SIMILARITIES BETWEEN PLEDGE, REAL ESTATE MORTGAGE AND CHATTEL MORTGAGE P100,000 debt owed by his father to X’s

P100,000 debt owed by his father to X’s father. May A ask for the release of the ring or gold watch? May X
release the ring or gold watch?
REQUISITES OF CONTRACT OF PLEDGE AND MORTGAGE:
1. That they be constituted to secure the fulfillment of a principal obligation; Rule of Indivisibility NOT applicable: If there being several things given in mortgage or pledge, each one of them
2. That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; guarantees only a determinate portion of the credit.
3. That the persons constituting the pledge or mortgage have the free disposal of their property, and in the The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt
absence thereof, that they be legally authorized for the purpose. for which each thing is specially answerable is satisfied.

ILLUSTRATION: On September 30, 2020, D executed a contract of pledge over the cellphone of his father to secure ILLUSTRATION: D has 2 debts with C for P50,000 each. To secure the obligations, D gave by way of pledge his
his (D’s) obligation to C for P10,000. On October 31, 2020, the father of D died and as sole heir, he obtained diamond ring and gold watch.
ownership over all the assets, including the cellphone. What is the status of the contract of pledge?
In this case, each of the contract of pledge is to secure separate obligations. As such, Once D paid P50,000, he can
Accessory contract: a pledge or mortgage, being an accessory contract, cannot exist without a valid demand the release of the diamond ring or gold watch, depending to which obligation each pertains.
obligation or a principal contract.

Nevertheless, similar to a guaranty, a pledge or a mortgage may be constituted to guarantee the

performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation.
It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the
pledge or mortgage consists may be alienated for the payment to the creditor.
The contract of pledge or mortgage may secure all kinds of obligations, be they pure or subject to a suspensive
or resolutory condition.
Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their
own property.

ILLUSTRATION: D is indebted to C for P100,000. X executed a pledge/mortgage in favor of C to secure D’ debt.

May X validly secure the obligation of D?

AUTOMATIC APPROPRIATION PROHIBITED: PACTUM COMMISSORIUM – VOID: The creditor cannot

appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null
and void. The stipulation is otherwise known as Pactum Commissorium.

INDIVISIBILITY OF CONTRACT: A pledge or mortgage is indivisible, even though the debt may be divided among
the successors in interest of the debtor or of the creditor.

Therefore:
1. The debtor’s heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge
or mortgage as long as the debt is not completely satisfied.
2. Neither can the creditor’s heir who received his share of the debt return the pledge or cancel the mortgage, to
the prejudice of the other heirs who have not been paid.
The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable.

