ANTI-MONEY LAUNDERING ACT

Background
Before AMLA, the BSP issued various circulars to avoid money laundering. Under AMLA, money
laundering is a crime whereby the proceeds of an unlawful activity are transacted and making them
appear to have originated from legitimate sources.

Purposes:
1. To protect and preserve the integrity and confidentiality of bank accounts;
2. To ensure that the Philippines shall not be used as a site for unlawful money laundering
activities;
3. To pursue State’s foreign policy to extend cooperation in transnational investigations and
prosecutions of persons involved in money laundering activities wherever committed.

Money Laundering
A crime whereby the proceeds of an unlawful activity are transacted, thereby making them appear to
have originated from legitimate sources.

Money laundering is committed by any person who, knowing that any monetary instrument or property
represents, involves or relates to the proceeds of any unlawful activity:
1. Transacts said monetary instrument or property;
2. Attempts or conspires to commit money laundering offenses referred to in paragraph 1, 2 and 3;
3. Aids, abets, assists in or counsels the commission of the money laundering offenses referred to
in paragraphs (a), (b) or (c) above;
4. Converts, transfers, disposes of, moves, acquires, possesses or uses said monetary instrument or
property;
5. Conceals or disguises the true nature, source, location, disposition, movement or ownership of
or rights with respect to said monetary instrument or property;
6. Performs or fails to perform any act as a result of which he facilitates the offense of money
laundering referred to in paragraphs (a), (b) or (c) above;
7. Any covered person who, knowing that a covered or suspicion transaction is required under this
Act to be reported to the Anti-Money Laundering Council (AMLC), fails to do so.

Prevention of Money Laundering

1. Customer Identification
a. Covered institutions shall establish true indemnity of clients based on official
documents;
b. Maintain a system of verifying true identity of clients;
c. Anonymous accounts, those under fictitious names and similar accounts are prohibited;
d. Peso and foreign currency non-checking numbered accounts are allowed.
BSP may conduct annual testing of such accounts to determine identity.
2. Record keeping
a. All records of all transactions of covered institution must be safely stored for 5 years
from date; or
b. In close accounts, records on customer identification and correspondence shall be
preserved for 5 years from date of closing.
3. Reporting covered and suspicious transactions
 a. Covered institutions shall report to AMLC all covered and suspicious transactions within
5 days from occurrence therefore. There can be extension but not exceeding 15 working
days.
b. If transaction be determined to be both covered and suspicious, it shall report such as
suspicious.
c. When reporting, covered institution deemed not to have violated:
i. R.A. NO. 1405- Act Prohibiting Disclosure of Deposits
ii. R.A. NO. 6426- Foreign Currency Deposits.
iii. R.A. NO. 8791- General Banking Law.
d. When reporting covered or suspicious transactions, covered institution and its officers
and employees are prohibited from communicating to any person or media of such fact.
In case of violation, officer or employee shall be criminally liable except if done in good
faith.
e. There can be no publication or airing of such report by mass media, e-mail or other
device. Publication of such shall hold, covered institution and media criminally liable.
f. Lawyers and accountants acting as independent legal professionals are not required to
report covered and suspicious transactions if the relevant information was obtained in
circumstances which are subject to privileged communication.

Covered Entities
1. Banks, non-banks, quasi-banks, trust entities, foreign exchange dealers, pawnshops, money
changers, remittance and transfer companies and other similar entities and all other persons
and their subsidiaries and affiliates supervised or regulated by the BSP;
2. Insurance companies, pre-need companies and all other persons supervised or regulated by the
Insurance Commission.
3. The following entities administering securities:
a. Securities dealers, brokers, salesmen, investment houses and other similar persons
managing securities or rendering services as investment agent, advisor or consultant;
b. Mutual funds, close-end investment companies, common trust funds, and other similar
persons; and
c. Other entities administering or otherwise dealing in currency, commodities or financial
derivatives based thereon, valuable objects, cash substitutes and other similar monetary
instruments or property supervised or regulated by the SEC;
4. Jewelry dealers of precious metals and stones, who, as a business, trade in precious stones, for
transactions in excess of one million pesos;
5. Company service providers which, as a business, provide any of the following services to third
parties: (i) acting as a formation agent of juridical persons; (ii) acting as (or arranging for another
person to act as a director or corporate secretary of a company, a partner of a partnership, or a
similar position in relation to other juridical persons; (iii) providing a registered office, business
address or accommodation, correspondence or administrative address for a company, a
partnership or any other legal person or arrangement, and (iv) acting as (or arranging for
another person to act as) a nominee shareholder for another person; and
6. Persons who provide any of the following services:
a. Managing of client money, securities or other assets;
b. Management of bank, savings or securities accounts;
c. Organization of contributions for the creation, operation or management of companies
and
 d. Creation, operation or management of juridical persons or arrangements, and buying
and selling business entities.

Note: The term covered persons shall exclude lawyers and accountants acting as independent legal
professionals in relation to information concerning their clients or where disclosure of information
would compromise client confidences or the attorney-client relationship: Provided, that these lawyers
and accountants are authorized to practice in the Philippines and shall continue to be subject to the
provisions of their respective codes of conduct and/or professional responsibility or any of its
amendments.

Three basic steps in money laundering (PLI)

1. Placement
At this stage, the launderer inserts the dirty money into a legitimate financial institution usually
in the form of cash bank deposits.
2. Layering
Involves sending money through various financial transactions to change its form and make it
more difficult to follow. It may consist of bank-to-bank transfers, changing currency, or
purchasing high value items. This is the most complex step.
3. Integration
The money re-enters mainstream economy in legitimate-looking form, appearing to have come
from some legitimate transaction. It may involve a final bank transfer into the account of a local
business in which the launderer is “investing” in exchange for a cut of the profits or the sale of
high value items bought during the layering stage.

Covered Transactions:
1. Any transaction in cash or other equivalent monetary instrument involving a total amount in
excess of Php500,000 within 1 banking day.
2. Jewelry dealers in precious stones, who, as a business, trade in precious stones, for transactions
in excess of Php1,000,000
3. The Land Registration Authority and all its Registries of Deeds to submit to the AMLC, reports on
all real estate transactions involving an amount in excess of Php500,000 within 15 days from the
date of registration of the transaction, in a form to be prescribed by the AMLC.

Note: These transactions are required to be reported to the AMLC.

Suspicious transactions:
Transactions with covered institutions regardless of the amounts involved, where any of the following
circumstances exists:
1. There is no underlying legal or trade obligation, purpose or economic justification;
2. Client is not properly identified;
3. Any circumstance relating to the transaction which is observed to deviate from the profile
and/or the clients past transactions with the covered institution;
4. Amount involved is not commensurate with the business or financial capacity of the client;
5. Taking into account all known circumstances, it may be perceived that the client’s transaction is
structured in order to avoid being the subject of reporting requirements under the act;
6. Transaction is in any way related to an unlawful activity or offense under this act that is about to
be, is being or has been committed; or
7. Analogous or similar transactions to any of the foregoing.
Examples of unlawful activities:
Any act or omission or series or combination thereof involving or having direct relation to the following:
1. Kidnapping for ransom;
2. Unlawful acts under the Comprehensive Dangerous Drugs Act of 2002;
3. Corrupt practices of public officers under Anti-Graft and Corrupt Practices Act;
4. Plunder under R.A. No. 7080;
5. Robbery and extortion;
6. Jueteng and Masiao punished as illegal gambling;
7. Piracy on the high seas;
8. Qualified theft;
9. Swindling and other forms of swindling;
10. Smuggling;
11. Violations of the Electronic Commerce Act of 2000;
12. Hijacking and other violations under R.A. No. 6235; destructive arson and murder;
13. Terrorism and conspiracy to commit terrorism;
14. Financing of terrorism and offenses punishable under Terrorism Financing Prevention and
Suppression Act of 2012;
15. Bribery and Corruption of Public Officers;
16. Frauds and Illegal Exactions and Transactions;
17. Malversation of Public Funds and Property;
18. Forgeries and Counterfeiting;
19. Violations of the Anti-Trafficking in Persons Act of 2003;
20. Violations of Revised Forestry Code of the Philippines;
21. Violations of Philippine Fisheries Code of 1998;
22. Violations of Philippine Mining Act of 1995; and
23. Felonies or offenses of a similar nature that are punishable under the penal laws of other
countries.

Safe Harbor Provision

No administrative, criminal or civil proceedings shall lie against any person for having made a covered
transaction report in the regular performance of his duties and in good faith, whether or not such
reporting results in any criminal prosecution under the AMLA or any other Philippine law.

Prosecution of Money Laundering

1. Any person may be charged with and convicted of both the offense of money laundering and
the unlawful activity;
2. Any proceeding relating to the unlawful activity shall be given precedence over the prosecution
of any offense or violation without prejudice to the freezing and other remedies.

Jurisdiction
1. All cases on money laundering: Regional Trial Court
2. Those committed by public officers and private persons in conspiracy with them
3. Freezing of monetary instrument or property

Anti-Money Laundering Council (AMLC)

Composition:
1. Governor of the BSP as Chairman;
2. Commissioner of the Insurance Commission; and
 3. Chairman of the SEC

Functions:
1. To require and receive covered or suspicious transaction reports from covered institutions;
2. To issue orders addressed to the appropriate supervising authority or the covered institution to
determine the rue identity of the owner of any monetary instrument or property subject of a
covered transaction or suspicious transaction;
3. To institute civil forfeiture proceedings and all other remedial proceedings through the OSG;
4. To cause the filing of complaints with the DOJ or the Ombudsman for the prosecution of money
laundering offenses;
5. To investigate suspicious transactions and covered transactions deemed suspicious after an
investigation by AMLC, money laundering activities, and other violations of this Act;
6. To apply before the Court of Appeals, ex parte, for the freezing of any monetary instrument or
property alleged to be laundered, proceeds from, or instrumentalities used in or intended for
use in any unlawful activity as defined in Section 3(i);
7. To implement such measures as may be necessary and justified under this Act to counteract
money laundering;
8. To receive and take action in respect of, any request from foreign states for assistance in their
own anti-money laundering operations provided in this Act;
9. To develop educational programs on the pernicious effects of money laundering, the methods
and techniques used in money laundering, the viable means of preventing money laundering
and the effective ways of prosecuting and punishing offenders;
10. To enlist the assistance of any branch, department, bureau, office, agency, or instrumentality of
the GOCCs, in undertaking any and all anti-money laundering operations;
11. To impose administrative sanctions for the violation of laws, rules, regulations and orders and
resolutions issued pursuant thereto.
12. To require the Land Registration Authority and all its Registries of Deeds to submit to the AMLC,
reports on all real estate transactions involving an amount in excess of Php500,000 within 15
days from the date of registration of the transaction, in a form to be prescribed by the AMLC.
The AMLC may also require the Land Registration Authority and all its Registries of Deeds to
submit copies of relevant documents of all real estate transactions.
 DATA PRIVACY ACT
What is the Data Privacy Act?
Republic Act No. 10173, otherwise known as the Data Privacy Act is a law that seeks to protect all forms
of information, be it private, personal, or sensitive. It is meant to cover both natural and juridical
persons involved in the processing of personal information.

What is the scope of the Data Privacy Act?

As mentioned earlier, the Data Privacy Act applies to any natural or juridical persons involved in the
processing of personal information. It also covers those who, although not found or established in the
Philippines, use equipment located in the Philippines, or those who maintain an office, branch, or
agency in the Philippines.

What is processing of personal information?

