ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 41  May 2021 CPA Licensure Examination  Week No. 7

REGULATORY FRAMEWORK for BUSINESS TRANSACTIONS Atty. J. Domingo  Atty. N. Soriano

RFBT-04: LAW ON CREDIT TRANSACTIONS

I. Provisions common to pledge and mortgage
a. 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:
o All kinds of obligations, whether pure or subject to a Suspensive or
Resolutory condition or even
o Voidable, unenforceable or natural obligations.

b. That the pledger or mortgagor be the absolute owner of the thing pledged or
mortgaged;
 The pledger or mortgagor must be the absolute owner of the thing pledged or
mortgaged at the time the pledge is constituted. Therefore, a pledge or
mortgage on future property is void;
 Third persons may pledge or mortgage their property – it is NOT required for
the validity of a pledge or mortgage that the debtor be the owner of thing
pledged or mortgaged. Third persons may pledge or mortgage their property to
secure another person’s debt. However, they can be held liable only to the
extent of the value of their property. With respect to mortgage, they may be
held liable for any deficiency in case of foreclosure if they expressly agreed to
assume the principal obligation;
c. 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.
 Free disposal means the property being given in pledge or mortgage is free
from claims or encumbrances.
d. Can the thing pledged or mortgaged be sold or alienated to pay the debt?
 Before Maturity – As a rule, NO because the payment of the debt cannot yet
be compelled;
o Except if the pledger or mortgagor fails to fulfill certain conditions such
a violation would make the debt due.
 At Maturity – Upon default of the debtor to pay the obligation at maturity, the
thing pledged or mortgaged may be sold or otherwise alienated to pay the
creditor;
e. Appropriation of the thing pledged or mortgaged
 Pactum Commissorium – this is an agreement whereby the creditor
automatically becomes the owner of the thing given by way of pledge or
mortgage or dispose of them in case of non-payment.
 It is a stipulation which enables the mortgagee or pledgee to acquire ownership
of the pledged or mortgaged property without the need of any foreclosure
proceeding or public auction.
 Pactum Commissorium is null and void.
 Distinguished from dacion en pago – In a true dacion en pago, the transfer of
the property to the creditor extinguishes the monetary debt. In pactum
commissorium, the property is initially given as a security but later
appropriated without the benefit of foreclosure.

f. As a 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. This
rule applies even if the debtors are jointly liable.
 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.

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Week No. 7: LAW ON CREDIT TRANSACTIONS

II. Pledge - is an accessory contact by virtue of which personal property delivered to the
creditor as a security for an obligation with the agreement that it can be sold at public
auction in case of non-payment to answer for the unpaid obligation or for the creditor to
return the same in case the principal obligation is paid. It may be conventional or
voluntary pledge or legal or by operation of law.
a. Requisites of Conventional or Voluntary Pledge:
 The pledge must be constituted to secure the fulfillment of a principal
obligation;
 Can an after incurred obligation be secured by an already existing pledge? Yes,
provided such obligation is accurately described.
 The pledgor must be the absolute owner of the thing pledged or mortgaged;
 The pledgor must have free disposal of the property;
 The thing pledged should be placed in the possession of the creditor or of a
third person by common agreement – ACTUAL delivery must be made and not
symbolic delivery.
 To take effect against third persons the description of the thing pledged and
the date of the pledge must appear in a public instrument.
b. Subject Matter of Pledge – only personal or movable properties susceptible of
possession.
 Incorporeal rights – evidenced by negotiable instruments, bills of lading, shares
of stocks, bonds, etc.
 Fruits – If the thing pledged earns or produces fruits, income, or dividends, the
creditor shall:
o Compensate what he receives with those which are owing him;
o 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
earning of the right pledged;
o Offspring of Animals – 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;
c. Rules in Possession
 The pledgee has the right to retain the thing until the debt is paid;
 The pledgor cannot alienate the thing pledged before the obligation becomes
due unless there is consent on the part of the pledgee – ownership of the thing
pledged is transferred to the vendee or transferee as soon as the pledgee
consents to the alienation but the latter shall continue in possession;
 The creditor-pledgee shall take care of the thing pledged with the diligence of a
good father of a family; he has a right of reimbursement of the expenses made
for its preservation and is liable for its loss or deterioration;
 The pledgee cannot deposit the thing pledged with a third person, unless there
is a stipulation authorizing him to do so;
 The creditor-pledgee may bring actions which pertain to the owner of the thing
pledged in order to recover it from or defend it against a third person;
 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. EXCEPT: If the
preservation of the thing pledged requires its use it must be used by the
creditor but only for that purpose.
d. Public Auction – 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. This sale shall be:
 Made at a public auction;
 With notification to the debtor and the owner of the thing pledged in a proper
case;
 The notice must state the date for which the public sale is to be made.
 If at the first auction sale 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, the creditor shall
be obliged to give an acquittance for his entire claim.

