CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS

Atty. Dante Dela Cruz/Atty. Kenneth Dela Cruz

SUPPLEMENTARY NOTES – PLEDGE AND MORTGAGE

Essential requisites of pledge and mortgage

1. The pledge or mortgage is constituted to secure the fulfillment of a principal obligation or contract of
loan.
2. The pledgor or mortgagor must be the absolute owner of the thing pledged or mortgaged.
3. 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.
Third persons who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property.

Pledge defined
A pledge is a contract by virtue of which the debtor delivers to the creditor or to a third person a movable
or instrument evidencing incorporeal rights for the purpose of securing the fulfillment of a principal
obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned
with all its fruits and accessions.

Characteristics of a contract of pledge

1. Real contract because it is perfected by delivery of the subject matter.
2. Accessory contract because it has no independent existence of its own but dependent upon a contract
of loan or it is constituted to secure the fulfillment of a principal obligation.
3. Unilateral contract because it creates an obligation on the part of the creditor to return the thing upon
the fulfillment of the principal obligation.
4. Indivisible because it creates a lien on the whole or all of the properties pledged, which lien continues
until the obligation has been fully paid.
5. Nominate because it has a name given by law.

Form required in a contract of pledge

A contract of pledge can be constituted in whatever form as in all other contracts and will produce its natural
and legal consequences with respect to the contracting parties.
However, to be effective against third persons, the contract of pledge must appear in a public instrument.

Subject matter of a contract of pledge

a. All movable or personal property susceptible of possession.
b. Incorporeal rights or intangible assets which are evidenced by negotiable instruments, bill of lading,
shares of stocks, bonds, warehouse receipts and similar documents.
However, since incorporeal rights are intangible and could not be delivered physically, the instrument
evidencing the right pledged shall be delivered to the creditor and if negotiable, must be endorsed.

Pledge of animals
In case of pledge of animals, their offspring shall pertain to the pledgor-debtor or owner of the animals
pledged. However the offspring shall be subject to the pledge, unless otherwise stipulated.

Sale of property pledged

The creditor cannot dispose of the thing pledged. Any stipulation authorizing the creditor to sell the property
pledged before maturity of the obligation is void.
However, if the obligation remains unpaid upon maturity, the thing pledged may be sold for payment to the
creditor.

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Foreclosure sale
1. If the amount due is not paid on time, the creditor may with the help of a Notary Public sell the property
pledged in a public auction with notice to the debtor of the amount for which the sale is to be made.
2. If at the first and second auction, the property pledged is not sold, the creditor may appropriate the
property pledged.
3. If sale price in the auction sale is less that the amount of the obligation, the creditor is not entitled to
recover the deficiency even if there is a stipulation to that effect.
4. If the sale price is more than the amount of the obligation, the creditor is entitled to the excess, unless
otherwise stipulated.

Debtor – pledgor’s right to bid

The debtor-pledgor may bid at the public auction. Should there be several highest bidders offering the same
terms and one of them is the debtor-pledgor, the latter is given preference of buying the thing pledged.

Creditor-pledgee’s right to bid

The creditor-pledgee may bid at the public auction sale. If the creditor-pledgee is the only bidder , the bid
is not valid, except if the creditor-pledgee is given the right to appropriate the thing pledged for failure to
sell on two public auction sales.

Extent of pledge
A pledge shall extend to the earnings of the thing pledged as well as the offsprings of the animals pledged,
unless otherwise stipulated.
The creditor-pledgee shall apply the fruits and earnings pledged in payment of the expenses incurred
interest, if any, and the principal obligation.

Null and void stipulations in a contract of pledge

1. A stipulation which provides that the pledge is not extinguished by the return of the thing pledged.
2. A stipulation allowing the automatic appropriation by the pledgee of the thing pledge case of default
of the debtor.
3. A stipulation for the recovery of deficiency in case the proceeds from the sale of the thing pledged is
less than the amount of the obligation.

