REGULATORY FRAMEWORK AND LEGAL

ISSUES IN BUSINESS
(RFB 301)

CONTRACT OF AGENCY,PLEDGE,
MORTGAGE AND ANTICHRESIS

Prepared by:
Atty. Ma. Pamela C. Castillo, CPA
 Notes on the Law on Pledge, Real Mortgage & Chattel
Mortgage

Common Provisions on Pledge and Mortgage

1. Essential Requisites common to both Pledge and Mortgage:

a. They are constituted to secure fulfillment of the principal obligation.
b. The pledgor or mortgagor is the absolute owner of the thing pledge or mortgage.
c. The person constituting the pledge or mortgage have free disposal of the their property
and in the absence thereof, that may be legally authorized for the purpose (Art. 2085);
and
d. The when the principal obligation becomes due, the things in which the pledge or
mortgage consists may be alienated for the payment of the creditor. (Art. 2087)

Note: a. Third persons who are not parties to the principal obligation may secure the latter by
pledging or mortgaging their own property (Art. 2085).
b. Any kind of obligation whether pure or conditional, including natural, voidable and
unenforceable obligations may be secured by a contract of pledge and mortgage. (Art.
2091, 2052).

2. Meaning of PACTUM COMMISSORIUM

It is a stipulation authorizing the creditor to appropriate the things given by way of pledge
and mortgage or to dispose of them. It is declared null and void by law. (Art 2088). Reason : The
amount of the loan is ordinarily much less than the value of the security.

Note: The appropriation must be automatic without need of further act on the part of the debtor.
Hence, the prohibition does not apply to:
a. Subsequent voluntary act of the debtor of making cession of the property or;
b. A promise to assign or sell said property in payment of the debt.

3. Rules on the indivisibility of Pledge and Mortgage:

a. 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;
b. Therefore, the debtor’s heirs who has paid of the debt cannot ask for the proportionate
extinguishments of the pledge or mortgage as long as the debt is not completely
satisfied;
c. Neither can the creditor’s heirs 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;
d. The above rules, however, do not apply where there being in several things given in
mortgage or pledge, each of them guarantees only a determinate portion of the credit.
In this case, the debtor shall have a right to the extinguishments of the pledge or
mortgage as the portion of the debt for each thing is especially answerable is satisfied.

Examples:
a. A borrowed from B P 10,000 and to guarantee payment, A pledge his diamond ring
worth P 4,000 and a pair of earnings worth P 6,000. if A pays P 4,000, he cannot ask
 for the return of the ring because both the ring and the earnings are given to secure
payment of the entire obligation of P 10,000. The same is true if A dies leaving W and
X as heirs and W pays P4,000 to B.

If the creditors are B and C, and A pays B P4, 000, B cannot return the ring to the
prejudice of C who has not received his share.

However, if it is agreed that the ring was given to secure the payment of P4,000 and
the earnings, the balance of P6,000 and A (or his heir W) pays P 4,000, A (or W) can
demand the return of the ring.
b. A and V are jointly liable to C in the sum of P9,000 secured by A’s ring worth P 5,000
and B’s watch worth P4,000. If A pays P5,000 he cannot demand the return of the
ring even if their liability is only joint or proportionate because pledge is indivisible.

4. Legal effect of a promise to constitute a pledge or mortgage:

It gives rise only to a personal right binding upon the parties but it creates no real right
in the property. (See Art. 2092).

PLEDGE
1. Meaning of Pledge
It is a contract by virtue of which the debtor delivers to the creditor or to the third person
a movable or instrument evidencing incorporeal rights for the purpose of securing the fulfillment
of a principal obligations is fulfilled the thing delivered shall be returned with all the fruits and
accessions.

2. Characteristics/Nature as a contract:
a. Real
b. Accessory
c. Unilateral
d. Subsidiary contracts because the obligation incurred does not arise until the fulfillment
of the principal obligation that is secured.
e. In addition to the common requisites of pledge and mortgage (Art 2085), 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.
(Art 2093).

3. Cause or Consideration in PLEDGE

Insofar as the pledgor is concerned, it is the principal obligation. But if he is the debtor
(Art 2085), the cause is the compensation stipulated for the pledge or the mere liberality of the
pledgor.