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 At the public auction, the pledgor or the 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. \
 The pledgor or owner has no right to redeem the property after the public
auction. However, there is equity of redemption, that is pledgor or owner may
satisfy the obligation after it becomes due and before the public sale.
e. Rules on Deficiency and excess
 Deficiency cannot be recovered – the sale of the thing pledged shall extinguish
the principal obligation, whether or not the proceeds of the auction sale are
equal to the amount of the principal obligation, interest and expenses in a
proper case. The creditor is not entitled to recover the deficiency even if there
is a stipulation to the contrary;
 Excess belongs to the creditor-pledgee – if the price of the sale is more than
the amount of the obligation, the debtor shall not be entitled to the excess.
Exceptions:
o If it is otherwise agreed.
o In legal pledge or pledge by operation of law, after payment of the debt
and expenses, the remainder of the price of the sale shall be delivered
to the obligor.
f. Extinguishment of Pledge:
 If the thing pledged is returned by the pledgee to the pledgor or owner and nay
stipulation to the contrary shall be void;
 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.

III. Real Estate Mortgage

a. Governing Law – Articles 2124 – 2131 of the Civil Code and Act No. 3135
b. Subject – only immovable properties or real rights over such immovable may be the
subject of a REM.
 Buildings are immovable properties distinct from the land on which they are built,
hence, buildings may be the subject of a separate REM;
 There are instances when certain movables are treated as real property because of
estoppel—if the parties are aware that the subject property is a movable and yet
then execute a REM on such property. The parties are precluded from denying the
existence of the REM in order to protect the interest of third persons;
c. Nature of REM – REM is an encumbrance on real property. The registered mortgage
follows the property even if there is a change in ownership.
 Security interest – only security interest is acquired, the right to possession is not
included unless otherwise stipulated;
 In case of several mortgages constituted over the same property, the first
registered mortgagee has superior right over junior mortgagees or attaching
creditors;
 Registration – a real estate mortgage must be registered with the Registry of
Deeds where the subject property is located in order to affect third persons.
However, an unregistered mortgage is valid between the parties.
d. After-acquired property and after-incurred obligations
 The parties may stipulate that after acquired property are automatically included in
the mortgage;
 After-incurred or future obligations may be covered by REM if the same is
expressly provided; In the absence of stipulation, the general rule is that the
mortgage must be limited to the amount mentioned in the mortgage;
 Dragnet clause – a stipulation wherein all debts of the mortgagor will be secured
by the current REM; A mortgage with a dragnet clause makes available future
loans without the need to execute another set of security documents.

