RFBT

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Pledge & Mortgage

1
Common requisites of pledge and
mortgage
To secure the fulfillment of a principal obligation

Pledge/mortgage is an accessory contract who is dependent upon

a principal contract.

It can secure the following principal obligations:

 Pure obligation
 Conditional obligation
 Obligation with a term
 Natural obligation
 Rescissible contracts
 Voidable Contracts
 Unenforceable contracts

It cannot secure a void obligation/contract

2
Common requisites of pledge and
mortgage
1. They may be constituted to secure the fulfillment of a principal
obligation
2. Pledgor or mortgagor is the absolute owner of the thing
pledged or mortgaged.
3. Person constituting the pledge or mortgage have the free
disposal of the property, and in the absence there of, that they
may be legally authorized for the purpose.

3
Common requisites of pledge and
mortgage
Pledgor or mortgagor is the absolute owner

• The pledgor or mortgagor must be the absolute owner at the

time of pledge or mortgage
• Third person may pledge or mortgage their property to
secure another person’s debt
• An agent can pledge or mortgage in his own name the property
of the principal if they are authorized, otherwise the contract is
VOID.

4
Common requisites of pledge and
mortgage
pledgor or mortgagor have the free disposal

• It is essential, that at the time of the execution of the

pledge/mortgage itself, the principal must already be the owner;
otherwise, the mortgage is VOID

5
 “
Art. 2088
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.
 Disposal of the thing
pledged/mortgaged

Is a mortgagee allowed during the existence of

the principal debt, to sell the property
mortgaged to him?

ANS.: No, because this would certainly be an act of

disposition. The answer would be the same even if the
contract allows the sale, for in such a case, said
stipulation would be null and void.

7
 Illustration
A borrowed from B a sum of money. A offered his house by way
of a mortgage. It was expressly stipulated in the contract that
upon non-payment of the debt on time, the house would belong
to B. Is the stipulation valid?

ANS.: No, such a stipulation (pacto comissorium) is null and

void. This clause has traditionally not been allowed because it is
contrary to good morals and public policy.

It is true that a debtor, instead of paying in cash, can just

alienate in favor of his creditor property to satisfy the debt
(dation in payment) but it would be illegal for the debtor to
previously authorize the creditor to appropriate the property
pledged or mortgaged as the latter’s own in payment of the
debt. 8
 Pactum Commissorium
Requisites

1. There should be a property mortgaged/pledged by way of

security for the payment of the principal obligation
2. There should be a stipulation for automatic appropriation by
the creditor of the thing mortgaged/pledged in case of non-
payment

9
 Indivisibility of
pledge/mortgage

10
Indivisibility of pledge/mortgage
General Rule:
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. Also applied if the debtors are jointly liable.

1. Indivisibility among heirs of debtor

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. Indivisibility among heirs of creditor

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.

11
 Illustration
• A borrowed P1 million from B, secured by a mortgage on A’s
land. A died leaving children X and Y. X paid P50,000 to B. Can
X ask for the proportionate extinguishment of the mortgage?

Ans: No

• A borrowed P1 million from B, secured by a mortgage on A’s

land. B died leaving two children, R and T. A paid R P500,000.
Is R allowed to cancel the mortgage?

Ans: No

12
Indivisibility of pledge/mortgage
Exception:
The pledge/mortgage is divisible if

1. Several things given in mortgage or pledge, and

2. each one of them guarantees only a determinate portion of the
credit.

The debtor, in this case, shall have a right to the extinguishment of

the pledge or mortgage as the portion of the debt for which each
thing is specially answerable is satisfied.

13
 Illustration
• A borrowed P100,000 from B, secured by a pledge of B’s ring
and bracelet. B paid P60,000, can he ask for the return of the
ring or the bracelet?

Ans: No

• A borrowed P100,000 from B, secured by a pledge of B’s ring

and bracelet. The ring will secure P40,000 and the bracelet
will secure P60,000. If B pays P50,000 can he ask the return
of the ring or the bracelet?

Ans: Only the ring.

14
 Illustration
• A and B jointly borrowed P30,000 from C. A pledged his
necklace, and B his ring. If A pays P15,000, can he ask for the
return of the his necklace?

Ans: No

15
Pledge

16
 TYPES OF PLEDGE

1. Conventional or voluntary – constituted by the mutual

consent of the pledgor and pledgee

2. Legal – created by operations of law

17
 REQUISITES OF A PLEDGE

1. They may be constituted to secure the fulfillment of a principal

obligation
2. Pledgor is the absolute owner of the thing pledged.
3. Person constituting the pledge or mortgage have the free
disposal of the property, and in the absence there of, that they
may be legally authorized for the purpose.
4. the thing pledged be placed in the possession of the
creditor, or of a third person by common agreement.

