RFBT3

THE LAW ON SALES AND CREDIT TRANSACTIONS

CREDIT TRANSACTIONS: PLEDGE, MORTGAGE AND ANTICHRESIS

CONTRACT OF PLEDGE

A contract wherein the debtor delivers to the creditor or to a third person a movable
or document evidencing incorporeal rights for the purpose of securing fulfillment of
a principal obligation with the understanding that when the obligation is fulfilled,
the thing delivered shall be returned with all its fruits and accessories.

Special Requisites:
(In addition to the common essential requisites)

1. Possession of the thing pledged must be transferred to the creditor or a third

person by agreement. (Art. 2093)

2. All movables which are within the commerce of men, provided they are susceptible
of possession (Art. 2094) and incorporeal rights evidenced by documents of title,
in which case, the instruments proving the right pledged shall be delivered to the
creditor, and if negotiable must be endorsed (Art. 2095)

3. The description of the thing and the date must appear in a public instrument to bind
third persons but not for the validity of the contract. (Art. 2096)

NOTE: To affect third persons, mere delivery of possession is insufficient.

NOTE: When the contract of pledge is not recorded in a public instrument, it is void
as against third persons; the buyer of the thing pledged is a third person within the
meaning of the article. The fact that the person claiming as pledgee has taken actual
physical possession of the thing sold will not prevent the pledge from being declared
void insofar as the innocent stranger is concerned.

Kinds:
1. Conventional / Voluntary
2. Legal

What May Be Pledged?

➢ Only movables can be pledged (including incorporeal rights)

➢ Real property cannot be pledged.
➢ Certificates of stock or of stock dividends, under the Corporation Code, are
quasi-negotiable instruments in the sense that they may be given in pledge to
secure an obligation.

Art. 2094. All movables which are within commerce may be pledged,
provided they are susceptible of possession.
 Art. 2095. 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.

Art. 2096. A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not appear
in a public instrument.

Art. 2097. 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.

NOTE: Pledgor May Alienate Thing Pledged as provided under Art. 2097.

Art. 2098. 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.

EXAMPLE: A owes B P1 million. As security, A pledged his diamond ring with B.

B has the right to retain the ring until the P1 Million debt is paid.

NOTE: Property which has been lawfully pledged to a creditor cannot be pledged
to another as long as the first one subsists. In short, no double pledge is allowed.

Characteristics:
1. Real contract – perfected by delivery of the thing pledged.
2. Accessory contract – it has no independent existence of its own.
3. Unilateral contract – obligation is solely on the part of the creditor to return the
thing subject thereof upon fulfillment of the principal obligation.
4. Subsidiary contract – the obligation incurred does not arise until the fulfillment of
the principal obligation which is secured.

Rights of the Pledgor

1. To demand return in case of reasonable grounds to fear the destruction or
impairment of the thing without the pledgee’s fault, subject to the duty of
replacement (Art. 2107).
2. To bid and be preferred at the public auction (Art. 2113)
3. To alienate the thing pledged provided the pledgee consents to the sale (Art. 2097)
4. To ask that the thing pledged be deposited in one of the following cases:
a. If the creditor uses the thing without authority or misuses the thing, he may
deposit the thing judicially or extrajudicially (Art. 2104)
b. If the thing is in danger of being lost or impaired because of negligence or willful
act of the pledgee, he may deposit the thing with a third person (Art. 2106).

Obligations of the Pledgor

1. To advise the pledgee of the flaws of the thing (Arts. 2101 and 1951)
2. Not to demand the return of the thing until after full payment of the debt, including
interest due thereon and expenses incurred for its preservation. (Art. 2105)
 Exception: Pledgor is allowed to substitute the thing pledged which is in danger
of destruction or impairment with another thing of the same kind and quality. (Art.
2107)

