absence thereof, that they be legally Pledge is a contract by virtue of which authorized for the purpose. the debtor delivers to the creditor or to Third persons who are not a third person a movable (Art. 2094.) or parties to the principal obligation may document evidencing incorporeal rights secure the latter by pledging or (Art. 2095) for the purpose of securing mortgaging their own property. the fulfillment of a principal obligation with the understanding that when the Common Characteristics of Pledge obligation is fulfilled, the thing delivered and mortgage: shall be returned with all its fruits and accessions. Both intended to secure the performance of a principal and PARTIES: pre-existing obligation by Pledgor – the debtor; the one specially subjecting to such who delivers the thing security, property or the fruits pledged to the creditor A pledge or mortgage, being Pledgee – the creditor, the one merely an accessory agreement, who receives the thing pledged. its invalidity does not affect the principal contract of loan KINDS OF PLEDGE: Without delivery there can be (1) Voluntary or conventional or one no pledge because, precisely, in which is created by agreement of the this delivery lies the security of parties the pledge (2) Legal or one which is created by operation of law. (see Art. 2121.) PROPERTY PLEDGED/MORTGAGED:
CHARACTERISTICS OF THE Future property cannot be
CONTRACT pledged or mortgaged Property acquired 1. real contract - it is perfected by subsequently – one which is the delivery of the thing pledged by executed by one who is not the the pledgor to the creditor who is owner of the thing pledged is called the pledgee, or to a third without legal existence and person by common agreement; registration cannot validate it. 2. accessory contract- it has no independent existence of its own; Property covered by Torrens Title: 3. unilateral contract - it creates an obligation solely on the part of the Free disposal and legal authority creditor to return the thing subject to do is not applicable because thereof upon the fulfillment of the the mortgagee has the right to principal obligation; and rely upon what appears in the 4. Subsidiary contract- the certificate of title and does not obligation incurred does not arise have to inquire further. until the fulfillment of the principal obligation which is PLEDGOR OR MORTGAGOR HAS secured. FREE DISPOSAL OF PROPERTY OR HAS LEGAL AUTHORITY: Cause or Consideration Free Disposal – property must not be As to pledgor -the principal obligation. the subject to any claim of third person Not a debtor – compensation Capacity to dispose – stipulated for the pledge or the mere pledgor/mortgagor has the capacity or liberality of the pledgor. (Art.2018) authority to make a disposition of property. Requisites are essential to the contracts of pledge and mortgage Thing pledge may be alienated: (Art.2085) To secure the fulfilment of a principal obligation (1) That they be constituted to secure Remedy: to have the security the fulfillment of a principal obligation given sold at public auction and (2) That the pledgor or mortgagor be the the proceeds of the sale applied absolute owner of the thing pledged or to the payment of the obligation mortgaged secured by the pledge or (3) That the persons constituting the mortgage. pledge or mortgage have the free 2
In the Sale – there must be o If the debtor fails to
“meeting of the minds” with comply with the obligation respect to the specific subject of at the time it falls due, the the contract. creditor is merely entitled to move for the Pledgor/ Mortgagor may be a third sale of the thing pledged person: or mortgaged (Art. 2087. It is not necessary that the Prohibition against appropriation principal debtor should always of property. be the pledgor or mortgagor. (Art. o pactum commissorium 2085, par. 2.) A stipulation whereby the Liability for deficiency. — The thing pledged or pledgor or mortgagor who mortgaged or under pledged or mortgaged his antichresis (Art. 2137.) property to guarantee an shall automatically indebtedness of another person, become the property of without expressly assuming the creditor in the event personal liability for such debt, of non payment of the is not liable for the payment of debt within the term fixed any deficiency, should the Forbidden so null and void property not be sufficient to contrary to good morals cover the debt. and public policy. o His liability extends only to the property pledged 2 requisites or elements for pactum or mortgaged. Should commissorium: there be any deficiency, 1. There should be a pledge, the creditor has recourse mortgage, or antichresis of on the principal debtor, property by way of security for the signatory to the the payment of the principal principal contract, who obligation; remains to be primarily 2. There should be a stipulation for bound an automatic appropriation by Pledge and real mortgage the creditor of the property in distinguished: the event of nonpayment of the obligation within the stipulated 1. Pledge