CREDIT TRANSACTIONS
o Requisites of contract of Pledge and Mortgage
 That they be constituted to secure the fulfillment of a
principal obligation.
 That the pledgor or mortgagor be the absolute owner
of the thing pledged or mortgaged.
 That the persons constituting the pledge or mortgage
have the free disposal of their property, and in the
absence thereof, that they be legally authorized for the
purpose.
o Third persons who are not parties to the principal obligation o
may secure the latter by pledging or mortgaging their own
property.
o Accessory contract: a pledge or mortgage, being an
accessory contract, cannot exist without a valid obligation or
a principal contract. Nevertheless, similar to a guaranty, a
pledge or a mortgage may be constituted to guarantee the
performance of a voidable or an unenforceable contract. It
may also guarantee a natural obligation.
 It is also of the essence of these contracts that when
the principal obligation becomes due, the things in
which the pledge or mortgage consists may be
alienated for the payment to the creditor.
 The contract of pledge or mortgage may secure all
kinds of obligations, be they pure or subject to a
suspensive or resolutory condition.
o Automatic appropriation prohibited: the creditor cannot
appropriate the things given by way of pledge or mortgage,
or dispose of them. Any stipulation to the contrary is null
and void.
 The stipulation is otherwise known as Pactum
Commissorium.
o Indivisibility of contract: A pledge or mortgage is indivisible,
even though the debt may be divided among the successors
in interest of the debtor or of the creditor.
 Therefore, the debtor's heir who has paid a part of the
debt cannot ask for the proportionate extinguishment
of the pledge or mortgage as long as the debt is not
completely satisfied.
 Neither can the creditor's heir who received his share
of the debt return the pledge or cancel the mortgage,
to the prejudice of the other heirs who have not been
paid.
 The indivisibility of a pledge or mortgage is not affected
by the fact that the debtors are not solidarily liable.
o Rule of Indivisibility not applicable: If there being several
things given in mortgage or pledge, each one of them
guarantees only a determinate portion of the credit.
 The debtor, in this case, shall have a right to the
extinguishment of the pledge or mortgage as the
portion of the debt for which each thing is specially
answerable is satisfied.
PLEDGE
o Pledge is a contract by virtue of which the debtor delivers to
the creditor or to a third person movable (Art. 2094) or
document evidencing incorporeal rights (Art. 2095) for the
purpose of securing the fulfilment of a principal obligation
with the understanding that when the obligation is fulfilled,
the thing delivered shall be returned with all its fruits and
accessions.
o Delivery: in addition to the above-mentioned essential
requisites of contracts of pledge or mortgage, it is necessary,
in order to constitute the contract of pledge, that the thing
pledged be placed in the possession of the creditor, or of a
third person by common agreement.
o Kinds of Pledge
 Voluntary or conventional – created by agreement of
the parties; or
 Legal – created by operation of law.
Characteristics
 Real – perfected by the delivery of the thing pledged.
 Accessory – no independent existence of its own.
 Unilateral – creates an obligation solely on the part of
the creditor to return the thing.
 Subsidiary – obligation incurred does not arise until the
fulfilment of the principal obligation which is secured.
o Cause or consideration
 Pledgor/debtor – the principal obligation.
 Pledgor not the debtor – compensation stipulated or
mere liberality.
OBJECT
 Movable property.
 Within the commerce of man and capable of possession.
 Incorporeal rights, evidenced by negotiable instruments,
bills of lading, shares of stock, bonds, warehouse receipts
and similar documents may also be pledged. The
instrument proving the right pledged shall be delivered to
the creditor, and if negotiable, must beindorsed.
 If the pledge earns or produces fruits, income, dividends,
or interests, the creditor shall compensate what he
receives with those which are owing him; but if none are
owing him, or insofar as the amount may exceed that
which is due, he shall apply it to the principal.
 Unless there is a stipulation to the contrary, the pledge
shall extend to the interest and earnings of the right
pledged.
 In case of a pledge of animals, their offspring shall pertain
to the pledgor or owner of animals pledged, but shall be
subject to the pledge, if there is no stipulation to the
contrary.
 Unless the thing pledged is expropriated, the debtor
continues to be the owner thereof.
 Nevertheless, the creditor may bring the actions which
pertain to the owner of the thing pledged in order to
recover it from, or defend it against a third person.
LOSS, DETERIORATION OF PLEDGED OBJECT OR THE FEAR
THEREOF
 If through the negligence or willful act of the pledgee, the
thing pledged is in danger of being lost or impaired, the
pledgor may require that it be deposited with a third
person.
  If there are reasonable grounds to fear the destruction or returned by the pledgee. This same presumption exists
impairment of the thing pledged, without the fault of the
pledgee, the pledgor may demand the return of the thing,
upon offering another thing in pledge, provided the latter
is of the same kind as the former and not of inferior
quality, and without prejudice to the right of the pledgee
under the provisions of the following article.