This requisite is most essential and is characteristic of a pledge without which

the contract cannot be regarded as entered into because precisely in this
delivery lies the security of the pledge. Indeed, if Art. 2093 is not complied
with, the pledge is VOID. Until the delivery of the thing, the whole rests in an
executory contract, however strong may be the engagement to deliver it, and
the “pledgee” acquires no right of property in the thing.

18
 What may be pledged

The following can be an object of a pledge:

1. Only movables can be pledged (including incorporeal rights)
2. Certificates of stock or of stock dividends
3. Incorporeal rights, evidenced by negotiable instruments, bills of
lading, shares of stock, bonds, warehouse receipts and similar
documents.
 The instrument proving the right pledged must be
DELIVERED.
 If negotiable, said instrument must be ENDORSED

Note: Real property cannot be pledged.

19
 What may be pledged

How about the fruits of the thing?

GR: If the thing pledged produces fruits, it will be applied to the

interest, then to the debt.

If the pledge earns or produces fruits, income, dividends, or

interests, the creditor shall compensate what he receives with
those which are owing him; but if none are owing him, or insofar as
the amount may exceed that which is due, he shall apply it to the
principal. Unless there is a stipulation to the contrary, the pledge
shall extend to the interest and earnings of the right pledged.

In case of a 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.

20
 Rights of Pledgor/debtor

1. To alienate, with the consent of the pledgee, the thing

pledged
2. To ask that the thing pledged be judicially or extrajudicially
deposited if it is used without authority or for a purpose other
than preservation
3. To continue to be the owner of the thing pledged unless it is
expropriated
4. To ask for the return of the thing pledged after he has paid the
debt and its interest, with expenses in a proper case
5. To require the thing pledged be deposited with a third person if
it is in danger or impair through the negligence or willful act of
the pledgee
6. To demand the return of the thing pledged, upon offering
another thing in pledge, provided the latter is of the same kind
and quality, if there are reasonable grounds to fear the
destruction or impairment of the thing pledged without the
fault of the pledgee.
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 Rights of Pledgor/debtor
To alienate, with the consent of the pledgee, the thing
pledged

The pledgor retains his ownership of the thing pledged. He may, therefore,
sell the same provided the pledgee consents to the sale. As soon as the
pledgee gives his consent, the ownership of the thing pledged is
transferred to the vendee subject to the rights of the pledgee, namely,
that the thing sold may be alienated to satisfy the obligation and that the
pledgee must continue in possession during the existence of the pledge.
But the pledge would not bind or adversely affect third persons unless
Article 2096 has been followed.

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.

22
 Illustration
A pledged his diamond ring with B. A may sell the ring
provided that B consents. The sale is, however, subject
to the pledge, that is, the pledge would bind third
persons if Art. 2096 has been followed. If C buys the
ring, the ownership of the ring is transferred to him, as
soon as B consents to the sale but B shall continue to
be in possession of the ring.

23
 Rights of Pledgor/debtor
To ask that the thing pledged be judicially or extrajudicially
deposited if it is used without authority or for a purpose
other than preservation
The pledgee who is in possession of the thing pledged has no
right to make use of it without permission from the owner. It is
in consequence of the fact that the pledgor in parting with his
property transmits only possession but not ownership.

If, however, that use is necessary in properly caring for it, then
it becomes his duty to use it so that it will not suffer from its
disuse.

In the following cases, the owner may ask that the thing pledged
be deposited judicially or extrajudicially:
1. if the creditor uses the thing without authority;
2. if he misuses the thing in any other way; or
3. if the thing is in danger of being lost or impaired because of the
negligence or willful act of the pledgee.
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 Rights of Pledgor/debtor
To continue to be the owner of the thing pledged unless it is
expropriated

The pledgor remains the owner of the property pledged. The

creditor to whom the property pledged has been delivered is
obliged to take care of it with the diligence of a good father of a
family.

He is authorized to bring such action as pertaining to the owner in

order to recover it or defend it, against claims of third persons.
Furthermore, unless given the right, the creditor might be
prejudiced by the negligence of the owner.

The right of a pledgee is a real right enforceable against third

persons but it is necessary that the contract of pledge be
embodied in a public instrument which shall contain a description
of the thing pledged and the date of the pledge.
25
 Rights of Pledgor/debtor
To ask for the return of the thing pledged after he has paid
the debt and its interest, with expenses in a proper case

The thing pledged stands as security for the fulfillment of the

pledgor’s obligation. Hence, he cannot ask for its return until said
obligation is fully paid including interest due thereon and expenses
incurred for its preservation.