ILLUSTRATION: D executed a contract of pledge in favor of C, delivering his diamond ring and a gold watch, as
security for his loan amounting to P100,000. Without the debt being paid, C died leaving X and Y, his sole heirs; D
likewise died leaving A and B, his sole heirs. A eventually made a payment to X representing his share of the
 PLEDGE ILLUSTRATION: D promised to deliver to C a diamond right worth P100,000. To secure the obligation, D
delivered a promise note executed by X in favor of D, which earns 10% annual interest.
PLEDGE is a contract by virtue of which the debtor delivers to the creditor or to a third person movable (Art. 2094)
or document evidencing incorporeal rights (Art. 2095) for the purpose of securing the fulfilment of a principal In this case, the interest being earned by the promissory note given by way of pledge will also form part of what
obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its secures the obligation to deliver.
fruits and accessions.
4. In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of animals pledged, but shall
Delivery: in addition to the above-mentioned essential requisites of contracts of pledge or mortgage, it is necessary, be subject to the pledge, if there is no stipulation to the contrary.
in order to constitute the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of 5. Unless the thing pledged is expropriated, the debtor continues to be the owner thereof.
a third person by common agreement. 6. Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to
recover it from, or defend it against a third person.
KINDS OF PLEDGE:
1. Voluntary or conventional – created by agreement of the parties; or Deposit of the Thing Pledged with a Third Person:
2. Legal – created by operation of law. 1. On the part of the pledgee – if there is stipulation granting such right; 2. On the part of the pledgor:
a. If through the negligence or willful act of the pledgee, the thing pledged is in danger of being lost or
CHARACTERISTICS: impaired.
1. REAL CONTRACT – perfected by the delivery of the thing pledged; b. If the pledgee uses or misuses the thing.
2. ACCESSORY CONTRACT – no independent existence of its own;
3. UNILATERAL – creates an obligation solely on the part of the creditor to return the thing; Fear of destruction, loss or impairment WITHOUT pledgee’s fault
4. SUBSIDIARY – obligation incurred does not arise until the fulfilment of the principal obligation which is secured. 1. The pledgor may demand the return of the thing, upon offering another thing in pledge, provided the latter
is of the same kind as the former and not of inferior quality; or
CAUSE OR CONSIDERATION: 2. The pledgee may cause the same to be sold at a public sale.
1. Pledgor/debtor – the principal obligation;
2. Pledgor not the debtor – compensation stipulated or mere liberality. The proceeds of the auction shall be a security for the principal obligation in the same manner as the thing
OBJECT: originally pledged.
1. Movable property; The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged.
2. 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 Form: there is no form required to constitute a contract of pledge.
delivered to the creditor, and if negotiable, must be indorsed. In order to affect third persons:
1. There must be a public instrument
Rules: 2. The public instrument contains:
1. Within the commerce of man and capable of possession; a. The description of the thing pledged; and
2. If the pledge earns or produces fruits, income, dividends, or interests, the creditor shall compensate what he b. the date of the pledge.
receives with those which are owing him; but if none are owing him, or insofar as the amount may exceed that Alienation (Sale) of the thing pledged: is allowed with the consent of the pledgee.
which is due, he shall apply it to the principal. • The ownership of the thing pledged is transmitted to the vendee or transferee as soon the pledgee consents
to the alienation,
ILLUSTRATION: D is indebted to C for P100,000, secured by a pledge on shares of securities owned by D in XYZ • But the creditor-pledgee shall continue in possession.
Corporation. While the debt remained unpaid, the Corporation declared dividends.
In this case, C may apply such dividends to any interest that may be due to him; if none, he can apply whatever Creditor-pledgee:
he received as payment for the principal. 1. The creditor shall take care of the thing pledged with the diligence of a good father of a family;
2. He has a right to the reimbursement of the expenses made for its preservation, and is liable for its loss or
3. Unless there is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the right deterioration, in conformity with the Civil Code.
pledged. 3. The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged.
4. If the creditor is deceived on the substance or quality of the thing pledged, he may either claim another thing
in its stead, or demand immediate payment of the principal obligation.
Use of the Thing Pledged: All bids at the public auction shall offer to pay the purchase price at once. If any other bid is accepted, the pledgee
General Rule: The creditor cannot use the thing pledged, without the authority of the owner. is deemed to have been received the purchase price, as far as the pledgor or owner is concerned.
Exceptions: Sale of the thing; proceeds thereof:
1. Authority from the owner (pledgor); or 1. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is
2. When the preservation of the thing pledged requires its use, it must be used by the creditor but only for that otherwise agreed.
purpose. 2. If the price of the sale is less, the creditor shall not be entitled to recover the deficiency, notwithstanding
any stipulation to the contrary.
Use (when there is no right) or misuse will authorize the owner may ask that the thing be judicially or extrajudicially
deposited. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are
equal to the amount of the principal obligation, interest and expenses in a proper case.
Pledgor: ILLUSTRATION: D is indebted to C for P100,000 secured by a pledge over D’s diamond ring. Unable to pay on the
1. The pledgor who, knowing the flaws of the thing pledged, does not advise the pledgee of the same, shall be due date, C foreclosed the pledge. If the proceeds of the foreclosure sale is:
liable to the latter for the damages which he may suffer by reason thereof. 1. P120,000 – as a general rule, C will be entitled thereto, except if there is a stipulation that the debtor-pledgor
2. The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he will be entitled to the excess.
has paid the debt and its interest, with expenses in a proper case. 2. P80,000 – C is not entitled to the deficiency regardless of stipulation.

Extinguishment of a Contract of Pledge: can be by any mode of extinguishment of obligations or the Credit as the object of a contract of pledge: If a credit which has been pledged becomes due before it is
extinguishment of the principal obligation or contract, but also: redeemed, the pledgee may collect and receive the amount due. He shall apply the same to the payment of his
1. Thing Pledged is Returned: If the thing pledged is returned by the pledgee to the pledgor or owner, the claim, and deliver the surplus, should there be any, to the pledgor.
pledge is extinguished. Any stipulation to the contrary shall be void.
ILLUSTRATION: D is indebted to C for P10,000 due on October 15, 2020. To secure the performance of the
Presumption: If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or obligation, D pledged his credit by delivering the promissory note issued to him by M. D, accordingly, negotiated
owner, there is a prima facie presumption that the same has been returned by the pledgee. This same said note to C which is due on September 30, 2020. On September 30, 2020, the promissory note becoming due,
presumption exists if the thing pledged is in the possession of a third person who has received it from the C will be allowed to collect the amount thereof and apply the P10,000 to the obligation of D, and return the excess
pledgor or owner after the constitution of the pledge. to D.

