1. .

DEFINITION
Pledge - is a contract by virtue of which the debtor delivers to the creditor or to a
third person a movable (Article 2094) or document evidencing incorporeal rights
(Article 2095) for the purpose of securing the fulfilment 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.
Mortgage - Real Mortgage is a contract whereby the debtor secures to the creditor
the fulfilment of a principal obligation, specially subjecting to such security
immovable property or real rights over immovable property in case the principal
obligation is not complied with at the time stipulated.
B. ESSENTIAL REQUISITES COMMON TO PLEDGE AND MORTGAGE (2085)
Article 2085. The following requisites are essential to the contracts of pledge and
mortgage:
(1) That they be constituted to secure the fulfilment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or
mortgaged; (3) That the persons constituting the pledge or mortgage have the free
disposal of their property, and in the absence thereof, that they be legally
authorized for the purpose. Third persons who are not parties to the principal
obligation may secure the latter by pledging or mortgaging their own property.
1. Acts as a security of a principal obligation
a. Principal Obligations secured. (2086, 2091)
Article 2086. The provisions of article 2052 are applicable to a pledge or
mortgage.
Article 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the performance of a
voidable or an unenforceable contract. It may also guarantee a natural
obligation.
Article 2091. The contract of pledge or mortgage may secure all kinds of
obligations, be they pure or subject to a suspensive or resolutory condition.
b. How security is satisfied (2087)
Article 2087. 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.
c. Pactum Commissorium (2088) automatic appropriation of pledged
property in case of default (void as it is against public policy)

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.
A. Francisco Realty and Development Corp. v. CA, 298 SCRA 349
A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION vs CA and SPOUSES
ROMULO S.A. JAVILLONAR and ERLINDA P.JAVILLONAR,
.
Facts:
A. Francisco Realty granted a loan of P7.5 M to spouses Javillonar, in consideration
of which, the latter executed a promissory note, a real estate mortgage over a
certain property, and a deed of sale of said mortgaged property in favor of A.
Francisco. Upon maturity, Javillonar spouses failed to pay, and as a consequence, A.
Francisco registered the sale of the mortgaged property, for which a new TCT was
issued. A. Francisco demanded possession of the mortgaged realty. Spouses refused
to vacate. Hence, A. Francisco filed a case for possession before the RTC. The
spouses admitted that they owed money in favor of A. Francisco but they also
alleged that it was not their intention to sell the realty as the deed of sale executed
by them was merely an additional security for the payment of their loan. RTC
adjudged in favor of A.Francisco. On appeal, CA reversed RTC decision and
dismissed the complaint against the spouses holding that the deed of sale was void,
being in the nature of a pactum commissorium prohibited by law. Hence, this
petition with the SC.
Issue:
Whether or not the deed of sale executed by the spouses was void, being in the
nature of pactum commissorium.
Held:
Yes. Art. 2088 of the Civil Code provides that the creditor cannot appropriate the
things given by way of pledge or mortgage, or dispose of them. Any stipulation to
the contrary is void. What is envisioned by this article is a provision in the deed of
mortgage providing for the automatic conveyance of the mortgaged property in
case of the failure of the debtor to pay the loan. A pactum commissorium is a
forfeiture clause in a deed of mortgage. The proscribed stipulation of automatic
conveyance must be found in the mortgage deed itself. In the case at bar, the
stipulations in the promissory note provide that, upon failure of spouses to pay
interest, ownership of the property would be automatically transferred to
A.Francisco and the deed of sale in its favor would be registered. These stipulations
are insubstance a pactum commissorium. They embody the two elements of
pactum commissorium, to wit:(1) that there should be a pledge or mortgage
wherein a property is pledged or mortgaged by way of security for the payment of
the principal obligation;(2) that there should be a stipulation for an automatic
appropriation by the creditor of the thing pledged or mortgaged in the event of nonpayment of the principal obligation within the stipulated period.
Bustamante v. Rosel, 319 SCRA 413 (1999)

Natalia Bustamante vs Rodito and Norma Rosel

Concept:
Article 1245. Dation in payment, whereby property is
alienated to the creditor in satisfaction of a debt in money,
shall be governed by the law on sales.
Facts:

March 8, 1987. Norma Rosel entered in a loan agreement with Natalia

Bustamante with the conditions:
1. That the borrowers are the registered owners of a parcel of land, evidenced by
TRANSFER CERTIFICATE OF TITLE No. 80667, containing an area of FOUR HUNDRED
TWENTY THREE (423) SQUARE Meters, more or less, situated along Congressional
Avenue.
2. That the borrowers were desirous to borrow the sum of ONE HUNDRED
THOUSAND (P100,000.00) PESOS from the LENDER, for a period of two (2) years,
counted from March 1, 1987, with an interest of EIGHTEEN (18%) PERCENT per
annum, and to guaranty the payment thereof, they are putting as a collateral
SEVENTY (70) SQUARE METERS portion, inclusive of the apartment therein, of the
aforestated parcel of land, however, in the event the borrowers fail to pay, the
lender has the option to buy or purchase the collateral for a total consideration of
TWO HUNDRED THOUSAND (P200,000.00) PESOS, inclusive of the borrowed amount
and interest therein;
3. That the lender do hereby manifest her agreement and conformity to the
preceding paragraph, while the borrowers do hereby confess receipt of the
borrowed amount.