Rights of the Pledgee

1. Option to demand replacement or immediate payment of the debt in case of
deception as to substance or quality (Art. 2109)
Note: Remedies are alternative.
2. To sell at a public auction in case of reasonable grounds to fear destruction or
impairment of the thing without his fault. (Art. 2108).
Note: The proceeds shall be a security for the principal obligation.
3. To bring actions pertaining to the owner or to defend it against third persons.
4. To choose which of the several things pledged shall be sold.
5. To collect and receive amount due on credit pledged.
6. To bid at the public auction, unless he is the only bidder.
7. To appropriate the thing in case of failure of the second public auction
8. To apply said fruits, interests, or earnings to the interest, if any, then to the principal
of the credit.
9. To retain excess value received in the public sale.
10. To retain the thing until after full payment of the debt.
11. To be reimbursed for the expenses made for the preservation of the thing pledged.
12. To object to the alienation of the thing.
13. To possess the thing.
14. To sell at public auction in case of non-payment of debt at maturity.

Obligations of the Pledgee

1. Take care of the thing with the diligence of a good father of a family and be liable
for the loss or deterioration of such. (Art. 2099).
2. Not to use thing unless authorized by the owner or its preservation requires its use.
3. Not to deposit the thing with a third person unless so stipulated.
4. Responsibility for acts of agent and employees as regards the thing.
5. To advise the pledgor of danger to the thing
6. To advise the pledgor of the result of the public auction
7. To return the thing upon payment of the debt.

Extinguishment of pledge:
1. The same causes as all other obligations
2. Return of the thing pledged by the pledgee to the pledgor
3. Statement in writing by the pledgee that he renounces or abandons the pledge
(Art. 2111)
Note: However, the principal debt is not affected by the waiver. But the waiver of
the principal carries with it the waiver of the pledge (Art. 1273).
4. Payment of the debt
5. Sale of the thing pledged at public auction
6. Appropriation under Art. 2112

Requirements for sale of thing pledged at public auction

1. The debt is due and unpaid;
2. The sale must be at a public auction
3. There must be notice to the pledgor and owner, stating the amount due
4. Sales must be with the intervention of a notary public.

Nature of the Bids at the Public Auction

The bids must be for CASH — for said bids “shall offer to pay the purchase price
AT ONCE.” Even if a purchase on installment is accepted by the pledgee, the sale
is still for cash — insofar as the pledgor or owner is concerned?
Rules if the Price At the Sale Is More or Less Than the Debt
(a) If the price at sale is MORE — excess goes to the creditor, unless the contrary
is provided. (This is rather unfair, because the pledgor is the OWNER.)
(b) If the price is LESS — creditor does NOT get the deficiency. A contrary
stipulation is VOID.

LEGAL PLEDGE

The provisions on the possession, care, and sale of the thing pledged governing
conventional pledges are applicable to pledges created by operation of law.

In legal pledge, there is no definite period for the payment of the principal
obligation. The pledgee must make a demand for the payment of the amount due
him; otherwise he cannot exercise the right of sale at public auction. (Art. 2122).

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 (Art. 2122). The remainder of
the price pertains to the debtor, unlike in conventional pledge.

Art. 2123. 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, and subsidiarily, the
provisions of this Title.

MORTGAGE (REAL)
Arts. 2124-2131

Article 2124. Only the following property may be the object of a contract of mortgage:

(1) Immovables;

(2) Alienable real rights in accordance with the laws, imposed upon immovables.

Nevertheless, movables may be the object of a chattel mortgage. (1874a)

Article 2125. In addition to the requisites stated in article 2085, it is indispensable, in

order that a mortgage may be validly 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.

The persons in whose favor the law establishes a mortgage have no other right than to
demand the execution and the recording of the document in which the mortgage is
formalized. (1875a)

Article 2126. 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. (1876)

Article 2127. 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.
(1877)

Article 2128. The mortgage credit may be alienated or assigned to a third person, in
whole or in part, with the formalities required by law. (1878)

Article 2129. 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. (1879)

Article 2130. A stipulation forbidding the owner from alienating the immovable mortgaged
shall be void. (n)

Article 2131. The form, extent and consequences of a mortgage, both as to its
constitution, modification and extinguishment, and as to other matters not included in this
Chapter, shall be governed by the provisions of the Mortgage Law and of the Land
Registration Law. (1880a)

I. Concept

Mortgage (otherwise known as “real estate mortgage” or “real mortgage”) is

a contract whereby the debtor secures to the creditor the fulfillment of a
principal obligation, specially subjecting to such immovable property or real
rights over immovable property which obligation shall be satisfied with the
proceeds of the sale of said property or rights in case the said obligation is not
complied with at the time stipulated.

