Chattel Mortgage Defined
A chattel mortgage is a contract of chattel mortgage defined in Sections 3 and 4 of Act No. 1508, as amended, otherwise known as the Chattel Mortgage Law. It is also referred to by Article 2140 of the Civil Code of the Philippines.
Under the Chattel Mortgage Law, 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.
Key Requirements
- The requirement for the recording of the contract of chattel mortgage in the Registry of Property is an indispensable requirement for its existence.
- While Article 2140 of the Civil Code requires recording of the personal property to the creditor as security, there is no chattel mortgage contract if there is no chattel mortgage registry.
- The registration of the personal property to the creditor as security for an obligation constitutes an indispensable requirement for the existence and validity of the said contract.
- An unregistered chattel mortgage is nevertheless valid between the parties thereto.
- The Philippine Supreme Court held that the validity of an unregistered chattel mortgage is upheld between the parties.
- Article 2125 of the Civil Code states that in order that a mortgage may be validly constituted, that the document in which it appears be recorded in the Registry of Property. This applies to chattel mortgages pursuant to the mandate of Article 2141.
- The better view suggests that registration is essential to the validity of the chattel mortgage contract.
Examples
Vehicle Financing
- Cars and trucks: A business purchases a delivery truck for $50,000, using the truck itself as security for the loan
- Construction equipment: A contractor finances a $200,000 excavator, with the excavator serving as collateral
- Fleet vehicles: A taxi company finances 10 vehicles, each secured by a chattel mortgage
Agricultural Equipment
- Tractors and harvesters: A farmer borrows $150,000 to buy a combine harvester, secured against the machine
- Livestock: In some jurisdictions, cattle or other livestock can be subject to chattel mortgages
- Irrigation systems: Movable irrigation equipment used as security for agricultural loans
Business Equipment
- Manufacturing machinery: A factory finances $500,000 worth of production line equipment
- Restaurant equipment: A new restaurant uses commercial ovens, refrigerators, and dishwashers as security
- Medical equipment: A clinic finances an MRI machine or other expensive diagnostic equipment
Marine Vessels
- Commercial fishing boats: A fisherman mortgages their vessel to secure working capital
- Pleasure craft: Yachts and boats used as collateral for loans
Technology and Office Equipment
- Computer systems: Large server installations or computer networks
- Printing equipment: Commercial printers securing loans with their printing presses
The key characteristic in all these examples is that the property can be moved (unlike real estate) and the borrower typically retains possession and use of the item while making loan payments. If the borrower defaults, the lender can repossess the chattel.