is constituted on period movables (Art. 2094.), while mortgage, on immovables. (Art. Risk of loss of property pledged or 2124.) mortgaged 2. In pledge, the property is Ownership remains with the delivered to the pledgee, or by debtor, therefore, under the common consent to a third maxim, res perit domino suo, the person (Art. 2093.), while in debtor-owner bears the loss of mortgage, delivery is not the property. necessary The principal obligation is not 3. Pledge is not valid against extinguished by the loss of the third persons unless a pledged or mortgaged property description of the thing pledged and the date of the pledge Pledge or mortgage indivisible (Art.2089) ART. 2088. The creditor cannot A pledge or mortgage is one and appropriate the things given by indivisible as to the contracting way of pledge or mortgage, or parties and the rule applies even dispose of them. Any stipulation if the obligation is joint and not to the contrary is null and void. solidary Single thing. — Every portion of Right of creditor where debtor the property pledged or fails to comply with his obligation mortgaged is answerable for the whole obligation as soon as The property given in pledge or it falls due. mortgage stands as security for Several things. — When several the fulfillment of the principal things are pledged or mortgaged obligation. (Art. 2085, par. 1.) to secure the same debt in its Sale of subject properly with entirety, all of them are liable formalities required by law. for the totality of the debt and the creditor does not have to 3
divide his action by distributing Chapter 2
the debt, among the various PROVISIONS APPLICABLE things pledged or mortgaged ONLY TO PLEDGE o Even when only a part of the debt remains unpaid, ART. 2093. In addition to the all the things are liable for requisites prescribed in Article 2085, such balance it is necessary, in order to constitute Debtor’s heir/creditor’s heir. the contract of pledge, that the thing The debtor’s heir who has paid a pledged be placed in the possession part of the debt cannot ask for of the creditor, or of a third person the proportionate extinction of by common agreement the pledge or mortgage Transfer of possession essential in pledge Exceptions to rule of indivisibility. To constitute contract. — An Where each one of several agreement to constitute a pledge things guarantees determinate only gives rise to a personal portion of credit. — The action between the contracting exception is where there are parties. (Art. 2092.) several things given in pledge or o creditor acquires no right mortgage and each one of to the property because them guarantees only a pledge is merely a lien and determinate portion of the possession is credit. indispensable to the right Where only portion of loan was of a lien released To affect third persons - apart Where there was failure of from being in a public consideration instrument, possession of the Where there is no debtor-creditor thing pledged must, in addition, relationship be delivered to the pledgee. o third person who did not take part in the What kind of possession is constitution thereof either required in pledge? personally or through an The mere taking of the property agent. is not enough. There must be continuous possession of the ART. 2091. The contract of pledge or thing. However, the pledge is mortgage may secure all kinds of allowed to temporarily entrust obligations, be they pure or subject the physical possession of the to a suspensive or resolutory thing pledged to the pledgor condition without invalidating the contract. Pledgor would in possession as a ART. 2092. A promise to constitute a mere trustee. pledge or mortgage gives rise only to a personal action between the Type of delivery depends upon contracting parties, without nature of thing pledged and peculiar prejudice to the criminal respon- circumstances of each case: sibility incurred by him who defrauds Actual delivery. — The delivery another, by offering in pledge or of possession referred to in mortgage as unencumbered, things Article 2093 as essential to the which he knew were subject to some validity of a pledge means actual burden, or by misrepresenting possession of the property himself to be the owner of the same pledged and a mere symbolic Promise to constitute pledge or delivery is not sufficient. mortgage creates no real right. Constructive delivery. that the A promise to constitute a pledge symbolical transfer of the goods or mortgage, if accepted, gives by means of the delivery of the rise only to a personal right keys to the warehouse where the binding upon the parties and goods were stored was sufficient creates no real right in the to show that the depositary property appointed by common consent of what exists is only a right of the parties was legally placed in action to compel the fulfillment possession of the goods. of the promise but there is no Note: Constructive or symbolic pledge or mortgage yet delivery does not confer physical possession of the thing, but by 4