4. What are the Kinds of pledge:

a. Voluntary or conventional – one which is created by agreement of the parties; or
b. Legal – one which is created by operation of law (Art 2121)

5. Additional requirements in order that pledge shall take effect against third parties:
a. The description of the thing pledge; and
 b. The date of pledge (Art 2076)

6. May thing pledge be alienated?

Yes, provided the pledgee consents to the sale. Ownership passes to the vendee but
subject to the rights of the pledgee. (Art 2097)

7. Enumerate the rights of the Pledgee;

a. To retain the thing in his possession or in that of a third person to whom it has
delivered, until the debt is paid (Art 2099).
b. To be reimbursed for the expenses incurred in its preservation (Art 2099).
c. To compensate (set – off) the fruits, income, dividends or interests earned or produced
by the thing pledged and received with those which are due to him (Art 2102).
d. To bring the actins which pertain to the owner of the thing pledged in order to recover
if from or defend it against a third person (Art 2103).
e. To sell the thing pledged at the public auction, if without his fault, there is danger of
destruction, impairment or diminution in the value of the thing (Art 2108).
f. To claim a substitute or demand immediate payment, if he is deceived on the
substance or quality of the thing pledged (Art 2109)
g. To sell the thing pledged at public auction if the obligation secured is not paid (Art
2112).
h. To bid at the public sale (Art 2114).
i. To collect the amount that become due on a credit pledged before such credit is
redeemed.
j. To choose which one of the several thing pledged shall be sold (Art 2119) .

8. Obligations of the pledgee:

a. To take care of the thing pledge with the diligence of a good father of the family (Art
2099).
b. To answer for its loss or deterioration in the proper case;
c. Not to deposit the thing pledge with a third person unless authorized (Art )
d. To be responsible for the acts of his agents or employees with respect to the thing
pledged (Art 2100);
e. Not to use the thing pledged unless authorized or its preservation so requires (Art
2104);
f. To advise the pledgor, without delay, of any danger to the thing pledged (Art 2107).
g. To promptly advise the pledgor or owner in case of sale at public auction of the result
thereof (Art 2116); and
h. To return the thing pledged when the principal obligation is paid.

9. Conditions required in an extra – judicial foreclosure sale of the thing pledged:

a. The debt is due and unpaid
b. The sale must be at a public auction
c. There must be notice to the pledgor and owner, stating the amount due; and
d. The sale must be made with the intervention of a notary public.

Note: The pledgee may appropriate the thing pledged if after the first and second auctions, the
thing is not sold. If the creditor appropriated the thing, it shall be considered as full payment for
his entire claim. He is thus obliged to give an acquittance for the same (Art. 2115).
 The sale must be made at the public auction 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 be held.

10. Rules on the proceeds after sale of the thing pledged:

a. Price of sale more than the amount due – The debtor is not entitled to the excess,
unless otherwise agreed; and
b. Price of sale less tan the amount due – The creditor is not entitled to recover any
deficiency, notwithstanding any stipulation to the contrary. (Art. 2115) Reason: To
compel the creditor to hold an honest public sale.

Note:
1. The creditor, however, may sue on the principal obligation instead of electing
to sell the thing pledged.
2. In pledge by operation of law, after payment of the debt and expense, the
remainder of the price shall be delivered to the obligor (Arts 2121, 2122)
3. Under the Chattel Mortgage Law, the mortgagor can also recover the excess
(Act. No. 1506, Sec 14).

11. Instances of Legal Pledges or Pledges by Operation of Law:

a. Possessor in good faith – for necessary and useful expenses incurred over the thing
(Art 546);
b. Usufructuary – for taxes and extraordinary expenses (Art 612) ;
c. Bailee – For damages suffered by reason of the flaws in the thing loaned. (Arts 1944,
1951);
d. Agent – for expenses advance and damages caused by the agency (Art 1914);
e. Depositary – for the payment of what may be due him by reason of the deposit (Art
1994); and
f. Hotel Keeper – for credits for lodging and supplies furnished (Art 2004); and
g. Independent contractor – he who has executed work upon a movable has a right to
retain it by way of pledge until he is paid. (Art 1731, see also Art 1701).

In case of pledge by operation of law, the proceeds shall be applied to the debt and
expenses, the remainder of the price of the sale shall be delivered to the obligor. (Art.
2121).

