CONTRAST IN CONTRACTS 2

CREDIT TRANSACTIONS

PLEDGE REAL MORTGAGE

Pledge is constituted on movables While mortgage, on immovables.
In pledge, the property is delivered to the while in mortgage, delivery is not necessary
pledgee, or by common consent to a third
person
Pledge is not valid against third persons While mortgage is not valid against third
unless a description of the thing pledged persons if not registered.
and the date of the pledge appear in a
public instrument

PLEDGE is a contract by virtue of which the debtor delivers to the creditor or to a third
person a movable (Art. 2094.) ordocument evidencing incorporeal rights (Art. 2095.) for the
purpose of securing the fulfillment of a principal obligation with the understanding that when
the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions.

Characteristics of the contract.

Pledge is:
(1) a real contract because it is perfected by the delivery of the thing pledged by the debtor
who is called the pledgor to the creditor who is called the pledgee, or to a third person by
common
agreement;

(2) an accessory contract because it has no independent existence of its own;

(3) a unilateral contract because it creates an obligation solely on the part of the creditor to
return the thing subject thereof upon the fulfillment of the principal obligation; and

(4) a subsidiary contract because the obligation incurred does not arise until the fulfillment of
the principal obligation which is secured.

MORTGAGE (otherwise known as “real estate mortgage” or “real mortgage’’) is a

contract whereby the debtor secures to the creditor the fulfi llment of a principal obligation,
specially subjecting to such security immovable property or real rightsover immovable property
which obligation shall be satisfied with the proceeds of the sale of said property or rights in
case the said obligation is not complied with at the time stipulated.

Characteristics of mortgage.
It is a real, accessory, and subsidiary contract. It is also unilateral because it creates
only an obligation on the part of the creditor who must free the property from the encumbrance
once the obligation is fulfilled.

JUDICIAL FORECLOSURE UNDER THE EXTRAJUDICIAL FORECLOSURE UNDER

RULES OF COURT ACT NO 3135

1
 CONTRAST IN CONTRACTS 2
CREDIT TRANSACTIONS
(1) Judicial action for the purpose.
— A mortgage may be foreclosed judicially
by bringing an action for that purpose, in
the proper court which has jurisdiction over
the area wherein the real property involved
or a portion thereof, is situated.
If the court finds the complaint to be
well-founded, it shall order the mortgagor
to pay the amount due upon the mortgage
debt or obligation with interest and other
charges within a period of not less than 90
days nor more than 120 days from the entry
of judgment.
If the mortgagor fails to pay at the time
directed in the order, the court, upon
On motion, shall order the property to be
sold to the highest bidder at public auction.
Confirmation of sale. — The sale when
confirmed by an order of the court, also upon
motion, shall operate to divest the rights of
all parties to the action and to vest their
rights in the purchaser subject to such right
of redemption as may be allowed by law.
Meaning of foreclosure (of mortgage).
1) Express authority to sell given to
mortgagee. — The law covers only real
estate mortgages. It is intended merely to
regulate the extrajudicial sale of the
property mortgaged if and when the
mortgagee is given a special power or
express authority to do so in the deed itself
or in a document annexed thereto.
(2) Authority not extinguished by
death of mortgagor or mortgagee.— A
mortgage may be foreclosed extrajudicially
where there is inserted in the contract a
clause giving the mortgagee the power,
upon default of the debtor, to foreclose the
mortgage by an extrajudicial sale of the
mortgaged property.
Statutory provisions governing
publication of notice of mortgage
foreclosure sales must be strictly complied
with,
And that even slight deviations therefrom
Will invalidate the notice and render the
sale at least voidable. The purpose of the
publication of the Notice Sheriff’s Sale
is to inform all interested parties of the date,
time, and place of
Publication of notice of auction sale.
— Publication is required to give the
foreclosure sale a reasonably wide publicity
such that those interested might attend the
public sale.
(a) Publication mandatory. — Failure to
comply with the statutory requirements as to
publication of notice of auction sale
constitutes a jurisdictional defect which
invalidates the sale or at least render the
sale voidable. Even slight deviations
therefrom are not allowed.
2
 CONTRAST IN CONTRACTS 2
CREDIT TRANSACTIONS

FORECLOSURE is the remedy available to the mortgagee by which he subjects the

mortgaged property to the satisfaction of the obligation to secure which the mortgage was
given.
It presupposes something more than a mere demand to surrender possession of the object
of the mortgage.

RULE 68

FORECLOSURE OF REAL ESTATE MORTGAGE

Section 1. Complaint in action for foreclosure. — In an action for the foreclosure

of a mortgage or other encumbrance upon real estate, the complaint shall set forth the date
and due execution of the mortgage; its assignments, if any; the names and residences of the
mortgagor and the mortgagee; a description of the mortgaged property; a statement of the
date of the note or other documentary evidence of the obligation secured by the mortgage,
the amount claimed to be unpaid thereon; and the names and residences of all persons
having or claiming an interest in the property subordinate in right to that of the holder of the
mortgage, all of whom shall be made defendants in the action. (1a)

