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Provisions Common to Pledge and Mortgage (Common Provisions), Articles 2085- 2092
Is a promise to constitute a pledge or mortgage valid?
Yes. A promise to constitute a pledge or mortgage is valid; however, it gives rise only to a personal
action between the contracting parties. (Art. 2092)
Which of the following is the appropriate remedy under a contract of pledge or mortgage?
May the pledgor or mortgagor obtain a release of the thing/s given by way of pledge or mortgage, to the
extent that the principal obligation has been partially fulfilled?
⇒ As a general rule, this is not possible; a pledge or mortgage being indivisible.(Art. 2089)
Is partial release possible, where there are several debtors who are not solidarily bound?
⇒ No. This is not possible. The indivisibility of a pledge or mortgage is not affected by the fact that the
debtors are not solidarily liable (Art. 2090)
⇒ A pledge is a contract by virtue of which the debtor delivers to the creditor or to a third person a movable,
or document 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. It may be voluntary or conventional, and legal (or one created by law).
Which of the following, in addition to the essential requisites under Art. 2085, is/are required to constitute
a contract of pledge?
(a) amount of the principal and of the interest shall be specified in writing; otherwise, the contract of pledge
shall be void
(b) description of the thing pledged and the date of the pledge must appear in a public instrument
(c) the subject of the pledge must be recorded in the appropriate registry of property
(d) there must be a written instrument of pledge
(e) the thing pledged must be placed in the possession of the creditor or a third person
⇒ No. Whether actual or constructive delivery is required depends on the peculiar nature of the things given
in pledge. (see Yuliongsui v. PNB)
⇒ Pledge may be constituted over movable property: (a) within the commerce of man and (b) susceptible of
possession. It may also cover incorporeal rights. Future property may not be the subject of pledge. Pledge
may extend to the fruits, income, dividends, or interests, subject to compensation, first as to interest,
and/or application to principal. (There may be stipulation to the contrary.)
⇒ In case of pledge of animals, their offspring shall pertain to the pledgor or owner of the animals pledged,
but shall be subject to the pledge, if there is no stipulation to the contrary. (Arts. 2094, 2095)
What is a rationale for requiring that a description of the property and date of the pledge be in a public
instrument?
⇒ The rule is a substantive one, without which the pledge cannot bind third parties. One aim to is prevent
fraud, particularly upon creditors, by a debtor who may attempt to conceal his property or remove them
from his estate by simulating a pledge. (Review Caltex v. CA)
⇒ (Take note, further, that the creditor may bring actions pertaining to the owner of the thing pledged under
Art. 2103 (a real right enforceable against third persons) only if the pledge is embodied in a public
instrument, containing description of the thing and the date of the pledge.)
⇒ Yes. A pledge may be created by operation of law. Examples are: (a) a possessor in good faith awaiting
reimbursement (Art. 546); (b) under lease (contract for piece of work), one who has executed a work upon
a movable has a right to retain it by way of pledge until he is paid (Art. 1731); and (c)in a deposit, where
depositary may retain the thing in pledge until the full payment of what may be due him by reason of the
pledge (Art. 1994). These are governed by provisions on pledge, as to possession, care, sale and
termination. (Art. 2121)
⇒ 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. (Art. 2098)
⇒ Corollarily, the debtor is obliged not to 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 the proper case (Art. 2105)
⇒ Although, there is no transfer of ownership (Art. 2103), the creditor may bring actions which pertain to the
owner of the thing pledged in order to recover it from, or defend it against a third person.
⇒ Note that pledgor has same responsibility as bailor in case under Art. 1951.
When, then, may the pledgor resort to return of the thing or other remedies?
⇒ without prejudice to Art. 2108, when there are reasonable grounds to fear the destruction or impairment of
the thing pledged, without fault of pledgee (Art. 2107)
DEPOSIT WITH THIRD PERSON
⇒ when through negligence or willful act of pledgee, the thing is in danger of being lost or impaired (Art.
2106)
⇒ when, through no fault of the pledgee, there is danger or destruction, impairment, or diminution in value
of thing pledged, he may cause
While the thing is in possession of the creditor, what standard of care must be observed?
⇒ As a general rule, he may not use the thing. The exceptions are: (a) when authorized, or (b) when
necessary for the preservation of the thing. (Art. 2104)
What is the remedy of the owner/pledgor in case of unauthorized use or misuse by the creditor?