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e. Foreclosure of REM
 Concept – foreclosure is the remedy available to the mortgagee by which he
subjects the property mortgaged to the satisfaction of the obligation secured;
 Grounds for foreclosure:
o When the principal obligation is not paid when due;
o When there is any violation of any condition, stipulation or warranty by the
mortgagor.
 Kinds of foreclosure
o Judicial Foreclosure – a foreclosure made through the filing of a petition in
court
 If the defendant fails to pay the amount due within the time directed
by the court, the property shall be sold;
 The proceeds of the sale shall be distributed as follows:
 The cost of the sale;
 The claim of the person foreclosing the mortgage;
 Claims of junior encumbrances in the order of their priority;
 Balance after all of the above are paid shall be paid to the
mortgagor or his agent.
 Deficiency judgment – if the proceeds of the sale are not sufficient
to satisfy the claim of the creditor, the court, upon motion, shall
render the judgment against the debtor, for such balance.
oExtrajudicial foreclosure – this is made in compliance with the provisions of
Act No. 3135 in the following cases:
 Where there is a stipulation in the mortgage contract that the
mortgage may be foreclosed extra-judicially; or
 Where such extra-judicial foreclosure sale is made under a special
power of attorney inserted in the contract.
f. Redemption
 Concept – a transaction through which the mortgagor, or one claiming in his
right, by means of payment or the performance of the condition, reacquires or
buys back the value of the title which may have passed under the mortgage.
 Kinds of redemption:
o Equity of Redemption – this refers to the right of the mortgagor to
redeem the mortgaged property after his default in the performance of
his obligation but before the property is sold.
 Available only in judicial foreclosure of REM, the mortgagor is
given not less than 90 days to pay the mortgage debt before the
property is sold;
o Right of Redemption – this refers to the right of the mortgagor to
repurchase the property within a certain period after it was sold for the
payment of the mortgage debt.
 In judicial foreclosure, the mortgagor may redeem the property
after the sale and before the confirmation by the court of the
sale.
 In extrajudicial foreclosure, the mortgagor has one year from the
date of registration of the sale to redeem the property.
 Exception: If the owner of the property is a juridical person, the
right of redemption may be exercised until the registration of the
certificate of foreclosure sale with the Registry of Deeds which in
no case shall be more than 3 months after foreclosure,
whichever is earlier.
IV. Chattel Mortgage
 Concept – It is an accessory contract by virtue of which personal property is recorded in
the Chattel Mortgage Registry as security for the performance of an obligation.

 Subject Matter – It covers personal or movable properties including incorporeal

properties, shares of stocks and interests in business. The exception in estoppel is also
applicable in chattel mortgage.

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 Required formalities:
o CM must be registered in the Chattel Mortgage Registry of the Registry of Deeds
where the mortgagor resides or if he resides outside the Philippines, in the place
where the property is situated. An unregistered mortgage is binding between the
parties but not on third persons;
o Affidavit of good faith – a document executed by the parties attesting that the loan
on which the personal property secures is entered into in good faith.
 After incurred obligations and after acquired properties
o A chattel mortgage can cover only obligations EXISTING at the time the mortgage
is constituted. It CANNOT cover after incurred obligations;
o Chattel mortgage shall be deemed to cover only the property described therein
and not like or substituted property thereafter acquired;
 Right of redemption – there is no right of redemption after the foreclosure sale; there is
only equity of redemption before the foreclosure sale—mortgagor is given not less than
90 days to pay the mortgage debt before the property is sold.
 Deficiency after foreclosure – after foreclosure, the mortgagee may generally recover any
deficiency that may result after applying the proceeds of the foreclosure sale to the
obligation. Exception:
o When the transaction secured is sale of personal property on installment basis
under the Recto Law.
V. Antichresis
 Concept – It is an accessory contract whereby the creditor acquires the right to
receive the fruits of an IMMOVABLE property of his debtor with the obligation to apply
them to the payment of the interest, if owing, and thereafter to the principal of his
credit.
 The property involved is an immovable that is delivered to the antichretic creditor as a
security – ownership is NOT transferred. The debtor cannot reacquire the enjoyment
of the immovable until full payment of his obligation.
 Antichresis is also indivisible and the rules that apply to mortgage and pledge
regarding indivisibility applies to Antichresis.
 Required formalities - The amount of the principal and the interest shall be specified in
writing, otherwise the contract of Antichresis is void.
 Measurement of value – the actual market value of the fruits at the time of the
application thereof to the interest and principal shall be the measure of the
application of fruits to the obligation.
 The contracting parties may stipulate that the interest upon the debt be compensated
with the fruits of the property which is the object of the Antichresis;
 If the value of the fruits should exceed the amount of interest allowed by the law
against usury, the excess shall be applied to the principal.
 Obligations of the antichretic creditor
o To pay the taxes and charges upon the estate, unless there is a stipulation on
the contrary – to be deducted from the fruits;
o To bear the expenses necessary for its preservation and repair – to be
deducted from the fruits;
 The creditor in order to exempt himself from the obligations imposed upon him to pay
the abovementioned expenses may always compel the debtor to enter again upon the
enjoyment of the property, except when there is a stipulation to the contrary.
 The creditor does not acquire the ownership of the real estate for non-payment of the
debt within the period agreed upon. Every stipulation to the contrary shall be void;
 The remedies of the creditor in case of non-payment of debt within the period agreed
upon (the fruits are not enough) are as follows:
o To abandon the security and file an action for specific performance;
o Petition the court for the payment of the debt or the sale of the real property –
the rules of court on the foreclosure of mortgages shall apply.

