Since 1977
Regulatory Framework for Business Transaction
RFBT.2904- CREDIT TRANSACTION
CREDIT TRANSACTIONS
PROVISIONS COMMON TO PLEDGE AND
20 IO NG
MORTGAGE
The following requisites are essential to the contracts of pledge
and mortgage: (2085)
1. That they be constituted to secure the fulfillment of a
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principal obligation. Hence, it is also of the essence of
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these contracts that when the principal obligation becomes
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due, the things in which the pledge or mortgage consists
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may be alienated for the payment to the creditor. (2087)
2. That the pledgor or mortgagor be the absolute owner of
the thing pledged or mortgaged;
3. That the persons constituting the pledge or mortgage have
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the free disposal of their property, and in the absence
thereof, that they be legally authorized for the purpose.
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4. Third persons who are not parties to the principal
obligation may secure the latter by pledging or mortgaging
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their own property.
• A pledge or mortgage cannot exist without a valid
obligation and may be constituted to a voidable or an
unenforceable contract as well as natural obligation
• The creditor cannot appropriate the things given by way
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of pledge or mortgage, or dispose of them. Any
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stipulation to the contrary is null and void. (2088)
(pactum commissorium)
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Act prohibited:
1. Creditor cannot appropriate to himself the thing given
to him by way of pledge or mortgage
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2. Creditor cannot dispose of the things pledges or
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mortgaged.
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Reason for prohibition: Contrary to good morals and public
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policy (Report, Code Commission, P.156)
Note: The creditor is entitled only to move for the public
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sale of the thing pledged or mortgaged, in order to satisfy
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his claims out of the proceeds thereof.
• 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. (2089)
• The indivisibility of a pledge or mortgage is not affected by
the fact that the debtors are not solidarily liable. (2090)
• The contract of pledge or mortgage may secure all kinds of
obligations, be they pure or subject to a suspensive or
resolutory condition. (2091)
• A promise to constitute a pledge or mortgage gives rise
only to a personal action between the contracting parties,
without prejudice to the criminal responsibility incurred by
him who defrauds another, by offering in pledge or
mortgage as unencumbered, things which he knew were
subject to some burden, or by misrepresenting himself to be
the owner of the same. (2092)
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PLEDGE
• 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.
(2093)
• Object of pledge
a. All movables which are within commerce may be
pledged, provided they are susceptible of possession.
(2094)
b. 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 be
indorsed. (2095)
•
Requisites of pledge to bind third person (2096)
It must appear in a public instrument
a. A description of the thing pledged
b. Date of the pledge
• With the consent of the pledgee, the thing pledged may
be alienated by the pledgor or owner, subject to the
pledge. The ownership of the thing pledged is transmitted to
the vendee or transferee as soon as the pledgee consents to
the alienation, but the latter shall continue in possession.
(2097)
•
The contract of pledge gives a right to the creditor to retain
the thing in his possession or in that of a third person to
whom it has been delivered, until the debt is paid. (2098)
• 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 provisions of this Code. (2099)
• 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.
(2100)
• 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. (2101)
• 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. (2102)
• 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
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EXCEL PROFESSIONAL SERVICES, INC.
against a third person. (2103)
• 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. (2104)
• 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. (2105)
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• 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.
(2106)
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• Right of the pledgor - to substitute thing pledged; Right of
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the pledge – to cause the same to be sold at a public sale
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a. The pledgor has reasonable grounds to fear the
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destruction or impairment of the thing pledged
b. There is no fault on the part of the pledgee,
c. The pledgor is offering in place of the thing another
thing in pledge which is of the same kind and quality as
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the former
d. The pledge does not choose to exercise his right to
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cause the thing pledged to be sold at public auction.
• If, without the fault of the pledgee, there is danger of
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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
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originally pledged. (2108)
• If the creditor is deceived on the substance or quality of the
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thing pledged (2109)
a. To either claim another thing in pledge
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b. To demand immediate payment of the principal
obligation.
• If the thing pledged is returned by the pledgee to the
pledgor or owner, the pledge is extinguished. Any
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stipulation to the contrary shall be void. If subsequent to the
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perfection of the pledge, the thing is in the possession of the
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pledgor or owner, there is a prima facie presumption that
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the same has been returned by the pledgee. This same
presumption exists if the thing pledged is in the possession
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of a third person who has received it from the pledgor or
owner after the constitution of the pledge. (2110)
• A statement in writing by the pledgee that he renounces or
abandons the pledge is sufficient to extinguish the pledge.
For this purpose, neither the acceptance by the pledgor or
owner, nor the return of the thing pledged is necessary, the
pledgee becoming a depositary. (2111)
• 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 be held. 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. (2112)
• At the public auction, the pledgor or owner may bid. He
shall, moreover, have a better right if he should offer the
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same terms as the highest bidder. (2113)
Foreclosure sale
Pledge
a. Excess – The debtor is not entitled to excess except if there
is stipulation.
b. Deficiency – Creditor is not entitled to recover the
deficiency. Any stipulation is void.
Chattel mortgage
a. Excees – The mortgagor is entitled to excess
b. Deficiency – The mortgagee is entitled to recover the