Essential requisites of mortgage: (Arts. 2085, 2087, 2125)

1) Constituted to secure the fulfillment of a principal obligation

2) Mortgagor must be the absolute owner of the thing mortgaged
3) The persons constituting the mortgage have the free disposal of their property,
and in the absence thereof, that they be legally authorized for the purpose
4) When the principal obligation becomes due, the thing mortgaged may be
alienated for the payment to the creditor
5) In order that a mortgage may be validly constituted, it must appear in a public
document duly recorded in the Registry of Property

➢ It is a real, accessory, and subsidiary contract.

➢ It is also unilateral because it creates only an obligation on the part of the creditor
who must free the property from the encumbrance once the obligation is fulfilled.
➢ The mortgagor-debtor, as a general rule, retains posession of the property
mortgaged as security for the payment of the sum borrowed from the mortgagee-
creditor, because by the mortgage, the debtor merely subjects the property to a
lien but ownership thereof is not parted with.

II. Elements
A. Parties
• Mortgagor - a person who mortgages property
• Mortgagee - a person to whom property is mortgaged

B. Object (Art. 2124)

• Immovables (See Art. 415, CC)
• Alienable real rights imposed upon immovables
 ➢ Future property cannot be object of a contract of mortgage.
➢ Art. 415. The following are immovable property:
(1) Land, buildings, roads and constructions of all kinds adhered to
the soil;
(2) Trees, plants, and growing fruits, while they are attached to the
land or form an integral part of an immovable;
(3) Everything attached to an immovable in a fixed manner, in such
a way that it cannot be separated therefrom without breaking the
material or deterioration of the object;
(4) Statues, reliefs, paintings 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;
(5) 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;
(6) Animal houses, pigeon-houses, beehives, fish ponds 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;
(7) Fertilizer actually used on a piece of land;
(8) Mines, quarries, and slag dumps, while the matter thereof forms
part of the bed, and waters either running or stagnant;
(9) 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;
(10) Contracts for public works, and servitudes and other real rights
over immovable property. (334a)

C. Consideration
• As mortgage is an accessory contract, its consideration is the
same as of the principal contract from which it receives its life,
and without which it cannot exist as an independent contract.
Being an accessory contract, its validity would depend on the
validity of the debt secured by it.
• Where a mortgage is not valid, e.g., it is executed by one who is
not the owner of the property, or the consideration of the contract
is simulated or false, the principal obligation which it guarantees
is not rendered null and void.

D. Form
▪ It is indispensible in order that a mortgage may be validly
constituted that it appears in a public document duly recorded in
the Registry of Property (Art. 2125)
▪ If the instrument of mortgage is not recorded, the mortgage is
nevertheless binding between the parties
▪ Registration only operates as a notice of the mortgage to third
persons but neither adds to its validity nor converts an invalid
mortgage into a valid one between the parties.

III. Classes

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.

B. Legal
▪ One required by law to be executed in favor of certain persons.

C. Equitable
▪ One which, although it lacks the proper formalities or other
requisites of a mortgage required by law, nevertheless reveals
the intention of the parties to burden real property as a security
for a debt, and contains nothing impossible or contrary to law.

IV. Effects
A. As to the property mortgaged

a. Real right is created (Art. 2126)

▪ A registered mortgage creates right in rem, a real right, a lien
inseparable from the property mortgaged, which is enforceable
against the whole world, affording specific security for the
satisfaction of a debt.
▪ Until discharged upon payment of the obligation, it follows the
property wherever it goes and subsists notwithstanding changes
of ownership.
▪ If the mortgagor sells the mortgaged property, the property
remains subject to the fulfillment of the obligation secured by it.
All subsequent purchasers of the property must respect the
mortgage, whether the transfer to them be with or without the
consent of the mortgagee. But the mortgage must be registered
or, if not registered, the buyer must know its existence, his
knowledge of the prior unregistered mortgage having the effect
of registration as to him.