 The pledgee is bound to advise the pledgor, without delay,

of any danger to the thing pledged.

 If, without the fault of the pledgee, there is danger of

destruction, impairment, or diminution in value of the
thing pledged, he may cause the same to be sold at a
public sale. The proceeds of the auction shall be a security
for the principal obligation in the same manner as the
thing originally pledged.

 Form: there is no form required to constitute a contract

of pledge, but in order to affect third persons, there must
be a public instrument containing both the description of
the thing pledged and the date of the pledge.

 Alienation of thething pledged: is allowed with the

consent of the pledgee. The ownership of the thing
pledged is transmitted to the vendee or transferee as
soon the pledgee consents to the alienation, but the
latter shall continue in possession.

CREDITOR-PLEDGEE

 The creditor shall take care of the thing pledged with the
diligence of a good father of a family; he has a right to the
reimbursement of the expenses made for its preservation,
and is liable for its loss or deterioration, in conformity with
the Civil Code.

 The pledgee cannot deposit the thing pledged with a third

person, unless there is a stipulation authorizing him to do
so.

 The pledgee is responsible for the acts of his agents or

employees with respect to the thing pledged.

 The creditor cannot use the thing pledged, without the

authority of the owner, and if he should do so, or should
misuse the thing in any other way, the owner may ask that
it be judicially or extrajudicially deposited. When the
preservation of the thing pledged requires its use, it must
be used by the creditor but only for that purpose.

 If the creditor is deceived on the substance or quality of

the thing pledged, he may either claim another thing in its
stead, or demand immediate payment of the principal
obligation.

PLEDGOR

 The pledgor who, knowing the flaws of the thing pledged,

does not advise the pledgee of the same, shall be liable to
the latter for the damages which he may suffer by reason
thereof.

 The debtor cannot ask for the return of the thing pledged
against the will of the creditor, unless and until he has paid
the debt and its interest, with expenses in a proper case.

 Thing Pledged is Returned: If the thing pledged is

returned by the pledgee to the pledgor or owner, the
pledge is extinguished. Any stipulation to the contrary
shall be void.

 If subsequent to the perfection of the pledge, the thing

is in the possession of the pledgor or owner, there is a
prima facie presumption that the same has been
 if the thing pledged is in the possession of a third  If two or more things are pledged, the pledgee may choose
person who has received it from the pledgor or which he will cause to be sold, unless there is a stipulation
owner after the constitution of the pledge. to the contrary. He may demand the sale of only as many
of the things as are necessary for the payment of the debt.
 Renunciation or Abandonment of Pledge: A
statement in writing by the pledgee that he
renounces or abandons the pledge is sufficient to
extinguish the pledge. For this purpose, neither
the acceptance by the pledgor or owner, nor the
return of the thing pledged is necessary, the
pledgee becoming adepositary.

FORECLOSURE SALE

 The creditor to whom the credit has not been satisfied

in due time, may proceed before a Notary Public to the
sale of the thing pledged.

 This sale shall be made at a public auction, and

 With notification to the debtor and the owner of the

thing pledged in a proper case, stating the amount for
which the public sale is to beheld.

 Creditor’s right of appropriation: If at the first

auction the thing is not sold, a second one with
the same formalities shall be held; and if at the
second auction there is no sale either, the
creditor may appropriate the thing pledged. In
this case, he shall be obliged to give an
acquittance for his entire claim.

