1.

4 Credit Transactions

1.4.1 Pledge, Real Mortgage and Chattel Mortgage

1.4.1.1 Similarities

Pledge Real Estate Mortgage Chattel Mortgage

Personal property susceptible Real property but extends to the Personal property subject
Object of possession including natural accessions, improvements, thereof
incorporeal rights growing fruits, and the rents or
income not yet received when the
obligation becomes due, and to the
amount of indemnity from insurance
or from expropriation

And may include after acquired

properties as per stipulation

Formal contract — Affidavit of Good

Faith registered in the Chattel
Mortgage Registry in the Registry
Perfection Delivery Consensual but covered by the statute of Deeds required to bind third
of fraud parties
Public instrument required
to bind third parties Public instrument that is registered if For vessels — Philippine Coast
the Registry of Deeds is required to Guard of port of entry of the
bind third parties vessel

For motor vehicles — registered

with the LTO where the motor
vehicle is registered
 Real Estate Mortgage Chattel Mortgage
Pledge
In case of failure to execute an
in equal fault
affidavit or non-registration if there
is none will make the parties in pari
-

delicto and will have no available

remedy against each other

Transferred to the pledgee Retained by mortgagor Retained by mortgagor

Possession Return of the thing

pledged by the pledgee to
the pledgor shall result in
extinguishment of the
contract of pledge
Generally, covers only that which Those indicated in the Affidavit of Good
Principal is stated in the deed even if less Faith unless there is stipulation as to
That which is existing at than the amount of loan. increase in coverage which will be
Obligation
the time of the pledge binding but the security itself arises
Covered
Exception, if there is a stipulation only after amending the old contract
to cover future advancements

Valid as long as with

Sale of the Valid — any stipulation as to the
consent of the creditor/ Mortgagor-owner cannot sell the property
thing during contrary is void
pledgee who shall continue mortgaged otherwise he can be criminally
the pendency
in possession even if the liably under Art 319 of the RPC: Removal
of the
ownership is transferred to of Mortgaged Property
contract
the buyer
 Real Estate Mortgage Chattel Mortgage
Pledge

Sale of the Done by notary public

Extrajudicial (Act No. 3135) or Extrajudicial (Act No. 1508)
thing to public auction - always
judicial (Rule 68)
answer for extrajudicial - no intervention
the debt of courts

Required - stating the amount Extrajudicial - not required, unless

due stipulated Required 10 days prior sale
Notice of
Sale to the In a legal pledge, a demand for Judicial posting in 3 public places Posting in two or more
mortgagor/ the amount is required and only at least 20 days prior to sale and public places 10 days
pledgor 30 days from such demand may publication of the notice of sale before auction
there be foreclosure in a newspaper of general
ciculation

Creditor’s The creditor is entitled to

right to excess, EXCEPT
excess of Creditor is not entitled to Creditor is not entitled to the
SP over There is stipulation to the the excess excess
unpaid contrary; and in case of legal
obligation pledges

Creditor is can recover deficiency Creditor can recover deficiency

Creditor’s
The creditor is not entitled except if the mortgagor is a third unless the sale is covered by the
right to
to recover any deficiency person (unless there is a stipulation Recto Law (i.e., sale of personal
recover property on installment)
making him liable)
deficiency
 No right of redemption
Extrajudicial foreclosure:
Redemption No right of redemption
1 year from date of foreclosure,
except

1. Creditor is a bank
2. Debtor is a juridical person

In which case, the redemption

period is until the registration of
the foreclosure sale, not exceeding
3 months.

Judicial foreclosure:
Equity redemption is until the
confirmation of sale by court
1.4.1.2 Requisites
secure the fulfillment of a principal obligation
Pledge and Mortgage absolute owner of the thing pledged or mortgaged
free disposal of their property or legally authorized for the purpose
an accessory contract; cannot exist without a valid obligation or principal contract

Types of obligations/contracts that a pledge/mortgage may secure:

1. Pure obligations “They cannot secure a void obligation/contract”

2. Conditional obligations
3. Obligations with a term
Right to foreclosure: when the principal obligation becomes
4. Natural obligations
due, the things which the pledge or mortgage consists may
5. Rescissible contracts
be alienated for the payment to the creditor.
6. Voidable contracts
7. Unenforceable contracts

pay
good, service, money in exchange to a promise to fraud
perform negligence
contravene to the tenot
magiging available sayo yung mga remedies default/delay
-
specific
substitute Payment or peformance
equivalent

rescission Nullify the contract

1.4.1.3 Indivisibility

A pledge or mortagage is indivisible, even though the debt may be divided among the successors
in interest of the debtor or creditor
Indivisibility is not affected by the fact that the debtors are not solidarily liable

• Debtor’s heir who has paid a part of a debt cannot ask for the proportionate extinguishment of the
pledge or mortgage as long as the debt is not completely satisfied
• Neither can the creditor’s heir who received his share of the debt return the pledge or cancel the
mortgage, to the prejudice of the heirs who have not been paid

Rule of Indivisibility not applicable:

If there being several things given in mortgage or pledge, each one of them guarantees only a determinate
portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of
the debt for which each thing is specially answerable is satisfied.

1.4.1.4 Pactum Commissorium

The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose them
Any stipulation to the contrary is null and void

1.4.1.5 Third party pledgors/mortgagors

Third parties who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property
1.4.2 Requirements to bind the parties and third persons

description of the thing pledged

Pledge — public instrument date of the pledged

public instrument containing the description necessary to bind third

Real Estate Mortgage
recorded in the Registry of Deeds persons, but not for the
validity of the contract
Affidavit of Good Faith
Chattel Mortgage
Chattel Mortgage Registry Can there be oral mortgage?
registered MARINA — vessels
YES. But binding only
LTO — vehicles as between parties.

1.4.3 Obligations and rights of pledgor and pledgee

Obligations of the debtor-pledgor

a. To pay the debt and its interest, with expenses, in a property case, when they are due if
the pledgor is also the debtor.

b. To pay damages that the pledgee may suffer by reason of the flaws of the thing pledged,
if he was aware of such flaws but did not advise the pledgee of the same.
c. To pay for the expenses which are necessary for the preservation of the thing pledged.
Rights of the debtor-pledgor

a. To alienate, but it must be with the consent of the pledgee, the thing pledged but the thing pledged
will still be subject to the contract of pledge.
b. To continue to be the owner of the thing pledged unless it is expropriated or sold in public auction after
default by the principal debtor.
c. To ask for the return of the thing pledged after he has paid the debt and its interest, with expenses in a
proper case.
d. To ask that the thing pledged be judicially or extra-judicially deposited if it is used without authority or for
purposes other than for its preservation.

e. To require that the thing be deposited with a third person if it is in danger of being lost or impaired through
the negligence or willful act of the pledgee.

f. To demand the return of the thing pledged, upon offering another thing in pledge, provided the latter
is of the same kind and quality, if there are reasonable grounds to fear the destruction or impairment
of the thing pledged without the fault of the pledgee.

This right is without prejudice to the right of the pledgee to have the thing sold at a public sale.
However, the pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged.

g. In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of animals pledged,
but shall be subject to the pledge, if there is no stipulation to the contrary.
Obligations of creditor-pledgee

a. To take care of the thing pledged with the diligence of a good father of a family.

b. To be liable for the loss or deterioration of the thing pledged unless it is due to a fortuitous event.
c. Not to deposit the thing pledged with a third person unless ordered by the court.
d. To be responsible for the acts of his agents or employees with respect to the thing pledged.
e. Not to use the thing pledged

except when he is authorized by the owner or

when the use of the thing is necessary for its preservation.
f. To deliver to the debtor the surplus after paying his claim from what he has collected on a credit that
was pledged and which has become due before it is redeemed.

g. If the pledge earns or produces fruits, income, dividends, or interests, the creditor shall compensate
what he receives with those which are owing him; but if none are owing him, or insofar as the amount may
exceed that which is due, he shall apply it to the principal. Unless there is a stipulation to the contrary,
the pledge shall extend to the interest and earnings of the right pledged.
Rights of the creditor-pledgee

a. To retain in his possession the thing pledged until the debt is paid.
b. To demand reimbursement of the expenses made for the preservation of the thing pledged.
c. To bring actions which pertain to the owner of the thing pledged in order to recover it from, or defend it
against third person.
d. To use the thing pledged
he is authorized to do so, or
only if
when its use is necessary of the preservation of the thing.

