Contract of Pledge and Mortgage

INTENDED LEARNING OUTCOMES

Ø  Define contract of pledge.

Ø  Discuss the nature and binding effect to third persons.

Ø  Enumerate the obligations and rights off pledgor and pledgee.

Ø  Explain the concept of pactum commissorium.

Ø  List down the modes of extinguishment.

Ø  Define contract of mortgage.

Ø  Discuss the nature and requisites of real and chattel mortgage.

Provisions Common to Pledge and Mortgage

Common requisites of pledge and mortgage

1.    That they be constituted to secure the fulfillment of a principal obligation.

The principal obligation must be a valid obligation, as a rule, because being

accessory contracts, pledge and mortgage owe their existence upon the principal
obligation. However, a pledge or mortgage may secure.

a.    All kind of obligations, whether pure or subject to a suspensive or resolutory

condition (Art 2091) or even

b.    Voidable, unenforceable, or natural obligations. (Arts, 2052,2086)

2.    That the pledger or mortgagor be the absolute owner of the thing pledged
or mortgaged.

a.    Ownership at the time pledge or mortgage is constituted

The pledger or mortgagor must be the absolute owner of the thing pledge or
mortgaged at the time it is constituted. Therefore, a pledge
or mortgage constituted on future properly is void. (Arenas vs. Raymundo, 19
Phil 46)

b.    Third persons may pledge or mortgage their property.

It is not required to the validity of a pledge or mortgage that the debtor be the

owner of the thing pledged or mortgaged. Third persons may pledge
or mortgage their property to secure another person’s debt (Art. 2085) however,
they can be held liable only to the extent of the value of their property. With
respect to the mortgage, they may be held liable for any deficiency in the case of
foreclosure if they expressly agreed to assume the principal obligation. (Philtrudt
vs Echaus. 52 Phil 852)
3.    That the persons constituting the pledge or mortgage have the free disposal
of the property, and in the absence thereof that they be legally authorized for the
purpose. (Art. 2085)

Free disposal means the property being given is pledge or mortgage is free from
the claim or encumbrances.

Thus, if the pledge or mortgage was constituted on the property of a

corporation under receivership, the pledge or mortgage is not valid, because the
corporation does not have the free disposal of the thing. (Compaña General de
Tabacos vs. Gauzon, 20 Phil 264)

When thing pledged or mortgaged may be sold or alienated to pay debt

1.    Before Maturity

General Rule: The thing pledged or mortgaged cannot be sold or alienated since

payment of the debt cannot yet be compelled.

Exception: if the pledger or mortgagor fails to fulfill certain conditions, such a

violation would make the debt due and entitle the pledgee or mortgagee to have
the thing sold through the formalities required by law. (PNB vs. Lopez-Vito, 52
Phil 41) thus, if the debtor has lost the right to make use of the period, or when
there is an acceleration clause in an obligation payable in installment and the
debtor has defaulted in the payment of an installment, the thing pledged or
mortgaged may be alienated because such violations would make the balance of
the debt become due and demandable.

2.    At maturity

Upon of the debtor to pay the obligation at maturity, the thing pledge or
mortgaged may be sold or otherwise alienated to pay the creditor. (Art 2087)

Appropriation of the thing pledged or mortgaged

1.    Pactum commissorium,  concept

This is a stipulation in a pledge or mortgage which provides for automatic

forfeiture, i.e., that ownership of the thing pledge or mortgaged shall pass to the
creditor by the mere default of the debtor. (Declaro vs. Alpha Insurance, 58564-R,
June 16, 1978)

The elements of pactum commissorium,   which enables the mortgagee (or

pledgee) to acquire ownership of the mortgaged (pledged) property without the
need of foreclosure proceedings, are (a) there should be a property mortgaged
(or pledged) by way of security for the payment of the principal obligation, and
(b) and there should be a stipulation for automatic appropriation by the creditor
of the thing mortgaged (or  pledged) in case of non-payment of the principal
obligation within the stipulated period. (Sps. Ong vs. Roban LendingCorporation,
G.R. No. 172592, July 9, 2008; Garcia vs. Villar, G.R. No. 185591, June 27, 2012)