⇒ Owner/pledgor may cause for the thing to be under judicial or extrajudicial deposit.
What then is the remedy of the pledgee in case there is danger of destruction, impairment, or
diminution of value?
⇒ The pledgee may cause the thing to be sold in a public auction. (Art. 2108)
May the pledgee appropriate the proceeds (or resort to compensation) in satisfaction of the debt?
⇒ No. The proceeds are held by the pledgee as security in place of the thing sold.
Is it correct to conclude that, notwithstanding transfer of possession only and retention by
owner/pledgor of ownership, that the owner of the thing cannot alienate the same?
⇒ No. This is incorrect. The thing may be alienated by the owner, with the pledgee’s consent. The purchaser
then takes the thing subject to the pledge. It is consent of pledgee which operates as transfer. Pledgee
retains ownership. (Note what may happen if there is no public instrument with description and date of
pledge.)
What is the principal remedy of the creditor, whose credit has not been satisfied in due time?
Effect of Sale
(a) The sale of the thing pledged extinguishes the principal obligation, whether the price is more or less
than the amount due.
(b) Price > Amount Due, debtor not entitled to excess, unless stipulated otherwise
(c) Price < Amount Due, creditor not entitled to deficiency. Stipulation to the contrary is void.
⇒ 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. (Creditor cannot refuse payment.) (Art. 2117)
⇒ A third party pledgor has same rights as guarantor under Arts. 2066 to 2070, Arts. 2077-2081. He shall not
be prejudiced by any waiver of rights by the principal obligor.
What is a mortgage?
⇒ Mortgage is a contract whereby the debtor secured to the creditor the fulfillment of a principal
obligation, specially subjecting to such security immovable property or real rights over immovable
property, which obligation shall be satisfied with the proceeds of the sale of the said property or rights,
in case the said obligation is not complied with at the time stipulated. Chattel mortgage has a specific
definition.
In addition to the requisites under Art. 2085, what must be complied with in order to establish a valid
mortgage as against third parties?
⇒ The document in which it appears must be recorded in the Registry of Property. (Note other requisites
with respect to Chattel Mortgage.)
⇒ No. Indeed, the persons in whose favor the law establishes a mortgage have no other right than to
demand the execution and recording of the document in which the mortgage is formalized.
⇒ 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. (Note that
this is a significant concept, even in the treatment of mortgage under provisions on Concurrence and
Preference of Credits.)
⇒ By mortgage, property is thus identified or set apart from the mass of the property of the debtor
mortgagor as security for the payment of money or fulfillment of an obligation, to answer the amount of
indebtedness in case of non-payment. (Note further, this is the basic rationale for availability of
deficiency to the creditor/mortgagee, unlike in the case of pledge.)
Does this mean that the mortgaged property may be further alienated?
⇒ Yes. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void. (Art.
2130)
⇒ As a general rule, a mortgage must sufficiently describe the debt sought to be secured by mortgage
unless it comes fairly within the terms of the mortgage.
⇒ A mortgage, however, may also cover past obligations and/or future advances, and be continuing in
nature. The amounts specifically stated in the contract of mortgage do not limit the amount for which the
mortgaged property may stand as security, if the intend to secure future loans or advances may be
sufficiently determined from the instrument.
⇒ “For the payment of the loan of PhP[specific amount] and such other loans or other advances already
obtained or still to be obtained by mortgagors as makers.”
⇒ The previously discussed provisions are known in American jurisprudence, as well as in our own, as
dragnet clause, specifically phrased to subsume all debts of past or future origin.
⇒ Note that this questions is significant vis-à-vis the requirement that the mortgage must be constituted by
the owner of the property; hence, the general disability to subject future property to a mortgage. (At best,
it may be covered under a promise to constitute a mortgage.)
⇒ We learn from People’s Bank and Trust v. Dahican Lumber that, under the factual setting of that case,
the parties may stipulate on after-acquired properties and that the character of the properties there were
properly made the subject of the provision.
⇒ Note here the Supreme Court found an attempt to circumvent this provision -
⇒ Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property of every nature
and description taken in exchange or replacement, as well as all buildings, machineries, fixtures, tools,
equipments, and other property that the mortgagor may acquire, construct, install, attach; or use in, to
upon, or in connection with the premises — that is, its lumber concession — "shall immediately be and
become subject to the lien" of both mortgages in the same manner and to the same extent as if already
included therein at the time of their execution.