Under Sec. 3(j) of the Data Privacy Act, “[p]rocessing refers to any operation or any set of operations
performed upon personal information including, but not limited to, the collection, recording,
organization, storage, updating or modification, retrieval, consultation, use, consolidation, blocking,
erasure or destruction of data.”
In other words, processing of personal information is any operation where personal information is
involved. Whenever your information is, among other things, collected, modified, or used for some
purpose, processing already takes place.

WHAT IS PERSONAL INFORMATION?

Under Sec. 3(g) of the Data Privacy Act, “[p]ersonal information refers to any information whether
recorded in a material form or not, from which the identity of an individual is apparent or can be
reasonably and directly ascertained by the entity holding the information, or when put together with
other information would directly and certainly identify an individual.”
In other words, personal information is any information which can be linked to your identity, thus
making you readily identifiable.

WHAT IS PRIVILEGED INFORMATION?

Under Sec. 3(k) of the Data Privacy Act, “[p]rivileged information refers to any and all forms of data
which under the Rules of Court and other pertinent laws constitute privileged communication.” One
such example would be any information given by a client to his lawyer. Such information would fall
under attorney-client privilege and would, therefore, be considered privileged information.

DOES THE DIFFERENCE BETWEEN PERSONAL INFORMATION AND SENSITIVE PERSONAL INFORMATION
MATTER?
Yes. The law treats both kinds of personal information differently. Personal information may be
processed, provided that the requirements of the Data Privacy Act are complied with. On the other
hand, the processing of sensitive personal information is, in general, prohibited. The Data Privacy Act
provides the specific cases where processing of sensitive personal information is allowed.

IS THERE A DIFFERENCE BETWEEN PERSONAL INFORMATION AND SENSITIVE PERSONAL INFORMATION?

Yes. While personal information refers to information that makes you readily identifiable, sensitive
personal information, as defined in Sec. 3(l) of the Data Privacy Act, refers to personal information:

(1) About an individual’s race, ethnic origin, marital status, age, color, and religious, philosophical or
political affiliations;
(2) About an individual’s health, education, genetic or sexual life of a person, or to any proceeding for
any offense committed or alleged to have been committed by such person, the disposal of such
proceedings, or the sentence of any court in such proceedings;

(3) Issued by government agencies peculiar to an individual which includes, but not limited to, social
security numbers, previous or cm-rent health records, licenses or its denials, suspension or revocation,
and tax returns; and

(4) Specifically established by an executive order or an act of Congress to be kept classified.

Therefore, any information that can be categorized under any of the enumerated items are considered
sensitive personal information.

ARE THERE ANY EXCEPTIONS TO THE APPLICATION OF THE DATA PRIVACY ACT?

The Data Privacy Act explicitly states that its provisions are not applicable in the following cases:

(a) Information about any individual who is or was an officer or employee of a government institution
that relates to the position or functions of the individual, including:

(1) The fact that the individual is or was an officer or employee of the government institution;

(2) The title, business address and office telephone number of the individual;

(3) The classification, salary range and responsibilities of the position held by the individual; and

(4) The name of the individual on a document prepared by the individual in the course of employment
with the government;

(b) Information about an individual who is or was performing service under contract for a government
institution that relates to the services performed, including the terms of the contract, and the name of
the individual given in the course of the performance of those services;

(c) Information relating to any discretionary benefit of a financial nature such as the granting of a license
or permit given by the government to an individual, including the name of the individual and the exact
nature of the benefit;

(d) Personal information processed for journalistic, artistic, literary or research purposes;

(e) Information necessary in order to carry out the functions of public authority which includes the
processing of personal data for the performance by the independent, central monetary authority and
law enforcement and regulatory agencies of their constitutionally and statutorily mandated functions.
Nothing in this Act shall be construed as to have amended or repealed Republic Act No. 1405, otherwise
known as the Secrecy of Bank Deposits Act; Republic Act No. 6426, otherwise known as the Foreign
Currency Deposit Act; and Republic Act No. 9510, otherwise known as the Credit Information System Act
(CISA);
(f) Information necessary for banks and other financial institutions under the jurisdiction of the
independent, central monetary authority or Bangko Sentral ng Pilipinas to comply with Republic Act No.
9510, and Republic Act No. 9160, as amended, otherwise known as the Anti-Money Laundering Act and
other applicable laws; and

(g) Personal information originally collected from residents of foreign jurisdictions in accordance with
the laws of those foreign jurisdictions, including any applicable data privacy laws, which is being
processed in the Philippines.

ARE COMPANIES REQUIRED TO APPOINT SOMEONE WHO SHOULD BE RESPONSIBLE FOR ENSURING
COMPLIANCE WITH THE DATA PRIVACY ACT?

Yes. Under the Implementing Rules and Regulations of the Data Privacy Act, all organizations are
required to appoint a Data Protection Officer (“DPO”). The Data Protection Officer shall be accountable
for ensuring compliance with the appropriate data protection laws and regulations.

CAN THERE BE MORE THAN ONE PERSON WHO SHALL PERFORM THE FUNCTIONS OF A DATA
PROTECTION OFFICER IN A ORGANIZATION?

Yes. The Implementing Rules and Regulations of the Data Privacy Act speaks of an individual or
individuals who shall perform the functions of a Data Protection Officer or a Compliance Officer.

HOW IS PRIVILEGED INFORMATION TREATED BY THE DATA PRIVACY ACT?

Much like sensitive personal information, the processing of privileged information is prohibited by the
law.

WHAT ARE THE CASES WHERE THE PROCESSING OF SENSITIVE PERSONAL INFORMATION AND
PRIVILEGED INFORMATION IS ALLOWED?

Section 13 of the Data Privacy Act enumerates the cases where sensitive personal information and
privileged information may be processed. These are the following:

(a) The data subject has given his or her consent, specific to the purpose prior to the processing, or in
the case of privileged information, all parties to the exchange have given their consent prior to
processing;

(b) The processing of the same is provided for by existing laws and regulations: Provided, That such
regulatory enactments guarantee the protection of the sensitive personal information and the privileged
information: Provided, further, That the consent of the data subjects are not required by law or
regulation permitting the processing of the sensitive personal information or the privileged information;

(c) The processing is necessary to protect the life and health of the data subject or another person, and
the data subject is not legally or physically able to express his or her consent prior to the processing;

(d) The processing is necessary to achieve the lawful and noncommercial objectives of public
organizations and their associations: Provided, That such processing is only confined and related to the
bona fide members of these organizations or their associations: Provided, further, That the sensitive
personal information are not transferred to third parties: Provided, finally, That consent of the data
subject was obtained prior to processing;

(e) The processing is necessary for purposes of medical treatment, is carried out by a medical
practitioner or a medical treatment institution, and an adequate level of protection of personal
information is ensured; or

(f) The processing concerns such personal information as is necessary for the protection of lawful rights
and interests of natural or legal persons in court proceedings, or the establishment, exercise or defense
of legal claims, or when provided to government or public authority.
 PLEDGE, MORTGAGE, AND ANTICHRESIS

Pledge v. Mortgages v. Antichresis

PLEDGE CHATTEL MORTGAGE REAL ESTATE ANTICHRESIS
MORTGAGE
Definition
An accessory contract Chattel mortgage is a It is a contract whereby A contract whereby the
whereby a debtor contract by virtue of the debtor secures to CR acquires the right to
delivers to the creditor which a personal the creditor the receive the fruits of an
or a third person a property is recorded in fulfillment of a principal immovable of the
movable or personal the Chattel Mortgage obligation, specially debtor, with the
property, or document Register as a security subjecting to such obligation to apply
evidencing incorporeal for the performance of security, immovable them to the payment of
rights, to secure the an obligation. property or real rights interest, if owing, and
fulfillment of a principal over immovable thereafter to the
obligation with the property, in case the principal of his credit.
condition that when the principal obligation is
obligation is satisfied, not paid or complied
the thing delivered shall with at the time
be returned to the stipulated.
pledgor with all its fruits
and accessions, if any.
Object of the contract
Movable or personal Personal property Immovable property or Fruits of an immovable
property, or document real rights over
evidencing incorporeal immovable property
rights
Necessity of delivery
Property must be Delivery is not Delivery is not Property is delivered to
delivered necessary necessary the creditor

Similarities of pledge and mortgage

1. Both are accessory contracts;
2. Both pledgor and mortgagor must be the absolute owner of the property;
3. Both pledgor and mortgagor must have the free disposal of their property or be authorized to do so;
and
4. In both, the thing proffered as security may be sold at public auction, when the principal obligation
becomes due and no payment is made by the debtor.

Indivisibility of pledge, mortgage and antichresis

GR: A pledge, mortgage or antichresis is indivisible.
NOTE: The mortgage is indivisible even if the obligation of the debtor is joint and not solidary. Generally,
the divisibility of the principal obligation is not affected by the indivisibility of the pledge or mortgage.
XPNs:
1. Where each one of several things guarantees determinate portion of the credit (Art. 2089,
NCC).
2. Where only a portion of the loan was released.
3. Where there was failure of consideration.

Obligations that can be secured by pledge, mortgage and antichresis

1. Valid obligations
2. Voidable obligations
3. Unenforceable obligations
4. Natural obligations
5. Conditional obligations

Rules common to pledge and mortgage

1. Constituted to secure the fulfillment of a valid principal obligation.
2. Pledgor or mortgagor must be the absolute owner of the thing pledged or mortgaged.
3. They must have the free disposal of their property, and in the absence thereof, that they be legally
authorized for such purpose.
4. Debtor retains ownership of the thing given as a security.

Limited liability of a third person as a pledgor or mortgagor

GR: A third person who pledged and mortgaged his property is not liable for any deficiency.

XPN: If the third party pledgor or mortgagor expressly agreed to be bound solidarily with the principal
debtor.

Property acquirable in the future cannot be mortgaged

Where the mortgagor mortgaged a property and, in the contract, he agreed to mortgage additional
properties which he may acquire in the future, there was no valid mortgage as to the latter because he
was not yet the owner of the properties at the time of the mortgage (Dilag v. Heirs of Ressurrecion, No.
48941, May 6, 1946).

Mortgage constituted to secure future advances

Mortgage constituted to secure future advances is valid. It is a continuing security and not discharged by
repayment of the amount named in the mortgage, until the full amount of the advances is paid.
However, a chattel mortgage can only cover obligations existing at the time the mortgage is constituted
and not to obligations subsequent to the execution of the mortgage.

Nature of an assignment of rights to guarantee an obligation of a debtor

An assignment of rights to guarantee an obligation of a debtor is in effect a mortgage and not an
absolute conveyance of title which confers ownership on the assignee (Manila Banking Corp. v. Teodoro,
Jr., G.R. No. 53955, Jan. 13, 1989).

Accomodation Mortgagor
An accommodation mortgagor is a third person who is not a party to a principal obligation and secures
the latter by mortgaging or pledging his own property. The liability of an accommodation mortgagor
extends up to the loan value of their mortgaged property and not to the entire loan itself.

NOTE: Accommodation is also applicable to pledge since the law provides that “third parties who are
not parties to the principal obligation may secure the latter by pledging or mortgaging their own
property” (Art. 2085, Civil Code). It is also applicable to antichresis since Art. 2139 states that the last
paragraph of Art. 2085 shall be applicable to a contract of antichresis.

Pactum commisorium
Pactum commisorium is a stipulation whereby the thing pledged or mortgaged or subject of antichresis
shall automatically become the property of the creditor in the event of non-payment of the debt within
the term fixed. Such stipulation is null and void.

Elements of Pactum Commissorium

1. There is a pledge, mortgage or antichresis of a property by way of security; and
2. There is an express stipulation for the automatic appropriation by the creditor of the property in case
of non-payment

NOTE: What are prohibited are those stipulations executed or made simultaneously with the original
contract, and not those subsequently entered into.

