In the offing – solutions to problems in secured transactions?

Pending in Congress is a bill introduced by Congresswoman Imee Marcos that attempts to resolve problem areas in secured transactions that have hindered financial transactions. In a nutshell, the bill provides for the following: (1) future property may be the subject of a chattel mortgage; (2) chattel mortgages may secure future obligations; (3) pledgees would be able to sue debtors for any deficiency, in case proceeds from the foreclosure of a pledge are not sufficient to cover the principal and other charges, and (4) assignments of receivables may be registered, so as to bind third parties.

Future Property. The rule today is that a "chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor (Sec. 7, Chattel Mortgage Law). The Supreme Court has carved out exceptions to this rule in the case of retail stores open to the public, such as drug stores, groceries and dry goods stores, the stocks-in-trade of which are constantly sold and substituted with new stock. Practice in the financial community has extended this exception to inventories of raw materials, goods and process and finished goods. But no further. The bill of Congresswoman Marcos explicitly allows a mortgage of future chattels, in much the same way that our law on sales allows the sale of future goods.

Future Obligations. The Supreme Court has flip-flopped on the issue whether or not future obligations may be the subject of a chattel mortgage. In Belgian Catholic Missionaries vs. Magallanes Press, 49 Phil. 647 (1926), the High Court struck down a chattel mortgage that secured an obligation not yet contracted by the mortgagor at the time the mortgage was constituted. In Ong Liong Tiak vs. Luneta Motor Company, 66 Phil. 459 (1938), the Supreme Court backtracked a bit and held that its ruling in Belgian Catholic Missionaries would not apply if there had been an express stipulation in the mortgage that it would secure future obligations as well. In Jaca v. Davao Lumber Company, 113 SCRA 107 (1982), the Supreme Court reverted to its position in Belgian Catholic Missionaries when it struck down a mortgage because it also secured "obligations which may hereafter be contracted by the Mortgagor in favor of the Mortgagee." The present position of the Supreme Court put to risk chattel mortgages which secured revolving credit lines, i.e., a credit line where the debtor may reveal of his line after prior availments shall have been paid. The bill of Congresswoman Marcos would explicitly allow chattel mortgages to secure future obligations.

Deficiency in Case of Pledge. Upon foreclosure of a real estate or chattel mortgage, the creditor may bring an action against the debtor for any deficiency in case the proceeds of the foreclosure sale are not sufficient to cover the secured obligations. In the case of a pledge, the foreclosure of the pledge extinguishes the obligations that it secured, whether or not the proceeds of the sale are equal to the amount of the secured obligations. If the price of the sale is less, the creditor is not entitled to any deficiency, and any stipulation to the contrary is void. As a form of collateral, the expenses for a pledge are less than that of a chattel mortgage, because there are no registration fees to be paid in case of a pledge. However, creditors have always been wary about a pledge, because of the rule against deficiency judgments. The bill of Congressman Marcos resolves this problem, by expressly allowing deficiency judgments in case of a pledge.

Assignments of Receivables. There has always been some doubt as to what kind of security is an assignment of receivables. Many lawyers are of the view that an assignment of receivables must comply with the requirements of either a chattel mortgage or a pledge. The bill of Congresswoman Marcos would set up a separate register in the chattel mortgage registry for the purpose of registering assignments of receivables, thus clearing up some of the mystery behind this form of security.

I believe that this is another measure that deserves the support of the financial community.

(The author is a senior partner of Abello Concepcion Regala & Cruz Law Offices or ACCRALAW. He may be contacted at tel. 830-8000 or e-mailed at [email protected]).