CREDIT TRANSACTIONS

RULES APPLICABLE TO CONTRACT OF PLEDGE AND MORTGAGE

REQUISITES OF CONTRACT OF PLEDGE AND MORTGAGE:

1. That they be constituted to secure the fulfillment of a principal obligation;
2. That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;
3. That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the
purpose.

Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property.

Accessory contract: a pledge or mortgage, being an accessory contract, cannot exist without a valid obligation or a principal contract. Nevertheless, similar to a
guaranty, a pledge or a mortgage may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural
obligation.

It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for
the payment to the creditor.

The contract of pledge or mortgage may secure all kinds of obligations, be they pure or subject to a suspensive or resolutory condition.

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

The stipulation is otherwise known as Pactum Commissorium.

INDIVISIBILITY OF CONTRACT: A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of
the creditor.

Therefore, the debtor's heir who has paid a part of the 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 other heirs who have not been
paid.

The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable.

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.

PLEDGE

PLEDGE is a contract by virtue of which the debtor delivers to the creditor or to a third person movable (Art. 2094) or document evidencing incorporeal rights (Art.
2095) for the purpose of securing the fulfilment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be
returned with all its fruits and accessions.

Delivery: in addition to the above-mentioned essential requisites of contracts of pledge or mortgage, it is necessary, in order to constitute the contract of pledge,
that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement.

KINDS OF PLEDGE:
1. Voluntary or conventional – created by agreement of the parties; or
2. Legal – created by operation of law.

CHARACTERISTICS:
1. REAL – perfected by the delivery of the thing pledged;
2. ACCESSORY – no independent existence of its own;
3. UNILATERAL – creates an obligation solely on the part of the creditor to return the thing;
4. SUBSIDIARY – obligation incurred does not arise until the fulfilment of the principal obligation which is secured.

CAUSE OR CONSIDERATION:
1. Pledgor/debtor – the principal obligation;
2. Pledgor not the debtor – compensation stipulated or mere liberality.

OBJECT:
1. Movable property;
2. Within the commerce of man and capable of possession;
3. Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares of stock, bonds, warehouse receipts and similar documents may also be pledged.
The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed.

Cesar Nickolai F. Soriano Jr.

1 Arellano University School of Law 2011-0303
CREDIT TRANSACTIONS based on De Leon
4. 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.
5. Unless there is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the right pledged.
6. 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.
7. Unless the thing pledged is expropriated, the debtor continues to be the owner thereof.
8. 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.

Loss, Deterioration of Pledged Object or the Fear thereof:

1. If through the negligence or willful act of the pledgee, the thing pledged is in danger of being lost or impaired, the pledgor may require that it be deposited with
a third person.
2. If there are reasonable grounds to fear the destruction or impairment of the thing pledged, without the fault of the pledgee, 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, and without prejudice to the
right of the pledgee under the provisions of the following article.

The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged.
3. If, without the fault of the pledgee, there is danger of destruction, impairment, or diminution in value of the thing pledged, he may cause the same to be sold at
a public sale. The proceeds of the auction shall be a security for the principal obligation in the same manner as the thing originally pledged.

Form: there is no form required to constitute a contract of pledge, but in order to affect third persons, there must be a public instrument containing both the
description of the thing pledged and the date of the pledge.

Alienation of the thing pledged: is 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 latter shall continue in possession.

Creditor-pledgee:
1. 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.
2. The pledgee cannot deposit the thing pledged with a third person, unless there is a stipulation authorizing him to do so.

The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged.
3. The creditor cannot use the thing pledged, without the authority of the owner, and if he should do so, or should misuse the thing in any other way, the owner
may ask that it be judicially or extrajudicially deposited. When the preservation of the thing pledged requires its use, it must be used by the creditor but only for
that purpose.
4. 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.

Pledgor:
1. 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.
2. 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.

Thing Pledged is Returned: If the thing pledged is returned by the pledgee to the pledgor or owner, the pledge is extinguished. Any stipulation to the contrary
shall be void.

