Sec. 14. Nature of mortgage. A chattel mortgage is a trans-
fer of a defeasible title to personal property as security for a debt.
The title is defeasible in that the mortgage agreement provides that
the property may be redeemed by payment of the debt at any time
before foreclosure. The person giving the mortgage is known as
the mortgagor, while the one accepting it as security is called the
A chattel mortgage differs from a pledge in that it usually pro-
vides for the retention of possession by the mortgagor, while a
pledge is good only when the pledgee remains in possession. Fur-
thermore, the pledgee obtains an inherent right to dispose of the
property upon default of the debtor, whereas the mortgagee must
foreclose in accordance with the statutes of the particular state, in
order to secure his money. The mortgage agreement may grant to
the mortgagee a right to possess, sell, and dispose of the property in
case of default; but in many states this right is encumbered, by
statute, with requirements for giving notice, for public sale, and for
an accounting, which requirements render a sale by the mortgagee
only slightly less cumbersome than foreclosure.
Sec. 15. Property subject to a mortgage. Property cannot be
the subject of a mortgage until such time as it has either actual or
potential existence. Thus, bricks not yet formed, or furniture as
yet unprocessed, cannot be effectively mortgaged as bricks or furni-
ture. Since no such product to which title may be transferred as
yet exists, it can be neither sold nor mortgaged. 1
Property has potential existence when it will normally come into
being without the aid of man: that is, when the property out of
which the increase naturally springs is present. The states are
somewhat in conflict concerning the time when crops to be grown
on certain land have potential existence. A bare majority of the
states permit a chattel mortgage on grain crops to be registered, al-
though the crops have not been planted. A strong minority, how-
ever, insist that the crops must be planted before they may be effec-
tively mortgaged. The majority of the states thus make it possible
to create a mortgage on crops that are to be grown during a number
of years in the future. So long as the mortgagor has an interest in
the land equal to the period covered by the mortgage, the crops are
said to have potential existence.
If no crops are grown by the mortgagor, or if the mortgagor's
right in the land is disposed of before the crops mature, the holder
of the chattel mortgage has no security for his debt. A mortgage on
future crops is good only in case the crops mature and are harvested
by the mortgagor before his interest in the land expires or is termi-
Property to which the mortgagor has no title may not be effec-
tively mortgaged. Such an attempt amounts in equity to a prom-
ise to mortgage, and will be enforced between the immediate parties
as soon as title is acquired by the mortgagor. A mortgage on prop-
erty to be acquired in the future, however, is not valid as against an
innocent third party, even after title has been acquired, unless the
mortgagee immediately takes possession of the property or obtains
and files a new mortgage. One who is interested in determining
the status of title to personal property seldom searches the records
beyond the date upon which the owner purchased the property,
He concludes that no mortgage would be created before the prop-
erty was purchased. Therefore, a mortgage given before title is
acquired is not effective against good-faith purchasers of the prop-
erty. An "after acquired" clause is subject to the same objection.
A mortgage on presently owned property which attempts to cover
other property obtained by purchase or gift during the life of the
mortgage is effective only on the presently owned property as
against innocent third parties. If the newly acquired goods are
sold to innocent purchasers, the purchasers obtain good title. In
several of the states a judgment creditor's lien is superior to the
mortgagee's "after acquired" clause.
In a number of the states an exception to this rule exists in the
case of a stock of merchandise. In these states a mortgage upon
stock in trade which covers subsequently acquired goods, purchased
with the proceeds from the sale of the mortgaged stock, is effective.
Perhaps a slight majority of the states follow the general rule and
refuse to uphold the validity of the mortgage on subsequently ac-
quired stock in trade.