b. Extension of accessions and accessories (Art. 2127)

▪ A real estate mortgage constituted on immovable property is
not limited to the property itself but also extends to all its
acessions, improvements, growing fruits and rents or income.
▪ To exclude them, it is necessary that there be an express
stipulation to that effect.

c. Pactum de non alienando (Art. 2130)

▪ The law considers void any stipulation forbidding the owner
from alienating the mortgaged property.
▪ However, if the mortgagor alienates the property, the
transferee is bound to respect the encumbrance because
being a real right, the property remains subject to the
fulfillment of the obligation.

B. Effects as to the mortgagee

a. Mortgagee may foreclose the mortgage

▪ A mortgage does not involve a transfer, cession or
conveyance of property but only constitute a lien thereon. It
gives the mortgagee no right or claim to the possession of the
property.
▪ The only right of a mortgagee in case of non-payment of a
debt secured by the mortgage would be to foreclose the
 mortgage and have the encumbered property sold to satisfy
the outstanding indebtedness.
▪ The mortgagor’s default does not operate to vest in the
mortgagee the ownership of the encumbered property.

b. Mortgage credit may be alienated or assigned to a third person (Art.

2128)
▪ The mortgage credit (the right of the mortgagee) is a real right.
Such real right may be alienated or assigned to a third
personam in whole or in part, by the mortgagee who is the
owner of said right and the assignee may foreclose the
mortgage in case of nonpayment of the mortgage
indebtedness.

V. Foreclosure

Foreclosure is the remedy available to the mortgagee by which he subjects

the mortgaged property to the satisfaction of the obligation to secure which the
mortgage was given.

➢ As a rule, the mortgage can be foreclosed only when the debt remains
unpaid at the time it is due..
➢ The right of foreclosure cannot be exercised by any person other than
the creditor-mortgagee or his assigns.
➢ Once the proceeds have been applied to the payment of the obligation,
the debtor cannot anymore be required to pay, unless there is a
deficiency between the amount of the loan and the foreclosure sale
price, because the obligation has already been extinguished.

Kinds of Foreclosure
A. Judicial Foreclosure
▪ This is goverened by Rule 68 of the Rules of Court.
▪ A mortgage may be forclosed judicially by bringing an action for
that purpose in the proper court .
▪ If the court finds the complaint to be well-founded, it shall order
the mortgagor to pay the amount due upon the mortgage debt or
obligation with interest and other charges within a period of not
less than 90 days nor more than 120 days from the entry of
judgment.
▪ If the mortgagor fails to pay at the time directed in the order, the
court shall order the property to be sold to the highest bidder at
public auction.
▪ The sale when confirmed by an order of the court shall operate
to divest the rights of all parties to the action and to vest their
rights in the purchaser subject to such right of redemption as may
be allowed by law.
▪ The proceeds of the sale shall be applied to the payment of the:
(1) cost of the sale, (2) the amount due the mortgagee, (3) claims
of junior encumbrances; and (4) the balance if any, shall be paid
to the mortgagor.
▪ In judicial foreclosures, the foreclosure is not complete until the
sheriff’s certificate is executed, acknowledged and recorded. In
the absence of a Certificate of Sale, no title passes by the
foreclosure proceedings to the vendee.

B. Extrajudicial Foreclosure
 ▪ This is goverened by Act No. 3135, as amended. The law covers
only real estate mortgages. It is a special law that governs
particularly extrajudicial foreclosure sales which are proper only
when so provided in the real estate mortgage contract.
▪ A mortgage may be foreclosed extrajudicially where there is
inserted in the contract a clause giving the mortgagee the power,
upon default of the debtor, to foreclose the mortgage by an
extrajudicial sale of the mortgaged property.
▪ There must be posting of the notice of sale in at least three (3)
public places at the municipality or city where each mortgaged
property is situated, to wit: the Sheriff’s Office, the Assessor’s
Office, and the Register of Deeds, and the publication thereof in
a newspaper of general cicurlation in said municipality.
▪ Publication is required to give the foreclosure sale a reasonably
wide publicity such that those interested might attend the public
sale.
▪ Failure to comply with the requirements as to publication of notice
of auction sale constitute a jurisdictional defect which invalidates
the sale or at least render the sale voidable

Redemption is a transaction by which the mortgagor reacquires or buys back

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

➢ The concept of redemption is to allow the owner to repurchase or buy

back, within a certain period and for a certain amount, a property that
has been sold due to debt, tax, or encumbrance.