deficiency except in case of foreclosure of chattel mortgage
on the thing sold on installment when the vendee’s failed to
pay covering two or more installment. (Recto law).
Real Estate Mortgage
a. Excess – The mortgagor is entitled to the excess.
b. Deficiency – The mortgagee is entitled to recover the
deficiency.
Antichresis
a. Excess – The mortgagor is entitled to the excess.
b. Deficiency – The mortgagee is entitled to recover the
deficiency.
• 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. (2114)
• 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 the
contrary. (2115)
• After the public auction, the pledgee shall promptly advise
the pledgor or owner of the result thereof. (2116)
• 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. (2117)
• 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.
(2118)
• If 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. He may demand the sale of only as many of
the things as are necessary for the payment of the debt.
(2119)
• 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. (2121)
• A thing under a pledge by operation of law may be sold
only after demand of the amount for which the thing is
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EXCEL PROFESSIONAL SERVICES, INC.
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.
(2122)
• Special laws govern the pawnshops and other
establishments, which are engaged in making loans
secured by pledges and subsidiarily by the civil code.
(2123)
REAL ESTATE MORTGAGE
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• Only the following property may be the object of a contract
of mortgage: (2124)
1. Immovables;
2. Alienable real rights in accordance with the laws,
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imposed upon immovables.
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3. Movables may be the object of a chattel mortgage.
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It is indispensable, in order that a mortgage may be validly
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constituted, that the document in which it appears be
recorded in the Registry of Property. If the instrument is not
recorded, the mortgage is nevertheless binding between the
parties. (2125)
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• The persons in whose favor the law establishes a mortgage
have no other right than to demand the execution and the
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recording of the document in which the mortgage is
formalized.
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• 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. (2126)
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• The mortgage extends to (2127)
a. Natural accessions,
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b. Improvements,
c. Growing fruits,
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d. The rents or income not yet received when the
obligation becomes due,
e. To the amount of the indemnity granted or owing to the
proprietor from the insurers of the property mortgaged,
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f. In virtue of expropriation for public use, with the
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declarations, amplifications and limitations established
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by law, whether the estate remains in the possession of
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the mortgagor, or it passes into the hands of a third
person.
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The mortgage credit may be alienated or assigned to a third
person, in whole or in part, with the formalities required by
law. (2128)
• The creditor may claim from a third person in possession of
the mortgaged property, the payment of the part of the
credit secured by the property which said third person
possesses, in the terms and with the formalities which the
law establishes. (2129)
• A stipulation forbidding the owner from alienating the
immovable mortgaged shall be void. (2130)
ANTICHRESIS
By the contract of antichresis the creditor acquires the right to
receive the fruits of an immovable of his debtor, with the
obligation to apply them to the payment of the interest, if
owing, and thereafter to the principal of his credit. (2132)
• The actual market value of the fruits at the time of the
application thereof to the interest and principal shall be the
measure of such application. (2133)
• The amount of the principal and of the interest shall be
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ATTY. ONG – OCT 2020
specified in writing; otherwise, the contract of
antichresis shall be void. (2134)
• The creditor is obliged to pay the taxes and charges upon
the estate unless there is a stipulation to the contrary. (2135)
He is also bound to bear the expenses necessary for its
preservation and repair.
The sums spent for the purposes stated in this article shall
be deducted from the fruits.
• The debtor cannot reacquire the enjoyment of the
immovable without first having totally paid what he owes
the creditor.
But the latter, in order to exempt himself from the
obligations imposed upon him by the preceding article, may
always compel the debtor to enter again upon the enjoyment
of the property, except when there is a stipulation to the
contrary. (2136)
• The creditor does not acquire the ownership of the real
estate for non-payment of the debt within the period agreed
upon. Every stipulation to the contrary shall be void. But
the creditor may petition the court for the payment of the
debt or the sale of the real property. In this case, the Rules
of Court on the foreclosure of mortgages shall apply. (2137)
• The contracting parties may stipulate that the interest upon
the debt be compensated with the fruits of the property
which is the object of the antichresis, provided that if the
value of the fruits should exceed the amount of interest
allowed by the laws against usury, the excess shall be
applied to the principal. (2138)
CHATTEL MORTGAGE
• By a 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. (2140)
• The provisions of this Code on pledge, insofar as they are
not in conflict with the Chattel Mortgage Law shall be
applicable to chattel mortgages. (2141)
Requisites of a chattel mortgage
1. Constituted to secure the fulfillment of a principal
obligation.
2. The mortgagor be the absolute owner of the thing
mortgaged.
3. Person constituting the mortgage must have free disposal of
his property, and in the absence thereof, that he be legally
authorized for the purpose.
4. That the document in which the mortgage appears be
recorded in the chattel mortgage register. (Standard Oil vs
Jaramillo, 44 Phil 630)
Characteristic of chattel mortgage
1. Accessory
2. Unilateral
3. Indivisible
4. Create real right
5. It does not convey dominion but is only a security (In re:
Du Tec Chuan, 34 Phil 488)
Distinction between pledge and Chattel mortgage
Pledge Chattel mortgage
The subject matter of The subject matter of chattel
pledge must be delivered to mortgage is not required to
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the creditor or third person
by common agreement
There must be a Public
instrument indicating
therein the description of
the thing pledge and the
date
The deficiency cannot be
recovered.
The excess of the proceed is The excess belongs to the
be deliver to the creditor
It must be Register to the
chattel mortgage registry
and there must be affidavit
of good faith
The deficiency can be
recovered except in case of
Recto law
4. If the thing or subject matter of the pledge is sold for an
amount in excess of the obligation, the pledgor becomes, as
a matter of right, entitled to the excess.
a. In case of voluntary pledge.
b. In case of legal pledge.
c. Both in cases of voluntary and legal pledge.
d. Neither in voluntary and legal pledge.
5. D borrows from C P400,000 and delivers his car to the
latter by way of chattel mortgage. The contract between D
and C is –
a. A pledge