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PLEDGE
1. What is an obligation of the pledgor?
A. To demand the return of the thing before full payment of the debt, including
interest due thereon and expenses incurred for its preservation
B. To advise the pledgee of the flaws of the thing
C. To take care of the thing with the diligence of a good father of a family and be liable
for the loss or deterioration of such
D. Responsibility for acts of agents and employees as regards the thing

2. What is an obligation of the pledgee?

A. To use the thing even without authority from the owner
B. To deposit the thing with a third person absent a stipulation
C. To advise pledgor of danger to the thing
D. To advise pledgor of the result of the private auction

3. The pledgor may alienate the thing pledged provided:

A. The pledgee consents to the sale
B. The owner consents to the sale
C. The loan has been fully paid
D. The price is not less than the amount of the loan

4. A contract of pledge is not effective between the contracting parties until:

A. The notarization of the contract
B. Actual delivery of the thing pledged to the creditor or to a third person by common
agreement
C. Constructive delivery of the thing pledged
D. The contracting parties come to an agreement

5. A contract of pledge is not effective against third persons until the following appears in
the public instrument:
A. Description of the thing pledged and date of pledge
B. Description of the thing pledged only
C. Date of pledge only
D. Amount of loan secured

6. If the pledgor or mortgagor is not the owner of the thing pledged or mortgaged, the
contract of pledge or mortgage is:
A. Void C. Valid
B. Voidable D. Unenforceable

7. The contract of pledge or mortgage may secure (1) pure and (2) conditional obligations.
A. Pure only
B. Conditional only
C. Both of them
D. Pure and suspensive conditional obligation only

8. Danny pledged his diamond ring with Justin. If Danny sells the ring and Ron buys it with
the consent of Justin, who shall have the right of possession over the ring?
A. Justin
B. Danny
C. Justin
D. Any third person agreed by Danny and Justin

9. Anna borrowed P30,000 from Rona and pledged her necklace to secure the debt. Without
being paid, Rona returned the necklace. Anna then borrowed P10,000 from Leinor and
pledged the same necklace. How many contract/s of pledge are existing?
A. None C. Two
B. Just one D. Three

10. Who shall be liable for the loss or deterioration of the thing pledged?
A. Debtor C. Creditor
B. Pledgor D. Both the creditor and debtor

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11. The pledgor continues to be owner of the thing pledged until:

A. The thing pledged is expropriated.
B. The debtor fails to pay what is due.
C. The pledgee exercises his right to appropriate the thing pledged.
D. The thing pledged is delivered to the pledgee.

12. When can the debtor ask for the return of the thing pledged?
A. Upon payment of debt and interest only.
B. Upon payment of debt and expenses only.
C. Upon judicial demand of the debtor.
D. Upon payment of debt, interest and expenses.