Kinds of Redemption:
A. Equity of Redemption – the right of the mortgagor in case of judicial
foreclosure to redeem the mortgaged property after his default in the
performance of the conditions of the mortgage but before the
confirmation of the sale of the mortgaged property.

▪ In judicial foreclosure, the mortgagor may exercise his equity of

redemption before but not after the sale is confirmed by the
court.
▪ It is the right of the defendant mortgagor to extinguish the
mortgage and retain ownership of the property by paying the
secured debt within the 90-day period after the judgment
becomes final, or even after the foreclosure sale but prior to its
confirmation.

B. Right of Redemption – the right of the mortgagor in case of extrajudicial

foreclosure to redeem the mortgaged property within a certain period
from and after it was sold for the satisfaction of the mortgaged debt.
C. In extrajudicial sale, the individual mortgagor may redeem the property
at anytime within the term of one year from and after the date of the sale,
i.e., date of registration of the certificate of sale with the appopriate
Registery of Deeds.
D. In the case of juridical persons (corporations and partnerships), they
have the right to redeem the property until, but not after the registration
of the certificate of foreclosure sale which in no case shall be more than
three (3) months after foreclosure, whichever is earlier.

CHAPTER 4: ANTICHRESIS
Arts. 2132-2139

Article 2132. 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. (1881)

Article 2133. 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. (n)

Article 2134. The amount of the principal and of the interest shall be specified in writing;
otherwise, the contract of antichresis shall be void. (n)

Article 2135. The creditor, unless there is a stipulation to the contrary, is obliged to pay
the taxes and charges upon the estate.

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.
(1882)

Article 2136. 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. (1883)

Article 2137. 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. (1884a)

Article 2138. 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. (1885a)

Article 2139. The last paragraph of article 2085, and articles 2089 to 2091 are applicable
to this contract. (1886a)

I. Concept

Antichresis is a contract whereby 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.

➢ Antichresis requires the delivery by the debtor of the property given as security to
the creditor. But such delivery is required only in order that the creditor may receive
the fruits.
➢ The contract of antichresis does not cover the immovable but only its fruits.
➢ The antichretic creditor is under obligation to apply the fruits of the property in
satisfaction, first of whatever interest on the debt is due, and secondly, to the
payment of the principal.
➢ The fruits of the immovable which is the object of the antichresis must be appriased
at their actual market value at the time of the application. (Art. 2133)
 ➢ The property delivered stands as a security for the payment of the obligation of the
debtor in antichresis. Hence, the debtor cannot demand its return until the debt is
totally paid. (Art. 2136)

Characteristics of the contract:

1) It is an accessory contract because it secures the performance of a principal

obligation.
2) It is a formal contract because it must be in a specified form to be valid.

Antichresis vs. Pledge:

1) Antichresis refers to real property, while pledge, to personal property;

2) Antichresis is perfected by mere consent, while pledge is perfected by the delivery
of the thing pledged;
3) Antichresis is a consensual contract, while pledge is a real contract.

Both are similar in that the debtor loses control of the subject matter of the contract.

Antichresis vs. Real Mortgage

1) In antichresis, the property is delivered to the creditor, while in mortgage, the
debtor usually retains possession of the property;
2) In antichresis, the creditor acquires only the right to receive fruits of the property;
hence, it does not produce a real right, while in mortgage, the creditor does not
have any right to receive the fruits, but mortgage creates a real right over the
property which is enforceable against the whole world;
3) In antichresis, the creditor, unless there is a stipulation to the contrary, is obliged
to pay the taxes and charges upon the estate, while in mortgage, the creditor has
no such obligation;
4) In antichresis, it is expressly stipulated that the creditor given the possession of
the property shall apply the fruits thereof to the payment of interest, if owning, and
thereafter to the principal of the credit, while in mortgage, there is no such
obligation on the part of the mortgagee.

