CHATTEL MORTGAGE, a transaction by which an owner of personal property transfers the property to a creditor for the purpose of securing payment of the debt. The chattel mortgage differs from a pledge in that the latter requires transfer of posses sion and control of the goods to the creditor, whereas in the typical chattel mortgage full possession and use of the goods remain in the mortgagor. And precisely here lie both the great economic advantage and the social danger of the device. For, having posses sion, use and control, the mortgagor retains the economic use of goods which he is vastly better able to utilize than is his lender; indeed, out of such use he may realize the wherewithal to pay off the very debt secured by the mortgage. So in the case of a chattel mortgage on crops to be sown or grown, the advances of the country banker are intended to finance the growing of those crops, and will normally be repaid out of its sale. And so with live stock mortgages and mortgages on the equipment of a factory, of a small plant, etc. On the other hand, the continued and unre stricted possession of the goods by the mortgagor is likely to mis lead his other creditors, present or prospective, into the belief that his assets are greater than they are ; and in the event of trouble, the mortgagee's prior claim, if sustained, may come in to cut them off from any possibility of realizing their debts. Out of this double need has arisen legislation in all American States except Pennsylvania (which does not recognize the chattel mortgage) limiting the validity of the transaction unless the mortgagee takes possession, or unless the mortgage instrument is filed for public information in some prescribed public office. But the details of the legislation are amazingly diverse. In some States the filing is required to be in the county where the mortgagor resides ; in others, in that where the goods are located, in still others, in both. In some States possession or filing must occur at once, to be effective; in others, within a fixed period, such as ten days; in still others it is effective as soon as it occurs, whenever that may be. Everywhere, persons purchasing the goods from the mortgagor in possession take free of the mortgage if it has not been filed, and if they are ignorant of it. Everywhere, some of the mortgagor's creditors can disregard the mortgage, if it remains unfiled ; but the precise classes of creditors protected vary widely. It may be safely stated, however, that a mortgagee who does not comply with the statute nowhere acquires a satisfactory security.
The requirements of form are equally diverse. The form of apparently outright bill of sale (q.v.) is permissible, but not widely used, to evidence chattel mortgages in the United States. In States where no form is required, save a paper signed by the mortgagor, the object is to allow business to be done simply and quickly. But some States attempt to avoid fraudulent practices of mortgagees by requiring the mortgagor to receive, and give a receipt for, a copy of the mortgage ; the purpose is to make fraud ulent alteration easy to detect. Others fear dishonest practices of mortgagors, and require witnesses or formal acknowledgment to make the document valid. Here the attempt is, in part, to prevent the mortgagor from later denying that he gave the mortgage. Others require, in addition, affidavits by the mortgagor, or by the mortgagee, or by both, that the debt secured is in truth owed, and the transaction bona fide. This last requirement arises out of the apparently not uncommon practice of debtors—especially merchants—when approaching insolvency, of creating fictitious debts to their friends, and attempting to divert their assets by colourable mortgages to secure such debts. And because of a similar fear of creditors being misled, a mortgage on a merchant's floating stock in trade has been hedged about by the courts with so many restrictions as to make it worthless as a continuing security to-day. That chattel mortgages are regarded—at least where merchants are the mortgagors—as signs of serious financial difficulty, sufficient to cause suspension of credit, is partly due to this fact, partly to their evil odour because of much attempted fraudulent use, and partly to the fact that in open-credit selling the sellers properly insist on the stock of goods continuing unen cumbered : they have supplied the goods ; they do not want those same goods to be diverted to paying debts to others.
Almost everywhere a chattel mortgage is good between mort gagor and mortgagee, despite non-compliance with such formal ities or with the filing provisions of the local statute. The mort gagee can take possession and foreclose on default in payment of the debt, or in any other_of the terms of the transaction—common requirements being that the mortgagor shall keep the goods on the premises, shall not attempt to sell them, nor suffer attachment of the goods by other creditors, and so on. The risk of loss by fire or theft lies, always, on the mortgagor; and often, too, he is required by the mortgage to keep the goods insured for the mortgagee's benefit.
Chattel mortgages are in wide use. Crop mortgages are a major basis for financing current farm operations throughout the coun try. The same is true of live stock raising; save that here the mortgages are commonly taken in the first instance by specialized mortgage companies rather than by banks or local merchants. The wide-spread instalment selling business makes considerable use of the device, though more of the conditional sale (see HIRE PURCHASE AGREEMENT). In the shape of mortgages on articles of personal use such as automobiles, and on household furniture, chattel mortgages underlie many of the small consumption loans of needy borrowers—often with serious abuses. And they are becoming increasingly important in corporate mortgage-bond issues, since a mortgage on plant is obviously seriously impaired unless it can be made to cover the plant's equipment as well. In this last field serious discrepancy is beginning to be felt between the real estate portion of the security, as to which recording, once effected, is good forever, and the chattel portion, as to which periodical refiling is necessary. Finally, the chattel mortgage, in the peculiar form of the trust receipt (q.v.), is used in the financ ing of imports, and of the sale of automobiles. In this form—an exception carved by the courts out of general statutes—it is good as against the mortgagor's creditors irrespective of filing or posses sion ; but not as against purchasers without notice.
In the United States the chattel mortgage takes the place of the bill of sale, the latter term being there applied to a signed docu ment describing goods and evidencing their sale, which a seller gives to a buyer who for some reason requires evidence of his ownership. Of late years the prevalence of automobile thefts has led generally to legislation requiring a bill of sale to be made out in the case of sales of second hand cars, and filed with the licensing authorities of the State. (K. N. L.) See L. A. Jones, Chattel Mortgages (Indianapolis, 1908) ; Hubbell's Legal Directory (annual) ; Karl T. Frederick (1922) , 2 2 Col. L. Rev., 395, C. Eliot, The Farmer's Campaign for Credit (N.Y., 1927).