26
 Rights of Pledgor/debtor
To require the thing pledged be deposited with a third
person if it is in danger or impair through the negligence or
willful act of the pledgee

The pledgee has the duty to preserve the thing pledged with the
diligence of a good father of a family. If the thing should be
exposed to loss or impairment through the negligence or
willful act of the pledgee, the pledgor may demand that it be
deposited with a third person. The pledgor may also require such
deposit should the pledgee use the thing without authority or
misuse it in any other way.

27
 Rights of Pledgor/debtor
To demand the return of the thing pledged, upon offering
another thing in pledge, provided the latter is of the same
kind and quality, if there are reasonable grounds to fear the
destruction or impairment of the thing pledged without the
fault of the pledgee.

The following are the requisites for the application of Article 2017:
1. The pledgor has reasonable grounds to fear the destruction or
impairment of the thing pledged;
2. There is no fault on the part of the pledgee;
3. The pledgor is offering in place of the thing, another thing in
pledge which is of the same kind and quality as the former; and
4. The pledgee does not choose to exercise his right to cause the
thing pledged to be sold at public auction.

the 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.

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 Rights of Pledgee/creditor

1. To alienate, with the consent of the pledgor, the thing

pledged
2. To ask that the thing pledged be judicially or extrajudicially
deposited if it is used without authority or for a purpose other
than preservation
3. To continue to be the owner of the thing pledged unless it is
expropriated
4. To ask for the return of the thing pledged after he has paid the
debt and its interest, with expenses in a proper case
5. To require the thing pledged be deposited with a third person if
it is in danger or impair through the negligence or willful act of
the pledgee
6. To demand the return of the thing pledged, upon offering
another thing in pledge, provided the latter is of the same kind
and quality, if there are reasonable grounds to fear the
destruction or impairment of the thing pledged without the
fault of the pledgee.
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Creditor/Pledgee

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 To take care of the thing

Upon fulfillment of the principal obligation, the pledgee must

return the thing pledged. Having possession of the property, he
has the obligation to take care of the same with the diligence of a
good father of the family. He is, however, entitled to
reimbursement of the expenses incurred for its preservation.

In case of the loss or deterioration of the thing pledged due

to fortuitous event, the pledgee cannot be held responsible
but he is liable for loss or deterioration by reason of fraud,
negligence, delay or violation of the terms of the contract.

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Responsibility of the creditor/pledgor

Obligation of pledgee not to deposit thing pledged with

another.

While the pledgee is entitled to retain the possession of the thing

pledged until the debt is paid, he is not authorized to transfer
possession to a third person. The prohibition is necessary for the
protection of the pledgor or the
owner of the thing pledged. The exception is when there is
stipulation authorizing him to do so.

Responsibility of pledgee for acts of his employees or

agents.

The pledgee is responsible for the acts of his agents or employees

with respect to the thing pledged because their acts are, in legal
effect, deemed his.
32
 “
Art. 2103
Unless the thing pledged is expropriated, the debtor
continues to be the owner thereof.

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.
Rights of pledgee against 3rd person

Except when expropriated, the pledgor remains the owner of the

property pledged. The creditor to whom the property pledged has
been delivered is obliged to take care of it with the diligence of a
good father of a family. He is authorized to bring such action as
pertaining to the owner in order to recover it or defend it, against
claims of third persons. Furthermore, unless given the right, the
creditor might be prejudiced by the negligence of the owner.

The right of a pledgee is a real right enforceable against third

persons but it is necessary that the contract of pledge be
embodied in a public instrument which shall contain a description
of the thing pledged and the date of the pledge.

34
 “
Art. 2109
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.
 Rights of pledgee

This article grants two remedies to the pledgee, in case he is

deceived as to the substance or quality of the thing pledged:

1. to claim another thing in pledge; and

2. to demand immediate payment of the principal obligation.

The remedies are alternative, that is, he is privileged to choose

only one and not both.

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Extinguishment
of a pledge
 Extinguishment of pledge

1. When the principal obligation is extinguished

2. Pledgee returns the thing pledged to the pledgor or owner
3. A statement in writing by the pledgee that he renounces or
abandons the pledge
4. Sale of the thing pledged

38
 “
Art. 2110
If the thing pledged is returned by the pledgee to the
pledgor or owner, the pledge is extinguished. Any
stipulation to the contrary shall be void.