This stipulation is void for being contrary to morals and public policy. (Perez vs.
Cortes, 35 Phil 211) the creditor is allowed only to move for the sale of the thing
pledged or mortgaged after the principal obligation becomes due, in order to
collect the amount of his claims from the proceeds. (Ranjo vs. Salmon, 15 Phil
436) the stipulation, however, that the pledgee or mortgagee may purchase the
thing pledged or mortgaged at its current price if the debt is not paid on time is
valid. (See Warmer-Barns vs. Buenaflor and Macoy, C.A. 36 OG 3290.) The
pledgee or mortgagee may also bid at the public auction of the things pledge or
mortgaged.

2.    Appropriation of property pledged or mortgaged

a.    Pledge

Appropriation in pledge is allowed only if the thing pledged is not sold at two
public auctions. The pledgee is required in this case to give an acquaintance for
his entire claim. (Art. 2112)

b.    Mortgage

In no case is appropriation of the property mortgaged allowed.

Indivisibility of pledge and mortgage

          General rule: 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.
(Art 2089) this rule applies even if the debtors are jointly liable. (Art. 2090)

1.    Indivisibility among heirs of debtor

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. (Art, 2089)

2.    Indivisibility among heirs of creditor

The creditor’s heir who received his share of the debt cannot return the pledge or
cancel the mortgage to the prejudice of the other heirs who have not been paid
(Art. 2089)

Exception.  The pledge or mortgage is divisible if several things are given in

pledge or mortgage and 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 answerable is
satisfied. (Art. 2089)

Examples;

1.    D barrowed P10,000.00 from C. the debt is secured by a pledge of D’s ring
and bracelet. Even if D pays C P6,000.00, he cannot ask for the return of the ring
or the bracelet so as to extinguish partially pledge. He can ask for the
extinguishment of the pledge only after he has paid the obligation in full.

However, if D and C agreed that the ring would secure the amount of P6,000.00,
and the bracelet P4,000.00, then d can ask for the extinguishment of the pledge
constituted on the ring upon his payment of P6,000.00.

         
2.    D borrowed from C P100, 000.00 secured by a mortgage on D’s trwo
adjoining lots ( Lot 1 and Lot 2). D dies leaving E and F as heirs with E inheriting
Lot 1 and F Lot 2. Even if E pays C P50, 000.00, he cannot ask for the
extinguishment of the mortgage on Lot 1.

3.    Suppose it is C who dies leaving X and Y as heirs of the credit right. If D pays
X P50,000.00, X cannot cancel the mortgage on Lot 1 to the prejudice of Y.

4.    A and B jointly borrowed P20,000.00 from C. To secure the debt, A pledge his
necklace and B his ring. If A pays C P10, 000.00, he cannot ask for the
extinguishment of the pledge on his necklace. Although the debtors are jointly
liable, the pledge constituted on the necklace and the ring is indivisible.

Promise to constitute pledge or mortgage

          A promise to constitute a pledge or mortgage given rise only to a

personal action between the contracting parties. (Art. 2092)

          The debtor can be complied by the creditor to fulfill his promise by
executing the pledge or mortgage. Until the mortgage has been executed, no
real right on the property is created. In the case of pledge, the same shall not be
perfected until the delivery of the object of the pledge.

          Should be debtor fail to comply with his promise to constitute the pledge
or mortgage, he loses the benefit of the period. Accordingly, the creditor may
demand immediate payment. (See Art, 1198)

Example;

          D borrowed P20,000.00 from C. the loan is payable in 12 months. D

promised to execute a mortgage on his land within one month to secure the
debt. C accepted the promise. In this case, no mortgage has been constituted
yet. However, C has a person right to demand the constitution of the mortgage.
Once the mortgage has been constituted, it creates a real right in favor of C.