construction of law, is equivalent to order to recover it from or defend it
acts of real delivery. against a 3rd person. ART. 2094. All movables which are ART. 2098. The contract of pledge within commerce may be pledged, gives a right to the creditor to retain provided they are susceptible of the thing in his possession or in that possession. of a third person to whom it has been ART. 2095. Incorporeal rights, delivered, until the debt is paid. evidenced by negotiable instruments, But the right of retention is bills of lading, shares of stock, bonds, limited only to the fulfillment of warehouse receipts and similar the principal obligation for which documents may also be pledged. The the pledge was created. instrument proving the right pledged What are the obligations of a pledge: shall be delivered to the creditor, and Take care of the thing pledged if negotiable, must be indorsed. with the diligence of a good fat Art. 417. The following are also her of a family. Art. 2099, NCC considered as personal property: Note: Pledgee is liable for the (1) Obligations and actions which have loss or deterioration of the for their object movables or demandable thing by reason of fraud, sums; negligence, delay, or violation (2) Shares of stock of agricultural, of the terms of the contract. commercial and industrial entities, GR: Pledgee cannot deposit the although they may have real estate. thing pledged to a 3rd person. ART. 2096. A pledge shall not take o XPN: Unless there is stipu effect against third persons if a lation to the contract (Art. description of the thing pledged and 2100, NCC) Note: Pledgee the date of the pledge do not appear is liable for the loss or in a public instrument deterioration of the thing one attested and certified by a by reason of fraud, public officer authorized by law negligence, delay,or to administer oath, such as a violation of terms of notary public) contract. o XPN: innocent buyer of o pledgee is responsible for the thing pledged the acts of his agents or notwithstanding that the employees with respect to pledgee has already taken the thing pledged (Art. possession of the same 2100, par. 2.) because Purpose: is to forestall fraud, their acts are, in legal because a debtor may attempt to effect, deemed his. conceal his property from his Apply the fruits, income, divid creditors when he sees it in ends, or interests produced or danger of execution by earned by the property, to inte simulating a pledge thereof with rests or expenses first, then to an accomplice the principal. (Art. 2102,) ART. 2097. With the consent of the GR: Cannot use the thing pledgee, the thing pledged may be pledged without authority: alienated by the pledgor or owner, a. XPNs: subject to the pledge. The ownership i. Authority or of the thing pledged is transmitted permission from to the vendee or transferee as soon pledgor as the pledgee consents to the ii. Use of thing is alienation, but the latter shall necessary for continue in possession preservation To allow the assignor to dispose Return the thing pledged to of or alienate the security the pledge when the principal without notice to and consent of obligation is fulfilled or the assignee will render nugatory satisfied it. the very purpose of a pledge or an assignment of credit Right of pledgor to ask that thing What are the rights of a pledge pledged be deposited: Retain the thing until debt is paid. (Art. 2018, NCC) In the following cases, the owner may To be reimbursed for the ask that the thing pledged be deposited expenses made for the preservation judicially or extrajudicially: of the thing pledged.(Art. 2099, NCC Creditor may bring any action if the creditor uses the thing pertaining to the pledgor in without authority; 5
(2) if he misuses the thing in any Extinguishment of pledge by return
other way; or of thing pledged. (3) if the thing is in danger of object is returned by the pledgee, being lost or impaired because of and this is true notwithstanding the negligence or willful act of any stipulation that the pledge the pledgee. (Art. 2106.) would continue although the pledgee is no longer in ART. 2105. The debtor cannot ask possession for the return of the thing pledged payment of the debt (see Art. against the will of the creditor, 2105.), unless and until he has paid the debt by renunciation or abandonment and its interest, with expenses in a of the pledge (Art. 2111.) proper case. the sale of the thing pledged at public auction. (see Art. 2115.) -XPN: 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. Presumption when the thing is found Right of pledgor to substitute thing in the possession of the pledgor subs pledged ( Art.2107) equent to the perfection of the pledg Requisites: e: The pledgor has reasonable gives rise to a prima facie grounds to fear the destruction presumption that the thing has or impairment of the thing been returned and, therefore, pledged; that the pledge has been There is no fault on the part of extinguished in any of the ff. the pledgee; circumstances: The pledgor is offering in place of a. If