UNIVERSITY OF NUEVA CACERES

COLLEGE OF BUSINESS AND ACCOUNTANCY

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS

2.0 LAW ON CREDIT TRANSACTIONS

2.1 Pledge, Real Mortgage and Chattel Mortgage

2.1.1 Nature and requisites

COMPARISON
Pledge Real Mortgage Chattel Mortgage
Accessory Contract- Accessory Contract- Accessory Contract-
Principal or
Cannot exist without Cannot exist without Cannot exist without
Accessory Contract?
Principal Contract Principal Contract Principal Contract
Purpose Security/Collateral Security/Collateral Security/Collateral
Subject Matter Personal property Real property Personal property
Formal/Solemn
Real contract-
Consensual-perfected contract-Must be
Perfection perfected by delivery
by mere consent recorded in Chattel
not by mere consent
Mortgage Register
No requirement for
validity or No requirement of
Must be recorded in
enforceability but in form to be valid and
CM Registry and in
order to bind 3rd enforceable but only
Public Instrument,
Formality person, must be in a for convenience to
must be accompanied
public instrument, bind 3rd person, must
by affidavit of good
dated and must be in public
faith.
specifically described instrument.
the thing pledge.
As a GR-With
recovery, unless there
No recovery, it is
is stipulation to the
prohibited. Any With recovery, unless
Recovery of contrary except in
stipulation for the there is stipulation to
deficiency case of personal
recovery of deficiency the contrary.
property sold in
is null and void.
installment under
Recto Law.
The excess goes to The excess goes to
The excess goes to the
the debtor/ the debtor/
Excess of Proceeds of pledgee/creditor,
mortgagor, unless mortgagor, unless
Sale unless otherwise
otherwise otherwise
stipulated.
stipulated. stipulated.
Remedy -Collection as remedy -Collection as remedy -Collection as remedy
is available. is available. is available.
-Foreclosure done -Foreclosure, judicial -Foreclosure done

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 through a Notary through a Notary
Public in a Public or exrajudicial Public in a Public
Auction. Auction.
None, no redemptiom None, no redemptiom
Redemption since personal With redemption. since personal
property. property.
No, existing
Can secure future Yes, continuing indebtedness only
Yes.
indebtedness? contract. (Affidavit of good
faith)
Prohibition against
Applicable Applicable Applicable
pactumcommissorium
Indivisibility of the
Indivisible Indivisible Indivisible
contract
The Mortgagor an sell The Mortgagor an sell
The pledger may only
the property. Any the property. Any
As to selling of sell the property with
stipulation prohibiting stipulation prohibiting
property the consent of the
the mortgagor to sell the mortgagor to sell
pledgee.
the property is void. the property is void.

Pledge – is a contract constituted to securethe fulfillment of a principal obligation wherethe thing

pledged, which may be a movable,or an incorporeal right evidenced by adocument, is placed in
the possession of thecreditor or a third person by commonagreement.

The pledgor must be the absolute owner ofthe thing pledged, and he must have the freedisposal
of the property, and in the absencethereof, that he be legally authorized for thepurpose.

Real Mortgage – a contract whereby the debtorsecures to the creditor the fulfillment of aprincipal
obligation (real securitytransaction), immediately making immovableproperty or real rights
answerable to theprincipal obligation in case it is not compliedwith at the time stipulated.

Chattel Mortgage – same as Real Mortgage except that the subject matter is personal property. It
is a contract by virtue of which personal property is recorded in the Chattel Mortgage Register as
a security for the performance of an obligation.

ESSENTIAL REQUISITES
Common to pledge and mortgage [Art.2085]
(1) Constituted to secure the fulfillment of aprincipal obligation.
(2) Pledgor or mortgagor must be theabsolute owner of the thing pledged ormortgaged.
(3) The persons constituting the pledge ormortgage have the free disposal of theirproperty, and in
the absence thereof, thatthey be legally authorized for thepurpose.
(4) Cannot exist without a valid obligation.
(5) Debtor retains the ownership of the thinggiven as a security.
(6) When the principal obligation becomesdue, the thing pledged or mortgaged maybe alienated
for the payment to thecreditor.

2.1.2 Requirements to bind the parties and third persons

FOR PLEDGE:

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(1) For the pledge to take effect between theparties, the thing pledged is placed in thepossession
(delivered) of the creditor or a thirdperson
(2) For the pledge to take effect as againstthird persons, a description of the thingpledged and the
date of the pledgeshould appear in a public instrument.
FOR REAL MORTGAGE:
(1) For the RM to take effect between theparties, there must be meeting of the minds
(consensual).
(2) For the RM to take effect as againstthird persons, it should appear in a public instrument.
FOR CHATTEL MORTGAGE:
(1) For the CM to take effect between theparties, there must be meeting of the minds
(consensual) and must be recorded in Chattel Mortgage Register (Formal/Solemn contract).
(2) For the CM to take effect as againstthird persons, it must be recorded in CM Registry and in
Public Instrument.