2. Renunciation or Abandonment of Pledge: A statement in writing by the pledgee that he renounces or Note that in this illustration, there was no foreclosure, this is different from foreclosure sale where the creditor-
abandons the pledge is sufficient to extinguish the pledge. For this purpose, neither the acceptance by the pledgee is entitled to the excess as a general rule.
pledgor or owner, nor the return of the thing pledged is necessary, the pledgee becoming a depositary.
Other Rules:
Foreclosure sale: 1. After the public auction, the pledgee shall promptly advise the pledgor or owner of the result thereof.
1. The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the 2. Any third person who has any right in or to the thing pledged may satisfy the principal obligation as soon as
sale of the thing pledged. the latter becomes due and demandable.
2. This sale shall be made at a public auction, and 3. If two or more things are pledged, the pledgee may choose which he will cause to be sold, unless there is a
3. With notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which stipulation to the contrary. He may demand the sale of only as many of the things as are necessary for the
the public sale is to be held. payment of the debt.
4. If a third party secures an obligation by pledging his own movable property, he shall have the same rights as
Creditor’s right of appropriation: a guarantor to be:
1. If at the first auction the thing is not sold, a second one with the same formalities shall be held; and a. Indemnified for the total amount of the debt, including interest, expenses or damages, if they are due;
2. If at the second auction there is no sale either, the creditor may appropriate the thing pledged. b. Subrogated to all the rights the creditor had against the debtor;
In this case he shall be obliged to give an acquittance for his entire claim. c. He is not prejudiced by any waiver of defense by the principal obligor.
5. With regard to pawnshops and other establishments, which are engaged in making loans secured by pledges,
Pledgor’s Right to bid: At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right the special laws and regulations concerning them shall be observed, and subsidiarily, the provisions of this
if he should offer the same terms as the highest bidder. Title.
The pledgee may also bid, but his offer shall not be valid if he is the only bidder.
Legal Pledge: ILLUSTRATION: D is indebted to C for P1,000,000. To secure the obligation, D mortgaged his lot and executed a
1. Pledges created by operation of law, such as those referred to in Articles 546, 1731, and 1994, are governed Deed of Real Estate Mortgage. In this case,
by the articles on the possession, care and sale of the thing as well as on the termination of the pledge. 1. D can validly dispose or transfer the lot to third persons. Any stipulation prohibition him (pactum de non-
However, after payment of the debt and expenses, the remainder of the price of the sale shall be delivered to aliendo) shall be void.
the obligor. 2. If D sells the property to X:
2. A thing under a pledge by operation of law may be sold only after demand of the amount for which the thing a. X shall not be bound by the mortgage if the Deed of Real Estate Mortgage is not registered in the Registry
is retained. of Property;
3. The public auction shall take place within one month after such demand. If, without just grounds, the creditor b. If the Deed is registered, X shall be bound by such registered mortgage, and in case of foreclosure:
does not cause the public sale to be held within such period, the debtor may require the return of the thing. i. And the proceeds of the foreclosure is P1,200,000 – X shall be entitled to the excess. ii. If
the proceeds is only P800,000
1) X shall not be liable for the P200,000 deficiency, as a rule.
REAL ESTATE MORTGAGE
2) X shall be bound for the deficiency of P200,000 if there was novation (expromision or
delegacion).
OBJECT: Only the following property may be the object of a contract of mortgage:
(1) Immovables; Foreclosure: in case of non-payment of the principal obligation, the creditor-mortgagee may foreclose the
(2) Alienable real rights in accordance with the laws, imposed upon immovables. mortgage either:
Nevertheless, movables may be the object of a chattel mortgage. 1. Judicially – under Rule 68 of the Rules of Court;
2. Extra-judicially – under Act No. 3135.
Form: there is no form required to constitute a contract of real estate mortgage.
Notice of Foreclosure Sale:
In order to affect third persons: 1. Extrajudicial – not required, unless stipulated.
1. There must be a public instrument containing the description thereof; and 2. Judicial - Posting in 3 public places at least 20 days prior to sale and publication of the notice of sale in a
2. The same should be recorded in the Registry of Property. newspaper of general circulation.

