, 1996) REGISTRATION In what place should a chattel mortgage be registered? If residing in Philippines: place of residence of mortgagor If residing abroad: province where the property is located If residence and location of property are different: In both place of residence of mortgagor and location of property Exception: If the amount of the mortgage is > P 500,000.00, the parties to the mortgage contract may agree to have the mortgagee registered only in the place where the property is located, and that shall be sufficient. (Sec. 198, Revised Administrative Code) In addition to

the foregoing, in what other registry or register should a chattel mortgage be registered or recorded? Motor vehicles: Land Transportation Office where vehicle is Registered Shares of stock: Register of Deeds where the corporation has its principal office. Note: There is no need for notation in the books of the corporation. (Chua Guan v. Samahang Magsasaka, 62 Phil. 472; 1935) Vessels: Philippine Coastguard Bureau of Customs in Manila (if in Manila) or in the Office of the Collector of Customs in the port of entry (if outside Manila) Motor vehicle which is Land Transportation Franchising and Regulatory public utility and loan Board (LTFRB) is not repayable within 1 year: When should a chattel mortgage be registered? Act No. 1508 does not prescribe any period within which a chattel mortgage must be registered. JUNIOR MORTGAGEES Can personal property already mortgaged be mortgaged again? In such a case, what is the right of the subsequent or junior mortgagees? Yes. In such a case, junior mortgagees have the right of redemption within the period of redemption allowed by law, for as long as the mortgagor has not yet exercised his right of redemption. DEFAULT AND FORECLOSURE Does the default of the mortgagor have the effect of vesting ownership of the mortgaged property on the mortgagee? In other words, could he appropriate the property to himself? No. He is only permitted 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 Sec. 14 of Act No. 1508. Pactum commissorium is prohibited. What is the procedure for foreclosure of chattel mortgages? 1. 30 days after the condition of the chattel mortgage is broken, the mortgagee (or his executor, administrator or assign) may cause the mortgaged property (or any part thereof) to be sold at public auction. 2. At least 10 days before the sale, the mortgagor and all junior mortgagors must be informed in writing of the time, place and purpose of the sale. The notice of sale must likewise be posted in at least 2 public places in the municipality where the mortgagor resides or where the property is situated. Who may bid in the foreclosure sale? At the public auction, the mortgagor or owner may bid. He shall, moreover, have a better right if he should offer the same terms as the highest bidder. (This implies the right to match.) The mortgagee may also bid, but his offer shall not be valid if he is the only bidder. (Art. 2113, Civil Code)

DEFICIENCY Can a chattel mortgagee sue for a deficiency following foreclosure? As a general rule, yes, a chattel mortgagee can sue for a deficiency judgment following foreclosure. However, if the property was sold in installments, the mortgagee can no longer take any action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary is void. (Art. 1484, Civil Code) What is the Recto law? The Recto law, which is now reflected in Articles 1484-1485 of the Civil Code, which provides that in a contract of sale of personal property, the price of which is payable in installments, the vendor may exercise any of the following remedies: a. Exact fulfillment of the obligation, should the vendee fail to pay (specific performance); b. Cancel the sale, should the vendee's failure to pay cover two or more installments (Note that this is not the same as rescission because here, the vendor gets back the object of the sale and retains the installments paid. However, this is not available in the absence of stipulation in the contract.); c. Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover 2 or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contract is void. (The principal object of this amendment was to remedy the abuses committed in connection with the foreclosure of chattel mortgages. This amendment prevents mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price, and then bringing the suit against the mortgagor for a deficiency judgment. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing practically the full amount of his original indebtedness.)

These remedies are alternative; not cumulative. (Pacific Commercial Co. v. Dela Rama, 72 Phil. 380) SPECIFIC PERFORMANCE In sales on installments, where the action instituted is for specific performance and the mortgaged property is subsequently attached and sold, the sale thereof does not amount to a foreclosure of the mortgage. Hence, seller is entitled to a deficiency judgment. (Southern Motors v. Moscoso, 2 SCRA 168; 1961) REDEMPTION What are the rules on redemption of property subject to chattel mortgage? Since the Chattel Mortgage Law does not contain provisions similar to Sec. 6 & 7 of Act No. 3135 governing extra-judicial foreclosure of real estate mortgage, the provisions of Rule 39 of the Rules of Court on redemption in case of execution sales will apply. (IFC Service Leasing v. Nera, 19 SCRA 181) EXTRAJUDICIAL FORECLOSURE OF REAL ESTATE MORTGAGE GOVERNING LAW Act 3135, as amended by Act No. 4118 and Sec. 47, R.A. 8791 (General Banking Law of 2000) governs sales made under a special power inserted in or attached to any real estate mortgage made as security for the payment of money or the fulfillment of any other obligation.