The thing under 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 thing.
(Art. 2122)

12. Rights of the Pledgor:

a. TO continue to be the owner of the thing pledged, until its sale, unless it is
expropriated (Art 2103) ;
b. To demand the deposit of the thing pledged should the creditor use it without
authority, or misuse it in any other was (Art 2104);
c. To substitute the thing pledged if it is endangered without fault of the pledgee without
prejudice to the pledgee’s right to have the thing sold at public sale (Art 2108).
 d. To bid and have preference at the foreclosure sale if he should offer the same terms
as the bidder (Art 2113) His offer is not valid however if he is the only bidder. All
bids shall offer to pay the purchase price in cash. If a bid other than for cash is
accepted, the pledgee is deemed to have received the purchase price in cash, as far
as the pledgor or owner is concerned. (Art. 2114). The sale of the thing pledged
extinguishes the principal obligation, whether or not the proceeds are equal to the
amount of the principal obligation, interest and expenses in proper case; and

e. To demand the return of the thing pledged upon the extinction of the principal
obligation. (Art 2085 (1))

Note: A statement in writing by the pledgee that he renounces or abandons the pledge
is sufficient to exinguish the pledge. For this purpose, neither the acceptance by the
pledgor or owner, nor the return of the thing pledged is necessary. The pledgee
becomes a depositary or bailee.

13. Obligations of the pledgor:

a. To notify the pledgee of any flaw or defect of the thing pledged known to him;
otherwise he answers for damages suffered by the pledgee (Art 2101);
b. To reimburse the pledgee for expenses made for its preservation (Art 2099); and
c. To fulfill his principal obligation (Art 2085)

14. Principles in Pledge:

1. As a general rule, the pledge extends to the interest and
earnings of the thing pledged, unless there is a stipulation to
the contrary. (Art. 2102)
2. Unless the pledge is expropriate, the debtor continues to be the
owner thereof. Nevertheless, the creditor may bring actions
which pertains to the owner of the thing pledged in order to
recover it from or defend it against third person. (Art. 2104)
3. The creditor cannot use the thing pledged without the consent
of the owner, and if he should do so, or should misuse t he
thing in any other way, the owner may ask the Court that it be
JUDICIALLY OR EXTRA-JUDICIALLY DESPOSITED. However,
when the preservation of the thing pledged requires its use, it
must be used by the creditor but only for that purpose. (Art.
2104)
4. The remedy of the pledgor should the thing pledgedd be in
danger of being lost or impaired through the negligence or
willful act of the pledgee is to require the thing to be deposited
with a third person. (Art. 2106)
5. The creditor who is deceived on the substance or quality of the
thing pledged may either (1) claim another thing instead; or
demand immediate payment of the principal obligation (Art.
2109).

15. Remedies should there be reasonable grounds to fear the destruction or impairment of the
thing pledged, without fault of the pledgee:
 - The pledgee is bound to advise the pledgor, without delay or danger to the thing
pledged.
- The pledgor, on the other hand, may demand the return of the thing, upon offering
another in pledge provided the latter is of the same kinf as the former and not of
inferior quality and without prejudice to the RIGHT OF THE PLEDGEE to cause the sale
of the thing pledged at public sale. The proceeds of the auction sale shall be security
for the principal obligation in the same manner as the thing originally pledged. (Arts.
2107; 2108). Between the right of the pledgor to demand the return of the thing
pledged and the right of the pledgee to cause it to be sold at public auction, the latter
prevails.

16. Causes for the extinguishments of the pledge:

a. Return of the thing pledged by the pledgee to the pledgor or owner, any stipulation
to the contrary being void (Art 2110);
b. Renunciation or abandonment executed in writing by the pledgee even without return
of the thing (Art 111)
c. Destruction or loss of the thing pledged;
d. Extinction of the principal obligation (by payment or sale of the thing pledged); and
e. Other causes of extinguishments or ordinary obligations (Art 1231)

SALIENT FEATURES OF PRESIDENTIAL DECREE NO. 114 otherwise known as

REGULATING THE ESTABLISHMENT AND OPERATION OF PAWNSHOPS
Background:
• Pawnshops provide an additional source of credit especially for small borrowers left
unserved by the banking and other financial institutions in the country;
• There is no specific law in the Philippines that governs pawnshop establishments,
particularly providing definite and uniform standards for their operation.
Declaration of Policy:

– It is hereby declared the policy of the State to regulate the establishment of

pawnshops and to place their operation on a sound and stable basis to derive the
optimum advantages from them as an additional source of credit;
- to prevent and mitigate, as far as practicable, practices prejudicial to public interest;
and to lay down the minimum requirements and standards under which they may be
established and do business. ( Sec. 2)

Definition of Terms:
• “Pawnshop” shall refer to a person or entity engaged in the business of lending money
on personal property delivered as security for loans and shall be synonymous, and may
be used interchangeably with pawnbroker or pawn brokerage.
• “Pawner” shall refer to the borrower from a pawnshop.
• “Pawnee” shall refer to the pawnshop or pawnbroker.
• “Pawn” is the personal property delivered by the pawner to the pawnee as security for a
loan.
• “Pawn ticket” is the pawnbrokers’ receipt for a pawn. It is neither a security nor a
printed evidence of indebtedness.
 • “Property” shall include only such personal property as may actually be delivered to the
control and possession of the pawnshop: Provided, however, That certain specified
chattels such as guns, knives and similar weapons whose reception in pawn is expressly
prohibited by other laws or regulations shall not be included.