When the loan was about to mature the respondent proposed to buy the land for
P200,000 but the petitioner refused and offered another residential lot at road. 20
project 8, quezon city. Respondent accepted the lot. The Respondents were not the
owner but entitled as Land developers

March 1, 1989. Petitioner tendered payment for the loan but the respondent
refused insisting that the former sign the document as deed of absolute sale of the
collateral

Respondent filed a complaint and sent a letter asking the petitioner to sell the
collateral pursuant to the loan agreement

March 5, 1990. Petitioner filed a petition for consignation and deposited the
amount of P153,000 with the City Treasurer of Quezon City. Petitioner refused the
sell the collateral and the respondent cosigned the amount of P47,500 with the trial
court. In arriving at the amount deposited, respondents considered the principal
loan of P100,000.00 and 18% interest per annum thereon, which amounted to
P52,500.00. The principal loan and the interest taken together amounted to
P152,500.00, leaving a balance of P47,500.00

The trial court ruled in favor of the petitioner and denied the prayer of the
respondents in the execution of the deed of sale

Court of Appeals reversed the decision of the trial court

The SC found no error in the decision of the trial court, petitioner asked for a
reconsideration. Respondent filed an opposition against petitioners motion for
reconsideration. They contend that the agreement between the parties was not a
sale with right of re-purchase, but a loan with interest at 18% per annum for a
period of two years and if petitioner fails to pay, the respondent was given the right

to purchase the property or apartment for P200,000.00, which is not contrary to

law, morals, good customs, public order or public policy.
Issue: W/ON the petitioner failed to pay the loan at its maturity and is the stipulation
in the loan contract valid
Held: No. The respondents refused to accept payment, petitioner consigned the
amount with the trial court. We note the eagerness of respondents to acquire the
property given as collateral to guarantee the loan. The sale of the collateral is an
obligation with a suspensive condition. It is dependent upon the happening of an
event, without which the obligation to sell does not arise. Since the event did not
occur, respondents do not have the right to demand fulfillment of petitioners
obligation, especially where the same would not only be disadvantageous to
petitioner but would also unjustly enrich respondents considering the inadequate
consideration (P200,000.00) for a 70 square meter property situated at
Congressional Avenue, Quezon City.
No, The SC said that the stipulation is void. the intent of the creditor appears to be
evident, for the debtor is obliged to dispose of the collateral at the pre-agreed
consideration amounting to practically the same amountas the loan. In effect, the
creditor acquires the collateral in the event of non-payment of the loan. This is
within the concept of pactum commissorium. Such stipulation is void.
2. Mortgagor or pledgor must be the absolute owner.
Vda de Bautista v. Marcos, 3 SCRA 434
State Investment House Inc. v. CA, GR No. 115548, March 5, 1996
Cruz v. Bancom Finance Corporation, G.R. No. 147788, March 19,
2002
Facts: Norma Sulit was introduced by Candelaria Sanchez to Edilberto and Simplicio
Cruz and offered to purchase the parcel of land owned by the Cruz brothers. The
asking-price for the land was P700, 000, but Sulit had only P25,000 which Edilberto
accepted as earnest money with the agreement that title would pass to Sulit on the
payment of the balance. Sulit failed to pay the balance. Capitalizing on the close
relationship of Sanchez with the brothers, Sulit succeeded in having the brothers
execute a document of sale in favor of Sanchez who would then obtain a bank loan
in her name using the said land as collateral. On the same day, Sanchez executed
another Deed of Absolute Sale in favor of Sulit. Sulit assumed all the obligations of
Sanchez to the original owners of the land in a Special Agreement. Unknown to the
brothers, Sulit managed to obtain a loan from Bancom secured by a mortgage over
the land. Because Sulit failed to pay the purchase price stipulated in the Special
Agreement, the brothers filed a complaint for reconveyance. Sulit also defaulted in
her payment to the Bank and her mortgage was foreclosed. At the auction sale,
Bancom
was
declared
the
highest
bidder.
Issue:

Whether

or

not

the

Deeds

of

Sale

were

valid

and

binding.