Q: ABC loaned to MNO P40,000 for which the latter pledged 400 shares of stock in XYZ Inc. It was agreed
that if the pledgor failed to pay the loan with 10% yearly interest within four years, the pledgee is
authorized to foreclose on the shares of stock. As required, MNO delivered possession of the shares to
ABC with the understanding that the shares would be returned to MNO upon the payment of the loan.
However, the loan was not paid on time. A month after 4 years, may the shares of stock pledged be
deemed owned by ABC or not? Reason. (2004 Bar Question)
A: The shares of stock cannot be deemed owned by ABC upon default of MNO. They have to be
foreclosed. Under Article 2088, NCC, the creditor cannot appropriate the things given by way of pledge.
And even if the parties have stipulated that ABC becomes the owner of the shares in case MNO defaults
on the loan, such stipulation is void for being a pactum commissorium.

Q: To secure a loan obtained from a rural bank, Purita assigned her leasehold rights over a stall in the
public market in favor of the bank. The deed of assignment provides that in case of default in the
payment of the loan, the bank shall have the right to sell Purita's rights over the market stall as her
attorney-in-fact, and to apply the proceeds to the payment of the loan.
1. Was the assignment of leasehold rights a mortgage or a cession? Why?
2. Assuming the assignment to be a mortgage, does the provision giving the bank the power to sell
Purita's rights constitute pactum commissorium or not? Why? (2001 Bar Question)

A:
1. The assignment was a mortgage, not a cession, of the leasehold rights. A cession would have
transferred ownership to the bank. However, the grant of authority to the bank to sell the leasehold
rights in case of default is proof that no such ownership was transferred and that a mere encumbrance
was constituted. There would have been no need for such authority had there been a cession.
2. No, the clause in question is not a pactum commissorium. It is pactum commissorium when default in
the payment of the loan automatically vests ownership of the encumbered property in the bank. In the
problem given, the bank does not automatically become owner of the property upon default of the
mortgagor. The bank has to sell the property and apply the proceeds to the indebtedness.

Q: Spouses Uy Tong purchased seven motor vehicles from Bayanihan Investment payable in
installments. It was agreed that if the spouses should fail to pay their obligation, Bayanihan will
automatically be the owner of the apartment which the spouses has a leasehold right. The spouses after
paying the downpayment, failed to pay the balance, hence, Bayanihan filed an action for specific
performance against the spouses. The judgment provided that in case the spouses failed to pay the
obligation within 30 days from notice, they are to execute a Deed of Absolute Sale over the apartment
and/or leasehold rights. Is the stipulation a pactum commissorium?
A: No. The questioned agreement evinces no basis for the application of pactum commissorium. There is
no contract of pledge or mortgage entered into by the parties. Bayanihan sought the intervention of the
court by filing an action for specific performance. Hence there was no automatic appropriation of the
property (Uy Tong v. CA, G.R. No. 77465, May 21, 1988).

Q: X borrowed money from Y and gave a piece of land as security by way of mortgage. It was expressly
agreed between the parties in the mortgage contract that upon nonpayment of the debt on time by X,
the mortgaged land would already belong to Y. If X defaulted in paying, would Y now become the owner
of the mortgaged land? Why?
A: No, Y would not become the owner of the land. The stipulation is in the nature of pactum
commissorium which is prohibited by law. The property should be sold at public auction and the
proceeds thereof applied to the indebtedness. Any excess shall be given to the mortgagor.

Q: Suppose in the preceding question, the agreement between X and Y was that if X failed to pay the
mortgage debt on time, the debt shall be paid with the land mortgaged by X to Y. Would your answer be
the same as in the preceding question? Explain. (1999 Bar Question)
A: No, the answer would not be the same. This is a valid stipulation and does not constitute pactum
commissorium. In pactum commissorium, the acquisition is automatic without need of any further
action. In the instant problem another act is required to be performed, namely, the conveyance of the
property as payment (dacion en pago).
 PLEDGE

Pledge
Pledge is a contract whereby the debtor delivers to a creditor or third person a movable or document
evidencing incorporeal right for the purpose of securing fulfillment 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.

Pledge v. Chattel Mortgage

BASIS CHATTEL MORTGAGE
Delivery Delivery is not necessary
Governing Law Procedure for the sale of the
thing given as security is
governed by Sec. 14, Act No.
1508
Excess If the property is foreclosed, the
excess goes to the debtor
Recovery of the deficiency The creditor is entitled to
recover the deficiency from the
debtor except if the chattel
mortgage is a security for the
purchase of property in
installments
Possession Possession remains with the
debtor
Contract Formal contract
Recording in a public instrument Must be recorded in a public
instrument to bind third persons
PLEDGE
Delivery is necessary
Art. 2112, NCC
If the property is sold, the debtor
is not entitled to the excess
unless otherwise agreed.
The creditor is not entitled to
recover the deficiency not withst
anding any stipulation to the
contrary.
Possession is vested in the
creditor
Real contract
Must be in a public instrument
containing description of the
thing pledged and the date
thereof to bind third persons

Pledge v. Real Estate Mortgage

PLEDGE REAL ESTATE MORTGAGE
Real contract Consensual contract
Subject matter is personal property Subject matter is real property
Possession of the thing pledged is vested in the Possession of the thing mortgaged remains with
creditor the debtor
Pledgee has the right to receive the fruits of the Mortgagee does not possess such right
thing pledged, with the obligation of applying the
same to the interest of the debt, if owing, and the
balance, if any, to the principal
Sale at public auction of the thing pledged is
always extrajudicial
Description of the thing and the date of pledge
must appear in a public instrument otherwise, it is
not valid as to third person
Not a real right
Sale may be judicial or extrajudicial
Must be registered, otherwise, it is not valid
against third persons although binding between
the parties
Real right and real property by itself

Kinds of pledge
1. Conventional - By agreement of parties
2. Legal - By operation of law

NOTE: A thing lawfully pledged to one creditor, cannot be pledged to another as long as the first pledge
subsists (Mission de San Vicente v. Reyes 19 Phil 524)

Requisites of a contract of pledge

1. Constituted to secure the fulfillment of a principal obligation;
2. Pledgor is the absolute owner of the thing pledged;
3. Persons constituting the pledge have the free disposal of their property, and in the absence thereof,
that they be legally authorized for the purpose (Art. 2085, NCC).
4. A contract of pledge is perfected when the thing pledged is placed in the actual possession of or
delivered to the pledgee or a third person designated by the parties by common consent (Art. 2093,
NCC).

NOTE: If Art. 2093 is not complied with, the pledge is void.

Continuous possession is required in pledge

The mere taking of the property is not enough in pledge. There must be continuous possession of the
thing. However, the pledgee is allowed to temporarily entrust the physical possession of the thing
pledged to the pledgor without invalidating the contract. But here, the pledgor would be in possession
as a mere trustee and his possession is subject to the order of the pledgee.

When possession or delivery of the thing pledged was not made

An agreement to constitute a pledge only gives rise to a personal action between the contracting
parties. Unless the movable given as a security by way of pledge be delivered to and placed in the
possession of the creditor or of a third person designated by common agreement, the creditor acquires
no right to the property because pledge is merely a lien and possession is indispensable to the right of a
lien.

When the pledge fails to take the property pledged into his possession
If a pledgee fails or neglects to take the property pledged into his possession, he is presumed to have
waived the right granted him by the contract (U.S. v. Terrel, 2 Phil. 222).

Pledge must be embodied in a public instrument to affect third persons

The requisite in Art. 2096 that the pledge must be in a public instrument does not affect its validity. It is
still valid between the parties, but it will not bind third person if the said provision is not complied with.
When the contract of pledge is not recorded in a public instrument, it is void as against third persons;
the buyer of the thing pledged is a third person. The fact that the person claiming as pledgee has taken
actual physical possession of the thing sold will not prevent the pledge from being declared void insofar
as the innocent stranger is concerned (Tec Bi & Co. v. Chartered Bank of India, Australia and China, 16
O.G. 908; Ocejo, Perez and Co. v. International Bank, 37 Phil. 631).

Requisites to bind third persons in a contract of pledge

The following must appear in the public instrument in order to affect third persons
1. A description of the thing pledged; and
2. Statement of date when the pledge was executed (Art. 2096, NCC).

Effect of undated instrument of pledge

An undated instrument of pledge cannot ripen into a valid pledge (Betita v. Ganzon, 49 Phil. 87).

Effect if no public instrument is made

The purpose of the requirements is to forestall fraud, because a debtor may attempt to conceal his
property from his creditors when he sees it in danger of execution by simulating a pledge thereof with
an accomplice (Tec Bi & Co. v. Chartered Bank of India, 41 Phil. 576).

Constructive/symbolic delivery in a contract of pledge

GR: Constructive or symbolic delivery of the thing is not sufficient to constitute pledge.

XPN: If the pledge consists of goods stored in a warehouse for purposes, of showing the pledgee’s
control over the goods, the delivery to him of the keys to the warehouse is sufficient delivery of
possession (constructive/symbolic delivery).

The type of delivery will depend upon the nature and peculiar circumstances of each case (Yuliongsiu v.
PNB, G.R. No. L-19227, Feb. 17, 1968).

Pledge of incorporeal rights

Incorporeal rights evidenced by proper document can be pledged. It is, however, required that the
actual instrument be delivered to the pledgee. More, if the instrument is a negotiable document, it must
be indorsed.

Q: Pablo owns a tractor which he left with his son Mike for safekeeping. Mike then offered the said
tractor to Calibo as security for the payment of his debt. When Pablo came back and learned that the
tractor was in the custody of Calibo, he demanded its return. Calibo, however, refused. Calibo alleged
that the tractor was pledged to him, and in the alternative, the tractor was left with him in the concept
of deposit and he may validly hold on to it until Mike pays his obligation. Is Calibo correct?
A: No. There is no valid pledge because Mike is not the absolute owner of the property pledged. He who
is not the owner or proprietor of the property pledged or mortgaged to guarantee the fulfillment of a
principal obligation, cannot legally constitute such a guaranty as may validly bind the property in favor
of his creditor, and the pledgee or mortgagee in such a case acquires no right whatsoever in the
property pledged or mortgaged. There is likewise no valid deposit, in this case, where the principal
purpose for receiving the object is not safekeeping (Calibo Jr. v. CA, G.R. No. 120528, Jan. 29, 2001).

Right of an owner of personal property pledged without authority

An owner of personal property pledged without authority may invoke Art. 559, NCC. The defense that
pawnshop owner acquired ownership of the thing in good faith is not available.

Art. 559 reads as: “The possession of movable property acquired in good faith is equivalent to a title.
Nevertheless, one who has lost any movable or has been unlawfully deprived thereof, may recover it
from the person in possession of the same.

If the possessor of a movable lost or of which the owner has been unlawfully deprived, has acquired it in
good faith at a public sale, the owner cannot obtain its return without reimbursing the price paid
therefore”

When two or more things are pledged

When 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 (1st sentence, Art. 2119, NCC).

The restriction on the right of the pledgee under the 1st sentence of Art. 2119 is that he may only
demand the sale of only as many of the things as are necessary for the payment of the debt (2nd
sentence, Art. 2119, NCC).

RIGHTS AND OBLIGATIONS OF THE PLEDGOR AND THE PLEDGEE

Parties in a contract of pledge
1. Pledgor – the debtor; the one who delivers the thing pledged to the creditor
2. Pledgee – the creditor; the one who receives the thing pledged

Rights of a pledgee
1. Retain the thing until debt is paid (Art. 2098, NCC).
2. To be reimbursed for the expenses made for the preservation of the thing pledged (Art. 2099, NCC).
3. Creditor may bring any action pertaining to the pledgor in order to recover it from or defend it against
a third person (Legal Subrogation) (Art. 2103, NCC).

