CREDIT TRANSACTIONS

PART II
PLEDGE & MORTGAGE
common provisions
constituted to secure the fulfillment of a principal valid obligation

pledgor or mortgagor is the absolute owner of the thing pledged

or mortgaged at the time they are constituted

persons constituting the pledge or mortgage have the free

disposal of the property and in the absence thereof, that they be
legally authorized for the purpose (free disposal: free from claims
and encumbrances)

thing pledged/mortgaged may be alienated (creditor is not the

automatic owner)
PLEDGE VS. MORTGAGE
constituted on movables movables or immovables

property is delivered to the

pledgee/ creditor or to a 3rd delivery is not necessary
person by consent of parties
not valid against 3rd persons unless
a description of the thing pledged not valid against 3rd persons
and the date of pledge appear on a if not registered
public instrument
 when thing pledged/mortgaged
may be sold or alienated to pay debt
BEFORE MATURITY

1. rule: they cannot be sold/alienated since payment of the debt

cannot yet be compelled

2. exception: pledgor/mortgagor fails to fulfill certain

conditions,debt becomes due

AT MATURITY

1. upon default of the debtor, the thing pledged/mortgaged may

be sold or alienated to pay the creditor
appropriation of the thing
pledged or mortgaged
pactum commissorium/pacto comisorio: automatic forfeiture;
ownership shall pass to the creditor by the mere default of the
debtor - stipulation is void-against public policy

creditor is allowed to move for the sale of the thing after the
principal obligation becomes due

In pledge: appropriation is allowed only if the thing pledge is

not sold at 2 public actions (acquittance for the entire claim as
an eect)

In mortgage: NOT allowed

indivisibility of pledge or
mortgage
general rule:a pledge or mortgage is indivisible, even if
the debt may be divided among the successors in
interest of the debtor or of the creditor.

exception: if several things are given in pledge or

mortgage and each one of them guarantees only a
determinate portion of the credit.The debtor shall have
a right of extinguishment of the pledge or mortgage as
the portion of the debt is satisfied
promise to constitute pledge
or mortgage
promise gives rise only to a personal action between the
contracting parties

debtor may be compelled to execute his promise

debtor's failure to comply: loses the benefit of period.

creditor may demand immediate payment
 criminal responsibility of
pledgor/mortgagor

Estafa is committed by a person who, pretending to be

the owner of any real property, shall convey, sell,
encumber or mortgage the same (Art. 316, Revised
Penal Code)
 PLEDGE
the debtor delivers to the creditor or a 3rd persona 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 al its fruits and
accessions.

characteristics: real contract, accessory contract, unilateral contract,

subsidiary contract

Kinds:

1. Conventional/voluntary

2. Legal
provisions applicable only to
pledge
actual transfer of possession is essential, either to the creditor or to the 3rd
person by common agreement (Art. 2093)

Subject matter: personal property (Art. 2094) or incorporeal rights (Art. 2095);
if negotiable, delivery plus indorsement; if non-negotiable, delivery only.

public instrument necessary to bind 3rd person (Art. 2096)-description of the

thing pledged and date of pledge

alienation of the thing pledged with the consent of the pledgee/creditor (Art.
2097) The vendee becomes the owner of the thing pledged, possession with
pledgee.

right of retention: until the debt is paid (Art. 2098)

obligations of the pledgee
Ordinary care of the thing pledged having the possession of
the property with right to of reimbursement of the expenses
incurred for its preservation (Art. 2099)

not to deposit/transfer possession the thing pledged with

another (Art. 2100) unless there is a contrary stipulation;
pledgee responsible for the acts of his agents/employees

obligation not to use the thing pledged (Art.2104) without

permission of pledgor

obligation to advise pledgor or owner result of public auction

(Art. 2116)
 rights of pledgee
right to compensate earnings of pledge with debt to the payment
of interest if owing and later to the principal but not the right to
use the thing or appropriate the fruits without the authority of the
owner (Art. 2102) interest, earnings and osprings of animals