Held: Simulation takes place when the parties do not really want the contract they
have executed to produce the legal effects expressed by its wordings. Art. 1345
states that simulation of a contract may be absolute or relative. The former takes
place when the parties conceal their true agreement while Art. 1346 states that
an absolutely simulated contract is void. A relative stimulation, when it does not
prejudice a third person and is not intended for any purpose contrary to law, morals,
good customs, public order or pubic policy binds the parties to their agreement.
The Deeds of Sale were executed merely to facilitate the use of the property as
collateral to secure a loan from a bank. Although the Deed of Sale between the
brothers and Sanchez stipulated a consideration, there was actually no exchange of
money. Moreover, the failure of Sulit to take possession of the property sold to her
was a clear badge of simulation that rendered the whole transaction void and
without force and effect.
- Qualification of a domestic corporation that seeks to mortgage property.
Sec. 113. Acquisition and alienation of property. - Any corporation sole may
purchase and hold real estate and personal property for its church, charitable,
benevolent or educational purposes, and may receive bequests or gifts for such
purposes. Such corporation may sell or mortgage real property held by it by
obtaining an order for that purpose from the Court of First Instance of the province
where the property is situated upon proof made to the satisfaction of the court that
notice of the application for leave to sell or mortgage has been given by publication
or otherwise in such manner and for such time as said court may have directed, and
that it is to the interest of the corporation that leave to sell or mortgage should be
granted. The application for leave to sell or mortgage must be made by petition,
duly verified, by the chief archbishop, bishop, priest, minister, rabbi or presiding
elder acting as corporation sole, and may be opposed by any member of the
religious denomination, sect or church represented by the corporation sole:
Provided, That in cases where the rules, regulations and discipline of the religious
denomination, sect or church, religious society or order concerned represented by
such corporation sole regulate the method of acquiring, holding, selling and
mortgaging real estate and personal property, such rules, regulations and discipline
shall control, and the intervention of the courts shall not be necessary.
3. Mortgagor or pledgor must have free disposal of property. (Arts. 96
& 124, Family Code; Art 122, Corporation Code; Bulk Sales Law)
Article 96. The existing laws which punish acts or omissions concerning the
marriage license, solemnization of marriage, authority to solemnize marriages, and
other acts or omissions relative to the celebration of marriage shall remain and
continue to be in force.
Article 124. If the marriage is between a citizen of the Philippines and a foreigner,
whether celebrated in the Philippines or abroad, the following rules shall prevail:
(1) If the husband is a citizen of the Philippines while the wife is a foreigner, the
provisions of this Code shall govern their relations;

(2) If the husband is a foreigner and the wife is a citizen of the Philippines, the laws
of the husband's country shall be followed, without prejudice to the provisions of
this Code with regard to immovable property.
Sec. 122. Corporate liquidation. - Every corporation whose charter expires by its
own limitation or is annulled by forfeiture or otherwise, or whose corporate
existence for other purposes is terminated in any other manner, shall nevertheless
be continued as a body corporate for three (3) years after the time when it would
have been so dissolved, for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs, to dispose of and convey its
property and to distribute its assets, but not for the purpose of continuing the
business for which it was established.
At any time during said three (3) years, the corporation is authorized and
empowered to convey all of its property to trustees for the benefit of stockholders,
members, creditors, and other persons in interest. From and after any such
conveyance by the corporation of its property in trust for the benefit of its
stockholders, members, creditors and others in interest, all interest which the
corporation had in the property terminates, the legal interest vests in the trustees,
and the beneficial interest in the stockholders, members, creditors or other persons
in interest.
Upon the winding up of the corporate affairs, any asset distributable to any creditor
or stockholder or member who is unknown or cannot be found shall be escheated to
the city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities.
C. CHARACTERISTICS COMMON TO CONTRACTS
MORTGAGE
(2085, 2094, 2125, 2126, 2129, 2089, 2090)

OF

PLEDGE

AND

Article 2085. The following requisites are essential to the contracts of pledge and
mortgage:
(1) That they be constituted to secure the fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or
mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of
their property, and in the absence thereof, that they be legally authorized for the
purpose. Third persons who are not parties to the principal obligation may secure
the latter by pledging or mortgaging their own property.
Article 2094. All movables which are within commerce may be pledged, provided
they are susceptible of possession.
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.
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.
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.
Article 2089. 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,
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.
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.
From these provisions is excepted the case in which, there being several things
given in mortgage or pledge, 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.
Article 2090. The indivisibility of a pledge or mortgage is not affected by the fact
that the debtors are not solidarily liable.
Central Bank v. CA, 139 SCRA 46
PNB v. RBL Enterprises, Inc. G.R. No. 149569, May 28, 2004
Belo v. CA, 353 SCRA 359 (2001)
Metrobank v. SLGT holdings, Inc., 533 SCRA 516