the thing is found in the the thing, another thing in possession of pledgor or pledge which is of the same kind owner after the pledge had and quality as the former; and been perfected The pledgee does not choose to b. Thing is found in the exercise his right to cause the possession of a third thing pledged to be sold at public person who received it auction. from pledgor after the ART. 2108. If, without the fault of perfection of the pledge. the pledgee, there is danger of presumption may be rebutted by destruction, impairment, or evidence to the contrary: diminution in value of the thing pledged, he may cause the same to the return was merely for the be sold at a public sale. The proceeds substitution of the thing pledged of the auction shall be a security for (Art. 2105.), the principal obligation in the same the thing was stolen and given manner as the thing originally by the thief to the pledgor or pledged owner pledgor is given the right “without prejudice to the right of ART. 2111. A statement in writing by the pledge the pledgee that he renounces or abandons the pledge is suffi cient to ART. 2109. If the creditor is deceived extinguish the pledge. For this on the substance or quality of the purpose, neither the acceptance by thing pledged, he may either claim the pledgor or owner, nor the return another thing in its stead, or demand of the thing pledged is necessary, the immediate payment of the principal pledgee becoming a depositary. obligation The remedies are alternative, Extinguishment of pledge by that is, he is privileged to choose renunciation or abandonment: only one and not both. waiver must be in writing What is the effect of the return of th prescription e thing pledged to the pledgor by the loss of the thing, pledge: merger, compensation, The pledge shall be extinguished. novation Any stipulation shall be void.(Art. 2110) 6
RIGHT OF PLEDGEE TO CAUSE SALE a. The reason is to compel
OF THING PLEDGED: the creditor to hold an honest public sale. The debt is due and unpaid; b. Furthermore, the creditor The sale must be at a public should see to it, which he auction; usually does, that he There must be notice to the loans only as much as he pledgor and owner, stating the is likely to realize at a amount due; public sale. The sale must be made with the intervention of a notary public Right of third person to satisfy Note that Article 2112 does not require obligation. posting of the notice of sale and publication. Notification to the pledgor GR: the creditor is not bound to and the owner of the thing pledged is accept payment or performance sufficient by a third person who has no interest in the fulfi llment of the obligation. (Art.1236) Right of pledgee to appropriate thing XPN: ART. 2117. Any third pledged. person who has any right in or to the thing pledged may The pledgee may appropriate the satisfy the principal obligation thing pledged if after the fi rst as soon as the latter becomes and second auctions, the thing is due and demandable not sold. This is an exception to the prohibition against pacto ART. 2119. If two or more things are commisorio. (Art. 2088.) pledged, the pledgee may choose which he will cause to be sold, unless ART. 2113. At the public auction, the there is a stipulation to the contrary. pledgor or owner may bid. He shall, He may demand the sale of only as moreover, have a better right if he many of the things as are necessary should offer the same terms as the for the payment of the debt highest bidder. The pledgee may also bid, but his offer shall not be valid if Limited only by stipulation. After he is the only bidder. suffi cient property has been sold to satisfy the obligation plus interests - To avoid fraud, the pledgee is not and expenses (Art. 2115.), no more allowed to acquire the thing shall be sold. pledged if he is the only bidder. Right of third person who pledged Bid must be for cash. All bids, his own property. including that of the pledgor, must be for cash. If the pledgee accepts a bid A third person who is not a party other than for cash, the pledgor or to the principal obligation may owner has the right to consider that the secure the latter by pledging his pledgee has received the purchase price own property. (Art. 2085, par. 2.) in cash (Art.2114) The law grants him the same rights as a guarantor (see Arts. EFFECT OF SALE OF THING 2066-2070, 2077-2081.) and he PLEDGED: cannot be prejudiced by any waiver of defense by the principal The sale of the thing pledged debtor. 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 REAL MORTGAGE creditor, the debtor is not entitled to the excess unless the ART. 2124. Only the following contrary is provided. property may be the object of a 2. In the same way, if the price of contract of mortgage: the sale is less, neither is the - Immovables; creditor entitled to recover the - Alienable real rights in defi ciency. A contrary accordance with the laws, stipulation is void. imposed upon immovables 7
Nevertheless, movables may be the Cause or consideration in mortgage.