A pawnshop may be established as a single proprietorship, partnership or corporation. (SEC. 4)

Any person or entity desiring to engage in the pawnshop business shall (a) register with the
Bureau of Commerce ( Department of Trade and Industries) in the case of single proprietorship
or the Securities and Exchange Commission in the case of a corporation or any other
association ( partnership) and (b) secure a license from the appropriate city or municipality
having territorial jurisdiction over the place of establishment and operation (business permit).

SEC. 6. Requirement of registration with the Central Bank. – Any individual, corporation, or
association duly registered and licensed to engage in the pawnshop business shall file
an information sheet, under oath, with the Central Bank before commencement of
actual operations: Provided, however, That pawnshops duly licensed and operating before the
approval of this Decree shall, within six months from the date of effectivity of the same, register
with the Central Bank. For this purpose, the Central Bank shall furnish pawnshops, upon request,
with necessary copies of the prescribed information sheet.

Requirement of registration with the Central Bank – Any individual, corporation, or association
duly registered and licensed to engage in the pawnshop business shall file an information sheet,
under oath, with the Central Bank before commencement of actual operations. (Sec. 6)

The minimum paid-in capital of any pawnshop which may be established after the effectivity
of this Decree shall be one hundred thousand pesos (P100,000.00):

Citizenship requirement. Upon the effectivity of this Decree, only Filipino citizens may establish
and own a pawnshop organized in the form of a single proprietorship: Provided, however, That
in the case of a partnership, at least seventy per cent (70%) of its capital shall be
owned by Filipino citizens: Provided, further That in the case of a corporation, at least
seventy per cent (70%) of the voting capital stock shall be owned by citizens of the
Philippines, or if there be no capital stock, at least seventy per cent (70%) of the
members entitled to vote, shall be citizens of the Philippines.

SEC. 9. Amount of loan. Pawnshops may grant such amount of loans as may be agreed upon
between the parties: Provided, That the amount of loan shall, in no case, be less than thirty
per cent (30%) of the appraised value of the security offered for the loan unless the pawner
manifests in writing the desire to borrow a lesser amount.

SEC. 10. Rates of interest. – No pawnshop shall directly or indirectly stipulate, charge, demand,
take or receive any higher rate or greater sum or value for any loan or forbearance than the
rate allowed by the Usury Law for such transactions. It shall be unlawful for a pawnshop to
divide the pawn offered by a pawner in order to collect greater interest and/or to require the
pawner to pay an additional charge as insurance premium for the safekeeping and conservation
of the article pawned. In addition to interest charges, pawnshops may impose a Maximum
service charge of five pesos (P5.00), but in no case to exceed one per cent (1%) of the
principal loan.

SEC. 13. Redemption. – The pawner who fails to pay his obligation on the date it falls due
may, within ninety days from the date of maturity of the obligation, redeem the pawn
by payment of the principal of the debt with interest: Provided, however, That for the purpose of
computing interest due after maturity of the obligation, the basis shall be the sum of the
principal obligation and interest earned at the time the obligation matured.

SEC. 14. Disposition of pawn on default of pawner. – In the event the pawner fails to redeem
the pawn within ninety days from the date of the maturity of the obligation in accordance with
the preceding section, the pawnbroker may sell or otherwise dispose of any article
taken or received by him in pawn: Provided, however, That the pawner shall be duly
notified of such sale on or before the termination of the ninety-day period, the
notice particularly stating the date, hour, and place of sale.

SEC. 15. Public auction of pawned articles. No pawnbroker shall sell or otherwise dispose of any
article or thing taken or received in pawn or pledge except at (1) public auction in his place of
business as such pawnbroker or in any other public place within the territorial limits of the
municipality or city where the pawnshop has its place of business, (2) under the control and
direction of an auctioneer with license duly issued by the corresponding authorities, (3) nor shall
any such article or thing to be sold or disposed of unless said pawnbroker has published a notice
once in at least two daily newspapers printed in the city or municipality during the week preceding
the date of such sale.