Both are similar in tthat the subject matter is real property.

II. Elements

A. Parties
▪ Creditor and Debtor
B. Object
▪ The contract covers only the fruits of an immovable of the debtor
C. Cause
• Being an accessory contract, its consideration is the same as of the
principal contract.
D. Form
▪ It is a formal contract. The amount of the prinicipal and of the interest
must be in writing for the contract to valid. Otherwise, the contract of
antichresis shall be void.

III. Effects

A. Rights of the antichretic creditor

a) To receive the fruits (Art. 2132)
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.
 b) Right of foreclosure (Art. 2137)
▪ If the debt is not paid, the creditor does not acquire ownership of the
real estate since what was transferred is not the ownership but merely
the right to receive its fruits. A stipulation authorizing the antichretic
creditor to appropriate the property upon nonpayment of the debt
within the period agreed upon is void.

▪ In cases of nonpayment of debt, the remedy of the creditor is (1) to

bring an action for specific performance; or (2) to petition for the sale of
the real property as foreclosure of mortgage.

B. Obligations of the antichretic creditor (Art. 2135)

a) To bear necessary expenses for preservation
The creditor is bound to bear the expenses necessary for the
preservation and repair of the property.

b) To pay the taxes and charges upon the estate

▪ The creditor is obliged, unless there is a stipulation to the contrary, to
pay the taxes and charges upon the estate.

▪ If the creditor does not want to pay the taxes and incur the expenses
necessary for the preservation and repair of the property, he may
compel the debtor to reacquire the enjoyment of the same except when
there is a contrary stipulation. (Art. 2136)

CHATTEL MORTGAGE
Arts. 2140-2141

Article 2140. 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. (n)

Article 2141. 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. (n)

ACT NO. 1508 – The Chattel Mortgage Law

xxx
Sec. 2. All personal property shall be subject to mortgage, agreeably to the provisions of
this Act, and a mortgage executed in pursuance thereof shall be termed chattel mortgage.

Sec. 3. Chattel mortgage defined. — A chattel mortgage is a conditional sale of personal

property as security for the payment of a debt, or the performance of some other
obligation specified therein, the condition being that the sale shall be void upon the seller
paying to the purchaser a sum of money or doing some other act named. If the condition
is performed according to its terms the mortgage and sale immediately become void, and
the mortgagee is thereby divested of his title.

Sec. 4. Validity. — A chattel mortgage shall not be valid against any person except the
mortgagor, his executors or administrators, unless the possession of the property is
delivered to and retained by the mortgagee or unless the mortgage is recorded in the
office of the register of deeds of the province in which the mortgagor resides at the time
of making the same, or, if he resides without the Philippine Islands, in the province in
which the property is situated: Provided, however, That if the property is situated in a
different province from that in which the mortgagor resides, the mortgage shall be
recorded in the office of the register of deeds of both the province in which the mortgagor
resides and that in which the property is situated, and for the purposes of this Act the city
of Manila shall be deemed to be a province.

xxx
Sec. 7. Descriptions of property. — The description of the mortgaged property shall be
such as to enable the parties to the mortgage, or any other person, after reasonable
inquiry and investigation, to identify the same.

If the property mortgaged be large cattle," as defined by section one of Act Numbered
Eleven and forty-seven, 2 and the amendments thereof, the description of said property
in the mortgage shall contain the brands, class, sex, age, knots of radiated hair commonly
known as remolinos, or cowlicks, and other marks of ownership as described and set
forth in the certificate of ownership of said animal or animals, together with the number
and place of issue of such certificates of ownership.

If growing crops be mortgaged the mortgage may contain an agreement stipulating that
the mortgagor binds himself properly to tend, care for and protect the crop while growing,
and faithfully and without delay to harvest the same, and that in default of the performance
of such duties the mortgage may enter upon the premises, take all the necessary
measures for the protection of said crop, and retain possession thereof and sell the same,
and from the proceeds of such sale pay all expenses incurred in caring for, harvesting,
and selling the crop and the amount of the indebtedness or obligation secured by the
mortgage, and the surplus thereof, if any shall be paid to the mortgagor or those entitled
to the same.