Obligations of a pledgee
1. Take care of the thing pledged with the diligence of a good father of a family (Art. 2099, NCC).
NOTE: Pledgee is liable for the loss or deterioration of the thing by reason of fraud, negligence, delay, or
violation of the terms of the contract.
2. GR: Pledgee cannot deposit the thing pledged to a third person.
XPN: Unless there is stipulation to the contract (Art. 2100, NCC).
NOTE: Pledgee is liable for the loss or deterioration of the thing pledged caused by the acts or
negligence of the agents or employees of the pledgee.
3. Apply the fruits, income, dividends, or interests produced or earned by the property, to interests or
expenses first, then to the principal (Art. 2102, NCC).
4. GR: Cannot use the thing pledged without authority (Art. 2104, NCC).
XPNs: a. If the pledgor had given him authority or permission to use it; b. If the use of the thing is
necessary for its preservation but only for that purpose.
5. Return the thing pledged to the pledgor when the principal obligation is fulfilled or satisfied it.

When the thing pledged is expropriated by the State

The debtor is no longer the owner of the thing in case the same is expropriated by the State as
ownership is transferred to the expropriating authority.
NOTE: The creditor may bring actions pertaining to the owner of the thing pledged in order to recover it
from, or defend it against a third person (Art. 2103, NCC).

Return of the pledge, when demandable

GR: A debtor cannot ask for the return of the thing pledged against the will of the creditor.
XPNs:
1. If the debtor has paid the debt and its interest, with expenses in a proper case (Art. 2105, NCC).
2. If the thing is in danger of destruction or impairment provided, the pledgor offers an acceptable
substitute for it which is of the same kind and not of inferior quality and without prejudice to the
application of Art. 2108 whenever warranted (Art. 2107, NCC).

When the pledgee may cause the sale of the thing even if the obligation is not yet due
If, without the fault of the pledgee, there is a danger of destruction, impairment, or diminution in value
of the thing pledged, he may cause the same to be sold at public auction. The proceeds of the auction
shall be security for the principal obligation in the same manner as the thing originally pledged (Art.
2108, NCC).

Rights of the creditor who is deceived on the substance or quality of the thing pledged
To demand:
1. From the pledgor an acceptable substitute of the thing; or
2. The immediate payment of the principal obligation (Art. 2109, NCC).

NOTE: The remedies are alternative and not cumulative. Only one may be chosen. The law used the
conjunctive “or”. Either one is more convenient than annulment.

Return of the thing pledged

The return of the thing pledged to the pledgor by the pledgee shall extinguish the pledge. Any
stipulation to the contrary shall be void (Art. 2110, NCC).

Presumption of return to the pledgor/owner by the pledgee

There is a prima facie presumption that the thing pledged has been returned by the pledgee to the
pledgor or owner, in any of the following circumstances:
1. If the thing is found in the possession of the pledgor or owner after the pledge had been perfected; or
2. If the thing is found in the possession of a third person who received it from the pledgor or owner
after the perfection of the pledge (Art. 2110 (2), NCC).
NOTE: It is presumed that the accessory obligation of pledge has been remitted when the thing pledged,
after its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns
the thing (Art. 1274, NCC).

Renunciation of the pledge by the pledgee

The renunciation or abandonment of the pledge by the pledgee requires a statement in writing to that
effect (1st sentence, Art. 2111, NCC).

NOTE: The renunciation of the pledge is not contrary to law, public order, public policy, morals or good
customs. Further, Art. 1356 of the NCC, which speaks of the form of contracts, must be complied with.

Necessity of acceptance in renunciation

Acceptance or return of the thing is not necessary for the validity of the renunciation under Art. 2111. It
is not a case of donation where acceptance is necessary to make the donation valid.

Necessity of return in extinguishment of pledge

Even if the thing was not returned, as long as there is an effective renunciation, abandonment or waiver,
the pledge is already extinguished even if the thing is not returned. The pledgor will be considered as a
depositor and the pledgee shall become a depositary of the thing. Accordingly, the law on deposit will
apply.

Q: Santos made time deposits with OBM. IRC, through its president Santos, applied for a loan with PNB.
To secure the loan, Santos executed a Deed of Assignment of the time deposits in favor of PNB. When
PNB tried to collect from OBM, the latter did not pay the CTDs. PNB then demanded payment from
Santos and IRC, but the latter refused payment alleging that the obligation was deemed paid with the
irrevocable assignment of the CTDs.
1. Is the liability of IRC deemed paid by virtue of the deed of assignment?
2. Is OBM liable for damages
A:
1. No. For all intents and purposes, the deed of assignment in this case is actually a pledge. Where a CTD
in a bank, payable at a future time, was handed over by a debtor to his creditor, it was not payment,
unless there was an express agreement on the part of the creditor to receive it as such.
2. Yes. While it is true that no interest shall be due unless it has been expressly stipulated in writing, this
applies only to interest for the use of money. It does not comprehend interest paid as damages. Santos
has the right to recover damages resulting from the default of OBM and the measure of such damages is
interest at the legal rate of 6% per annum on the amounts due and unpaid at the expiration of the
periods respectively provided in the contracts (Integrated Realty Corp. v. PNB, G.R. No. 60705, June 28,
1989)

Rights of the pledgor

1. Right to dispose the thing pledged, provided there is consent of the pledgee (Art. 2097, NCC) NOTE:
The pledge however, shall continue in possession.
2. Right to ask that the thing pledged be deposited (Art. 2104 and Art. 2106, NCC)
3. Right to substitute thing pledged (Art. 2107, NCC)

Right to ask that the thing pledged be deposited

The owner ask that the thing pledged be deposited judicially or extrajudicially in the following instances:
1. If the creditor uses the thing without authority
2. If he misuses the thing in any other way
3. If the thing is in danger of being lost or impaired because of the negligence or willful act of the pledge
(Art. 2106, NCC)

Right to demand the return of thing pledged against the will of creditor
The pledgor does not have the right to demand the return of the thing pledged against the will of the
creditor. He cannot ask for its return until the obligation is fully paid including interest due thereon and
expenses incurred for its preservation (Art. 2105, NCC)
Requisites before the pledgor may substitute the thing pledged with another thing
1. Pledgor has reasonable grounds to fear the destruction or impairment of the thing pledged;
2. No fault on the part of the pledge
3. Pledgor is offering in place of the thing, another thing in pledge which is of the same kind and quality
as the former; and
4. Pledgee does not choose to exercise his right to cause the thing pledged to be sold at public auction
(Art. 2107, NCC).

FORECLOSURE

Foreclosure of the thing pledged

A pledgee forecloses the thing pledged when there is no payment of the debt on time, the object of the
pledge may be alienated for the purpose of satisfying the claims of the pledgee.

Right of the pledge or mortgagor to foreclose

If the debtor failed to pay on maturity date, the thing pledged or mortgaged may be sold at public
auction as provided by law so that the proceeds may be used for payment of the obligation.

Options of an unpaid creditor

1. Foreclose the thing pledged; or
2. Abandon the pledge and file a claim for collection

Procedure for the public sale of a thing pledged

1. The obligation must be due and unpaid
2. The sale of the thing pledged must be at public auction
3. There must be notice to the pledgor and owner, stating the amount for which the sale is to be held
4. The sale must be conducted by Notary Public.

Who can bid in a public auction

The following can bid in the public auction
1. The public
2. Pledgor/owner/debtor – Shall be preferred if same terms as the highest bidder is offered
3. Pledgee/creditor – He must not be the only bidder, otherwise, his bid is invalid and void

Third person paying pledgor’s debt

A third person pay the pledgor’s debt if he has any interest in the fulfillment of the principal obligation
(Art. 2117, NCC).

Effect of sale of the thing pledged

The sale of the thing pledged extinguishes the principal obligation. The extinction is automatic regardless
of whether or not the proceeds realized from the public auction sale are more or less than the amounts
of the principal obligation and other incidental expenses.

If the price of the sale is more than the amount of the debt, the excess will go the pledgee . This is to
compensate him for the eventuality where the purchase price is lesser than the amount of the debt,
wherein he cannot retrieve any deficiency unless there is a contrary agreement.
Effect when the thing pledged was not sold at the first public auction
When the property was not sold at the first auction (such as when there are no participating bidders),
there will be another setting for the second auction following the same formalities.

The pledgee is allowed to appropriate the thing pledged if no sale was effected on the second auction.
This is an exception to the prohibition against pactum commissorium.

Deed of acquittance
A deed of acquittance is a document of the release or discharge of the pledgor from the entire
obligation including interests and expenses. This shall be executed by 1the pledgee after appropriating
the thing in case a no sale was made in a second auction.

Application of the proceeds of the sale

The pledgee may collect and receive the amount due when what has been pledged is a “credit”. He shall
apply the same to the payment of his claim, and deliver the surplus, should there be any, to the pledgor
(Art. 2118, NCC).

PLEDGE BY OPERATION OF LAW

Legal pledge
Pledge by operation of law or legal pledges are those constituted or created by operation of law. This
refers to the right of retention.

Rules that apply to legal pledge

1. The rules governing conventional pledge applies to legal pledge.
2. There is no definite period for the payment of the principal obligation. The pledge must, therefore,
make a demand for the payment of the amount due him. Without such demand, he cannot exercise the
right of sale at public auction (De Leon).

Instances of legal pledges where there is right of retention

1. Art. 546 – Right of the possessor in good faith to retain the thing until refunded of necessary
expenses.
2. Art. 1707 – Lien on the goods manufactured or work done by a laborer until his wages had been paid.
3. Art. 1731 – Right to retain of a worker who executed work upon a movable until he is paid.
4. Art. 1914 – Right of an agent to retain the thing subject of the agency until reimbursed of his advances
and damages (Arts. 1912 and 1913, NCC).
5. Art. 1994 – Right of retention of a depositary until full payment of what is due him by reason of the
deposit.
6. Art. 2004 – Right of the hotel-keeper to retain things of the guest which are brought into the hotel,
until his hotel bills had been paid.

Sale of the thing pledged

Before the pledgee may cause sale of the thing pledged he must first make a demand of the amount for
which the thing is retained. After the demand, the pledgee must proceed with the sale of the thing
within thirty (30) days. Otherwise, the pledgor can require of him the return of the thing retained.

The remainder of the price of sale shall be delivered to the obligor (Art. 2121, NCC).
Effects of sale of the thing pledged
1. Extinguish the principal obligation even if the proceeds of the sale do not satisfy the whole amount of
the obligation.
2. If proceeds from the sale exceed the amount due, the debtor is not entitled to the excess, the excess
goes to the pledgee. This is to compensate him for the eventuality where the purchase price is lesser
than the amount of the debt, wherein he cannot receive any deficiency unless there is a contrary
agreement or in case of legal pledge, the pledgor is entitled to the excess
3. If the proceeds of the sale is less than the amount due, the creditor has no right to recover the
deficiency and the pledgor is not liable for the deficiency even if there is a stipulation that he be so
liable. Such stipulation is void.
 REAL MORTGAGE

Real Estate Mortgage

Real estate mortgage (REM) is a contract whereby the debtor secures to the creditor the fulfillment of
the principal obligation, specially subjecting to such security immovable property or real rights over
immovable property in case the principal obligation is not fulfilled at the time stipulated.

Essence of a contract of mortgage

The essence of a contract of mortgage indebtedness is that a property has been identified or set apart
from the mass of the property of the debtor-mortgagor as security for the payment of money or the
fulfillment of an obligation to answer the amount of indebtedness in case of default of payment.