In remote areas where newspapers are neither published nor circulated, notice by
newspaper publication shall be substituted by posting notices in conspicuous public
places within the territorial limits of the city or municipality where the pawnshop has
its place of business. Said notice, whether published or posted, shall be in English, and either
in Pilipino or in the local dialect, and shall contain the name of the pawnshop, its owner, address
of the establishment, hour, and the date of the auctions sale. (SEC.15)

Pawnshop business is under the regulatory power of the Central bank of the Philippines. (Sec.
17)

REAL MORTGAGE
1. Define mortgage:
Mortgage otherwise known as Real Estate mortgage or Real Mortgage is a contract
whereby the debtor secures to the creditor the fulfillment of the principal obligation, especially
subjecting to such security immovable property or real rights over immovable property in case
the principal obligation is not complied with at the time stipulated:

2. Characteristics as a Contract:
a. Real
b. Accessory
c. Unilateral; and
 d. Subsidiary contract

3. Distinguish Mortgage from Pledge

a. Pledge is constituted on movables (Art 2094), while mortgage on immovables (Art
2124);
b. In pledge, the property is delivered to the pledgee, or by common consent to third
person (Art 2093), while in mortgage, delivery is not necessary; and
c. Pledge is not valid against third persons unless a description of the thing pledged and
the date of the pledge appear on a public instrument (Art 2096), while mortgage is
not valid against third persons if not registered even if embodied in a public
instrument. (Art 2125).

Note: Both are extinguished by the fulfillment of the principal obligation and by the destruction
of the property pledged or mortgaged.

4. Cause or consideration in mortgage:

Its consideration is that the principal contract from which it receives its life, although the
obligation secured is incurred by a third person, that is, the principal debtor is other than the
mortgagor.

5. Kinds of Mortgage:
a. Voluntary – one which is agreed to between the parties or constituted by the will of
the owner of the property on which it is created (Art 138, Spanish Mortgage Law)
b. Legal – one required by law to be executed on favor of certain persons (Art 2125, par
2; see also Arts 2082, 2083)
c. Equitable – one which, although it lacks the proper formalities of a mortgage, show
the intention of the parties to make the property as a security for a debt.

6. Property which may be object of Mortgage:

a. immovables; and
b. Inalienable real rights in accordance with laws, imposed upon immovables (Art 2124)

WHAT CONSTITUTE IMMOVABLE?

Immovables
• The following are immovable property:
• Land, buildings, roads and construction of all kinds adhered to the soil.
• Trees, plants and growing fruits, while they are attached to the land or form an integral
part of an immovable.
• Everything attached to an immovable in fixed manner, in such a way that it cannot be
separated there from without breaking the material or deterioration of the object.
• Statues, reliefs, painting or other objects for use or ornamentation, placed in buildings
or on lands by the owner of the immovable in such a manner that it reveals the
intention to attach them permanently to the tenements.
• Machinery, receptacles, instruments or implements intended by the owner of the
tenement for an industry or works which may be carried on in a building or on a piece of
land, and which tend directly to meet the needs of the said industry or works.
 • Animal houses, pigeon houses, beehives, fishponds or breeding places of similar nature,
in case their owner has placed them or preserves them with the intention to have them
permanently attached to the land, and forming a permanent part of it; the animals in
these places are included.
• Fertilizer actually used on a piece of land.
• Mines, quarries, slag dumps, while the manner thereof forms part of the bed, and
waters either running or stagnant.
• Docks and structures which, though floating, are intended by their nature and object to
remain at a fixed place on a river, lake or coast.
• Contracts for public works, and servitudes and other real rights over immovable
property. (Art. 415, Civil Code)

7. Effects of a Mortgage:
a. It creates a real right, i.e., it 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);
b. The mortgage (creditor) may, therefore demand payment from any possessor of the
mortgaged property (Art 2129);
c. He may alienate or assign the mortgage credit (his right as mortgagee) to a third
person (Art 2128);
d. The mortgage does not extinguish the title of the mortgagor (debtor) who does not,
therefore, lose his right to dispose. Indeed, the law considers void any stipulation
forbidding the owner from alienating the property mortgaged. (Art 2130)

8. Scope of Mortgage:
It extends to and includes the following:
a. Natural accessions;
b. Improvements (even if subsequently made);
c. Growing fruits;
d. Rents or income (belonging to the mortgagor) not yet received when the obligation
becomes due;
e. Proceeds of insurance received or owing from insurance of the property;
f. Amounts received or owing in virtue of the expropriation of the properly for public sale
(Art 2127)

Note:
1. The above are deemed included in the mortgage unless expressly excluded;
2. But the mortgage does not extend to improvements made by a third person
subsequent to the mortgage and after the property has passed to him.