e. To cause the sale of the thing pledged at a public sale, if there is a danger of destruction, impairment or
diminution of value of the thing pledged without his fault.

f. To collect and receive the amount due if the thing pledged is a credit which becomes due before it is
redeemed, and to apply the same to the payment of his claim.
g. To sell the thing pledged upon default of the debtor.

h. To select or choose the thing to be sold in public auction in case there are two or more things pledged.

i. To appropriate the thing pledged in case the thing pledged is not sold in at least two public auctions.
1.4.4 Obligations and rights of mortgagor and mortgagee

Right of Mortgagee if Principal Obligation is not fulfilled

a. Right to sell. Jus distrahendi.

b. Foreclose the mortgage and alienate.
c. Buy the mortgage property in foreclosure sale.
d. Can recover his credit and security remains valid, in case of void stipulation.
e. Novation — subsequent voluntary cession of property (voluntary sale of the mortgaged property for
the amount of debt)
f. If mortgagor/debtor sell his mortgaged property to third person, mortgagee can sue mortgagor for damages.
• A owed B, mortgaged his land as security. A sold said land to C. B can sue A for damages.
• If C is in bad faith, B can also sue C for damages.
• If C was guilty of fraud, it would be a ground for rescission — A can sue for annulment of sale.
Note: not B but A as the owner of the land)
g. Can take possession of the mortgaged land upon foreclosure of mortgage.

h. Does not bear the loss of the property but principal obligation is not extinguish.
(ownership retains to the debtor- “res perit domino suo”
the debtor-owner bears the loss of the property
i. Benefit of indivisibility — right to have the properties either or both to sell to satisfy the claim
can be waived
 1.4.5 Modes of extinguishment

Extinguishment of a Contract of Pledge

a. Indirect Mode of Extinguishment

i. When the principal obligation or contract of loan secured by the contract of pledge is extinguished.

b. Direct Modes of Extinguishment of contract of pledge that do not extinguish the secured contract of loan
i. Return by the pledgee of the thing pledged to the pledgor or owner.
ii. Renunciation or abandonment in writing by the pledgee of the contract of pledge.
c. Direct Modes of Extinguishment of contract of pledge that also extinguish the secured contract of loan

i. Sale of the thing pledged regardless of the net proceeds of the sale.
1. Rule in case of deficiency
a. The pledgee can never recover the deficiency despite stipulation for recovery. Any stipulation for
recovery of deficiency is null and void.

2. Rule in case of excess

a. The pledgee is generally entitled to the excess in the absence of stipulation to the contrary.

ii. Appropriation of the thing pledged by the pledgee if the thing pledged is not sold in at least two public
auctions.
 Pledge contract by virtue of which the debtor delivers to the creditor or to a third person

movable or for the purpose of securing the fulfilment of a principal obligation

document evidencing when the obligation is fulfilled, the thing delivered shall be returned
incorporeal rights with all its fruits and accessions

rights to property that cannot be seen or touched, generally relating to intangible property
jura in re aliena (i.e., encumbrances) and jura in re propria (intangible property ownership).

negotiable instruments
Voluntary or Conventional — created by agreement of the parties
Kinds bills of lading
Legal — created by operation of law shares of stocks
bonds
warehouse receipts
Characteristics others

Real — It is perfected by delivery of the subject matter. must be delivered/indorsed

Accessory — It has no independent existence of its own.
Unilateral — It creates an obligation on the part of the creditor to return the thing upon the fulfillment of the
principal obligation.
Subsidiary — The obligation incurred does not arise until the fulfillment of the principal obligation which is secured.
Indivisible — It creates a lien on the whole or all of the properties pledged, which lien continues until the obligation
is secures has been fully paid.
Nominate — It has a name given to it by law.
Cause of Consideration
Pledgor/debtor — the principal obligation
Pledgor not the debtor — compensation stipulated or mer liberty

Rules on Object

Within the commerce of man and capable of possession

If the pledge earns or produces fruits, income, dividends, or interests, the creditor shall compensate what he
receives with those which are owing him; but if none are owing him, or insofar as the amount may exceed that
which is due, he shall apply it to the principal.