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retained by the pledgee, mortgagor even if there is no b. A chattel mortgage
except: stipulation to that effect c. Either a pledge or chattel mortgage according to the
a.) by stipulation; b.) legal choice of D.
pledge d. Either a pledge or chattel mortgage according to the

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Pledgee may appropriate Mortgagee cannot choice of C.

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the thing pledged, if the appropriate the thing 6. In a contact of pledge if the obligation is not paid, which of
these is a correct statement?

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same is not sold in two mortgaged.

R AC .H.
public auctions a. If object of the pledge is sold at public auction by a
notary public and there is an excess from that of the
Distinction between Real Estate mortgage and Chattel debt - Excess shall appertain to the pledgee.
Mortgage b. But if there is a stipulation that such excess shall
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Real Mortgage Chattel mortgage appertain to the debtor, then it shall be given to the
It is constituted on It is constituted on movables latter.
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immovables c. If it is sold at a deficiency, the pledgee cannot recover
It must be registered to take It must be accompanied by the deficiency judgment from the pledgor.
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effect against third person an affidavit of good faith to d. If it is sold at a deficiency but there is a stipulation that
take effect against third such deficiency can be recovered from debtor - that
persons stipulation is null and void.
It may secure future Cannot secure future e. All of the above
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obligations obligations 7. D borrowed from C P1,000,000 and to secure the payment

of which the former verbally agreed to deliver his 40
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hectare agricultural land by way of antichresis. The contract