9. Define Foreclosure:
Foreclosure is a remedy available to the mortgagee by which he subject the mortgaged
property to the satisfaction of the obligation to secure which the mortgage was given through the
sale of the property at public auction and the application of the proceeds to the payment of his
claims.

10. Kinds of Foreclosure:

 a. Judicial Foreclosure – A mortgage may be foreclosed judicially by bringing an action
for that purpose in the Regional Trial Court of the province or city the real property is
located or any part thereof lies; and

b. Extra – judicial foreclosure – A mortgage may be foreclosed extra-judicially where

there is inserted in the contract a clause giving the mortgagee the prior upon default
of the debtor to foreclose the mortgage by an extra-judicial sale of the mortgaged
property (Sec 1, Art No. 3155 as amended by Act no 4148).

11. Define Redemption

Redemption may be defined as a transaction by which the mortgagor reacquires or buys

back the property, which may have been passed under the mortgage or divests the property of
the lien, which the mortgage may have created.

12. Kinds of Redemption:

a. Equity of Redemption – the right of the 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. In judicial foreclosure, the mortgagor may exercise
his equity of redemption before and not after the sale is confirmed by the court; and

b. Right of Redemption – the right of the mortgagor to redeem the mortgaged property
with a certain period after it was sold for the satisfaction of the mortgaged debt. In
all cases of extra – judicial sale, the mortgagor may redeem the property at any time
within the term of one year from and after the date of the registration of the sale. In
judicial foreclosure, the general rule is that the mortgagor cannot exercise his right of
redemption after the sale is confirmed by an order of the Court.

Rules on Foreclosure

VALIDITY AND EFFECT OF FORECLOSURE

➢ The right to foreclose the mortgage and to have the
property seized and sold with a view to applying the proceeds to the payment of
the principal obligation

> A mortgage contract may contain an acceleration clause—

on occasion of the mortgagor’s default, the whole sum remaining unpaid automatically
becomes due and payable

> Essence of mortgage contract—property has been

identified and separated from a mass of the property of
the mortgagor to secure the payment of a principal obligation
>Once the proceeds have been applied to the payment of
the principal obligation, the debtor cannot anymore be asked to pay unless there is deficiency.
GROUNDS FOR FORECLOSURE
A. Failure to pay the principal obligation on maturity date.
B. Violation of any condition, stipulation or warranty of the mortgage contract by the
debtor/debtor
C. Kinds of Foreclosure:
D. Judicial Foreclosure – A mortgage may be foreclosed judicially by bringing an action for
that purpose in the Regional Trial Court of the province or city the real property is
located or any part thereof lies as outlined under Sections 4 and 70 of the Revised Rules
of Court. If there is deficiency in the public sale, the mortgagee can petition the court
for a deficiency judgment and collect the unpaid balance from the debtor.

A third person who owns the land mortgaged but merely secured the principal obligation shall
not be liable for the deficiency of the debtor. The latter shall be personally liable thereof.

Rule 68 Rules of Court

1. The mortgagee should file a petition for judicial foreclosure in the court which has
jurisdiction over the area where the property is situated
2. The court will conduct a trial. If, after trial, the court finds merit in the petition, it will
render judgment ordering the mortgagor/debtor to pay the obligation within a period not
less than 90 nor more than 120 days from the
finality of judgment.
3. Within this 90 to 120 day period, the mortgagor has the chance to pay the obligation
to prevent his property from being sold. This is called the EQUITY OF REDEMPTION
PERIOD.
4. If mortgagor fails to pay within the 90-120 days given to him by the court, the property
shall be sold to the highest bidder at public auction to satisfy the judgment.
5. There will be a judicial confirmation of the sale.
After the confirmation of the sale, the purchaser shall be entitled to
the possession of the property, and all the rights of the
mortgagor with respect to the property are severed or terminated.
The equity of redemption period actually extends until the sale is confirmed. Even
after the lapse of the 90 to 120 day period, the mortgagor can still redeem the property, so
long as there has been no confirmation of the sale yet. Therefore, the equity of
redemption can be considered as the right of the mortgagor to redeem the property
BEFORE the confirmation of the sale.
a. After the confirmation of the sale, the mortgagor
does not have a right to redeem the property anymore. This is the general rule
in judicial foreclosures – there is no right of redemption after the sale is confirmed.

The proceeds of the sale of the property will be disposed as follows:

a. First, the costs of the sale will be deducted from the price at which the property was
sold
b. The amount of the principal obligation and interest will be deducted.
c. The junior encumbrances will be satisfied.
d. If there is still an excess, the excess will go back to the mortgagor. In mortgage, the
mortgagee
DOES NOT get the excess (unlike in pledge).