right of pledgee against 3rd persons in in order to recover or defend

the thing pledged (Art. 2103)

right to cause sale of the thing pledged at public auction in case

there is danger of destruction or impairment or diminution in value
of the thing pledge without his fault (Art. 2108) : superior vs. Art.
2107

right to demand substitute or immediate payment in case he is

deceive on the substance or quality of the thing pledged (Art. 2109)
right to cause sale of the thing pledged (for the payment to the creditor)
with right to appropriate the thing after 2 auctions, the thing is not sold
(Art. 2112)

1. debt is due and unpaid;

2. sale must be at a public auction;

3. notice to the pledgor and owner, stating the amount due; and

4. sale must be made with the intervention of a notary public. [debtor

not entitled to excess of value of thing vs. principal obligation]

right to collect and receive amount due on credit pledged (Art. 2188)

right to choose which one of several things pledged shall be sold (Art. 2119)
 obligation of pledgor

responsibility of a bailor in commodatum for flaws of

the thing pledged (Art. 2101)
 rights of pledgor
right to ask that the thing pledged be deposited if the creditor (1) uses the thing
without authority; (2) misuses the thing in any other way; (3) if the thing is in danger
of being lost or impaired because of the negligence or willful act of the pledgee
(Arts. 2104 and 2106)

right to demand the return of the thing after the payment of full obligation (Art.
2105)

right to substitute thing pledged (Art. 2107) :

1. pledgor has reasonable grounds to fear the destruction or impairment of the

thing pledged;

2. there is no fault of the pledgee;

3. pledgor is oering in place of the thing another thing in pledge which is of the
same kind and quality;

4. pledgee does not choose to exercise his right of cause the thing pledged to be
sold at public auction.
extinguishment of pledge by return
of the thing pledged (Art. 2110)
requisite of pledge: possession of the thing by the
pledgee

prima facie presumption where the thing pledged in

possession of pledgor or owner and thus pledge is
extinguished

only the accessory obligation is remitted NOT the

principal obligation,
extinguishment by renunciation
or abandonment (Art. 2111)

waiver: statement in writing on renunciation or

abandonment

acceptance by the pledgor or return of the thing not

required, pledgee becomes depositary

principal debt not aected by waiver

 sale of the thing pledged
pledgor and pledgee have right to bid at public auction (Art.
2114)

sale extinguishes the principal obligation whether the price of

sale is more or less than the amount due: (Art. 2115)

A. debtor not entitled to excess EXCEPT if there is

contrary stipulation

B. Creditor cannot recover deficiency

pledgee to advise the pledgor of results (Art. 2116)

right of 3rd person to satisfy
obligation (Art. 2117)

rule: creditor not bound to accept payment form 3rd

person who has no interest in the fulfillment of the
obligation

exception: 3rd person has any right in or to the thing

pledged
 legal pledges
created by operation of law

1. possessor in good faith may retain thing until payment

of necessary expenses

2. agent to retain thing in pledge object of agency until

reimbursement of advances, indemnity of damages

3. laborer's wages on goods manufactured

 REAL MORTGAGE

real estate mortgage: debtor secures to the creditor the

fulfillment of a princiapl obligation, subjecting to a
security (immovables and alienable real rights) in case
the obligation is not complied with at the time of
stipulation.

real, accesory, subsidiary

 kinds of mortgage

voluntary

legal (Arts. 2125; 2082; 2083)

equitable (Arts. 1365; 1450;1454;1602;1603;1604;1607)

 requisites of a valid
mortgage

public instrument

recorded with the Register of Deeds (valid between

the parties)
 effect and extent of
mortgage

EFFECT: creates a real right (provided it must be

registered) AND creates merely an encumbrance

EXTENT: property, accessions, improvements, fruits,

p r o ce e d s o f i n s u r a n ce e x ce p t w h e n t h e r e i s a
stipulation to the contrary
 rights of mortgagee/
creditor