13. If there are reasonable grounds to fear the destruction or impairment of the thing
pledged, without the fault of the pledgee, what is remedy available to the pledgor?
A. Demand the return of the thing pledged even without a substitute.
B. Cause the same to be sold at a public sale.
C. Cause the same to be sold at a private sale.
D. Demand the return of the thing pledged but there must be a substitute.

14. 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:
A. Voidable C. Void
B. Unenforceable D. Valid

15. How many auction/s should fail before the pledgee can appropriate the thing pledged for
himself?
A. 1 B. 2 C. 3 D. 5

16. If at the public auction of the thing pledged, the pledgor or owner offered the same terms
as the highest bidder, who has a better right?
A. Pledgor or owner
B. Highest bidder
C. Any of the pledgee’s choosing
D. Conduct another auction

17. If the price of the sale of the thing pledged is more than the obligation due, who is
entitled to the excess?
A. Debtor, unless it is otherwise agreed
B. Creditor, unless it is otherwise agreed
C. Creditor, notwithstanding any stipulation to the contrary
D. Debtor, notwithstanding any stipulation to the contrary

18. Oliver borrowed from Ryan P10,000. This was secured by a negotiable promissory note
made by Roald in favor of Oliver to the amount of P15,000. The negotiable promissory
note was endorsed by Oliver in Ryan’s favor. If the note becomes due before it is
redeemed and Ryan collects from Roald, how much can Ryan keep?
A. P8,000 B. P10,000 C. P18,000 D. None

19. If two or more things are pledged, which must be chosen to be sold, if necessary?
A. Whatever the pledgee chooses
B. Whatever the pledgor chooses
C. The thing with the highest value
D. The thing with the lowest value

20. If the thing pledged by operation of law is not sold during the first public auction, what
must be done next?
A. Conduct another public auction
B. Deposit the thing to the court
C. Pledgee may keep the thing
D. Return the thing to the owner

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REAL MORTGAGE
21. First Statement: A third person who is not a party to the principal obligation may
mortgage his property to secure the obligation of the debtor.
Second Statement: The mortgage is indivisible.
A. Both statements are true.
B. Only first statement is true.
C. Only second statement is true.
D. None of the statements is true.

22. First Statement: The mortgage secures only the amount stated in the mortgage deed
which may be less than the amount of the principal obligation
Second Statement: A building can be separately mortgaged from the land where it
stands.
A. Both statements are true.
B. Only first statement is true.
C. Only second statement is true.
D. None of the statements is true.

23. In order to affect third persons, a real estate mortgage must be registered with the
Register of Deeds:
A. Where the mortgagor resides
B. Where the mortgagee resides
C. Where the subject property is located
D. Where both the mortgagor and mortgagee reside

24. First Statement: The parties may stipulate that after-acquired properties are
automatically included in the real estate mortgage.
Second Statement: A deed of real estate mortgage may expressly provide that it may
secure after-incurred or future obligations.
A. Both statements are true.
B. Only first statement is true.
C. Only second statement is true.
D. None of the statements is true.

25. Land with a Torrens title was mortgaged as security for a bank loan. If the Torrens title is
later nullified, will the mortgage be also nullified?
A. No, because the mortgage is a separate document.
B. No, as long as the bank has acted in good faith.
C. Yes, because the accessory document follows the principal document.
D. Yes, without the title, there can’t be any mortgage.