Laws that govern contract of real mortgage

1. New Civil Code
2. Mortgage Law
3. Property Registration Decree (PD 1529)
4. Sec. 194, as amended by Act No. 3344, Revised Administrative Code (Phil. Bank of Commerce v. De
Vera, G.R. No. L-18816, Dec. 29, 1962)
5. R.A. 4882 – law governing aliens who become mortgagees.

Kinds of real mortgages

1. Conventional mortgages – constituted voluntarily by the contracting parties.
2. Legal mortgage – required by law.
3. Equitable mortgage – intention of the parties is to make the immovable as a security for the
performance of the obligation but the formalities of a real mortgage are not complied with.

Requisites for a valid constitution of a real mortgage

1. It covers only immovable property and alienable real rights imposed upon immovables
2. It must appear in a public instrument
3. Registration in the Registry of Property is necessary to bind third persons

Real estate mortgage v. Contract of sale with right of repurchase

REAL ESTATE MORTGAGE SALE WITH RIGHT OF REPURCHASE
Accessory contract Principal and independent contract
There is no transfer of title and possession of the There is transfer of title and possession of the
property property, although conditional
Creditor has no right to the fruits of the property The vendee a retro is entitled to the fruits even
during the pendency of the mortgage during the period of redemption
If the debtor fails to pay his debt, the creditor As soon as there is a consolidation of title in the
cannot appropriate the property mortgaged nor vendee a retro, he may dispose of it as an absolute
dispose of it owner
Registration of mortgage
Registration of mortgage is a matter of right. By executing the mortgage, the mortgagor is understood to
have given his consent to its registration, and he cannot be permitted to revoke it unilaterally.

Mortgage as a real and inseparable right

Mortgage is a real and inseparable right. The mortgage directly and immediately subjects the property
upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose
security it was constituted (Art. 2126, NCC).

Things that are deemed included in the mortgage

1. Natural accessions
2. Improvements
3. Growing fruits
4. Rents
5. Income
6. Insurance proceeds
7. Expropriation price (Art. 2127, NCC)

Attachment of mortgage lien on new or future improvements

The mortgage lien attaches in case of new or future improvements on the date of the registration of the
mortgage (Luzon Lumber and Hardware Co., Inc, v. Quiambao, G.R. No. L-5638, Mar. 20, 1954).

Dragnet clause
A dragnet clause is a mortgage provision which is specifically phrased to subsume all debts of past or
future origin. It is a valid and legal undertaking, and the amounts specified as consideration in the
contracts do not limit the amount for which the pledge or mortgage stands as security, if from the four
corners of the instrument, the intent to secure future and other indebtedness can be gathered. A pledge
or mortgage given to secure future advancements is a continuing security and is not discharged by the
repayment of the amount named in the mortgage until the full amount of all advancements shall have
been paid (Premiere Development Bank v. Central Surety & Insurance, Inc., G.R. No. 176246 [2009]).

NOTE: It is a clause which operates as a convenience and accommodation to the borrowers as it makes
available additional funds without their having to execute additional security documents, thereby saving
time, travel, loan closing costs, costs of extra legal services, recording fees etc.

Interpretation of dragnet clause

Dragnet clause must be carefully scrutinized and strictly construed particularly where the mortgage
contract is one of adhesion.

NOTE:
1. A mortgage must sufficiently describe the debt sought to be secured, and an obligation is not secured
by a mortgage unless it comes fairly within the terms of the mortgage.
2. Where the intention of the mortgagor is to secure a larger amount, the action to foreclose may be for
the larger amount.
3. But where the obligation is not a series of indeterminate sums incurred over a period of time but 2
specific amounts procured in a single instance, what applies is the general rule state above that an
action to foreclose a mortgage must be limited to the amount mentioned in the mortgage.
4. A mortgage given to secure future advancements is a continuing security and is not discharged by the
repayment of the amount named in the mortgage, until the full amount of the advancements is paid. It
permitted the mortgagor to take the money as it is needed and thus avoid the necessity of paying
interest until the necessity for its use actually arises.

Statement of the amount in a mortgage contract in a dragnet clause

The amount stated in the contract is not controlling in case of mortgage securing future advancements.
The amount named in the contract does not limit the amount for which the mortgage stand as a
security, if, from the four corners of the instrument the intent to secure future and other indebtedness
can be gathered.

Q: Petitioner obtained a loan of P20K from defendant Rural Bank of Kawit. The loan was secured by a
REM over a parcel of land. The mortgage contract states that the mortgage will cover the payment of
the loan of P20K and such other loans or other advances already obtained or to be obtained by the
mortgagors from the bank. The loan of P20k was fully paid. Thereafter they again obtained a loan of
P18K, secured by the same mortgage. The spouses defaulted. The bank extra judicially foreclosed the
mortgage. Was the foreclosure sale valid?
A: Yes. It has long been settled that mortgages given to secure future advancements are valid and legal
contracts; that the amounts named as consideration in said contract do not limit the amount for which
the mortgage may stand as security, if from the four corners of the instrument the intent to secure
future and other indebtedness can be gathered. A mortgage given to secure advancement is a
continuing security and is not discharged by repayment of the amount named in the mortgage, until the
full amount of the advancements is paid (Mojica v. CA, G.R. No. 94247, Sept. 11, 1991).

Alienation or assignment of mortgage credit

Mortgage credit may be alienated or assigned to a third person in whole or in part, with the formalities
required by law (Art. 2128, NCC).

Assignment of credit, right or action shall be in a public instrument in order to affect third persons
An assignment of a credit, right or action shall produce no effect as against third persons, unless it
appears in a public instrument, or the instrument is recorded in the Registry of Property in case the
assignment involves real property (Art. 1625, NCC).

Possession by third person of the property mortgaged

The creditor may claim from the third person in possession of the property payment of the credit up to
the extent secured by the property which the third party possesses, in terms and with the formalities
which the law establishes (Art. 2129, NCC).

A stipulation forbidding the owner from alienating the immovable mortgaged is not valid. The
prohibition to alienate is contrary to public good inasmuch as the transmission of property should not be
unduly impeded (Report, Code Commission, p. 58).
‘
 FORECLOSURE

Foreclosure
Foreclosure is a remedy available to the mortgagee in which he subjects the mortgaged property to the
satisfaction of the obligation.

Kinds of foreclosure
1. Judicial – Governed by Rule 68, Rules of Court
2. Extrajudicial – Mortgagee is given a SPA to sell the mortgaged property (Act No. 3135)

Nature of judicial foreclosure

A judicial foreclosure is an action quasi in rem (Ocampo v. Domalanta, 20 SCRA 1136)

Action for foreclosure of mortgage survive the death of mortgagor

An action for foreclosure of mortgage survive the death of mortgagor because the claim is not a pure
money claim but an action to enforce a mortgage lien. Being so, the judgment rendered therein may be
enforced by a writ of execution. The action may be prosecuted by the interested person against the
executor or administrator independently of the testate or intestate proceedings of the settlement of the
mortgagor’s estate “for the reason that such claims cannot in any just sense be considered claims
against the estate, but the right to subject specific property to the claim arises from the contract of the
debtor whereby he has during life set aside certain property for its payment, and such property does
not, except in so far as its value may exceed the debt, belong to the estate” (Testamentaria de Don
Amadeo Matute Olave v. Canlas, No. L-12709, Feb. 28, 1962).

Remedies of the mortgagee in case of death of the debtor

1. To waive the mortgage and claim the entire debt from the estate of the mortgagor as an ordinary
claim;
2. To foreclose the mortgage judicially and prove any deficiency as an ordinary claim; or
3. To rely on the mortgage exclusively, foreclosing the same at any time before it is barred by
prescription, without right to file claim for any deficiency (Maglaque v. Planters Development Bank, GR
No. 109472, May 18, 1999).

Necessity for confirmation of court in foreclosure sale (Judicial Foreclosure)

A foreclosure sale (in judicial foreclosure) is not complete until it is confirmed and before such
confirmation, the court retains control of the proceedings by exercising sound discretion in regard to it
either granting or withholding confirmation as the rights and interests of the parties and the ends of
justice may require (Rural Bank of Oroquieta v. CA, No. 53466, Nov. 10, 1980).

There can be no redemption of the property after confirmation. Such confirmation retroacts to the date
of the auction sale. After the confirmation, the previous owners lose any right they may have had over
the property, which rights in turn vested on the Purchaser of the property (Lonzame v. Amores, No. L-
53620, Jan. 31, 1985).

Extrajudicial foreclosure
An extrajudicial foreclosure may only be effected if in the mortgage contract covering a real estate, a
clause is incorporated therein giving the mortgagee the power, upon default of the debtor, to foreclose
the mortgage by an extrajudicial sale of the mortgage property (Sec. 1, Act No. 3135, as amended by Act
No. 4148).

Authority to sell
The authority to sell may be done in a separate document but annexed to the contract of mortgage. The
authority is not extinguished by the death of the mortgagor or mortgagee as it is an essential and
inseparable part of a bilateral agreement (Perez v. PNB, No. L-21813, July 30, 1966).

How to initiate an extrajudicial foreclosure

An extrajudicial foreclosure initiated by filing a petition with the office of the sheriff. It may also be
initiated through a Notary Public commissioned in the place where the property is situated.
NOTE: Notice containing the place and date is required before an auction sale is made in extrajudicial
foreclosure (Sec. 3, Act No. 3135).

Notice of sheriff’s sale

The notice of sheriff’s sale must contain the correct number of the certificate of title and the correct
technical description of the real property to be sold (San Jose v. CA, GR No. 106953, Aug. 19, 1993).
Publication and posting requirements cannot be waived because they are imbued with public policy
considerations and any waiver thereon would be inconsistent with the intent and letter of the law. It
would thus be converting into a private sale what ought to be a public auction. The purpose of notice of
sale is to inform the public of the nature and condition of the property sold, and of the time, place and
terms of the sale.

Place of posting of notice of sale

The notice of sale should be posted in at least 3 public places in the city or municipality where the
property is situated
1. Sheriff’s Office;
2. Assessor’s Office; and
3. Register of Deed

Publication of notice of sale in newspaper of general circulation

The publication of the notice of sale in a newspaper of general circulation alone is more than sufficient
compliance with the notice-posting requirement of law considering that such newspaper which is
distributed nationwide, has a readership of more people than notice posted in a public bulletin board,
no matter how strategic its location may be, which caters only to a limited few.

Requisites for a newspaper to be deemed of general circulation

1. It must be published for the dissemination of local news and general information;
2. It must have a bona fide subscription list of paying subscribers;
3. It must be published at regular intervals; and
4. It must be available to the public in general and not just to a select few chosen by the publisher,
otherwise, the precise objective of publication of notice of sale will not be realized;
5. It must not be devoted to the interests or published for the entertainment of a particular profession,
trade, calling, race or religion.

Q: MBTC granted a loan to spouses Peñafiel, who mortgaged their two (2) parcels of land in
Mandaluyong. The spouses defaulted in the payment. MBTC instituted an extrajudicial foreclosure
proceeding under Act No. 3135. The Notice of Sale was published in Maharlika Pilipinas, which has no
business permit in Mandaluyong and its list of subscribers shows that there were no subscribers from
Mandaluyong. Did MBTC comply with the publication requirement under Section 3, Act No. 3135?
A: No. Maharlika Pilipinas is not a newspaper of general circulation in Mandaluyong where the property
is located. To be a newspaper of general circulation, it is enough that it is published for the
dissemination of local news and general information, that it has a bona fide subscription list of paying
subscribers, and that it is published at regular intervals. The newspaper must be available to the public
in general, and not just to a select few chosen by the publisher. Otherwise, the precise objective of
publishing the notice of sale in the newspaper will not be realized (Metropolitan Bank and Trust
Company, Inc. v. Eugenio Peñafiel, G.R. No. 173976, Feb. 27, 2009).