⇒ The case of Prudential v. Alviar teaches us important information regarding a “dragnet clause” -
⇒ Also known as a “blanket clause”
⇒ Specifically phrased to subsume all debts of past or future origin
⇒ Carefully scrutinized and strictly construed
⇒ Enables the parties to provide continuous dealings, the nature or extent of which may not be known or
anticipated at the time, and they avoid the expense and inconvenience of executing a new security on
each new transaction.
⇒ A “dragnet clause” operates as a convenience and accommodation to the borrowers as it makes
available additional funds without their having to execute additional security documents, thereby saving
time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera.
⇒ Considered valid and legal
⇒ Amounts specified do not necessarily limit the amount for which the mortgage may stand as security
⇒ Intent to secure future and other indebtedness must be asceretained
⇒ The problem in Alviar - “If the parties intended that the “blanket mortgage clause” shall cover
subsequent advancement secured by separate securities, then the same should have been indicated in the
mortgage contract. Consequently, any ambiguity is to be taken contra proferentum, that is, construed
against the party who caused the ambiguity which could have avoided it by the exercise of a little more
care.”
⇒ In Mojica v. Court of Appeals, the pertinent real estate mortgage contract states among others:
“... agreement for the payment of the loan of P20,000.00 and such other loans or other advances already
obtained or still to be obtained by the mortgagors …”
⇒ There the Supreme Court ruled that It has long been settled by a long line of decisions that mortgages
given to secure future advancements are valid and legal contracts; that the amounts named as
consideration in said contract do not limit the amount for which the mortgage may stand as security if
from the four corners of the instrument the intent to secure future and other indebtedness can be
gathered.
⇒ A mortgage given to secure advancements is a continuing security and is not discharged by repayment of
the amount named in the mortgage, until the full amount of the advancements are paid.
⇒ Note that, consistent with Article 2085 of the Civil Code, a sale though unregistered, would take
precedence over a registered mortgage, considering that the sale deprived the mortgagor of ownership
(Flancia v. Court of Appeals, 457 SCRA 224)
Remedies
⇒ While we know that the principle remedy under a mortgage is foreclosure, we learn in Caltex v. IAC,
that the secured creditor has two alternative remedies.
⇒ Where a debt is secured by a mortgage and there is a default in payment on the part of the mortgagor, the
mortgagee has a choice of one (1) of two (2) remedies, but he cannot have both. The mortgagee may:
⇒ When the mortgagee chooses the foreclosure of the mortgage as a remedy, he enforces his lien by the
sale on foreclosure of the mortgaged property. The proceeds of the sale will be applied to the satisfaction
of the debt. With this remedy, he has a prior lien on the property. In case of a deficiency, the mortgagee
has the right to claim for the deficiency resulting from the price obtained in the sale of the real property
at public auction and the outstanding obligation at the time of the foreclosure proceedings.
⇒ On the other hand, if the mortgagee resorts to an action to collect the debt, he thereby waives his
mortgage lien. He will have no more priority over the mortgaged property. If the judgment in the action
to collect is favorable to him, and it becomes final and executory, he can enforce said judgment by
execution. He can even levy execution on the same mortgaged property, but he will not have priority
over the latter and there may be other creditors who have better lien on the properties of the mortgagor.
Extrajudicial Foreclosure
When applicable
(a) Where there is a power of sale in the mortgage deed
(b) Nature of an agency, not mere representation
(c) Is not extinguished by death of the mortgagor
(d) Does not prohibity mortgagee from bidding
Notice Requirement
⇒ Posting of 20 days, 3 public places in city or municipality where property located, but need not be on
property itself
⇒ Publication once a week for three consecutive weeks in newspaper of general circulation (not widest
circulation)
⇒ Personal or other notice to any particular party not required, unless otherwise stipulated
⇒ The rule is statutory provisions governing public notice of foreclosure must be strictly complied with; even
slight deviation will invalidate sale or, at the very least, render it voidable.