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Multiple Choice
of loan and antichresis.
1. Which of these is not essential requisite common to both
a. Are both valid.
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pledge and mortgage?

b. Both null and void
a. That the pledge or mortgage be constituted to secure the
c. The loan is valid but the antichresis is null and void.
fulfillment of a principal obligation.
d. The contract of antichresis is valid but the loan is null
b. That the pledgor or mortgagor be the principal debtor in
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and void.
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the obligation.
8. In which of these cases is the object of the pledge allowed
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c. That the pledgor or mortgagor have the free disposal of

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to be delivered to a third person and not the pledge?

their properties.
a. When there is a stipulation to that effect.
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d. That it is essence of a pledge or mortgage that if the

b. When the pledgee uses the thing pledged.
obligation is not paid the thing which the pledge or
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c. When although the pledgee is allowed to use the thing,

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mortgage consists may be alienated for the payment of

he abuses the same.
the debt.
d. When through the fault of the pledgee, the thing
2. Statement 1: Pledgor and pledgee may agree that if the
pledged is in danger of being damaged or lost.
debt is not paid the pledgee will just automatically own the
e. All of the above
object of the pledge.
9. Effect of sale on the thing pledged if it is less than the
Statement 2: The pledgor can be compelled to pay the
principal obligation.
deficiency judgment provided there is a stipulation to that
a. Creditor cannot recover the deficiency.
effect.
b. Creditor can recover the deficiency.
a. Both statements are true.
c. Creditor cannot recover the deficiency even if there is
b. Both statements are false.
stipulation.
c. Statement 1 is true, but statement 2 is false.
d. Creditor can recover the deficiency if there is
d. Statement 1 is false, but statement 2 is true.
stipulation.
3. D is indebted to C in the amount of P200,000 and delivers
10. 1st Statement - If two or more things are pledged, the
to C his diamond ring by way of pledge. If D sells the
pledgee may choose which he will cause to be sold, unless
diamond ring to T, when will T acquire ownership of the
there is stipulation to the contrary. He may demand the sale
same?
of only as many of the things as are necessary for the
a. From the time the sale is perfected as between D and T.
payment of the debt.
b. From the time T pays the price to D.
2nd Statement - Pledge is a consensual contract that is
c. From the time C consents to the sale between D and T.
perfected from the time the thing pledged is placed in the
d. From the time T obtains actual possession of the
diamond ring.
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EXCEL PROFESSIONAL SERVICES, INC. ATTY. ONG – OCT 2020

possession of the creditor, or of a third person by common c. The delivery of the personal property is necessary.
agreement. d. The registration of the property in the Registry of
a. Both are True c. 1st is True; 2nd is False Property is not necessary.
b. Both are False d. 1st is False; 2nd is True 18. Basco pledged his Omega watch to Cruz pawnshop for
P10,000. Basco failed to pay the pawnshop the P10,000 on
11. Dean borrowed from Bean P20,000. Dean offered his ring
due date. Cruz sold the Omega watch at a public auction to
by way of pledge. It was expressly stipulated that upon non- the highest bidded at P8,000. (Phil CPA, 98-1)
payment of the debt on time, the ring would belong to Bean. a. Cruz can recover the deficiency of P2,000 from Basco.
This forfeiture clause, which has traditionally not been b. Cruz cannot recover the deficiency of P2,000 even if
allowed, is called: there is a stipulation.
a. Pacto de retro c. Commodatum c. Cruz can recover the deficiency of P2,000 even without
b. Pacto comisorio d. Mutuum stipulation.

20 IO NG
12. A stipulation whereby the pledgee or mortgagee d. Cruz cannot recover the deficiency of P2,000 unless
automatically becomes the owner of the thing pledged or there is a stipulation.
mortgaged: (Phil CPA, 93-2) e. Property is not necessary.
a. Pactum commissorium.
19. The following are essential requisites common to the

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b. Consolidation of ownership.