Enjoining the implementation of writ possession

As a rule, any question regarding the validity of the mortgage or its foreclosure cannot be a legal ground
for refusing the issuance of a writ of possession. Regardless of whether or not there is a pending suit for
annulment of the mortgage or the foreclosure itself, the purchaser is entitled to a writ of possession,
without prejudice to the outcome of the case. Hence, an injunction to prohibit the issuance of writ of
possession is entirely out of place. Prohibition does not lie to enjoin the implementation of a writ of
possession. Once the writ of possession has been issued, the trial court has no alternative but to enforce
the writ without delay (Sps. Ong v. CA, G.R. No. 121494, June 8, 2000).

Recovery of the deficiency

The mortgagee recover the deficiency if there be a balance due to him after applying the proceeds of
the sale, the mortgagee is entitled to recover the deficiency (DBP v. Mirang, G.R. No. L-29130, Aug. 8,
1975).

NOTE: In judicial foreclosure, the Rules of Court specifically gives the mortgagee the right to claim for
deficiency in case a deficiency exists (Sec. 6, Rule 70). While Act No. 3135 governing extrajudicial
foreclosures of mortgage does not give a mortgagee the right to recover deficiency after the public
auction sale, neither does it expressly or impliedly prohibit such recovery.

Stipulation for upset price

Stipulation of upset price is a stipulation of minimum price at which the property shall be sold to
become operative in the event of a foreclosure sale at public auction. It is null and void.

REDEMPTION
Redemption
Redemption is a transaction by which the mortgagor reacquires or buys back the property which may
have passed under the mortgage or divests the property of the lien which the mortgage may have
created.

Kinds of redemption
1. Equity of redemption – Right of mortgagor to redeem the mortgaged property after his default in the
performance of the conditions of the mortgage but before the sale of the mortgaged property or
confirmation of sale. It applies in cases of judicial foreclosure.
2. Right of redemption – Right of the mortgagor to redeem the mortgaged property within one year
from the date of registration of the certificate of sale. It applies in case of extrajudicial foreclosure.
Q: X and Y, judgment creditors of A, obtained the transfer of the title of the mortgaged property in their
names. Earlier, A executed a mortgage over the same property in favor of FGU Insurance. The latter
mortgage was registered. When A defaulted, FGU foreclosed the property. A certificate of sale was
thereafter issued in FGU’s favor, which was confirmed by the RTC. However, before the new TCT could
be issued, X and Y filed their respective motion for intervention and to set aside the judgment alleging
that they are the new owners of the property and the failure of FGU to implead X and Y in the action for
foreclosure deprived the latter of due process. Is the contention of X and Y correct?
A: No. Subordinate lien holders acquire only a lien upon the equity of redemption vested in the
mortgagor, and their rights are strictly subordinate to the superior lien of the mortgagee. Such equity of
redemption does not constitute a bar to the registration of the property in the name of the mortgagee.
Registration may be granted in the name of the mortgagee but subject to the subordinate lien holders’
equity of redemption, which should be exercised within ninety (90) days from the date the decision
becomes final. This registration is merely a necessary consequence of the execution of the final deed of
sale in the foreclosure proceedings (Looyuko v. CA, G.R. No. 102696, July 12, 2001).

Requisites for valid right of redemption

1. Must be made within one year from the time of the registration of the sale.
2. Payment of the purchase price of the property plus 1% interest per month together with the taxes
thereon, if any, paid by the purchaser with the same rate of interest computed from the date of
registration of the sale; and
3. Written notice of the redemption must be served on the officer who made the sale and a duplicate
filed with the proper Register of Deeds (Rosales v. Yboa, G.R. No. L-42282, Feb. 28, 1983).

NOTE: The redemptioner should make an actual tender in good faith of the full amount of the purchase
price as provided above, i.e., the amount fixed by the court in the order of execution or the amount due
under the mortgage deed, as the case may be, with interest thereon at the rate specified in the
mortgage, and all the costs, and judicial and other expenses incurred by the bank or institution
concerned by reason of the execution and sale and as a result of the custody of said property less the
income received from the property (Heirs of Quisimbing v. PNB, G.R. No. 178242, Jan. 20, 2009).

Period of redemption is not a prescriptive period

The period of redemption is not a prescriptive period but a condition precedent provided by law to
restrict the right of the person exercising redemption.

If a person exercising the right of redemption has offered to redeem the property within the period
fixed, he is considered to have complied with the condition precedent prescribed by law and may
thereafter bring an action to enforce redemption.

If, on the other hand, the period is allowed to lapse before the right of redemption is exercised, then the
action to enforce redemption will not prosper, even if the action is brought within the ordinary
prescriptive period.

Q: D obtained a loan from C secured by a REM over a parcel of land. When D defaulted, C extrajudicially
foreclosed the property. C was declared the highest bidder in the auction. On October 29, 1993, C
caused the registration of the certificate of sale. On November 9, 1994 D filed a complaint for annulment
of the extrajudicial foreclosure and auction sale. Can D redeem the property beyond the one year
redemption period?
A: No. D lost any right or interest over the subject property primarily because of his failure to redeem
the same in the manner and within the period prescribed by law. His belated attempt to question the
legality and validity of the foreclosure proceedings and public auction must accordingly fail (Sps.
Landrito v. CA, G.R. No. 133079, Aug. 9, 2005).

A mortgagor, whose property has been extrajudicially foreclosed and sold, can validly execute a
mortgage contract over the same property in favor of a third party during the period of redemption. The
purchaser at the foreclosure sale merely acquires an inchoate right to the property which could ripen
into ownership only upon the lapse of the redemption period without his credit having been discharged,
it is illogical to hold that during that same period of twelve months the mortgagor was "divested" of his
ownership, since the absurd result would be that the land will consequently be without an owner
although it remains registered in the name of the mortgagor. Such mortgage does not involve a transfer,
cession or conveyance of the property but only constitutes a lien thereon (Medida v. CA, G.R. No. 98334,
May 8, 1992).

Q: DBP guaranteed LCD’s loan. When LCD defaulted, DBP paid it and sought reimbursement. LCD failed
to reimburse DBP, hence DBP extrajudicially foreclosed the REM, where it was the highest bidder. The
Sheriff’s certificate of sale was annotated in the certificate of titles on April 30, 1976. La Campana failed
to redeem the properties. The court, among others, ordered LCD to pay such sums of money unlawfully
collected or received by way of rentals and/or fruits from the subject properties to DBP. When should
the period for the remittance of collected/received rentals/fruits from the properties, of LCD to DBP
start?
A: In foreclosure proceedings, the buyer becomes the absolute owner of the property purchased if it is
not redeemed during the prescribed period of redemption, which is one year from the date of
registration of the sale. The Sheriff’s certificate of sale was annotated in the certificate of titles on April
30, 1976. DBP became the absolute owner of the properties on May 1, 1977. Thus, the period to be
considered in determining the amount of collection should start from May 1, 1997 up to the time when
the possession of the properties are actually and completely surrendered to DBP (La Campana
Development Corporation v. DBP, G.R. No. 146157, Feb. 13, 2009).
 ANTICHRESIS

Antichresis
Antichresis is a contract whereby the creditor acquires the right to receive the fruits of an immovable of
the debtor, with the obligation to apply them to the payment of interest, if owing, and thereafter to the
principal of his credit.

Characteristics of antichresis
1. Accessory contract.
2. Formal contract – the amount of the principal and of the interest must both be in writing; otherwise
the contract of antichresis is void.
3. It deals only with immovable property.
4. It is a real right.
5. The creditor has the right to receive the fruits of the immovable.
6. It is a real contract.
7. It can guarantee all kinds of valid obligations.

NOTE: It is not essential that the loan should earn interest in order that it can be guaranteed with a
contract of antichresis. Antichresis is susceptible of guaranteeing all kinds of obligations, pure or
conditional [Javier v. Valliser, (CA) N. 2648-R, Apr. 29, 1950; Sta. Rosa v. Noble, 35 O.G. 27241]

Stipulation authorizing for appropriation of property upon non-payment of the debt

A stipulation authorizing the antichretic creditor to appropriate the property upon the non-payment of
the debt within the period agreed upon is void (Art. 2038, NCC).

Form of a contract of antichresis and its contents

1. Covers only the Fruits of real property
2. Delivery of the property necessary so that CR may receive the fruits therefrom
NOTE: Delivery of the property to the creditor is required only in order that the creditor may receive the
fruits and not for the validity of the contract.
3. Amount of principal and interest must be specified in writing, otherwise, the contract shall be void.
4. Express agreement that debtor will give Possession to the CR and that CR will apply the fruits to the
interest and then to the principal.
NOTE: The fruits of the immovable which is the object of the antichresis must be appraised at their
actual market value at the time of the application (Art. 2138, NCC).The property delivered stands as a
security for the payment of the obligation of the debtor in antichresis. Hence, the debtor cannot
demand its return until the debt is totally paid.

Antichresis v. Real Estate Mortgage

ANTICHRESIS
Property is delivered to creditor
Creditor acquires only the right to receive the
fruits of the property; does not produce a real
right unless registered in the Registry Property
Creditor obliged to pay the taxes and charges upon
the estate unless stipulated otherwise
There is an express stipulation that the creditor
REAL ESTATE MORTGAGE
Debtor usually retains possession of the property
Creditor has no right to receive fruits, but
mortgage creates real right against the property
Creditor has no such obligation
There is no such obligation on the part of the
shall apply the fruits to the payment of the mortgagee
interest, if owing, and thereafter to the principal of
the debt.

Antichresis v. Pledge
Antichresis Pledge
Refers to real property Personal property
Formal Real
Principal and interest must be specified in writing, Need not be in writing, oral evidence may be
otherwise contract is void allowed to prove the same.

Antichresis v. Pacto de retro sale

Antichresis Pacto de retro sale
Creditor is given the right to enjoy the fruits and Creditor does not have such right
apply them to the payment of the interest and to
the principal of the loan

Availability of acquisitive prescription to the antichretic creditor

Prescription is not as a mode of acquiring ownership available to the creditor in antichresis because the
possession of the property is not in the concept of an owner but that of a mere holder during the
existence of the contract (Ramirez v. CA, G.R. No. L-38185, September 24, 1986).

Determination of the amount paid in antichresis

The amount of payment in antichresis is determined the actual market value of the fruits at the time of
the application thereof to the interest and the principal shall be the measure of such application (Art.
2133, NCC).

Parties to a contract of antichresis

1. Antichretic creditor – One who receives the fruits on the immovable property of the debtor.
2. Antichretic debtor – One who pays his debt through the application of the fruits of his immovable
property.

Obligations of an antichretic creditor

1. Pay the taxes and charges assessable against the property like real estate taxes and others;
2. Bear the necessary expenses for the preservation of the property;
3. Bear the expenses necessary for the repair of the property; and
4. Apply the fruits received for payment of the outstanding interests, if any, and thereafter of the
principal.

NOTE: The creditor be exempted from the obligations imposed by Art. 2135 by compelling the debtor to
re-enter into the property.

Rule on the application of the fruit upon the debt

The application of the fruit upon the debt must be expressly agreed between the creditor and the
debtor that the former, having been given possession of the properties given as security, is to apply their
fruits to the payment of interest, if owing, and thereafter to the principal of his credit (Art. 2132, NCC).
Return of the property of the antichretic debtor
The antichretic debtor can only demand the return of the property after having fully paid his obligations
to the creditor. It is not fair for the debtor to regain the possession of the property when his debt has
not been fully paid. Until there is full payment of the obligation, the property shall stand as security
therefor (Macapinlac v. Gutierrez Repide, No. 18574, Sept. 20, 1922).