          If D does not constitute the mortgage within the one-month period, C

may demand immediate payment of the debt.

PLEDGE

Kinds of pledge

1.    Conventional or voluntary - that which is constituted by the mutual consent

of the pledger and the pledgee.

2.    Legal -  That  which is created by operation of law.(Arts. 546, 1731 and 1994)

Conventional pledge

Requisites

1.    That it be constituted to secure the fulfillment of a principal obligation. (Art.

2085)

2.    That the pledger be the absolute owner of the thing pledged. (Art. 2085)
3.    That the person constituting the pledge has the free disposal of his property,
and in the absence thereof, that he be legally authorized for the purpose. (Art.
2085)

4.    That the thing pledge be placed in the possession of the creditor, or of a

third person by common agreement. (Art.2093)

Necessity of actual or physical delivery

          A pledge, being a real contact, requires for its perfection the delivery of the
thing to the creditor or to the third person by common agreement. Thus, without
delivery, the pledge is void. (El Banco Espanol-Filipino vs. Peterson, 7 Phil 409) the
delivery required here is actual delivery.  (Betita vs. Ganzon, 49 Phil 97; Pacific
Commercial vs. PNB, 49 Phil 936) thus, no pledge is constituted if the delivery is
merely symbolic.

Object of the pledge

1.    All movables within the commerce of men which are susceptible possession.
(Art 2094

2.    Incorporeal rights evidenced by negotiable instruments, bills of lading, shares

of stocks, bonds, warehouse receipts and similar documents.

The instrument proving the right pledged shall be delivered to the creditor, and if
negotiable must be endorsed (Art 2095)

Form of pledge

1.   Between the parties

The pledge may be in any form as in fact the mere delivery of the object is
sufficient to bind the parties.

2.    As regards third persons

To take effect against third persons, the pledge must be in a public instrument
showing a description of the thing pledged and the date of the pledge (Art 2096)

Extent of pledge

          The pledge shall cover the following;

1.    The thing pledged

2.    The fruits, income dividends or interest earned or produced by the thing

pledged, unless there is a stipulation excluding them.

The creditor shall compensate what he receives as fruits, income, dividends or

interests with those which are owing him. If none are owing him, or insofar as the
amount may exceed that which is due, he shall apply it to the principal. (Art 2102)

Example; D borrowed from C P10,000.00 which bears interest at 1% a month. The

obligation is secured by a pledged of certain shares of stock owned by D. in
addition to delivering to C the stock certificate covering the shares, D also gave C
the authority to collect a dividend of P250.00, he shall apply P100.00 to the
interest due and balance of P150.00 to the principal. If no interest is due to him,
he shall apply the total amount of P250.00 to the principal.

3.    The offspring, when the thing pledged is an animal, unless there is stipulation
excluding them. (Art 2102)

The offspring, however, shall pertain to the pledgor. (Art 2102)

Rights of the debtor/pledgor

1.   To alienate, with the consent of the pledgee, the thing pledged.

The ownership of the thing pledged is transmitted to the vendee or transferee as

soon as the pledgee consents to the alienation, but the pledgee shall continue in
possession. (Art 2097)

2.   To ask that the thing pledged be judicially or extra-judicially deposited if it is

used without authority or for a purpose other than for its preservation. (Art 2104)

3.   To continue to be the owner of the thing pledged unless it is expropriated.

(Art 2103)

4.   To ask for the return of the thing pledged after he has paid the debt and its
interests, with expenses in a proper case. (Art 2105)

5.   To require that the thing pledged 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. (Art 2106)

6.   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. (Art 2107, 2108)

This right, however, is without prejudice to the right of the pledgee to have the
thing sold at a public sale. The proceeds of the auction shall be security for the
principal obligation in the same manner as the thing originally pledged. (Arts
2107, 2108)