Sec. 16. Recording mortgage. A chattel mortgage which per-
mits the mortgagor to remain in possession of the mortgaged prop-
erty becomes effective against bona fide purchasers and judgment
creditors only when it is properly executed and recorded or filed. 3
The statutes of most states require that the mortgage be recorded
or filed some require recording, while others provide for filing
8 McMaster v. Emmerson et al., 1899, 109 Iowa 284, 80 N.W. 389; p. 772.
8 Seacoast Finance Corp. v. Cornell et al., 1927, 104 NJ.L. 24, 138 Atl. 695; p. 773.
354 SECURITY FOR CREDIT TRANSACTIONS
with the recorder of the county in which the mortgagor resides. In
a few states it is recorded in the county offices of the county in
which the property is located. Removal of the mortgagor from one
county or state to another, with the consent or knowledge of the
mortgagee, imposes a duty upon the latter to record his mortgage in
the new location. 4
A bona fide purchaser is one who gives value for the property
without knowledge that it has been mortgaged. Even though the
mortgage is not recorded, a purchaser with knowledge of its exist-
ence takes subject to the mortgage. He cannot, by purchasing the
property, cut off a superior equity of which he is aware. In most
states a mortgage is not effective until it is placed on record or until
third persons have knowledge of it. Any rights of third parties in
the property, which intervene between the giving and the recording
of the mortgage in these states, are superior to the mortgage. In a
few states the statute provides that a mortgage must be recorded
within ten days after it is given, or else it is void as to all creditors. 5
Prompt recording of a chattel mortgage is desirable, since secret
liens are not favored by the courts.
Attention should be called to the fact that recording or filing is
unnecessary where the mortgagee takes possession of the property.
In order for a purchaser of personal property to be certain that no
lien exists against it, he should search the records of the county in
which the mortgagor resides, and he should also inquire of any third
party who happens to be in possession of the property of what the
latter's interest consists.
A chattel mortgage may not be filed or recorded unless it has been
properly executed. The laws of the various states determine the
form of the mortgage and require that it be sworn to before some
public officer. The particular public officers who may perform this
duty differ in various states.
Sec. 17. Description of goods. Extreme care should be exer-
cised by the mortgagee in the description of the property mort-
gaged. It must be described with sufficient clearness to enable in-
terested third parties to identify the property. 6 As between the
immediate parties, however, whenever a description proves ambig-
uous, evidence may be introduced to prove their intention.
A mortgage on growing crops is effective only when the real estate
4 First National Bank of Ellsworth v. Ripley, Sheriff, 1927, 204 la. 590, 215 N.W.
647; p. 773.
'Illinois Nat. Bank & Trust Co. v. Holmes, 1941, 311 111. App. 286, 35 N.E.(2)
823; p. 774.
6 Baldwin v. Boyce, 1898, 152 Ind. 46, 51 N.E. 334; p. 776.
CHATTEL MORTGAGE 355
upon which the crops are to be grown is specifically designated.
Such a mortgage is not defeated by the fact that the crops are later
harvested and confused with other goods.
A mere change in the form of the property does not affect the
validity of the mortgage. Thus, it has been held that a mortgage
on leather is good also on shoes manufactured from the leather. So
long as the mortgaged property can be traced into the new article,
and forms the major portion of it, the mortgage is good.
Some question exists as to whether the natural increase of live-
stock is covered by a mortgage, where the matter is not specifically
mentioned. Although there are very few cases on the subject, the
prevailing view seems to be that the increase follows the property
mortgaged and is subject to the lien. However, to be safe in such
cases, it is best to provide definitely that the increase of the live-
stock shall be subject to the terms of the mortgage.
Sec. 18. Loans secured. The purpose of a mortgage is to se-
cure the payment of a debt. It may secure only one obligation, or
various ones, depending upon the mortgage agreement. If the
mortgage is correctly drawn, it may secure advances to be made in
the future, as well as existing loans. Where the agreement includes
a stipulation covering future advances, any advances made there-
under carry security superior to a second mortgage on the same
property in favor of some third party, although the second mort-
gage is given and recorded before the advances are made. To il-
lustrate: A gives B a chattel mortgage to secure a present loan of
$500 and other sums as advanced, not exceeding an additional
$1,000. Shortly thereafter, A, to secure a loan of $400, gives C a
second mortgage on the same property. Still later, B advances A
an additional $500. Clearly, in such a case B is protected under his
mortgage to the extent of $1,000, before C can expect any security.
However, a second mortgagee may limit the advances which are
possible under a first mortgage by giving the first mortgagee actual
notice of the former's interest. Mere recording of the second mort-
gage does not have this effect, although actual knowledge of the
inferior equity will have, regardless of how the knowledge is ob-
tained. Thus, in the illustration, if C had informed B of the second
mortgage before the advance was made, C's lien would have been
superior to that which protected the later advance. However, the
mere recording of A's mortgage to C did not have the effect of giv-
ing notice, as B was under no duty to inspect the records after he
recorded his mortgage.