If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner, there is a prima facie presumption that the same has been
returned by the pledgee. This same presumption exists 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.

Renunciation or Abandonment of Pledge: A statement in writing by the pledgee that he renounces or abandons the pledge is sufficient to extinguish the pledge.
For this purpose, 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.

Right to bid: At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right if he should offer the same terms as the highest bidder.

The 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; proceeds thereof:

Cesar Nickolai F. Soriano Jr.

2 Arellano University School of Law 2011-0303
CREDIT TRANSACTIONS based on De Leon
1. 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.
2. 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.
3. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary.

Other Rules:
1. After the public auction, the pledgee shall promptly advise the pledgor or owner of the result thereof.
2. Any third person who has any right in or to the thing pledged may satisfy the principal obligation as soon as the latter becomes due and demandable.
3. If a credit which has been pledged becomes due before it is redeemed, the pledgee may collect and receive the amount due. He shall apply the same to the
payment of his claim, and deliver the surplus, should there be any, to the pledgor.
4. If two or more things are pledged, the pledgee may choose which he will cause to be sold, unless there is a stipulation to the contrary. He may demand the sale
of only as many of the things as are necessary for the payment of the debt.
5. If a third party secures an obligation by pledging his own movable property, he shall have the same rights as a guarantor to be:
a. Indemnified for the total amount of the debt, including interest, expenses or damages, if they are due;
b. Subrogated to all the rights the creditor had against the debtor;
c. He is not prejudiced by any waiver of defense by the principal obligor.
6. Pledges created by operation of law, such as those referred to in Articles 546, 1731, and 1994, are governed by the foregoing articles on the possession, care
and sale of the thing as well as on the termination of the pledge. However, after payment of the debt and expenses, the remainder of the price of the sale shall
be delivered to the obligor.
7. A thing under a pledge by operation of law may be sold only after demand of the amount for which the thing is retained. The public auction shall take place
within one month after such demand. If, without just grounds, the creditor does not cause the public sale to be held within such period, the debtor may require
the return of the thing.
8. With regard to pawnshops and other establishments, which are engaged in making loans secured by pledges, the special laws and regulations concerning them
shall be observed, and subsidiarily, the provisions of this Title.

REAL ESTATE MORTGAGE

OBJECT: Only the following property may be the object of a contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws, imposed upon immovables.

Nevertheless, movables may be the object of a chattel mortgage

Form: there is no form required to constitute a contract of real estate mortgage, but in order to affect third persons, there must be a public instrument containing
the description thereof and the same should be recorded in the Registry of Property.

The creditor-mortgagee has no other right than to demand the execution and the recording of the document in which the mortgage is formalized.

Extent: The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income not yet received when the obligation becomes
due, and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use,
with the declarations, amplifications and limitations established by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of
a third person.

Mortgage credit is transferable: The mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law.

Pactum de non-aliendo: the owner is allowed to alienate the immovable property mortgaged. A stipulation prohibiting/forbidding such right is called pactum de
non-aliendo and is considered void.

Third party transferee: Buyers or transferees of the property mortgaged are not affected by an unregistered mortgage. However, if the mortgage is registered (Art.
1312) they are
a. Bound by a foreclosure sale on the property
b. Not bound to answer the deficiency
c. Unless there is novation in the person of the debtor

CHATTEL MORTGAGE

CHATTEL MORTGAGE: personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation.

If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge and not a chattel mortgage.