A chattel mortgage shall be deemed to cover only the property described therein and not
like or substituted property thereafter acquired by the mortgagor and placed in the same
depository as the property originally mortgaged, anything in the mortgage to the contrary
notwithstanding.

Sec. 8. Failure of mortgagee to discharge the mortgage. — If the mortgagee, assign,

administrator, executor, or either of them, after performance of the condition before or
after the breach thereof, or after tender of the performance of the condition, at or after the
time fixed for the performance, does not within ten days after being requested thereto by
any person entitled to redeem, discharge the mortgage in the manner provided by law,
the person entitled to redeem may recover of the person whose duty it is to discharge the
same twenty pesos for his neglect and all damages occasioned thereby in an action in
any court having jurisdiction of the subject-matter thereof.

xxx

Sec. 13. When the condition of a chattel mortgage is broken, a mortgagor or person
holding a subsequent mortgage, or a subsequent attaching creditor may redeem the
same by paying or delivering to the mortgagee the amount due on such mortgage and
the reasonable costs and expenses incurred by such breach of condition before the sale
thereof. An attaching creditor who so redeems shall be subrogated to the rights of the
mortgagee and entitled to foreclose the mortgage in the same manner that the mortgagee
could foreclose it by the terms of this Act.

Sec. 14. Sale of property at public auction; Officer's return; Fees; Disposition of proceeds.
— The mortgagee, his executor, administrator, or assign, may, after thirty days from the
time of condition broken, cause the mortgaged property, or any part thereof, to be sold at
public auction by a public officer at a public place in the municipality where the mortgagor
resides, or where the property is situated, provided at least ten days' notice of the time,
place, and purpose of such sale has been posted at two or more public places in such
municipality, and the mortgagee, his executor, administrator, or assign, shall notify the
mortgagor or person holding under him and the persons holding subsequent mortgages
of the time and place of sale, either by notice in writing directed to him or left at his abode,
if within the municipality, or sent by mail if he does not reside in such municipality, at least
ten days previous to the sale.

The officer making the sale shall, within thirty days thereafter, make in writing a return of
his doings and file the same in the office of the register of deeds where the mortgage is
recorded, and the register of deeds shall record the same. The fees of the officer for
selling the property shall be the same as in the case of sale on execution as provided in
Act Numbered One hundred and ninety, 4 and the amendments thereto, and the fees of
the register of deeds for registering the officer's return shall be taxed as a part of the
costs of sale, which the officer shall pay to the register of deeds. The return shall
particularly describe the articles sold, and state the amount received for each article, and
shall operate as a discharge of the lien thereon created by the mortgage. The proceeds
of such sale shall be applied to the payment, first, of the costs and expenses of keeping
and sale, and then to the payment of the demand or obligation secured by such mortgage,
and the residue shall be paid to persons holding subsequent mortgages in their order,
and the balance, after paying the mortgages, shall be paid to the mortgagor or person
holding under him on demand.

If the sale includes any "large cattle," a certificate of transfer as required by section sixteen
of Act Numbered Eleven hundred and forty-seven 5 shall be issued by the treasurer of
the municipality where the sale was held to the purchaser thereof.

I. Concept

Chattel Mortgage is that contract by virtue of which personal property is

recorded in the Chattel Mortgage Register as a security for the performance of
an obligation.

A chattel mortgage is a conditional sale of personal property as security for the

payment of a debt, or the performance of some other obligation specified
therein, the condition being that the sale shall be void upon the seller paying to
the purchaser a sum of money or doing some other act named. If the condition
is performed according to its terms the mortgage and sale immediately become
void, and the mortgagee is thereby divested of his title. (Sec 3, Act. 1508)

Characteristics of Chattel Mortgage:

1. It is an accessory contract because it is for the purpose of securing the
performance of a principal obligation
2. A formal contract because of its validity, registration in the Chattel
Mortgage Register is indispensable
3. A unilateral contract because it produces only obligations on the part
of the creditor to free the thing from the encumbrance on fulfillment of
the obligation