The creditor-mortgagee has no other right than to demand the execution and the recording of the document in Proceeds: if the proceeds of the foreclosure sale:
which the mortgage is formalized. 1. Is more than the unpaid amount – the mortgagor shall be entitled to the excess;
Is less than the unpaid amount – the mortgagee shall be entitled to recover the deficiency.
Extent of Coverage: 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 The generic treatment is that the mortgage is still a separate contract and merely stands as a means to recover
or owing to the proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use, the unpaid amount. That’s why any excess is returned to the mortgagor and any deficiency, the debtor remains
with the declarations, amplifications and limitations established by law, whether the estate remains in the liable thereto.
possession of the mortgagor, or it passes into the hands of a third person.
Principal Obligation Covered:
General Rule: covers only that which is stated in the deed even if less than the amount of loan. Exception: if there Redemption: exists only in Real Estate Mortgage foreclosures. The period to redeem shall depend if the
is stipulation to cover future advancements called a dragnet clause. foreclosure is:
Mortgage credit is transferable: The mortgage credit may be alienated or assigned to a third person, in whole or 1. Extrajudicial:
in part, with the formalities required by law. a. General Rule: 1 year from date of foreclosure
Pactum de non-aliendo: the owner is allowed to alienate the immovable property mortgaged. A stipulation b. Exception: Under the General Banking Law, 3 months from sale or registration of the certificate of sale,
prohibiting/forbidding such right is called pactum de non-aliendo and is considered void. whichever is earlier, whenever: i. The debtor – juridical person ii. The creditor – bank

Third party transferee: Buyers or transferees of the property mortgaged are not affected by an unregistered ILLUSTRATION: ABC Bank borrowed money from XYZ Corporation and secured the obligation with a real
mortgage. However, if the mortgage is registered (Art. 1312) they are a. Bound by a foreclosure sale on the property estate mortgage. Due to non-payment, XYZ Corporation foreclosed the mortgage. What will be the
b. Not bound to answer the deficiency applicable period of redemption?
c. Unless there is novation in the person of the debtor
2. Judicial – although the Rules of Court provide that the equity of redemption is 90 to 120 days, it has been held
that the equity of redemption exists as long as there is no confirmation of sale by the court.
CHATTEL MORTGAGE

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.

Affidavit of Good Faith: stating that the parties swear that the mortgage is made for the purpose of securing the
obligations specified in the conditions thereof, and for no other purposes, and that the same is a just and valid
obligation and not one entered into for purposes of fraud, is also required under the law. Making it a formal contract.

However, the absence of such affidavit or the non-recording should one exist, does not affect the validity of the
contract as between the parties, it only makes the contract non-binding to third persons who acted in good faith.
While, it is a formal contract, the absence of an affidavit of good faith would make the parties in pari delicto that
would have no remedy against each other, thus having the effect of leaving the chattel mortgage in place.

To affect third persons: there must be an Affidavit of Good Faith and the same is registered with the Chattel
Mortgage Registry; or the MARINA – in case of vessels; and in case of vehicles with a report to the Land
Transportation Office.

Coverage: shall be the debts existing at the time the contract was entered into and indicated in the Affidavit of
Good Faith. An amendment of the Affidavit shall be necessary to cover subsequent obligations.

Disposal of the object during the pendency of the mortgage: is considered a criminal act under Art. 319 of the
Revised Penal Code: Removal of Mortgaged Property.

Foreclosure: shall be done extrajudicially. Rule 68 of the Rules of Court does not apply to foreclosure of a chattel
mortgage.

Notice: Required 10 days prior to sale; Posting in two or more public places 10 days before auction.

Redemption: there is no right of redemption that exists in a foreclosure of chattel mortgage.

Proceeds of Foreclosure Sale: if the amount of the proceeds of foreclosure sale:

1. Is more than the unpaid amount – the excess shall belong to the mortgagor; 2. Is less
than the unpaid amount:
a. General Rule: the creditor is entitled to the deficiency;
b. Except: if the object is subject of a sale in installment and covered by the Recto Law which prohibits
collection of unpaid amount once the creditor (unpaid seller) already foreclosed the chattel mortgage on
the property itself.