SIMILARITIES BETWEEN THE THREE:

1. Requisites in common:
a. It must be constituted to secure the fulfillment of a principal obligation.
b. The mortgagor must be the absolute owner of the thing mortgaged
c. The mortgagor must have free disposal of the property
2. Indivisibility
a. Several things to ONE debt: partial payment of the debt will not release any of the thing pledged/mortgaged;
b. Several things to ONE credit: the partial payment of the debt corresponding to an heir’s share of the credit will not entitle him to release of any of the things
pledged/mortgaged;
Cesar Nickolai F. Soriano Jr.
3 Arellano University School of Law 2011-0303
CREDIT TRANSACTIONS based on De Leon
 c. Several things to several debts: if each one thing guarantees only a determinate portion of the credit, there are as many pledges/mortgages as there are
things given.
3. Pactum Commissorium – stipulation allowing the creditor, mortgage or pledgee to appropriate or dispose of the thing – void.
4. Future things – cannot be the subject of pledge/mortgage since the pledger/mortgagor is not the absolute owner nor do they have free disposal of the property.
5. Third persons – are allowed to pledge/mortgage the thing they own even if they are not parties to the principal obligation secured thereby.

DISTINCTIONS:

PLEDGE REAL ESTATE MORTGAGE CHATTEL MORTGAGE

Object Personal property susceptible of
possession including incorporeal rights
Real property but extends to the natural Personal property subject thereof
accessions, improvements, 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.
Perfection Delivery Consensual but covered by the statute of Consensual
frauds
Public instrument required to bind third Affidavit of Good Faith* registered in the
parties Public instrument that is registered in the Chattel Mortgage Registry in the Registry
Registry of deeds is required to bind third of Deeds required to bind third parties
parties
For vessels – registration is with the
MARINA

For motor vehicles - + report to the LTO

Possession Transferred to the pledgee Retained by the mortgagor Retained by the mortgagor
Principal obligation That which is existing at the time of the Generally, covers only that which is Those indicated in the Affidavit of Good
covered pledge stated in the deed even if less than the Faith unless there is stipulation as to
amount of loan. Exception: if there is increase in coverage which will be
stipulation to cover future advancements. binding but the security itself arises only
after amending the old contract.

Sale of the thing during
the pendency of the
contract
Sale of the thing to
answer for the debt
Notice of sale to the
mortgagor/pledgor
Creditor’s right to excess
of selling price over
unpaid obligation
Creditor’s right to
recover deficiency
Redemption
Valid as long as with consent of the
creditor/pledgee who shall continue in
possession even if the ownership is
transferred to the buyer
Done by notary public – public auction –
always extrajudicial – no intervention of
the courts.
Required – stating the amount due
The creditor is entitled to the excess
unless there is stipulation to the contrary
The creditor is NOT entitled to recover
any deficiency
No right of redemption
Valid – any stipulation to the contrary is
void.
Extrajudicial (Act No. 3135) or judicial
(Rule 68)
Extrajudicial – not required, unless
stipulated.
Judicial Posting in 3 public places at least
20 days prior to sale and publication of
the notice of sale in a newspaper of
general circulation
Creditor is not entitled to the excess
Creditor can recover deficiency except if
the mortgagor is a third person (unless
there is stipulation making him liable)
EXTRAJUDICIAL FORECLOSURE:
1 year from date of foreclosure, except:
Mortgagor-owner cannot sell the
property mortgaged otherwise he can be
criminally liable under Art. 319 of the
RPC: Removal of Mortgaged Property
Extrajudicial (Act No. 1508)
Required 10 days prior to sale
Posting in two or more public places 10
days before auction
Creditor is not entitled to the excess
Creditor can recover deficiency unless the
sale is covered by the RECTO LAW (i.e.,
sale of personal property on installment)
No right of redemption after foreclosure
sale.

1. Creditor is a bank If the condition of the mortgage is

2. Debtor is a juridical person
In which case the redemption period is
until the registration of the foreclosure
sale, not exceeding 3 months.
broken, redemption may be made by:
1. the mortgagor;
2. person holding subsequent mortgage;
3. a subsequent attaching creditor.

JUDICIAL FORECLOSURE:
Equity of redemption is until the
confirmation of sale by the court

Cesar Nickolai F. Soriano Jr.

4 Arellano University School of Law 2011-0303
CREDIT TRANSACTIONS based on De Leon