Obligation of the debtor/pledgor

1.    To pay the debt and its interest, with expenses in a proper case when they
are due. (Art. 2105)

2.    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 avoids the pledgee of
the same. (Art. 1951, 1201)

Right of the creditor/ pledgee

1.    To retain in his possession the thing pledged until the debt is paid. (Art.
2098)

2.    To demand reimbursement of the expenses made for the preservation of the
thing pledged. (Art. 2099)
3.    To bring actions which pertain to the owner of the thing pledged in order to
recover it from, or defend it against, third persons. (Art. 2103)

4.    To use the thing pledged if he is authorized to do so, or when its use is
necessary for the preservation of the thing. (Art. 2104)

5.    If he is deceived of the substance of the thing pledged, he may either.

a.    Claim the another thing be given to him in place of the thing pledged , or

b.    Demand immediate payment of the principal obligation. (Art. 2109)

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

The proceeds of the auction shall be security for the principal obligation in the
same manner as the thing originally pledged. (Art. 2108)

7.    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. He shall apply what he has collected to the payment of his claim. He shall
apply what he has collected to payment of his claim. And deliver the surplus,
should there be any, to the pledgor (Art. 2118)

Example, D received a promissory note of P10,000.00 from M the same being due
on March 1. Thereafter, D pledged the promissory note to secure a loan of
P8,000.00 which the obtained from C. the loan is due on March 5. On march 1, C
can collect the note of P10,000.00 from M. he shall apply P8,000.00 for the
payment of his claim and deliver the surplus of P2,000.00 to D.

8.    To sell the thing pledged upon default of the debtor. (Art. 2087, 2112)

Obligation of the creditor/pledgee

1.    To take care of the thing pledged with the diligence of a good father of a
family. (Art. 2099)

2.    To be liable for the loss or deterioration of the thing pledged unless it is due
to fortuitous event. (Art.2099)

3.    Not to deposit the thing pledged with a third person, unless authorized.
(Art.2100)

4.    To be responsible for the acts of his agents or employees with respect to the
thing pledged. (Art.2100)

5.    Not to use the thing pledged, except when:

a.    He is authorized by the owner, or.

b.    The use of the thing is necessary for tits preservation.

6.    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. (Art.2108)
Rights of a third person who pledges his own movable property to secure
the debt of another.

1.    To be indemnified by the debtor if he pays the creditor. The indemnity

consists of the following:

a.    The total amount of the debt.

b.    The legal interests thereon from the time the payment was made known ro
the debtor, even though it did not earn interest for the creditor.

c.    The expenses incurred by the pledger after having notified the debtor that
payment had been demanded of him.

d.    Damages, if they are due. (Arts 2066, 2120)

2.    To be subrogated to all the rights of the creditor against the debtor if he
pays the creditor. (Arts 2067, 2120)

The pledgor is considered a third person interested in the fulfillment of the

obligation; hence, he is entitled to be subrogated to the creditor’s right upon
payment. (See Arts 1236 and 1302)

Example: D obtained a loan of P10,000.00 from C. the debt is secured by the

guarantee of G and the pledge by T of his ring.

If T pays C, T steps into the place of C. thus, T can demand the indemnification
mentioned in No. 1 above from D. if D cannot pay, T can go after G.

3.    To be released from liability in the following cases:

a.    If the creditor voluntary accepts immovable or other property in payment of

the debt even if creditor thereafter loses the same eviction. (Arts. 2077, 2120)

Example: D borrowed P50, 000.00 from C. the debt is secured by a pledge of T’s
ring. On due date, C accepted a parcel of land from D in payment of the debt T
can demand that he be released from the pledge. T shall be released even if later,
C should lose the lot by eviction in case there is a rightful owner.