 Right to bid: At the public auction, the pledgor or

owner may bid. He shall, moreover, have a better
right if he should offer the same terms as the
highest bidder. The pledgee may also bid, but his
offer shall not be valid if he is the only bidder.

 All bids at the public auction shall offer to pay the

purchase price at once. If any other bid is
accepted, the pledgee is deemed to have been
received the purchase price, as far as the pledgor
or owner is concerned.

SALE OF THE THING AND PROCEEDS THEREOF

 The sale of the thing pledged shall extinguish the

principal obligation, whether or not the proceeds of
the sale are equal to the amount of the principal
obligation, interest and expenses in a proper case.

 If the price of the sale is more than said amount, the

debtor shall not be entitled to the excess, unless it is
otherwise agreed.

 If the price of the sale is less, neither shall the creditor

be entitled to recover the deficiency, notwithstanding
any stipulation to thecontrary.

OTHER RULES

 After the public auction, the pledgee shall promptly

advise the pledgor or owner of the result thereof.

 Any third person who has any right in or to the thing

pledged may satisfy the principal obligation as soon as
the latter becomes due and demandable.

 If a credit which has been pledged becomes due

before it is redeemed, the pledgee may collect and
receive the amount due. He shall apply the same to
the payment of his claim, and deliver the surplus,
should there be any, to the pledgor.
  If a third party secures an obligation by pledging his own
movable property, he shall have the same rights as a o Third party transferee: Buyers or transferees of the property
guarantor tobe: mortgaged are not affected by an unregistered mortgage.

 Indemnified for the total amount of the debt,

including interest, expenses or damages, if they are
due.

 Subrogated to all the rights the creditor had against

the debtor.

 He is not prejudiced by any waiver of defense by the

principal obligor.

 Pledges created by operation of law, such as those referred

to in Articles 546, 1731, and 1994, are governed by the
foregoing articles on the possession, care and sale of the
thing as well as on the termination of the pledge. However,
after payment of the debt and expenses, the remainder of
the price of the sale shall be delivered to the obligor.

 A thing under a pledge by operation of law may be sold

only after demand of the amount for which the thing is
retained. The public auction shall take place within one
month after such demand. If, without just grounds, the
creditor does not cause the public sale to be held within
such period, the debtor may require the return of the
thing.

 With regard to pawnshops and other establishments,

which are engaged in making loans secured by pledges, the
special laws and regulations concerning them shall be
observed.

REAL ESTATE MORTGAGE

o Object: Only the following property may be the object of a

contract of mortgage:

 Immovables

 Alienable real rights in accordance with the laws,

imposed upon immovables

o Nevertheless, movables may be the object of a chattel

mortgage.

o Form: there is no form required to constitute a contract of

real estate mortgage, but in order to affect third persons,
there must be a public instrument containing the
description thereof and the same should be recorded in the
Registry of Property.

o The creditor-mortgagee has no other right than to demand

the execution and the recording of the document in which
the mortgage is formalized.

o Extent: The mortgage extends to the natural accessions, to

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

o Mortgage credit is transferable: The mortgage credit may

be alienated or assigned to a third person, in whole or in
part, with the formalities required by law.

o Pactum de non-aliendo: the owner is allowed to alienate

the immovable property mortgaged. A stipulation
prohibiting/forbidding such right is called pactum de non-
aliendo and is considered void.
  However, if the mortgage is registered (Art. 1312)
they are:

 Bound by a foreclosure sale on the property.

 Not bound to answer the deficiency.

 Unless there is novation in the person of the debtor.

CHATTEL MORTGAGE

o Chattel mortgage: personal property is recorded in

the Chattel Mortgage Register as a security for the
performance of an obligation. If the movable,
instead of being recorded, is delivered to the
creditor or a third person, the contract is a pledge
and not a chattel mortgage.

o Similarities between the three:

 Requisites in common:

 It must be constituted to secure the

fulfillment of a principal obligation.

 The mortgagor must be the absolute

owner of the thing mortgage.