To assign or alienate mortgage credit (Art. 2128)

To claim from a 3rd person in possession of the

mortgaged property the payment of the credit secured
(Art. 2129)
stipulation forbididng alienation
of mortgaged property

void (Art.2130)

transfereeis bound to respect the encumbrances as the

mortgage is a real right
 foreclosure of mortgage
remedy in favor of the mortgagee by which he subjects
the mortgaged property to the satisfaction of the
obligation to secure which the mortgage was given
(public sale)

kinds: judicial (court) and extrajudicial (contract)

proceeds of sale: amount due the mortgagee; claims of

person holding subseqent mortgages in order of
priority; excess for the mortgagor
 redemption

equity of redemption: redemptio after default of the

mortgagor but before the sale of the mortgaged
property

right of redemption: extrajudicial sale: 1 year from and

after date of registration of sale; judicial sale: no right
after the confirmation of sale.
 antichresis (Art. 2132)
creditor acquires the right to receive the fruits of an
immovable of his debtor, with the obligation to apply to the
(a)payment of interest, if owing and (b) principal debt based
on actual market value at the time of application (Art. 2133)

accesory, and formal (in writing or if not-void Art. 2134)

pledge and antichresis:debtor loses control of the subject

matter

real mortgage and antichresis: subject is real property

 antichresis vs. pledge

real property personal propery

perfected by delivery of
perfected by mere consent
the thing
antichresis vs. real mortgage

property delivered to the the debtor retains

creditor possession of the property

creditor acquire the right

creditor NO right to
to receive the fruits of the
receive the fruits
property
obligations of the antichretic
creditor (Art. 2135)

pay the taxes and charges upon the estate

bear necessary expenses for preservation

can be deducted from the fruits

obligations of the antichretic
debtor (Art. 2136)

REACQUIRE or demand the return of the property

WHEN the debt is totally paid

Compelled to enter again the enjoyment of the

property if the creditor exempt himself from the
obligations imposed upon him, except when there is a
stipulation to the contrary
nonpayment of the debt by the
antichretic debtor (Art. 2137)

creditor does not acquire ownership of the real

property in case of nonpayment. contrary stipulation is
void.

legal remedy: specific performance or judicia sale

(foreclosure of mortgage)
CHATTEL MORTGAGE
(ART. 2140)
Personal property is recorded in the Chattel Mortgage
Register of the Register of Deeds (where the mortgagor
resides) as a security for the performance of an obligation

accessory, formal (registration is indespensable), unilateral

growing crops and large cattle are considered chattel

Act 1508 -Chattel Mortgage Law (CML); Civil Code;

Administrative Code; Revised Penal Code; Ship Mortgage
Decree
 affidavit of good faith
an oath in a contract of chattel mortgage wherein
parties "severally swear that the mortgage is made for
the purpose of securing the obligations specified in the
conditions and for NO other purposes and that the
same is a just and a valid obligation and one NOT
entered into for the purpose of fraud ( Sec. 5 CML)

absence of the adavit: vitiates mortgage only as

against 3rd persons without notice like creditors and
subsequent encumbrances
 foreclosure of chattel
mortgage
creditor has NO right to appropriate the mortgaged
property

remedy: proceeds of the public sale of the mortgaged

property

deficiency after the public sale: creditor may recover the

deficiency as the law is silent EXCEPT:

if the chattel mortgage is constituted as security for the

purchase of personal property in installments
proceeds of the sale:

1. costs and expenses of keeping and sale

2. payment of obligation secured

3. claims of person holding subsequent mortgages

4. balance, to the mortgagor

right of redemption: by paying or delivering to the mortgagee the amount

due on such mortgage and the costs and expenses by the following:

1. mortgagor

2. person holding a subsequent mortgage

3. subsequent attaching mortgage

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FUTURE CPA'S AND....
(future lawyers)