Sale
⇒ Within province, by public auction, without prior levy
⇒ Under direction of sheriff, judge, notary (see Supreme Court Circular)
⇒ Price need not be amount of debt or value of property
⇒ Creditor or representative may participate as bidder
⇒ Result of sale is certificate of sale to the purchaser
Purchaser
⇒ Entitled to registration of certificate of sale
⇒ Acquires rights to property which owner-mortgagor has, subject to prior liens
Right of redemption
⇒ Is the prerogative to re-acquire the property after registration of foreclosure sale
⇒ Is different from a right to repurchase
⇒ Vested in debtor, successor-in-interest, judicial creditor and lienholders subsequent to mortgage
⇒ Subsists for one year from registration of certificate of sale
⇒ Exercised by offer with tender (an action to repurchase has been construed as such offer)
⇒ Purchaser at public auction entitled to possession during period of redemption by filing a petition for
issuance of writ of possession, upon filing of bond
⇒ Upon lapse of redemption period, purchaser is entitled to consolidate title by affidavit of consolidation at
Register of Deeds and obtain possession by writ of possession or other action
⇒ Extrajudicial Foreclosure
Deficiency Judgment
⇒ Has been defined as one for the balance of the indebtedness after applying the proceeds of the sale of the
mortgaged property to such indebtedness and necessarily filed after foreclosure proceeding.
⇒ Remedies of mortgagor are (1) personal action or (2) foreclosure, each one affording complete relief; hence,
mutually exclusive
When applicable
⇒ Where there is no special power in the mortgage permitting extrajudicial foreclosure
⇒ Where such power is granted, annotators are of opinion that it should not bar resort to judicial foreclosure
⇒ In petition for sale of property in antichresis
⇒ Note that chattel mortgage not mentioned under the rules, but J. Feria (ret.) is of the opinion that rules may
apply to chattel mortgage
Procedure
⇒ By action in court
⇒ Court renders judgment for (1) sum found due with order to pay the court or the judgment obligee, not less
than 90 days and not more than 120 days from entry of judgment and (2) upon default, cause the sale
⇒ Motion to sell
⇒ Motion for order of confirmation of sale
Equity of Redemption
⇒ It is the right of defendant mortgagor (in equity) to extinguish the mortgage and retain ownership by paying
secured debt (or amount specified in judgment) witin the period under the Rule. This period is mandatory
and cannot be changed by stipulation.
⇒ According to J. Feria, it may be exercised even after the sale but before confirmation of sale by the court.
⇒ Judicial Foreclosure
⇒ Effect of confirmation
Divests rights in the property and invests rights in the purchaser, subject to right of redemption under Rep.
Act No. 337.
Foreclosure
⇒ Foreclosure action prescribes in ten years.
⇒ An action to enforce a right arising from a mortgage should be made within ten (10) years from the time the
right of action accrues; otherwise, it wall be barred by prescription and the mortgage creditor will lose his
rights under the mortgage.
Chattel Mortgage (Act No. 1508, as amended)
Subject Matter
⇒ Generally, movable.
⇒ Examples in jurisprudence include shares of stock, an interest in the business, machinery treated by the
parties as personal property, vessels, motor vehicles, house of mixed materials, house built on rented land)
(a) The chattel mortgage is being executed for not purpose other than to secure the obligation described
in the deed;
(b) The same is valid and binding in accordance with its terms; and
(c) The same is not entered into for the purpose of fraud.
⇒ In real estate mortgage, the mortgage may, under certain circumstances, extend to after-acquired property. In
a chattel mortgage, however, there is a requirement that personal property being mortgaged is required to be
described in the deed of chattel mortgage itself, so as to enable the parties thereto, or other person, after
reasonable inquiry or investigation, to identify the said mortgaged chattels. This renders an “after-acquired
property clause” of doubtful validity. But Torres v. Limjap teaches that it may extend to shifting stock.
Foreclosure
⇒ The proceeds of the sale shall be applied to the payment, first, of the costs and expenses of keeping the
chattel and sale thereof, and then to the payment of the demand or obligation secured by chattel mortgage.
The residue, if any, shall be paid to persons holding subsequent mortgages in their order. Thereafter, if there
be any balance still remaining, the same shall be delivered to the mortgagor.
Deficiency
⇒ In the event the foreclosure sale proceeds is insufficient to cover the entire debt secured by the chattel
mortgage, the mortgagor may maintain an action for recovery of deficiency. The rationale offered in support
of this position is that, unlike a pledge, chattel mortgage is given as security and not as payment for the debt
in case of default.
⇒ Exception is Article 1484 of the Civil Code, on sale of personal property in installments, where chattel
mortgage constituted as security for the purchase price.