Pactum Commissorium
It is a stipulation whereby the thing pledged or mortgaged shall automatically become the property of the
creditor in the event of nonpayment of the secured debt within the term fixed.

Such stipulation is null and void for being contrary to law and public policy. However, the contract of loan
and contract of pledge remain to be valid.

Obligations of the debtor-pledgor

1. To pay the debt and its interest, with expenses, when due if the pledgor is also the debtor.
2. To pay damages that the pledgee may suffer by reason of the flaws of the thing pledged if the pledgor
was aware of such flaws but did not advise the pledgee of the same.
3. To pay for the expenses which are necessary for the preservation of the thing pledged.

Creditor-pledgee’s right of retention

The creditor-pledgee can retain possession of the thing pledged until the obligation is paid because the
pledge is a security contract, The purpose of the pledge is to secure the principal obligation and therefore,
the right of retention continues until the obligation is paid.

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Obligations of creditor-pledgee
1. To take care of the thing pledged with the diligence of a good father of a family.
2. To be liable for the loss or deterioration of the thing pledged unless it is due to a fortuitous event.
3. Not to deposit the thing pledged with a third person unless ordered by the court.
4. To be responsible for the acts of his agents or employees with respect to the thing pledged.
5. Not to use the thing pledged except when authorized to do so or when the use of the thing is necessary
for its preservation.

Modes of extinguishment of a contract of pledge

1. Indirect mode of extinguishment – The extinguishment of the principal obligation carries with it the
extinguishment of the contract of pledge.
2. Direct modes of extinguishment - The contract of pledge is extinguished independent of the principal
obligation.
a. Return by the pledgee of the thing pledged to the pledgor.
b. Abandonment in writing by the pledgee of the contract of pledge
c. Sale of the thing pledged
d. Appropriation of the thing pledged by the pledgee if the thing pledged is not sold in at least two
public auctions.

Kinds of pledge
1. Voluntary or conventional pledge – created by the parties
2. Legal pledge – created by operation of law

Legal pledge
Legal pledge refers to the right of a person to retain a thing until he receives payment of his claim. Examples
of legal pledge are:
a. A possessor in good faith may retain the movable upon which he has incurred necessary and useful
expenses until he has been reimbursed therefore.
b. He who has executed work upon movable has a right to retain it by way of pledge until he is paid.
c. The depositary may retain the thing deposited until the full payment of what is due him by reason of
the deposit.

Real Estate Mortgage

Real estate mortgage is a contract whereby the debtor secures to the creditor the fulfillment of a principal
obligation, specially subjecting to such security real property in case of nonfulfillment of the principal
obligation at the time stipulated.

Characteristics of real estate mortgage

1. Accessory because it cannot exist without a principal obligation, such as contract of loan.
2. Indivisible because it creates a lien on the whole or all of the properties mortgaged, which lien continues
until the obligation has been fully paid.
3. Inseparable because the mortgage adheres to the property regardless of who its owner may subsequent
be.
4. Real right because it creates a lien on the property mortgaged.
5. Consensual because it is perfected by mere consent.
6. Nominate because it has a name given by law.

Kinds of real estate mortgage

1. Conventional real estate mortgage is one which is created by the agreement of the parties.
2. Legal mortgage is one executed pursuant to an express requirement of a provision of law.
3. Equitable mortgage is one which, although lacking some certain formality, form or words or other
requisites prescribed by law, show the intention of the parties to charge the real property as a security
for a debt and contains nothing contrary to law.

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Subject matter of contract of real estate mortgage

a. Immovable property
b. Rights on immovable property

Registration
A contract of real estate mortgage should be constituted in a public document and recorded in the Registry
of Property of the province or city where the thing is situated.

Even if the mortgage is not registered, the mortgage is nevertheless binding between the parties.

An unregistered mortgage does not affect innocent third persons. However, third persons with knowledge
of the existence of mortgage are bound because knowledge of a prior unregistered mortgage is the
equivalent of registration.