If there is a deficiency, the mortgagee can ask for a DEFICIENCY JUDGMENT which
can be imposed on other property of the mortgagor. The rule on extrajudicial
foreclosure is different. The mortgagee must go to court and file another action for the
collection of the deficiency.
The proceeds from the judicial sale of foreclosed property shall be applied as follows:
a. To the total amount of the debt.
b. To the costs of the sale.
c. To the claims of subsequent mortgagees.
If there is any excess from the proceeds of the sale, such will be returned to the
debtor/mortgagor.
Right of Redemption in Judicial Foreclosure
The right to redeem the mortgaged property is exercised by the judgment debtor or
mortgagor at anytime before the confirmation of the sale. Generally, the court is given a
period of ninety (90) days to confirm the sale. The generally rule is the mortgagor cannot
exercise his right of redemption after the sale is confirmed.

WHY ONE WOULD SHY AWAY FROM A JUDICIAL FORECLOSURE?

1. Judicial foreclosure is costly, since the parties would need to hire lawyers. But then
again, the present rules provide
that court fees are needed to be paid in extrajudicial proceedings also.

2. The parties have very little control over the sale because there is court
intervention.

3. More susceptible to stalling/dilatory tactics by the mortgagor, since he can file

all sorts of motions in court to prevent the sale.

4. It is more efficient to have extrajudicial proceedings since for judicial proceedings,

there is a minimum lapse of time of 6 years.

Extra –Judicial Foreclosure – A mortgage may be foreclosed extra-judicially where there is

inserted in the contract a clause giving the mortgagee the prior upon default of the
debtor to foreclose the mortgage by an extra-judicial sale of the mortgaged property (Sec
1, Art No. 3155 as amended by Act no 4118).
(UNDER ACT 3135/4118 AND SC ADMINISTRATIVE CIRCULAR)

WHERE SHOULD AN EXTRAJUDICIAL FORECLOSURE SALE BE DONE?

Sale cannot be made legally outside the city or province

wherein the property sold is situated. In case the place
has been stipulated, it shall be made in the
municipal building of the said place.

NOTICE OF THE SALE

1. POSTING of the notices of the sale FOR NOT LESS THAN 20 DAYS in at least 3
public places of the municipality or city where the property is situated.
2. IF THE PROPERTY IS WORTH MORE THAN P400, such notice shall also be
published once a week at least 3 consecutive weeks in a newspaper of general circulation
in the municipality or city.
(You don't need to count 6 days between publications.)
NOTE: there is jurisprudence, which held that
there is sufficient notice when there is publication

• PUBLIC AUCTION/SALE

1. Time shall be between 9AM and 4PM. It shall be made in

the direction of the sheriff of the province, the justice or auxiliary justice of the
peace of the municipality, or of the notary public
of the municipality, who shall be
compensated with P5 for each day of actual work or performance in addition to
his expenses.

2. Anyone may bid at the sale, unless there are stipulations in the agreement.

POSSESSION
> Upon foreclosure, if the mortgagor is in possession of the
property, he will retain possession during the redemption period—1 year from the date of
sale

> If the winning bidder wants possession during the redemption period, he may
execute a bond in the amount equivalent to the use of the property for 12 months, to
indemnify the debtor in case it be shown that the sale was made without violating the mortgage
or without complying with the requirements of the Act. Upon approval, a writ of possession will
be issued in his favor.

> If the winning bidder is able to secure possession, the mortgagor may petition that
the sale is set aside and the writ of possession be cancelled on the ground that he
wasn't in default or that the sale wasn't made in
accordance with Act 3135. This must be filed within 30 days from issuance of the writ of
possession.

RIGHT OF REDEMPTION

➢ The debtor, his successors-in-interest, or any judicial creditor or judgment creditor

of said debtor, or any person having a lien on the property subsequent to the mortgage
or deed of trust under which the property is sold, may
redeem the same at any time WITHIN THE TERM OF 1 YEAR FROM AND AFTER
THE DATE OF THE SALE and such will be governed by the Rules of Court. –registration
of the sale.

➢ When the property is redeemed after the purchaser has been given
possession, the redeemer is entitled to deduct
from the price of redemption any rentals that said purchaser may have
collected in case the property or any part thereof was rented. If the
property was used as his own dwelling, it being town property, or used it
gainfully, it being rural property, the redeemer may deduct from the price
the interest of 1% per month provided in the Rules of Court
CHATTEL MORTGAGE ( Act No. 1508, as amended).
1. Define 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 (Art 2140).