Chattel Mortgage vs. Pledge

The following are the distinctions:

1. In chattel mortgage, the delivery of the personal property to the
mortgagee is not necessary, while in pledge, such delivery is necessary;
2. In chattel mortgage, the registration of the same in the Chattel Mortgage
Register is required by law, while in pledge, registration in the Registry
of Property is not necessary
 3. The procedure for the sale of the thing given as 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;
4. In chattel mortgage, if the property is foreclosed, the excess over the
amount due goes to the debtor, while in pledge, if the property is sold,
the debtor is not entitled to the excess unless it is otherwise agreed or
except in the case of a legal pledge
5. In chattel mortgage, if the property is foreclosed and there is a
deficiency, the creditor is entitled to recover the deficiency from the
debtor except if the chattel mortgage is a security for the purchase of
personal property in installments. In pledge, if the property is sold, and
there is a deficiency, the creditor is not entitled to recover the deficiency
notwithstanding any stipulation to the contrary.

Similarities between chattel mortgage and pledge

1. Both are executed to secure performance of a principal obligation;
2. Both are constituted only on personal property
3. Both are indivisible;
4. Both constitute a lien on the property;
5. In both cases, the creditor cannot appropriate the property to himself in
payment of the debt
6. In both cases, when the debtor defaults, the property must be sold for
the payment of the creditor; and
7. Both are extinguished by fulfillment of the principal obligation or by the
destruction of the property pledged or mortgaged.

II. Elements
A. Parties
▪ Mortgagor
▪ Mortgagee

B. Object
▪ The subject matter of chattel mortgage must always be personal
or movable property. Example: shares of stocks, machineries
treated by the parties as personal property, vessels, motor
vehicles, growing crops, large cattles, etc.

C. Cause
▪ Since it is an accessory contract, its consideration is the same as
of the principal contract.

D. Form
▪ It must be regsitered in the Chattel Mortgage Register.
▪ The registration of the chattel mortgage is an effective and
binding notice to the other creditors of its existence and creates
a real right or a lien which, being recorded, follows the chattels
whenever it goes.

III. Effect of Mortgage

▪ It constitute a lien on the property
▪ The description of the mortgaged property shall be such as to enable
the parties to the mortgage, or any other person, after reasonable inquiry
and investigation, to identify the same. (Sec. 7, Act 1508)
▪ A chattel mortgage shall be deemed to cover only the property described
therein. (Sec. 7, Act 1508)

IV. Discharge of Mortgage

 ▪ After payment of the debt or the performance of the condition specified
in the Chattel Mortgage (Sec. 3, Act No. 1508), the mortgagee must
discharge the mortgage in the manner provided by law otherwise, he
may be held liable for damages by any person entitled to redeem the
mortgage. (Sec. 8, Act No. 1508)

V. Redemption

▪ When the condition of a chattel mortgage is broken the following may

redeem: (Sec. 13, Act No. 1508)
a) the mortgagor;
b) a person holding a subsequent mortgage; or
c) a subsequent attaching creditor
▪ An attaching creditor who so redeems shall be subrogated to the rights
of the mortgagee and entitled to foreclose the mortgage in the same
manner that the mortgagee could foreclose it. (Sec. 13, Act No. 1508)
▪ The redemption is made by paying or delivering to the mortgagee the
amount due on such mortgage and the costs and expenses incurred by
such breach of condition before the sale thereof. (Sec. 13, Act No. 1508

VI. Foreclosure

▪ The mortgagee may, after thirty (30) days from the time of the condition
broken, cause the mortgaged property to be sold at public auction by a
public officer. (Sec. 14, Act No. 1508)
▪ The 30-day period to foreclose a chattel mortgage is the minimum period
after violation of the mortgage condition for the mortgage creditor to
cause the sale at public auction of the mortgage chattel with at least ten
(10)-days notice to the mortgagor and posting of public notice of time,
place, and purpose of such sale, and is a period of grace for the
mortgagor, to discharge the mortgage obligation. After the sale of the
chattel at public auction, the right of redemption is no longer available to
the mortgagor.