Foreclosure
Foreclosure is a remedy available by which the mortgagee subjects the property mortgaged for the payment
of the obligation secured when the principal obligation is not paid when due or when there is any violation
of any condition, stipulation or warranty by the mortgagor.

Kinds of Foreclosure of Real Estate Mortgage

1. Judicial foreclosure is a type of foreclosure made through the filing of a petition in court and availed
of when the deed of real estate mortgage does not provide for special power of attorney (SPA)
authorizing the mortgagee-creditor to foreclose the thing mortgaged extrajudicially.
2. Extrajudicial Foreclosure is a type of foreclosure available when there is a stipulation in the mortgage
contract that the mortgage may be foreclosed extrajudicially or when such foreclosure sale is made
under a special power of attorney inserted in the contract of mortgage.

Redemption
Redemption is a transaction through which the mortgagor re-acquires or buys back the value of the title
which may have passed under the mortgage.

Kinds of redemption
1. Equity redemption – The right of the mortgagor to redeem the property mortgaged after his default but
before the property is sold.
2. Right of redemption – The right of the mortgagor to redeem or repurchase the property sold for the
payment of the mortgage obligation.

Equity redemption vs. right of redemption

Equity redemption is the right of the mortgagor after judgment in a judicial foreclosure to redeem the
property by paying to the court the amount of the judgment debt before the sale.

On the other hand, right of redemption is the right of the mortgagor to redeem the property sold at an
extrajudicial foreclosure by paying to the buyer in the foreclosure sale the amount paid by the buyer within
one year from such sale.

Null and void stipulations in a contract of mortgage

1. A stipulation which provides for typo or upset price in the foreclosure sale of mortgaged property.
A typo or upset price is the price at which the mortgaged property is exposed to sale by auction below
which the mortgaged property is not to be sold.
2. A stipulation allowing the automatic appropriation by the mortgagee of the thing pledged in case of
default of the debtor.
3. A stipulation prohibiting the mortgagor from disposing or selling his property.

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Chattel mortgage
Chattel mortgage is a contract by virtue of which personal property is recorded in the Chattel Mortgage
Registry as a security for the performance of an obligation.

Characteristics contract of chattel mortgage

a. Accessory because it cannot exist without a principal obligation, such as contract of loan.
b. Indivisible because it t creates a lien on the whole or all of the properties mortgaged, which lien
continues until the obligation has been fully paid.
c. Inseparable because it adheres to the property regardless of whoever the possessor may be for the
fulfillment of the obligation.
d. Formal contract because it is perfected by the registration in the Chattel Mortgage Registry.
e. Nominate because it has a name given by law.

Subject matter of chattel mortgage

Only personal property may be the subject matter of chattel mortgage, such as:
1. Shares of stock of corporations
2. Growing crops
3. Interest in business
4. Vessels
5. Large cattles

Pledge Real Estate Mortgage Chattel Mortgage

Form required to bind Oral or in writing provided Oral or in writing Oral or in writing
parties that the thing pledged must
be delivered to the creditor
or to a third person by
common agreement
Form required to bind Must be in a public Must be registered Must be accompanied
third persons instrument showing a in the Registry of Deeds by affidavit of good
description of the thing faith and must be
pledged and the date of the registered in the Chattel
pledge. Mortgage Registry
As to excess of proceeds It belongs to the It belongs to the It belongs to the
creditor/pledgee unless there mortgagor unless there is mortgagor unless there
is a stipulation to the a stipulation to the is a stipulation to the
contrary. contrary. contrary.
As to deficiency Cannot be recovered even if Can be recovered Can be recovered
there is a stipulation to the except in case of Recto
contrary. Law
Pledgor’s right to sell Can be sold even without Can be sold even without Cannot be sold without
pledgee’s consent. But to consent of the mortgagee consent of creditor,
transfer ownership to buyer, which must be in
pledgee’s consent is required writing.
in writing or oral

END

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