2. Characteristics as a Contract:
a. accessory
b. unilateral
c. formal contract
d. if the chattel mortgage (or real mortgage) is not recorded, the mortgagee acquires
the right to demand registration of the contract. (Art 2125)

3. Laws principally governing chattel mortgages:

a. Chattel Mortgage Law (Act No. 1508)
b. Civil Code
c. Revised Administrative Code; and
d. Revised Penal Code

4. Similarities between pledge and chattel mortgage:

a. both are executed to secure performance of a principal obligation;
b. both are constituted only on personal property;
c. both are indivisible
d. both are constitute a lien on the property
e. In both cases, the creditor cannot appropriate the property to himself in payment of
the debt;
f. In both cases, when the debtor defaults, the property must be sold for the payment
of the creditor; and
g. Both are extinguishments by the fulfillment of the principal obligation and by the
destruction of the property pledged or mortgaged.

5. Distinguish chattel mortgage from pledge:

a. In chattel mortgage, the delivery of the personal property to the mortgagee is not
necessary, while in pledge, such delivery is necessary;
b. In chattel mortgage, the registration of the same in the Chattel Mortgage Register is
necessary for its validity, while in pledge, registration in the Registry of Property is not
necessary.
 c. The procedure for the sale of the thing given as a security is different. In chattel
mortgage, the procedure is found in Section 14 of Act No. 1508, as amended, while
in pledge, it is found in Article 2112 of the Civil Code.
d. In chattel mortgage, the excess over the amount due after foreclosure goes to the
debtor (Art No. 1508, Section 14), while in pledge, if the property is sold, the debtor
is not entitled to the excess unless it is otherwise agreed (Art 2115) or except in the
case of a legal pledge (Art 2121) and;
e. In chattel mortgage, the creditor is entitled to recover any deficiency except if the
chattel mortgage is a security for the purchase of personal property in installments,
while in pledge, the creditor is not entitled, any stipulation to the contrary
notwithstanding (Art 2115).

6. Object of Chattel Mortgage Contract:

Only movable or personal properties such as:
a. Shares of stock (the mortgage to be registered both in Chattel Mortgage Registries of
the province where the mortgagor resides, and the province where the corporation
has its principal business);
b. Interest in business;
c. Growing crops;
d. Large cattles;
e. Vehicles (the mortgage to be registered also with the Land Transportation Office); and
f. Vessels (the mortgage to be registered with the Office of the Philippine Coast Guard
of the Port of Documentation of such vessels. (Pres. Decree No. 1521, Sec. 3 9a)).
g. House built on rented land but as between the parties only under the doctrine of
estoppel; and
h. House to be demolished and portable nipa huts for what are really mortgaged in this
case are the materials thereof and they are, therefore, personal property.

Note: Growing crops and large cattle are considered personal property under the Chattel
Mortgage Law (Art 1508 Sec 7). They cannot however, be the object of a contract of pledge
because they are considered immovable under the Civil Code, which principally governs pledge.

7. Extent or scope of Chattel Mortgage:

It covers only property described in the contract, and excludes like or substituted property
thereafter acquired by the mortgagor, notwithstanding any thing in the contract to the contrary
(Art No. 1508 Sec 7). Exception: In this case of stock or merchandise contained in drugstores,
grocery stores, etc. which are constantly sold and substituted with new stock.

8. What is an Affidavit of Good Faith?

The Affidavit of Good Faith is an oath in a contra t 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 purpose and that the same is just and valid obligation
and one not entered into for the purpose of fraud. (Section 5)

Note: The absence of the affidavit vitiates a mortgage only as against third persons without
notice, like creditors and subsequent encumbrances.

9. Who may exercise right of redemption when condition of the chattel mortgage is broken:
 a. The mortgagor;
b. A person holding a subsequent mortgage;
c. A subsequent attaching creditor

The redemption is made by paying or delivering to the mortgage the amount due on such
mortgage and the costs and expenses incurred by such breach of condition before the sale
thereof. (Section 13).

10. Kinds of Foreclosure of Chattel Mortgage:

a. Judicial Foreclosure – the mortgagee institutes an action in court;
b. Extra-judicial Foreclosure – The sale is made by the mortgagee himself when
authorized by the Chattel mortgage contract or by special law.

11. How proceeds of the foreclosure be applied?

To the payment of the following in their order:
a. Costs and expenses of keeping and sale;
b. Payment of the obligation secured by the mortgage;
c. Claims of persons holding subsequent mortgages in their order; and
d. The balance, if any. Shall be paid to the mortgagor, or in person holding under him.

END