Unless there is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the right
pledged.
In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of animals pledged,
but shall be subject to the pledge, if there is no stipulation to the contrary.

Unless the thing pledged is expropriated, the debtor continues to be the owner
seize/take away
Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to
recover it from, or defend it against a third person.
 Deposit of the Thing Pledged with a Third Person

On the part of the pledgee – if there is stipulation granting such right

On the part of the pledgor:
a. If through the negligence or willful act of the pledgee, the thing pledged is in danger of being lost or impaired.
b. If the pledgee uses or misuses the thing.

Fear of destruction, loss or impairment without pledgee’s fault

• The pledgor may demand the return of the thing, upon offering another thing in pledge, provided the
latter is of the same kind as the former and not of inferior quality or
• The pledgee may cause the same to be sold at a public sale.
proceeds — security for the principal obligation in the
same manner as the thing originally pledged

"The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged"

Form there is no form required to constitute a contract of pledge.

sale
Alienation of the thing pledged

allowed with the consent of the pledgee.

The ownership of the thing pledged is transmitted to the vendee or transferee as soon the pledgee
consents to the alienation
But the creditor-pledgee shall continue in possession.
Creditor-pledgee

The creditor shall take care of the thing pledged with the diligence of a good father of a family
He has a right to the reimbursement of the expenses made for its preservation, and is liable for its loss or
deterioration, in conformity with the Civil Code.
The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged.
If the creditor is deceived on the substance or quality of the thing pledged, he may either claim another thing in
its stead, or demand immediate payment of the principal obligation.

Use of the Thing Pledged

General Rule: The creditor cannot use the thing pledged, without the authority of the owner.

Authority from the owner (pledgor); or

Exceptions:
preservation of the thing pledged requires its use

“Use or misuse will authorize the owner may ask that the thing be judicially or extrajudicially deposited.”
when there is no right

Pledgor

The pledgor who, knowing the flaws of the thing pledged, does not advise the pledgee of the same, shall be
liable to the latter for the damages which he may suffer by reason thereof.
The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he
has paid the debt and its interest, with expenses in a proper case.
Extinguishment of a Contract of Pledge

can be by any mode of extinguishment of obligations or the extinguishment of the principal obligation or contract, but also:

1. Thing pledged is returned — Any stipulation to the contrary shall be void

If subsequent to the perfection of the pledge, the thing is in the possession of the
presumption: pledgor or owner or

if the thing pledged is in the possession of a third person who has received it from
the pledgor or owner after the constitution of the pledge.

2. Renunciation or Abandonment of Pledge statement in writing by the pledgee

neither the acceptance by the pledgor or owner, nor the return of the thing
pledged is necessary, the pledgee becoming a depositary

Foreclosure sale

1. The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary
Public to the sale of the thing pledged.
2. This sale shall be made at a public auction, and
3. With notification to the debtor and the owner of the thing pledged in a proper case, stating the
amount for which the public sale is to be held
 Creditor’s right of appropriation

If at the first auction the thing is not sold, a second one with the same formalities shall be held; and
If at the second auction there is no sale either, the creditor may appropriate the thing pledged.

In this case he shall be obliged to give an acquittance for his entire claim.

a document which shows that a debtor has been

I

released from a debt obligation by paying it in full

Pledgor’s Right to bid

have a better right if he should offer the same terms as the highest bidder.

the pledgor or owner may bid

pledgee may also bid, but his offer shall not be valid if he is the only bidder.

"All bids at the public auction shall offer to pay the purchase price at once."
If any other bid is accepted, the pledgee is deemed to have been received the purchase price, as far as the pledgor or owner is concerned.

Sale of the thing

If the price of the sale is more than said amount, the debtor shall not be entitled to the excess,
unless it is otherwise agreed.
If the price of the sale is less, the creditor shall not be entitled to recover the deficiency,
notwithstanding any stipulation to the contrary.

“The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of
the sale are equal to the amount of the principal obligation, interest and expenses in a proper case.”