(Also, there is a SC circular that outlines the procedure for foreclosure of Real Estate Mortgages. Unfortunately, hindi ko alam yung number. Please find it nalang.)

FORECLOSURE SALE TYPE OF SALE: Public auction VENUE OF SALE: Province where the property is situated If venue is subject to stipulation, such sale shall be made in said place (i.e., the place so stipulated) or in the municipal building of the municipality in which the property or part thereof is situated. NOTICE: Notices of the sale are to be posted in at least 3 public places of the municipality or city where the property is situated for not less than 20 days. Such notice shall likewise be published once a week for at least 3 consecutive weeks in a newspaper of general circulation in the municipality or city. TIME OF SALE: Between 9 AM and 4 PM WHO MAY BID: The creditor; The trustee; Other persons authorized to act for the creditor; Other bidders not privy to the mortgage or trust deed

PROCEDURE: 1. The mortgagee files an application for foreclosure with the Executive Judge through the Clerk of Court, who will receive and docket the application and collect the appropriate filing fees. (SC Circular) 2. Notice of the sale is posted in at least 3 public places of the municipality or city where the property is situated for not less than 20 days and published once a week for at least 3 consecutive weeks in a newspaper of general circulation in the municipality or city. (Sec. 3, Act 3135) 3. The auction sale is conducted under the direction of the sheriff, the Executive Judge, or a notary public of the municipality. (Sec. 4, Act 3135) At the sale, the creditor, trustee, or other persons authorized to act for the creditor may participate in the bidding and purchase under the same conditions as any other bidder unless the contrary has been expressly provided in the mortgage or trust deed under which the sale is made. (Sec. 5, Act 3135) There must be at least 2 participating bidders for the auction sale to be valid. (SC Circular) 4. Once the sale has been confirmed, the Clerk of Court issues a certificate of sale to the winning bidder. (Confirm this!) 5. After the date of the confirmation of the auction sale, the winning bidder has the right to enter upon and take possession of such property and administer the same in accordance with law. (Sec. 47, R.A. 8791) Within 30 days after the purchaser is given possession of the property, the debtor may petition that the sale be set aside on the ground that the mortgage was not violated or the sale was not made in

accordance with the provisions of Act 3135. (Sec. 8, Act 3135) 6. Upon failure of the debtor to redeem the property within the period allowed him by the law, absolute ownership over the purchased property vests in the winning bidder. POSSESSION The purchaser at the auction sale has the right to enter upon and take possession of the property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. (Sec. 47, R.A. 8791, amending Sec. 7 of Act 3135) REDEMPTION WHO MAY REDEEM: (1) The debtor; (2) The debtor's successors-in-interest; (3) Any judicial creditor or judgment creditor of the debtor; (4) Any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold PERIOD FOR REDEMPTION: Natural persons: Within 1 year from and after the date of the sale (Sec. 6, Act 3135) Juridical persons: Until but not after the registration of the certificate of foreclosure sale with the applicable Register of Deeds, which in no case shall be more than 3 months after foreclosure, whichever is earlier. (Sec. 47, R.A. 8791) EFFECT OF INADEQUACY OF PRICE When there is a right to redeem, inadequacy of price is of no moment for the reason that the judgment debtor always has the chance to redeem and reacquire the property. In fact, the property may be sold for less than its fair market value precisely because the lesser the price the easier for the owner to effect a redemption. (Valmonte v. CA, 303 SCRA 278, citing DBP v. Moll, 43 SCRA 82) EFFECT OF REQUEST FOR EXTENSION OF TIME ON RIGHT TO QUESTION VALIDITY OF FORECLOSURE SALE The act of seeking an extension of the redemption period estops the mortgagors from questioning the foreclosure sale thereafter.