object of a chattel mortgage. As mortgage is an accessory Mortgage (otherwise known as “real contract, its consideration is the estate mortgage” or “real mortgage’’) is a same as of the principal contract contract whereby the debtor secures to from which it receives its life, the creditor the fulfillment of a principal and without which it cannot obligation, specially subjecting to such exist as an independent contract, security immovable property or real although the obligation thereby rights over immovable property which secured is incurred by a third obligation shall be satisfied with the person and, therefore, it will be proceeds of the sale of said property or valid if the principal obligation is rights in case the said obligation is not valid, and cannot be avoided on complied with at the time stipulated. the ground of lack of consideration The mortgage must sufficiently Characteristics of mortgage describe the debt sought to be secured. An obligation is not real, secured by a mortgage unless it accessory, comes fairly within its terms. subsidiary contract. unilateral because it creates only an Kinds of mortgage. obligation on the part of the creditor who must free the property from the A mortgage may be: encumbrance once the obligation is fulfilled. (1) Voluntary. — one which is agreed to between the parties or constituted by Essence of a contract of mortgage is the will of the owner of the property on that a property has been identified or which it is created (Art. 138, Spanish set apart from the mass of the property Mortgage Law.); of the debtor-mortgagor as security for the fulfillment of his obligation, in case (2) Legal. — one required by law to be of default of payment. executed in favor of certain persons (see Art. 2125, par. 2; Arts. 2082, 2083.); or Possession of property mortgaged. Art
-retains possession of the property (3) Equitable. — one which, although it
mortgaged as security for the payment lacks the proper formalities or other of the sum borrowed from the requisites of a mortgage required by mortgagee-creditor, because by the law, nevertheless reveals the intention mortgage, the debtor merely subjects of the parties to burden real property as the property to a lien but ownership a security for a debt, and contains thereof is not parted with nothing impossible or contrary to law.
Since it is the mortgagor in a contract Subject matter of mortgage.
of mortgage who is entitled to the possession of the subject property, it The objects of contract of mortgage are follows that one’s status as mortgagee immovables (Art. 415.3) and alienable cannot be the basis of possession. real rights imposed upon immovables.
Payment of interest on mortgage Hence, a mortgage on real property is in
credit. It is not also an essential itself a real property. requisite of the contract of mortgage that the principal of the mortgage credit The inclusion of “buildings” under bears interest, or that the interest as Article 415 of the Civil Code, separate compensation for the use of the and distinct from the land means that a principal and enjoyment of its fruits be building is by itself an immovable in the form of a certain percent thereof. property. While a mortgage of land necessarily includes, in the absence of The interest may be in the form stipulation, the improvements thereon, of fruits of the mortgaged a building by itself may be mortgaged property, without the contract’s apart from the land on which it is built. losing thereby its character of a Possessory rights over said property mortgage contract. before title is vested on the grantee may be validly transferred or conveyed as in a deed of mortgage 8
has a right to rely in good
Future property cannot be object of faith on the certificate of mortgage title of the mortgagor of the property given as security Stipulation in a contract of and in the absence of any mortgage whereby the mortgagor sign that might arouse also constituted a mortgage in suspicion, has no obligation favor of the mortgagee and his to undertake further assignees “on any other property investigation. he then might have and those he might acquire in the future” did The doctrine is based on the rule not constitute a valid mortgage that all persons dealing with the on the properties acquired property covered by a Torrens subsequent to the constitution of Certificate of Title as buyers or the mortgage. mortgagees, are not required to mortgagor could not legally go beyond what appears on the mortgage any property he did not face of the title. yet own Greater care and diligence ART. 2125. In addition to the required of mortgagee-bank. — requisites stated in Article 2085, it is A mortgagee-bank is expected to indispensable, in order that a exercise greater care and mortgage may be validly constituted, prudence before entering into a that the document in which it mortgage contract even those appears be recorded in the Registry involving registered lands in its of Property. If the instrument is not dealings than private individuals recorded, the mortgage is as their business is impressed nevertheless binding between the with public interest. parties. The persons in whose favor the law establishes a mortgage have no other right than to demand the execution and the recording of the document in which the mortgage is formalized. (1875a)
Where mortgage in a private
document. — No valid mortgage is constituted where the alleged deed of mortgage is a mere private document and, therefore, is not registered. Where mortgage not registered-if the instrument of mortgage is not recorded, the mortgage is nevertheless binding between the parties. o In other words, registration only operates as a notice of the mortgage to others but neither adds to its validity nor converts an invalid mortgage into a valid one between the parties. Where mortgage registered under Act No. 3344-an unregistered pacto de retro sale over a house is superior to a recorded mortgage over the same house of a later date