If subsequent to the perfection of the pledge, the thing is

in the possession of the pledgor or owner, there is a
prima facie presumption that the same has been
returned by the pledgee. This same presumption exists if
the thing pledged is in the possession of a third person
who has received it from the pledgor or owner after the
constitution of the pledge.
 “
Art. 2111
A statement in writing by the pledgee that he renounces
or abandons the pledge is sufficient to extinguish the
pledge. For this purpose, neither the acceptance by the
pledgor or owner, nor the return of the thing pledged is
necessary, the pledgee becoming a depositary.
 Rights of pledgee

The pledge is a personal right of the pledgee which may be

waived.

Under Article 2111, renunciation or abandonment must be in

writing to extinguish the pledge, and such renunciation is not
conditioned upon the acceptance by the pledgor or owner nor
upon the return of the thing pledged. The waiver transforms the
pledgee into a depositary with the rights and obligations of one.

The principal debt, however, is not affected by the waiver of the

pledge. But the waiver of the principal obligation carries with it
that of the pledge.

41
 “
Art. 2112
The creditor to whom the credit has not been satisfied in
due time, may proceed before a Notary Public to the sale
of the thing pledged. This sale shall be made at a public
auction, and with notification to the debtor and the
owner of the thing pledged in a proper case, stating the
amount for which the public sale is to be held. If at the
first auction the thing is not sold, a second one with the
same formalities shall be held; and if at the second
auction there is no sale either, the creditor may
appropriate the thing pledged. In this case he shall be
obliged to give an acquittance for his entire claim.
 Sale of the thing pledged

The formalities required for such sale under the above article are
as follows:

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; and
4. The sale must be made before a notary public.

43
 “
Art. 2113
At the public auction, the pledgor or owner may bid. He
shall, moreover, have a better right if he should offer the
same terms as the highest bidder.

The pledgee may also bid, but his offer shall not be valid
if he is the only bidder.
 Sale of the thing pledged

The following may bid in the public auction

a. Pledgor or owner - have a better right if he should offer the

same terms as the highest bidder

b. Pledgee - his offer shall not be valid if he is the only bidder

c. Third persons

45
 Sale of the thing pledged

The sale of the thing pledged extinguishes the principal obligation

whether the price of the sale is more or less than the amount due.

(1) If the price of the sale is more than the amount due the
creditor, the debtor is not entitled to the excess unless the
contrary is provided.

(2) In the same way, if the price of the sale is less, neither is the
creditor entitled to recover the deficiency. A contrary
stipulation is void.

46
 CONVENTIONAL PLEDGE LEGAL PLEDGE
DEFFICIENCY
shouldered by ALWAYS IF STIPULATED
creditor
NEVER
DEFICIENCY
Stipulation to the effect shall GENERAL RULE
shouldered by debtor
be void
EXCESS return to
IF STIPULATED ALWAYS
debtor
EXCESS BELONG TO
GENERAL RULE NEVER
creditor

47
 Other rules in pledge

1. 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.
2. If a credit which has been pledged becomes due before it is
redeemed, the pledgee may collect and receive the
amount due. He shall apply the same to the payment of his
claim, and deliver the surplus, should there be any, to the
pledgor.
3. If two or more things are pledged, the pledgee may
choose which he will cause to be sold, unless there is a
stipulation to the contrary. He may demand the sale of only
as many of the things as are necessary for the payment of the
debt.

48
Real Mortgage
 REQUISITES OF A REAL MORTGAGE

1. They may be constituted to secure the fulfillment of a principal

obligation
2. Pledgor or mortgagor is the absolute owner of the thing pledged
or mortgaged.
3. Person constituting the pledge or mortgage have the free
disposal of the property, and in the absence there of, that they
may be legally authorized for the purpose.
4. That the document in which the mortgage appears be recorded
in the Registry of Property
4TH requirement is necessary only to bind third persons but not for the validity
of the real mortgage which may be entered into in any form.

50
 Objects

Only the following may be the object of a contract of mortgage:

1. Immovables
2. Alienable real rights

If the object is a movable, it is a chattel mortgage.

51
Characteristics of a real mortgage

1. Accessory
2. Indivisible
3. Inseparable
4. Real right
5. Consensual contract
6. Nominate

52
 Forms of real mortgage

1. Between the parties

The real mortgage may be in any form for it is a

consensual contract.

2. As regards to third person

To bind third persons, it must be recorded in the

Registry of Property. It is also binding if 3rd person
has knowledge.

53
 Extent of a real mortgage

1. Property mortgaged
2. Natural accessions
3. Improvements
4. Fruits
5. Rents or income not yet received when the
obligation becomes due
6. Amount of indemnity granted or owing to the
proprietor from the insurers of the property
mortgaged

54
 Obligation covered

Principal obligation covered by the mortgage extends

only to the credit stated in the deed.