 The mortgagor must have free

disposal of the property.

 Indivisibility

 Several things to one debt: partial

payment of the debt will not release
any of the thing pledged/mortgaged.

 Several things to one credit: the

partial payment of the debt
corresponding to an heir’s share of
the credit will not entitle him to
release of any of the things
pledged/mortgaged.

 Several things to several debts: if

each one thing guarantees only a
determinate portion of the credit,
there are as many
pledges/mortgages as there are
things given.

 Pactum Commissorium – stipulation

allowing the creditor, mortgage or pledgee
to appropriate or dispose of the thing – void.

 Future things – cannot be the subject of

pledge/mortgage since the
pledger/mortgagor is not the absolute owner
nor do they have free disposal of the
property.

 Third persons – are allowed to

pledge/mortgage the thing they own even if
they are not parties to the principal
obligation securedthereby.
 DISTINCTIONS:
Pledge Real Estate Chattel Mortgage
Mortgage
Real property but extends to
the natural accessions,
Personal property improvements, growing
Object susceptible of fruits, and the rents or Personal property subject
possession including income not yet received thereof.
incorporeal rights. when the obligation becomes
due, and to the amount of
indemnity from insurance or
from expropriation.
And may include after acquired
properties as per stipulation.
Consensual.

Affidavit of Good Faith*

Delivery.
Perfection
Public instrument required
to bind third parties.
Consensual but covered
by the statute of frauds.
Public instrument that is
registered in the Registry of
deeds is required to bind third
parties.
registered in the Chattel
Mortgage Registry in the
Registry of Deeds required to
bind third parties.
For vessels – registration
is with the MARINA.

For motor vehicles - report to the

LTO.
Possession Transferred to the pledgee. Retained by the mortgagor. Retained by the mortgagor.
Generally, covers only that Those indicated in the Affidavit
Principal which is stated in the deed of Good Faith unless there is
obligation That which is existing even if less than the amount stipulation as to increase in
covered at the time of the of loan. coverage which will be binding
pledge. but the security itself arises
Exception: if there is only after
stipulation to cover future amending the old contract.
advancements.
Valid as long as with
consent of the Mortgagor-owner cannot
Sale of the thing creditor/pledgee who Valid – any stipulation to the sell the property mortgaged
during the pendency shall continue in contrary is void. otherwise he can be
of the contract possession even if criminally liable under Art.
the ownership is 319 of the RPC: Removal of
transferred to Mortgaged Property.
the buyer.
Sale of the thing Done by notary public –
to answer for the public auction – Extrajudicial (Act No. Extrajudicial (Act No. 1508).
debt always extrajudicial – no 3135) or judicial
intervention of the courts. (Rule 68).
Extrajudicial – not
required, unless Required 10 days prior to sale.
stipulated.
Notice of sale to Posting in two or more
the Required – stating the Judicial Posting in 3 public public places 10 days
mortgagor/pledgor amount due. places at least 20 days prior before auction.
to sale and publication of
the notice of
sale in a
newspaper of
 general
circulation.
Creditor’s right to
excess The creditor is entitled to Creditor is not entitled to the Creditor is not entitled to the
of selling price the excess unless there is excess. excess.
over unpaid stipulation
obligation to the contrary.
Creditor can recover deficiency
Creditor’s right to The creditor is NOT entitled Creditor can recover unless the sale is covered by the
recover deficiency to recover any deficiency. deficiency except if the Recto Law (i.e.,
mortgagor is a third sale of personal property on
person (unless installment).
there is stipulation making him
liable).
Extrajudicial foreclosure:
1 year from date of foreclosure,
No right of
Except: redemption after
1. Creditor is a bank foreclosure sale.
2. Debtor is a juridical person
If the condition of the
In which case the mortgage is broken,
Redemption No right of redemption. redemption period is until redemption may be made
the registration of the by:
foreclosure sale, not
exceeding 3 months. 1. The mortgagor;
2. Person holding
Judicial foreclosure: subsequent mortgage;
3. A subsequent attaching
Equity of redemption creditor.
is until the
confirmation of sale
by
the court.