When the mortgagee has contracted to make certain future ad-
vances, the better view is that he is not limited, in making the
356 SECURITY FOR CREDIT TRANSACTIONS
advances, by knowledge of inferior liens. It is only where the ad-
vances are optional that knowledge of an inferior lien precludes the
right to make additional advances.
A mortgage should accurately describe the obligations which it
secures. It is only by such a description that the purchaser of
mortgaged property can ascertain the indebtedness which he must
pay in order to clear the property of the mortgage. The courts
will, at the instance of an interested party, avoid a mortgage in
which the amount has been fraudulently overstated. If the over-
statement is the result of an error or mistake, the mortgage is usu-
ally held to be good security for the actual amount of the indebted-
Sec. 19. Waiver. Most states provide for certain penalties in
case the mortgagor sells or moves the mortgaged property without
the consent of the mortgagee. If the mortgagee consents to a sale
of such property, he thereby waives his lien, and the purchaser ob-
tains good title. 7 A general authority to sell, granted by the mort-
gagee, constitutes a waiver of all interest in the property or the pro-
ceeds of sale. In order adequately to protect his interest, where a
sale appears desirable, the mortgagee should either sell the property
himself, after securing the consent of the mortgagor, or make the
latter an agent to sell for the benefit of the former. If the mort-
gagee pursues the latter course, he maintains his lien upon the pro-
ceeds resulting from the sale.
Sec. 20. Foreclosure. Whenever the mortgagor defaults or
fails to meet the obligation which the mortgage secures, the mort-
gagee is entitled to foreclose. A foreclosure is effected by a court
order giving authority to some court officer, usually the sheriff, to
sell the property. The debt is then paid out of the return from the
sale. Inasmuch as a mortgage is given merely for security, any
surplus arising from foreclosure must be paid to the mortgagor.
Any deficit existing after the sale price has been applied to the debt
may be recovered from the mortgagor, along with any court costs
attached to the proceedings.
In order to avoid the time and expense involved in a foreclosure
suit, the majority of mortgage agreements provide that the mort-
gagee may, upon default, take possession of the property and sell as
best he can. As mentioned before, many states, by statute, have
modified this right in various ways. For example, Illinois demands
in such a case that the sale be public, after requisite notice has been
given, and that an accounting be rendered to the mortgagor within
a certain period after the sale has taken place.
7 Van Sant v. Austin-Hamill-Hoover Commission Co., 1927, 221 Mo. App. 1096,
295 S.W. 506 ; p. 777.
CHATTEL MORTGAGE 357
The duration of a mortgage and the time within which it must
be foreclosed are often prescribed by statute in the various states.
Thus, in Illinois a chattel mortgage may not exceed five years in
duration and must always be foreclosed within ninety days after
Review Questions and Problems
1. Who usually retains possession of property secured by a chattel
mortgage? What kind of property is subject to a chattel mortgage?
2. A 9 desiring to purchase two trucks, gave to a bank a mortgage on
the trucks to obtain the money with which to purchase them. He then
purchased the trucks. He later sold one of these trucks to C, an inno-
cent purchaser. Assuming the mortgage to be properly recorded, whose
claim to the truck is superior?
3. Is recording always essential to the validity of the mortgage?
4. A gave B a chattel mortgage upon certain leather. This leather,
unknown to B, was converted into shoes and sold to C. Does C take the
shoes subject to the mortgage?
5. May future loans be secured by a chattel mortgage and be effective
against intervening mortgages?
6. A held a mortgage on B's wheat crop. He told B to sell the crop
and to pay him the amount of the debt. B sold the wheat, but used the
money for other purposes. Did A lose his lien on the wheat?
7. May the mortgagee take possession and sell the mortgaged property
in case the mortgagor has defaulted in payment of the debt?
8. A borrowed $5,000 of M and gave him a chattel mortgage on certain
cattle as security for the loan. The mortgage was properly recorded, but
Ay prior to the maturity of the debt, sold some of the cattle and increase
therefrom to X } a packer who resided in another state. A failed to pay
M and the latter desires to recover of X. Is X liable and, if so, to what