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contract of pledge and mortgage, except one: (Phil CPA,
c. Conventional redemption. 97-2)
d. Consignation.

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a. That they are constituted to secure the fulfillment of a

R AC .H.
13. Which of the following statements is true and correct? (Phil principal obligation.
CPA, 93-2) b. That the pledgor or mortgagor is the absolute owner of
a. Pledge and mortgage are accessory contracts because the thing pledged or mortgaged.
they cannot exist by themselves. c. That the contract is registered with the Register of
BE NS A
b. In both pledge and mortgage the creditor is entitled to Deeds.
deficiency judgment. d. That the person constituting the contract has free
disposal of his property or that he is authorized legally
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c. Where an obligation is secured by a pledge or mortgage
for the purpose.
and it is not paid when due the pledgee or mortgagee 20. Cesar pledged his Toyota car to Dan for P100,000. Cesar
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may dispose of the thing pledged or mortgaged if there
is an agreement to that effect between the parties.
d. Unless otherwise agreed upon by the parties, the sale of
the mortgaged property extinguishes in full the
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was unable to pay the obligation two (2) months after the
obligation became due and demandable. Wherefore, Dan
sold the car at public auction for P80,000. Can Dan recover
the deficiency of P20,000 from Cesar?
1st answer: No, he cannot recover the deficiency even is

obligation of the mortgagor to the mortgagee.

14. D borrowed P50,000.00 from C. The obligation bears there is a stipulation the he can.
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interest of 12% per annum. To secure the debt; D agreed 2nd answer: Yes, he can recover the deficiency even
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with C that the fruits from the agricultural lot of D shall without stipulation. (Phil CPA, 97-2)
answer for the interest and the principal obligation. a. 1st answer correct, 2nd answer wrong
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b. Both answers are wrong

Assuming the form required by law was complied with, the c. 1st answer wrong, 2nd answer correct
contract entered into between D and C for the application of d. Both answers are correct
the fruits of the lot to the interest and principal obligation is 21. In real estate mortgage, the mortgagor can sell the
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known as: mortgaged property

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a. Antichresis c. Real estate mortgage

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a. With the consent of the mortgagee in writing.

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b. Pledge d. Guaranty b. Even without the consent of the mortgagee.

15. Pledge and mortgage are accessory contracts because they:
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c. Only with the consent of the mortgagee in writing or

(Phil CPA, 95-1) orally.
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a. Are meant to secure the fulfillment of a principal d. All of the above.

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obligation. 22. Real mortgage:

b. Cannot exist if the principal obligation is void. a. May guarantee future debts
c. Can exist by themselves. b. Objects are immovable property
d. Cannot secure fulfillment of rescissible obligation. c. Is an accessory contract
16. When the mortgage is due and remains unpaid, can the d. All of the above
Mortgagee appropriate the mortgaged property? 23. X, at Y’s request, executed a Real Estate Mortgage (REM)
1st answer: No, the only right of the mortgagee-creditor on his (X’s) land to secure Y's loan from Z. Z successfully
is to foreclose the mortgage. foreclosed the REM when Y defaulted on the loan but half
2nd answer: Yes, if there is a stipulation in the mortgage of Y's obligation remained unpaid. May Z sue X to enforce
contract allowing the mortgagee-creditor to appropriate the his right to the deficiency?
property mortgaged. (Phil CPA, 96-2) a. Yes, but solidarily with Y.
a. 1st answer correct; 2nd answer wrong. b. Yes, since X’s is deemed to warrant that his land would
b. 1st answer wrong, 2nd answer correct. cover the whole obligation.
c. Both answers are wrong. c. No, since it is the buyer at the auction sale who should
d. Both answers are correct. answer for the deficiency.
17. Chattel mortgage as distinguished from Pledge: (Phil CPA, d. No, because X is not Z’s debtor.
97-2)
a. The excess over the amount due after foreclosure goes
to the debtor.
b. The sale of the object in an auction extinguishes the
obligation.
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