Deposit
Define a contract of deposit.
⇒ A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation
of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal
purpose of the contract, there is no deposit but some other contract. It may be judicial or extrajudicial; in
case of the latter, voluntary or necessary.
Are fixed, savings and current deposits of money in banks and similar institutions considered contracts of
voluntary deposit?
⇒ Fixed, savings and current deposits of money in banks and similar institutions shall be governed by the
provisions concerning loan.
The depositary is liable for the loss of the thing through a fortuitous event:
(a) If it is so stipulated;
(b) If he uses the thing without the depositor’s permission;
(c) If he delays its return;
(d) If he allows others to use it, even though he himself may have been authorized to use the same
Obligations of Depositor
⇒ Where gratuitous, reimburse the depositary for expenses incurred for preservation of the thing
⇒ Reimburse for loss arising from character of the thing deposited (exceptions in Art. 1993)
Conditions of return
⇒ As a general rule, thing must be returned to the depositor upon demand, even though a specified period or
time for return has been fixed
⇒ The thing deposited shall be returned with all its products, accessories and accessioins
⇒ Where delivered closed and sealed, return must be in same condition
⇒ If place was designated for return at the time the deposit was made, return must be made at such place, with
depositor shouldering cost of transportation
Let us say the depositor has made a demand for the return of the thing. May the depositary refuse to
return on the ground that he doubts the depositor’s legal title to the thing?
⇒ No. He may not refuse. The depositary cannot demand that the depositor prove his ownership of the thing
deposited.
⇒ If depositary discovers thing has been stolen and knows true owner - advise latter of deposit
⇒ If owner, so informed, does not claim within one month, depositary relieved of responsibility by returning
thing to the depositor
⇒ If depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the
depositor - he may return the same
Antichresis
What is a contract of 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.
Remedies
May the creditor claim ownership of the real estate for non-payment of debt?
⇒ No. Any stipulation to this effect shall be void.
⇒ In the event of non-payment, the creditor may petition the court for the payment of the debt or the sale of
real property. Rules on judicial foreclosure applies.
⇒ Concurrence occurs when the same specific property of the debtor or all of his property is subjected to
claims of several creditors. Concurrence of credits raises no question of consequence where value of
property or asset not sufficient. When property not sufficient, preference arises.
⇒ Where there is concurrence, credits stand equally, without priorty among themselves, and satisfied pro rata.
Preference
⇒ Distinction should be made between a preference and a lien. A preference applies only to claims which to do
not attach to specific properties. The right of first preference as regards unpaid wages does constitute a lien
on the property of the insolvent debtor in favor of workers, but a preference in application.
Application (Classification of Credits)
⇒ Articles 2241 and 2242 are special preferred credits. Only taxes enjoy priority. Excess used to satisfy other
credits, which are not preferred. Within provisions, credits are equal, concurrent and proportionate.
⇒ If asset not sufficient, special preferred may become ordinary preferred under 2244
⇒ 2245 refers to common credits
⇒ Claims of workers become specially preferred only when under Article 2241 (6) or Article 2242 (3).
Sample problem -
A debtor corporation in insolvency has the following creditors:
(a) PC Stop - for various laptops and personal computers sold on credit, amounting to PhP450,000.00
(b) Rapid Din - for parts and repair service rendered on a company car in the amount of PhP20,000.00
(c) Employees engaged in manufacturing parts produced and sold by company for unpaid wages - PhP1M
(d) Nik Nak - former employee and judgment creditor in illegal dismissal case for PhP 300,000.00
(e) BIR - unpaid VAT - PhP200,000.00
(f) LGU - unpaid real estate taxes - PhP80,000.00
(g) The Credit Company - loan of PhP2.5M
Apply the rules on concurrence and preference of credits
⇒ Claim of LGU is preferred under 2242, should be satisfied first as to the specific immovable
⇒ Claim of Rapid Din is preferred under 2241, as to vehicle
⇒ Claim of workers preferred under 2241, as to goods manufactured
⇒ Following claims must be paid in following order - (2244)
⇒ BIR for VAT
⇒ Nik Nak’s claim
⇒ The claim of the Credit Company, and PC Stop as unpaid seller are common credits and should be paid last.
(Some annotators indicate that PC Stop claim may be considered preferred as to the equipment, per 2241,
par. 3).