Exemption: Dragnet Clause – a stipulation to cover

future credits

55
Stipulation prohibiting alienation

A stipulation forbidding the owner from alienating the

immovable mortgaged shall be void.

56
 Foreclosure

In case of non-payment of the principal obligation, the

creditor may foreclose the mortgage either:

1. Judicially – foreclosure made trough the filing a

petition in court

2. Extra-judicially - only if there is a special power

inserted or attached to the document in which
the real estate mortgage appears and only in
accordance with the provisions of Act No. 3135.

57
 Notice of Foreclosure

A notice of foreclosure sale is necessary to make the

foreclosure action valid under the following scenarios:

1. Judicial – always required

2. Extra judicial – Public sale should be made after

proper notice to the public; otherwise, it is a
jurisdictional defect which could render the sale
voidable.

58
 .
CONVENTIONAL LEGAL REAL CHATTEL
PLEDGE PLEDGE MORTGAGE MORTGAGE
only in case of
DEFFICIENCY
personal
shouldered ALWAYS IF STIPULATED IF STIPULATED
property sold in
by creditor
instalments
NEVER
DEFICIENCY
Stipulation to the GENERAL
shouldered GENERAL RULE GENERAL RULE
effect shall be RULE
by debtor
void
EXCESS
return to IF STIPULATED ALWAYS GENERAL RULE GENERAL RULE
debtor
EXCESS
BELONG TO GENERAL RULE NEVER IF STIPULATED IF STIPULATED
creditor
59
 Redemption

It is a transaction by which the mortgagor reacquires

the property mortgaged.

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 Redemption

KINDS
1. Equity of redemption – or 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.

2. Right of redemption - or 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 mortgage debt. 61
 Redemption

Equity of redemption
In judicial foreclosure, the mortgagor may exercise his
equity of redemption before but not after the sale is
confirmed by the court. It is simply the right of the
defendant mortgagor to extinguish the mortgage and
retain ownership of the property by paying the secured
debt:

1. the grace period for the mortgagor to pay the

amount due is not less than 90 days nor more than
120 days from the entry of judgment on foreclosure.
In default of such payment, the property shall be
sold at public auction to satisfy the judgment. ; or
2. Even after the foreclosure sale but prior to its
62
confirmation.
 Redemption

Right of redemption

In all cases of extrajudicial sale, the (individual)

mortgagor may redeem the property at any time 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 appropriate Registry of Deeds.

63
Chattel Mortgage

64
REQUISITES OF A CHATTEL MORTGAGE

1. They may be constituted to secure the fulfillment of a principal

obligation
2. Pledgor or mortgagor is the absolute owner of the thing pledged
or mortgaged.
3. Person constituting the pledge or mortgage have the free
disposal of the property, and in the absence there of, that they
may be legally authorized for the purpose.
4. That the document in which the mortgage appears be recorded
in the Chattel Mortgaged Register

4TH requirement is necessary for the contract’s perfection.

65
 Chattel mortgaged vs pledged
Some differences

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;

66
 To affect 3rd persons

To affect 3rd persons, the mortgage must be:

1. Deed of chattel mortgaged

2. An affidavit of good faith is attached to the deed
3. Recorded in the chattel mortgaged registrar

67
 Chattel mortgage

Chattel mortgage of after-incurred obligations.

A pledge, real estate mortgage, or antichresis may

exceptionally secure after-incurred obligations so long
as these future debts
are accurately described.

A chattel mortgage, however, can only cover

obligations existing at the time the mortgage is
constituted.

68
 .
CONVENTIONAL LEGAL REAL CHATTEL
PLEDGE PLEDGE MORTGAGE MORTGAGE
only in case of
DEFFICIENCY
personal
shouldered ALWAYS IF STIPULATED IF STIPULATED
property sold in
by creditor
instalments
NEVER
DEFICIENCY
Stipulation to the GENERAL
shouldered GENERAL RULE GENERAL RULE
effect shall be RULE
by debtor
void
EXCESS
return to IF STIPULATED ALWAYS GENERAL RULE GENERAL RULE
debtor
EXCESS
BELONG TO GENERAL RULE NEVER IF STIPULATED IF STIPULATED
creditor
69
To be enforceable to third persons

CHATTEL MORTGAGE PLEDGE

1) Affidavit of good faith 1) Public Instrument
2) Deed of Chattel 2) Description of thing
Mortgage pledge
3) Recorded in the Chattel 3) Date of pledge
Mortgage Register
Real Mortgage
Additional note:
Chattel mortgage shall be 1) Recorded in the Registry of
registered in the province of the Property
mortgagor and the province where
the property is located if different.