Note:  the acceptance by the creditor of a property in payment of the debt is in

the nature of dacion en pago.

b.    If an extension of time is granted to the debtor by the creditor without his
(pledgor’s) consent. (Arts 2079, 2080)

c.    If through some act of the creditor, the pledgor cannot be subrogated to the
rights, mortgages and preferences of the creditor. (Arts. 2080,2120)

Thus, if, in the example is No. 2, C cancels G’s guarantee, T is released from
liability because if T pays C, T can no longer go after G if D cannot pay the
indemnification due him (T).

Extinguishment of pledge

          Pledge may be extinguished directly or indirectly.

1.    Indirect cause-when the principal obligation secured by the pledge is
extinguished, the pledge being merely an accessory contract, is likewise
extinguished.

          Any third person who has any right in or to the thing pledged may satisfy
the principal obligations soon as the latter becomes due and demandable.
(Art.2117)

          Examples: D owes C P5,000.00. The debt is secured by a pledge of D’s

wristwatch. If D pays C P5,000.00 the debts extinguished together with the
pledge.

2.    Direct Causes- Pledge may be extinguished directly as follows:

a.    Return by the pledge of the thing pledged to the pledgor or owner.

1)    Any stipulation that the pledge in not extinguished by the return of the thing
is void.

2)     Prima Facie presumption that pledgee returned the thing pledged.

a) If the thing pledged is found in the possession of the pledgor or owner.

b)       If the thing pledge is in possession of a third person who has received it
from the pledgor or owner. (Art.2110)

Renunciation or abandonment in writing by the pledgee of the pledge.

1)   The acceptance of the pledgor or owner of the renunciation, or the return of

the thing pledged is not necessary for such mode of extinguishing pledge.

2)   The pledgee becomes a depository upon renunciation (Art.2111) if in the

meantime, the thing pledged is not yet returned to the owner.

Sales of the thing pledge

1)   Formalities of the sale- The sale shall be.

a)   By public auction.

b)   Through a notary public, and

c)    With the notice of the debtor and the owner of the thing pledge, stating the
amount for which the public sale is to be held (Art.2112)

2)   Who may bid at the public auction.

a)   The pledge of owner.

       He shall be preferred if they should offer the same terms as the highest
bidder.

b)   The pledgee.

       However, his offer shall not be valid if he is the only bidder. (Art2113)
c)    Third persons.

3)   Required amount of bids.

          All bids shall be offer to pay the purchase price at once. If any other bid is
accepted, the pledgee is deemed to have received the purchase price, as far as
the pledgor or owner concerned. (Art.2114)

4)   Effects of sales.

The principal obligation shall be extinguished whether or not the proceeds of the
sales are equal to the amount of the principal obligation, Interest and expenses in
the proper case. (Art 2115)

a)   If the price is more than the amount of the obligation, the debtor shall not be
entitled to the excess, unless there is an agreement to the effect.

b)   If the price is less, the creditor cannot recover the deficiency even if stipulated
(Art2115)

 Example:

          D owes C P10,000.00. The debt is secured by a pledge of D’s shares of

stock which is evidenced by a stock certificate delivered by D to C at the time D
received proceeds. If D defaults and C sells the share of stock at P9,5000.00D’s
debt is extinguished cannot recover the deficiency of P500.00. If the shares of
stock are sold atP11,000.00, D’s debt is likewise extinguished. The excess of
P1,000.00 belong to unless the parties had an agreement that any excess shall be
turned over to D.

5)       Rule when two or more things are pledged

          The pledgee may choose which he will cause to be sold, unless there is a
contrary stipulation. He may demand the sale of only as many of the thing as are
necessary for then payment of the debt. (Art2119)

Appropriation of the thing pledged

          If the thing pledge is not sold in the first and second public auction, the
creditor may appropriate the thing pledged. In this case, he shall be obliged to
give an acquaintance for his entire claims. (Art2112)

NOTE: The sale of the thing pledge or its appropriation will result in the
extinguishment not only the pledge of the principal obligation.