Remedy of the creditor in case of nonpayment of his credit

1. File an action for collection; or
2. File a petition for the public sale of the property (Barretto v. Barretto, No. 11933, Dec. 1, 1917).
 CHATTEL MORTGAGE

Chattel Mortgage
Chattel mortgage 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.

Characteristics of chattel mortgage

1. It is a formal contract because it must be embodied in a public instrument and recorded in the Chattel
Mortgage Register;
2. It is an accessory contract because its existence depends upon an existing valid principal obligation;
3. It is a unilateral contract because the obligation is only on the part of the creditor to free the chattel
from encumbrance upon the payment of the principal obligation;
4. It does not convey dominion but is only a security (In re: Du Tec Chuan, No. 11156, March 28, 1916);
5. It creates a real right or a lien which is being recorded and follows the chattel wherever it goes
(Northern Motors, Inc. v. Coquia, No. L-40018, Dec. 15, 1975)

Requisites in a chattel mortgage

1. GR: It covers only movable property
XPN: When the parties treat as personally that which is according to its nature realty.
2. Registration with the Chattel Mortgage Register.
3. Description of the property.
NOTE: Section 7 of the Chattel Mortgage Law does not demand specific description of every chattel
mortgaged in the deed of mortgage, but only requires that the description of the mortgaged property be
such as to enable the parties to the mortgage or any other person to identify the same after a
reasonable investigation and inquiry (Saldana v. Phil. Guaranty Co., Inc., No. L-13194, Jan. 29, 1960);
otherwise, the mortgage is invalid.
4. Accompanied by an affidavit of good faith to bind third persons.
NOTE: The absence of an affidavit of good faith does not affect the validity of the contract.

Laws that govern chattel mortgages

1. Chattel Mortgage Law (Act No. 1508)
2. Provisions of the Civil Code on pledge
NOTE: In case of conflict between nos. 1 and 2, the former shall prevail.
3. Revised Administrative Code
4. Revised Penal Code (Art. 319)
5. Other special laws (i.e. Motor vehicle law)
6. Ship Mortgage Decree of 1978 (P.D. No. 1521)

Similarities between chattel mortgage and pledge

1. Both are executed to secure performance of a principal obligation;
2. Both are constituted only on personal property;
3. Both are indivisible;
4. Both constitute a lien on the property;
5. In both cases, the creditor cannot appropriate the property to himself in payment of the debt;
6. When the debtor defaults, the property must be sold for the payment of the creditor
7. Extinguished by the fulfillment of the principal obligation or by the destruction of the property
pledged or mortgaged.
Subject matter of chattel mortgage
1. Shares of stock in a corporation;
2. Interest in business;
3. Machinery and house of mixed materials treated by parties as personal property and no innocent
third person will be prejudiced thereby (Makati Leasing and Finance Corp. v. Weaver Textile Mills, Inc.,
No. L58469, May, 16, 1983);
4. Vessels, the mortgage of which have been recorded with the Philippine Coast Guard in order to be
effective as to third persons;
5. Motor vehicles, the mortgage of which had been registered both with the Land Transportation
Commission and the Chattel Mortgage Registry in order to affect third persons;
6. House which is intended to be demolished; or
7. Growing crops and large cattle (Sec. 7 (2)(3), Act No. 1508).

Affidavit of good faith

An affidavit of good faith is an oath in a contract of chattel mortgage wherein the parties “severally
swear that the mortgage is made for the purpose of securing the obligation specified in the conditions
thereof and for no other purposes and that the same is a just and valid, existing obligation and one not
entered into for the purpose of fraud.”

The absence of the affidavit vitiates the mortgage only as against third persons without notice like
creditors and subsequent encumbrances, but its absence is not fatal between the parties.

Chattel mortgage v. Real Estate Mortgage

BASIS CHATTEL MORTGAGE REAL ESTATE MORTGAGE
Subject matter Personal property Real property
As to Guaranty of Future Cannot guaranty future May guaranty future obligations
Obligations obligations because it requires
immediate recording

REGISTRATION

Registration of the Chattel mortgage

Registration is tantamount to the symbolic delivery of the mortgage to the mortgagee, which is
equivalent to actual delivery (Meyers v. Thein, No. 5577, Feb. 21, 1910).

Registration period of the chattel mortgage

The law does not provide period within which the registration should be made. Yet, the law is
substantially and sufficiently complied with where the registration is made by the mortgagee before the
mortgagor has complied with his principal obligation and no right of innocent third persons is
prejudiced.

Registration in Real Estate Mortgage and Registration in Chattel Mortgage

The difference in registration of real mortgage and chattel mortgage is that a deed of real estate
mortgage is considered registered once recorded in the entry book. However, chattel mortgage must be
registered not only in the entry book but also in the Chattel Mortgage Register (Associated Insurance
and Surety Co. v. Lim Ang, (CA) 52 Off. Gaz. 5218).
Increase in mortgage credit
If the parties to a chattel mortgage take an oath that the debt, honestly due and owing from the
mortgagor to the mortgagee, it is obvious that a valid mortgage cannot be made to secure a debt to be
thereafter contracted (11 C.J. 448). A mortgage that contains a stipulation in regard to future advances
in the credit will take effect only from the date of the mortgage. The increase in the mortgage credit
becomes a new mortgage (Belgian Catholic Missionaries v. Magallanes Press, No. 25729, Nov. 24, 1926).

Abandoment of mortgage lien

The mortgage lien is deemed abandoned by obtaining a personal judgment on the mortgage lien.

Offenses involving chattel mortgage

1. Knowingly removing any personal property mortgaged under the Chattel Mortgage Law to any
province or city other than the one in which it was located at the time of the execution of the mortgage
without the written consent of the mortgagee; or
2. Selling or pledging personal property already mortgaged, or any part thereof, under the terms of the
Chattel Mortgage Law without the consent of the mortgagee written on the back of the mortgage and
duly recorded in the Chattel Mortgage Register (Art. 319, RPC).

FORECLOSURE
Procedure in foreclosure of a chattel mortgage The mortgagee may, after thirty (30) days from the time
of the default or from the time the condition is violated, cause the mortgaged property to be sold at
public auction by a public officer (Sec. 14, Act No. 1508).

The 30-day period to foreclose a chattel mortgage is the minimum period after violation of the mortgage
condition for the mortgage

The creditor has at least ten (10) days notice served to the mortgagor The notice of time, place and
purpose of such sale, is posted.

After the sale of the chattel at public auction, the right of redemption is no longer available to the
mortgagor (Cabral v. Evangelista, 28 L-26860, July 30, 1969).

Legal consequences of mortgaging a building erected not by the owner of the land
A building is immovable or real property whether it is erected by the owner of the land, by a
usufructuary, or by a lessee. It may be treated as a movable by the parties to a chattel mortgage but
such is binding only between them and not on third parties. As far as third parties are concerned, the
chattel mortgage does not exist.

Recovery of deficiency
GR: CR may recover deficiency if the redemption price is less than the debt secured in case of
foreclosure sale in chattel mortgage.
XPN: When the chattel mortgage is used to secure the purchase of personal property in installments
(Recto Law).
 INTELLECTUAL PROPERTY RIGHTS

Coverage of intellectual property rights (CTG- IPLP)

1. Copyright and Related Rights;
2. Trademarks and Service Marks;
3. Geographic indications;
4. Industrial designs;
5. Patents;
6. Layout designs (Topographies) of Integrated Circuits;
7. Protection of Undisclosed Information (TRIPS).

DIFFERENCES BETWEEN COPYRIGHTS, TRADEMARKS, AND PATENT

INTELLECTUAL PROPERTIES DEFINITION
Trademark Any visible sign capable of distinguishing the goods
(trademark) or services (service mark) of an
enterprise and shall include a stamped or marked
container of goods.
Tradename The name or designation identifying or
distinguishing an enterprise.
Copyright Literary and artistic works which are original
intellectual creations in the literary and artistic
domain protected from the moment of their
creation.
Patentable Inventions Any technical solution of a problem in any field of
human activity which is new, involves an inventive
step and is industrially applicable.

PATENTS

A set of exclusive rights conferred by the State to an inventor or his legal successor, for a limited period
of time to exclude others from making, using, selling or importing the invention within the territory of
the country that grants the patent, in exchange for the disclosure of the invention to the public.

Patentable inventions
Any technical solution of a problem in any field of human activity which is new, involves an inventive
step and is industrially applicable. It may be, or may relate to, a product, or process, or an improvement
of any of the foregoing (Sec. 21, IPC).

Product patent v. Process patent

PRODUCT PATENT PROCESS PATENT
The right to make, use, sell and import the The right to restrain, prevent or prohibit any
product. unauthorized person or entity from using the
process, and from manufacturing, dealing in, using,
selling or offering for sale, or importing any
product obtained directly or indirectly from such
process. (Sec. 71, IPC)
Conditions for patentability (NIA)
1. Novelty – An invention shall not be considered new if it forms part of a prior art (Sec. 23, IPC).
2. Inventive step –if, having regard to prior art, it is not obvious to a person skilled in the art at the time
of the filing date or priority date of the application claiming the invention.
3. Industrially Applicable – An invention that can be produced and used in any industry (Sec. 27, IPC).

Prior art
1. Everything which has been made available to the public anywhere in the world, before the filing date
or the priority date of the application claiming the invention
2. The whole contents of a published application, filed or effective in the Philippines, with a filing or
priority date that is earlier than the filing or priority date of the application. Provided, that the
application which has validly claimed the filing date of an earlier application under Section 31 of the IPC,
there shall be a prior art with effect as of the filing date of such earlier application: Provided further, that
the applicant or the inventor identified in both applications are not one and the same (Sec. 24, IPC).

Coverage of patents
1. Invention – creation of an object which does not exist in nature; it requires novelty, inventive step and
industrial application for patentability.
2. Utility Model - any technical solution of a problem in any field of human activity which is new and
industrially applicable. It may be, or may relate to, a product, or process, or an improvement of any of
the aforesaid. It is sometimes referred to as a device or useful object.
3. Industrial Design – the utility value or ornamental/aesthetic aspect of a useful article (Vicente
Amador, Intellectual Property Fundamentals, 2007).

Rules on public disclosure

GR: When a work has already been made available to the public, it shall be non-patentable for absence
of novelty.
XPNs: Non-prejudicial disclosure – the disclosure of information contained in the application during the
12-month period before the filing date or the priority date of the application if such disclosure was made
by:
1. The inventor;
2. A patent office and the information was contained: a. In another application filed by the inventor and
should have not have been disclosed by the office, or b. In an application filed without the knowledge or
consent of the inventor by a third party which obtained the information directly or indirectly from the
inventor;
3. A third party which obtained the information directly or indirectly from the inventor (Sec. 25, IPC).

Burden of proving want of novelty of an invention

The burden of proving want of novelty is on him who avers it and the burden is a heavy one which is met
only by clear and satisfactory proof which overcomes every reasonable doubt (Manzano v. CA, G.R. No.
113388, Sept. 5, 1997)
NON-PATENTABLE INVENTIONS
1. Plant varieties or animal breeds or essentially biological process for the production of plants or
animals. This provision shall not apply to micro-organisms and non-biological and microbiological
processes
2. Aesthetic creations
3. Discoveries, scientific theories and mathematical methods
4. Schemes, rules and methods of performing mental acts, playing games or doing business, and
programs for computers
5. Anything which is Contrary to public order or morality (Sec. 22, IPC as amended by R.A. 9502).
6. Methods for treatment of the human or Animal body
7. In the case of Drugs and medicines, mere discovery of a new form or new property of a known
substance which does not result in the enhancement of the efficacy of that substance

Patentability of computer programs

GR: Computer programs are not patentable but are copyrightable.
XPN: They can be patentable if they are part of a process (e.g. business process with a step involving the
use of a computer program).