2.1.3 Obligations and rights of pledgor and pledgee

PLEDGEE:
(1) The pledgee cannot deposit the thingpledged with a 3rd person, unless thereis a contrary
stipulation [Art. 2100 (1)].
(2) Pledgee is responsible for the acts of hisagents or employees with respect to thething pledged
[Art. 2100 (2)].
(3) General Rule: Has no right to use thething or to appropriate its fruits withoutauthority from
the owner. If he does so, ormisuses it in any way, the owner may askthat the thing be judicially
orextrajudicially deposited. [Art. 2104]
Exception: When the preservation ofthe thing pledged requires its use, it mustbe used by the
creditor only for thatpurpose.
(4) May cause the public sale of the thingpledged if, without fault on his part, thereis danger of
destruction, impairment ordiminution in value of the thing. Theproceeds of the auction shall be a
securityfor the principal obligation [Art. 2108].

PLEDGOR:
(1) Takes responsibility for the flaws of thething pledged [Art. 2101 in relation to Art.1951].
(2) Cannot ask for the return of the thingagainst the will of the creditor, unlessand until he has
paid the debt and itsinterest, with expenses in a proper case[Art. 2105].
(3) Subject to the right of the pledgee underArticle 2108, pledgor is allowed tosubstitute the
thing which is in danger ofdestruction or impairment without anyfault on the part of the pledgee
withanother thing of the same kind andquality [Art. 2107].
(4) May require that the thing be depositedwith a 3rd person, if through thenegligence or willful
act of the pledgeethe thing is in danger of being lost orimpaired [Art. 2106].

2.1.4 Obligations and rights of mortgagor and mortgagee

MORTGAGOR:
1. The mortgagor is entitled to the surplus, ifany, after payment of the proceeds of the sale.

MORTGAGEE:
(1) Mortgagee is entitled to recover deficiency.This extends to judicial foreclosure ofmortgage
arising out of the settlement ofestate.
(2) If the deficiency is embodied in ajudgment, it is referred to as deficiencyjudgment.
(3) Action for recovery of deficiency may befiled even during redemption period.
(4) Action to recover prescribes after 10 yearsfrom the time the right of action accrues.
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2.1.5 Effect of pactumcommissorium
PactumCommissorium- a stipulation for automatic appropriation by the creditor in case of non-
payment of the principal obligation within the stipulated period. Automatic foreclosure. 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 nullity of the pactumcommissorium doesnot affect the validity of the contract ofpledge or
mortgage. The creditor may recover the creditfrom the proceeds of a foreclosure saleeffected in
accordance with law.

The mortgagor may still sell the property,and any stipulation to the contrary is void.
Pactum de non alienundo – a stipulation notto alienate. Art. 2130, CC: A stipulation forbidding
theowner from alienating the immovablemortgaged shall be void.

However, a stipulation prohibiting themortgagor from entering into second orsubsequent

mortgages is valid since there isno law prohibiting it.

2.1.6 Modes of Extinguishment

For PLEDGE:
REQUIREMENTS IN SALE OF THETHING PLEDGED BY A CREDITOR, IFCREDIT IS
NOT PAID ON TIME[Art. 2112]
(1) Debt is due and unpaid.
(2) Sale must be at a public auction.
(3) Notice to the pledgor and owner, statingthe amount due.
(4) Sale must be made with the interventionof a notary public.
(5) If at the first auction the thing is not sold,a second one with the same formalitiesshall be held.
(6) If at the second auction, there is no saleeither, the creditor may appropriate thething pledged
but he shall give anacquittance (release) for his entire claim.

THE SALE OF THE THING PLEDGED extinguishes the principal obligation,whether the
proceeds of the sale is moreor less than the amount due.
General Rule: If the price of sale is more than amount due, the debtor is notentitled to the excess
Exception: Unless the contrary isprovided.
If the price of sale is less, the creditor isnot entitled to recover the deficiency. Acontrary
stipulation is void

The provisions of the Civil Code on pledge,insofar as they are not in conflict with theChattel
Mortgage Law shall be applicable tochattel mortgages.

For REAL MORTGAGE:

Foreclosure – is the remedy available to themortgagee by which he subjects themortgaged
property to the satisfaction of theobligation secured by the mortgage.
Kinds of foreclosure
1. Judicial Foreclosure
2. Extrajudicial Foreclosure

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 Judicial Extrajudicial
Court intervenes No court intervention
There is equity ofredemption – periodstarts There is right ofredemption – period
from thefinality of thejudgment until order start from date ofregistration ofcertificate of
of confirmation sale
Decisions areAppealable Not appealable
No need for aspecial power ofattorney in the Special power ofattorney in favor ofthe
contract ofmortgage mortgagee isrequired in thecontract

For CHATTEL MORTGAGE:

Foreclosure
The mortgagee, his executor, administrator or assign may cause the mortgaged property orany
part thereof to be sold at a public auction by a public officer:
(1) After 30 days from default
(2) At a public place in the municipality where the mortgagor resides, or where the property is
situated
(3) Provided at least 10 day-notice of the time, place, and purpose of such sale has been posted at
2 or more public places in such municipality, and
(4) The mortgagee, his executor, administrator, or assign shall notify the mortgagor or person
holding under him and the persons holding subsequent mortgages of the time and place of sale at
least 10 days previous to the sale:
(a) Either by notice in writing directed to him or left at his abode, if within the municipality, or
(b) Sent by mail if he does not reside in such municipality

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