Is registration of assignment of chattel mortgage needed to bind third parties?

In the subject Credit Transactions, law students often take up the case of Yap Tico vs. Sison, 37 Phil. 584 (1918). Devoid of verbal trappings, the facts involved a creditor who extended a loan secured by a chattel mortgage. The original creditor assigned the chattel mortgage to another, without giving actual notice to the debtor. The new creditor, however, registered the assignment in the chattel mortgage registry. In the absence of actual knowledge, the debtor continued to pay the original creditor. When the loan was paid, the new creditor demanded payment. The debtor refused, claiming that any payment made to the original creditor prior to notification of the assignment was valid. The new creditor claimed that registration of the assignment amounted to constructive notice to the debtor and thus all payments made by the debtor to the original creditor after registration were void.

The Supreme Court, a majority of whom at the time were Americans, cited American case law and held that registration of the assignment did not operate as notice to the mortgagor, because the law did not require such assignments to be registered.

The rule is different in cases of real estate mortgages. For Article 152 of the Real Estate Mortgage Law expressly requires notice of the assignment to be given to the debtor and the assignment of the real estate mortgage to be recorded in the registry.

Justice George Molcolm, in In re Shoop, 41 Phil. 213 (1920), discussed the extent that American law had influenced decisions of the Philippine Supreme Court and cited Sison vs. Yap Tico among his examples. Justice Malcolm declared: "The Court relies upon American authorities for the rule that, if a document is not required to be recorded, the recording thereof is not constructive notice. In support of the Civil Code, it cites American authorities for the rule [that] payment to original creditor, before notice of assignment, is good."

In the light of the Yap Tico case, is registration of an assignment of a chattel mortgage needed to bind third parties? The Supreme Court has cited Sison vs. Yap Tico several times, but each time the issue was whether or not payment to the original creditor, before actual notice by the debtor of an assignment of a chattel mortgage, was good.

Does this mean that in case an earlier assignment is not registered and another subsequent assignment is registered, the unregistered assignment would prevail? Although Sison vs. Yap Tico and In re Max Shoop suggest that the unregistered assignment would indeed prevail, reliance on these two cases to reach that conclusion is not free from risk. Among other reasons, the Supreme Court has yet to resolve a situation such as that.

In his concurring opinion in Sison vs. Yap Tico, Justice Carson accepted the ruling of the majority, but disagreed with the rationale of the majority that "if the law does not require a particular instrument to be recorded, the recording will not be constructive notice of its existence to any one." Justice Carson, also citing American authorities, distinguished between a situation where the law does not require registration, and one where the law does not authorize such registration. Where the registration of such transfer is not authorized, he was of the opinion that filing and recording would impart no notice to anyone. However, where recording, although not required, is authorized, as in the case of Section 15 of the Chattel Mortgage Law (and now Section 116(3) of PD No. 1529 [The Property Registration Decree]), the result would be different.

In another concurring opinion, Justice Street, again citing American authorities, argued that recording imparts constructive notice only to such persons as would have been entitled to protection had it not been recorded – in other words, to persons who are under a legal obligation to search for it. He added that it is only a subsequent conveyance that can defeat a prior unrecorded conveyance and therefore only persons who acquire their rights subsequent to the registration can be charged with notice of a recorded conveyance.

Until the Supreme Court resolves a situation involving both a registered and an unregistered assignment of a chattel mortgage, perhaps the prudent position would be to limit the application of Yap Tico to cases where a debtor/mortgagor pays the original creditor without actual notice that the chattel mortgage had been assigned to a new creditor, but which assignment had been registered.

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(The author is a Senior Partner of Angara Abello Concepcion Regala & Cruz Law Offices or ACCRALAW. He may be contacted at tel. no. 830-8000 or e-mailed at [email protected])