26. If one mortgages his property to guaranty another’s debt, when can he be compelled to
pay the deficiency remaining after the mortgage has been foreclosed?
A. When the creditor files an action against him
B. When he mortgaged his property, he already guaranteed the whole debt
C. When he expressly assumes personal liability for such debt
D. No mortgagor can ever be held liable for the deficiency

27. What distinguishes pledge from mortgage?

A. Pledge is an accessory contract.
B. The pledgor must be the absolute owner of the thing pledged.
C. The pledgor must have free disposal.
D. The thing pledged must be placed in the possession of the creditor, or of a third
person by common agreement.
28. If the mortgage is not recorded in the Registry of Property, it is:
A. Void C. Binding between the parties
B. Voidable D. Unenforceable

29. If a mortgaged property is sold to a buyer, what happens to the mortgage?

A. Continues to exist
B. Extinguished upon sale
C. Extinguished upon transfer of possession
D. Binds the personal properties of the buyer

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30. A stipulation forbidding the owner from alienating the immovable mortgage shall be:
A. Voidable
B. Valid
C. Void
D. Unenforceable

CHATTEL MORTGAGE
31. First Statement: Chattel mortgage on shares of stocks need not be registered in the stock
and transfer book.
Second Statement: A machinery installed by the lessee on the leased premises may
be subject of a chattel mortgage.
A. Both statements are true. C. Only second statement is true.
B. Only first statement is true. D. None of the statements is true.

32. For a machinery to be considered real property, which of the following requisites must be
present?
First: installed by the owner
Second: intended by the owner of the tenement for an industry or work being carried
on in a building or piece of land
Third: which tend directly to meet the needs of the said industry or works
A. First and second only C. Second and third only
B. First and third only D. All of them

33. For mortgage over shipping vessels to be effective as to third persons, it must be
recorded in the office/s of:
A. Maritime Industry Authority and Register of Deeds
B. Maritime Industry Authority only
C. Register of Deeds only
D. Philippine Coast Guard only

34. First Statement: The chattel mortgage over a building is considered valid as between the
parties on the basis of estoppel but not against third persons.
Second Statement: Chattel mortgage shall be deemed to cover only the property
described therein and not like or substituted property thereafter acquired but such
rule does not apply to stores open to the public.
A. Both statements are true. C. Only second statement is true.
B. Only first statement is true. D. None of the statements is true.

35. First Statement: A chattel mortgage can only cover obligations existing at the time the
mortgage is constituted.
Second Statement: Since a chattel mortgage is just a security, foreclosure thereof will
not prevent the mortgagee from applying any deficiency that may result after applying
the proceeds of the foreclosure sale to the obligation.
A. Both statements are true. C. Only second statement is true.
B. Only first statement is true. D. None of the statements is true.

36. If the movable as a security for the performance of an obligation, is delivered to the
creditor or a third person, the contract is a:
A. Chattel mortgage C. Guaranty
B. Pledge D. Deposit

37. When should a chattel mortgage registered in two registries?

A. When the mortgagor and mortgagee stipulate such arrangement.
B. When the property is not where the chattel mortgage is executed.
C. When the mortgagor resides in one province and the property is in another.
D. When the mortgagee resides in one province and the property is in another.

38. When may a house be subject of a chattel mortgage?

A. If the parties agree even though third persons are prejudiced.
B. If the house is not intended to be demolished or removed.
C. If the parties agree and no third persons are prejudiced.
D. It can never be subject of a chattel mortgage.

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39. Where the proceeds from the sale of mortgaged property (chattel mortgage) do not fully
satisfy the secured debt, is the mortgagee entitled to recover the deficiency from the
mortgagor?
A. No, the rule on pledge applies to chattel mortgage.
B. No, the chattel satisfies the obligation in full.
C. No, notwithstanding any stipulation to the contrary.
D. Yes, the mortgagee is entitled to recover.

40. When a chattel mortgage is entered into as security for the purchase of personal property
payable in installments, no deficiency judgment can be asked. Any agreement to the
contrary shall be:
A. Valid C. Voidable
B. Void D. Unenforceable

ANSWER KEY
1. B 9. B 17. B 25. B 33. B
2. C 10. C 18. B 26. C 34. A
3. A 11. A 19. A 27. D 35. A
4. B 12. D 20. D 28. C 36. B
5. A 13. D 21. A 29. A 37. C
6. A 14. C 22. A 30. D 38. C
7. C 15. B 23. C 31. A 39. D
8 A 16. A 24. A 32. D 40. B

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