Duration of protection of an invention, utility model and industrial design

FORM TERM OF PROTECTION
INVENTION Letters patent 20 years from date of filing of
application without renewal.
(Sec. 54, IPC)
UTILITY MODEL Utility Model Registration 7 years from the filing date of
the application without renewal.
(Sec. 109.3, IPC)
INDUSTRIAL DESIGN Certificate of registration 5 years from the filing date of
the application, renewable for
not more than two (2)
consecutive periods of five (5)
years each. (Sec. 118.2, IPC)

PATENT INFRINGEMENT
Acts which constitute infringement of patent
1. Making, using, offering for sale, selling or importing a patented product or a product obtained directly
or indirectly from a patented process; or
2. Use of a patented process without authorization of the owner of the patent (Sec. 76, IPC).

TRADEMARKS
Trademark
Any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an
enterprise (Sec 121.1, IPC). A trade name is a name or designation identifying or distinguishing an
enterprise.

Trademark v. Tradename
TRADEMARK TRADE NAME
Goods or services offered by a proprietor or A natural or artificial person who does business
enterprise are designated by trademark (goods) or and produces or performs the goods or services
service marks (services). designated by trademark or service mark.
Refers to the goods. Refers to business and its goodwill.

Acquired only by registration. Need not be registered

Functions of trademark
1. To point out distinctly the origin or ownership of the articles to which it is affixed.
2. To secure to him who has been instrumental in bringing into market a superior article or merchandise
the fruit of his industry and skill
3. To prevent fraud and imposition (Etepha v. Director of Patents, G.R. No. L-20635, Mar. 31, 1966).

Acquisition of marks
Marks are acquired solely through registration (Sec. 122, IPC).
NOTE: Registration, without more, does not confer upon the registrant an absolute right to the
registered mark. The certificate of registration is merely a prima facie proof that the registrant is the
owner of the registered mark or trade name. Evidence of prior and continuous use of the mark or trade
name by another can overcome the presumptive ownership of the registrant and may very well entitle
the former to be declared owner in an appropriate case.

Marks which may be registered

Any word, name, symbol, emblem, device, figure, sign, phrase, or any combination thereof except those
enumerated under Section 123, IPC.

Requirements for a mark to be registered

1. A visible sign (not sounds or scents); and
2. Capable of distinguishing one’s goods and services from another.

Q: Is there an infringement of trademark when two similar goods use the same words, “PALE PILSEN”?
A: None, because “pale pilsen” are generic words descriptive of the color (pale) and of a type of beer
(pilsen), which is a light bohemian beer with strong hops flavor that originated in the City of Pilsen in
Czechoslovakia. Pilsen is a primarily geographically descriptive word, hence, non-registrable and not
appropriable by any beer manufacturer(Asia Brewery, Inc. v. CA, G.R. No. 103543, July 5, 1993)

Acquisition of trade names

Trade names or business names are acquired through adoption and use. Registration is not required
(IPC, Sec. 165). It is the actual use in commerce or business is a pre-requisite to the acquisition of the
right of ownership (Shangri-la Hotel Management Ltd. v Developers Group of companies, May 10, 2006
G.R. No. 159938).

Q: Can a previously used trade name of a business in a foreign country bar its appropriation by another
in the Philippines?
A: Yes. The IPC does not require that the actual use of a trademark must be within the Philippines. For a
person to have ownership of a mark, the mark must not have been already appropriated (i.e., used) by
someone else. The Intellectual Property Code (IPC) embodies the firm resolve of the Philippines to
observe and follow the Paris Convention (Shangri-la Hotel Management Ltd. v Developers Group of
companies, supra).
Non-registrable marks (IFNIIIM-GCDS)
1. Consists of Immoral, deceptive or scandalous matter or falsely suggest a connection with persons,
institutions, beliefs, or national symbols
2. Consists of the Flag or coat of arms or other insignia of the Philippines or any of its political
subdivisions, or of any foreign nation
3. Consists of a Name, portrait or signature identifying a particular living individual except by his written
consent, or the name, signature, or portrait of a deceased President of the Philippines, during the life of
his widow except by written consent of the widow
4. Identical with a registered mark belonging to a different proprietor or a mark with an earlier filing or
priority date, in respect of:
a. The same goods or services, or
b. Closely related goods or services, or
c. If it nearly resembles such a mark as to be likely to deceive or cause confusion;

5. Is Identical with an internationally well-known mark, whether or not it is registered here, used for
identical or similar goods or services
6. Is Identical with an internationally well-known mark which is registered in the Philippines with respect
to non-similar goods or services. Provided, that the interests of the owner of the registered mark are
likely to be damaged by such use
7. Is likely to Mislead the public as to the nature, quality, characteristics or geographical origin of the
goods or services
8. Consists exclusively of signs that are Generic for the goods or services that they seek to identify
9. Consists exclusively of signs that have become Customary or usual to designate the goods or services
in everyday language and established trade practice
10. Consists exclusively that may serve in trade to Designate the kind, quality, quantity, intended
purpose, value, geographical origin, time or production of the goods or rendering of the services, or
other characteristics of the goods or services
11. Consists of Shapes that may be necessitated by technical factors or by the nature of the goods
themselves or factors that affect their intrinsic value
12. Consists of Color alone, unless defined by a given form; or
13. Is Contrary to public order or morality (Sec. 123, IPC).

Internationally well-known mark

The following constitutes internationally well-known mark
1. Considered by the competent authority of the Philippines to be “well-known” internationally and in
the Philippines as the mark of a person other than the applicant or registrant
2. Need not be used or registered in the Philippines
3. Need not be known by the public at large but only by relevant sector of the public.

Rules regarding internationally-well known marks

GR: Prohibition on subsequent registration does not include services and goods of different nature or
kind.
XPNs:
1. If the internationally well-known mark is not registered in the Philippines, the application for
registration of a subsequent or similar mark can be rejected only if the goods or services specified in the
application are similar to those of the internationally well-known mark.
2. If the internationally well-known mark is registered in the Philippines, the application for registration
of a subsequent or similar mark can be refused even if the goods or services specified in the application
are not identical or similar to those of the internationally well-known mark.

Duration of a certificate of trademark registration

A certificate of registration shall remain in force for ten (10) years: Provided, That the registrant shall file
a declaration of actual use and evidence to that effect, or shall show valid reasons based on the
existence of obstacles to such use, as prescribed by the Regulations, within one (1) year from the fifth
anniversary of the date of the registration of the mark. Otherwise, the mark shall be removed from the
Register by the Office (Sec, 145, IPC).
NOTE: The applicant or the registrant shall file a declaration of actual use of the mark with evidence to
that effect, as prescribed by the Regulations within three (3) years from the filing date of the application.
Otherwise, the application shall be refused or the mark shall be removed from the Register by the
Director (Sec. 124.2, IPC).

Renewal of registration
A certificate of registration may be renewed for periods of ten (10) years at its expiration. Each request
for renewal of registration must be made within 6 months before the expiration of the registration or
within 6 months after such expiration on payment of the additional fee prescribed (Sec. 146, IPC).

Rights of a registered mark owner

1. Protection against reproduction, or imitation or unauthorized use of the mark (infringement of mark)
2. To stop entry of imported merchandise into the country containing a mark identical or similar to the
registered mark
3. To transfer or license out the mark

COPYRIGHTS
Copyright
A right over literary and artistic works which are original intellectual creations in the literary and artistic
domain protected from the moment of creation (Sec. 171.1, IPC).

Elements of copyright-ability
1. Originality – Must have been created by the author’s own skill, labor, and judgment without directly
copying or evasively imitating the work of another (Ching Kian Chuan v. CA, G.R. No. 130360, Aug. 15,
2001).
2. Expression – Must be embodied in a medium sufficiently permanent or stable to permit it to be
perceived, reproduced or communicated for a period more than a transitory duration.

Elements of originality
1. It is independently created by the author, and
2. It possesses some minimal degree of creativity

Time when copyright vests

Works are protected from the time of their creation, irrespective of their mode or form of expression, as
well as of their content, quality and purpose.
Copyrightable works
1. Literary and Artistic Works (BOLD-MAN-GAS-PAP-CO)
a. Books, pamphlets, articles and other writings
b. Lectures, sermons, addresses, dissertations prepared for Oral delivery, whether or not
reduced in writing or other material form
c. Letters
d. Dramatic, choreographic works
e. Musical compositions
f. Works of Art
g. Periodicals and Newspapers
h. Works relative to Geography, topography, architecture or science
i. Works of Applied art
j. Works of a Scientific or technical character
k. Photographic works
l. Audiovisual works and cinematographic works
m. Pictorial illustrations and advertisements
n. Computer programs; and
o. Other literary, scholarly, scientific and artistic works (Sec. 172.1, IPC).
2. Derivative Works
a. Dramatizations, translations, adaptations, abridgements, arrangements, and other alterations
of literary or artistic works;
b. Collections of literary, scholarly, or artistic works and compilations of data and other
materials which are original by reason of the selection or coordination or arrangement of their
contents (Sec. 173, IPC).

NOTE: Derivative works shall be protected as new works, provided that such new work shall not affect
the force of any subsisting copyright upon the original works employed or any part thereof, or be
construed to imply any right to such use of the original works, or to secure or extend copyright in such
original works (Sec. 173.2, IPC).

Non-copyrightable works (INOD-PGTSS)

1. Idea, procedure, system, method or operation, concept, principle, discovery or mere data as such
2. News of the day and other items of press information
3. Any Official text of a legislative, administrative or legal nature, as well as any official translation
thereof
4. Pleadings
5. Decisions of courts and tribunals – this refers to original decisions and not to annotated decisions
such as the SCRA or SCAD as these already fall under the classification of derivative works, hence
copyrightable
6. Any work of the Government of the Philippines
7. TV programs, format of TV programs (Joaquin v. Drilon, G.R. No. 108946, Jan. 28, 1999)
8. Systems of bookkeeping; and
9. Statutes.
Rights of an author
1. Economic rights – The right to carry out, authorize or prevent the following acts:
a. Reproduction of the work or substantial portion thereof
b. Carry-out derivative work (dramatization, translation, adaptation, abridgement, arrangement
or other transformation of the work)
c. First distribution of the original and each copy of the work by sale or other forms of transfer of
ownership
d. Rental right
e. Public display
f. Public performance
g. Other communications to the public
2. Moral rights – For reasons of professionalism and propriety, the author has the right:
a. To require that the authorship of the works be attributed to him (attribution right)
b. To make any alterations of his work prior to, or to withhold it from publication
c. Right to preserve integrity of work, object to any distortion, mutilation or other modification
which would be prejudicial to his honor or reputation; and
d. To restrain the use of his name with respect to any work not of his own creation or in a
distorted version of his work (Sec.193, IPC).
3.Droit de suite (Right to proceeds in subsequent transfers or follow up rights) – This is an inalienable
right of the author or his heirs to receive to the extent of 5% of the gross proceeds of the sale or lease of
a work of painting or sculpture or of the original manuscript of a writer or composer, subsequent to its
first disposition by the author.

Rights which are not covered under a Droit de suite (PEEWS)

1. Prints
2. Etchings
3. Engravings
4. Works of applied art
5. Similar works wherein the author primarily derives gain from the proceeds of reproductions (Sec. 201,
IPC).