Section 2. Judgment on foreclosure for payment or sale. — If upon the trial in

such action the court shall find the facts set forth in the complaint to be true, it shall ascertain
the amount due to the plaintiff upon the mortgage debt or obligation, including interest and
other charges as approved by the court, and costs, and shall render judgment for the sum so
found due and order that the same be paid to the court or to the judgment obligee within a
period of not less than ninety (90) days nor more than one hundred twenty (120) days from
the entry of judgment, and that in default of such payment the property shall be sold at public
auction to satisfy the judgment. (2a)

Section 3. Sale of mortgaged property; effect. — When the defendant, after

being directed to do so as provided in the next preceding section, fails to pay the amount of
the judgment within the period specified therein, the court, upon motion, shall order the
property to be sold in the manner and under the provisions of Rule 39 and other regulations
governing sales of real estate under execution. Such sale shall not affect the rights of
persons holding prior encumbrances upon the property or a part thereof, and when
confirmed by an order of the court, also upon motion, it shall operate to divest the rights in
the property of all the parties to the action and to vest their rights in the purchaser, subject to
such rights of redemption as may be allowed by law.

Upon the finality of the order of confirmation or upon the expiration of the period of
redemption when allowed by law, the purchaser at the auction sale or last redemptioner, if
any, shall be entitled to the possession of the property unless a third party is actually holding
the same adversely to the judgment obligor. The said purchaser or last redemptioner may
secure a writ of possession, upon motion, from the court which ordered the foreclosure. (3a)

Section 4. Disposition of proceeds of sale. — The amount realized from the

foreclosure sale of the mortgaged property shall, after deducting the costs of the sale, be
paid to the person foreclosing the mortgage, and when there shall be any balance or
residue, after paying off the mortgage debt due, the same shall be paid to junior
encumbrancers in the order of their priority, to be ascertained by the court, or if there be no
such encumbrancers or there be a balance or residue after payment to them, then to the
mortgagor or his duly authorized agent, or to the person entitled to it. (4a)

Section 5. How sale to proceed in case the debt is not all due. — If the debt for
which the mortgage or encumbrance was held is not all due as provided in the judgment as

3
 CONTRAST IN CONTRACTS 2
CREDIT TRANSACTIONS

soon as a sufficient portion of the property has been sold to pay the total amount and the
costs due, the sale shall terminate; and afterwards as often as more becomes due for
principal or interest and other valid charges, the court may, on motion, order more to be sold.
But if the property cannot be sold in portions without prejudice to the parties, the whole shall
be ordered to be sold in the first instance, and the entire debt and costs shall be paid, if the
proceeds of the sale be sufficient therefor, there being a rebate of interest where such rebate
is proper. (5a)

Section 6. Deficiency judgment. — If upon the sale of any real property as

provided in the next preceding section there be a balance due to the plaintiff after applying
the proceeds of the sale, the court, upon motion, shall render judgment against the
defendant for any such balance for which, by the record of the case, he may be personally
liable to the plaintiff, upon which execution may issue immediately if the balance is all due at
the time of the rendition of the judgment; otherwise; the plaintiff shall be entitled to execution
at such time as the balance remaining becomes due under the terms of the original contract,
which time shall be stated in the judgment. (6a)

Section 7. Registration. — A certified copy of the final order of the court

confirming the sale shall be registered in the registry of deeds. If no right of redemption
exists, the certificate of title in the name of the mortgagor shall be cancelled, and a new one
issued in the name of the purchaser.

Where a right of redemption exists, the certificate of title in the name of the
mortgagor shall not be cancelled, but the certificate of sale and the order confirming the sale
shall be registered and a brief memorandum thereof made by the registrar of deeds upon the
certificate of title. In the event the property is redeemed, the deed of redemption shall be
registered with the registry of deeds, and a brief memorandum thereof shall be made by the
registrar of deeds on said certificate of title.

If the property is not redeemed, the final deed of sale executed by the sheriff in favor
of the purchaser at the foreclosure sale shall be registered with the registry of deeds;
whereupon the certificate of title in the name of the mortgagor shall be cancelled and a new
one issued in the name of the purchaser. (n)

Section 8. Applicability of other provisions. — The provisions of sections 31, 32

and 34 of Rule 39 shall be applicable to the judicial foreclosure of real estate mortgages
under this Rule insofar as the former are not inconsistent with or may serve to supplement
the provisions of the latter. (8a)

Meaning of redemption (of foreclosed property).

REDEMPTION may be defined as a transaction by which the mortgagor reacquires

or buys back the property which may have passed under the mortgage or divests the
property of the lien which the mortgage may have created. (59 C.J.S. 813.) In general, the
concept of redemption is to allow the owner to repurchase or buy back, within a certain
period and for a certain amount, a property that has been sold due to debt, tax, or
encumbrance.

4
 CONTRAST IN CONTRACTS 2
CREDIT TRANSACTIONS
REDEMPTION
NATURAL PERSON
The debtor (natural person)
has the right to redeem the property sold
within the term of one year from and after the
date of the sale. (Sec. 6, Act No.3135.) The
reckoning date in cases of registered land is
from the registration of the certificate of sale
since it is only from the date that the sale
takes effect as a conveyance.
EQUITY OF REDEMPTION
(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.
(1) Exercised before confirmation of sale. —
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 within the 90-day period
after the judgment becomes final in
accordance with Rule 68, or even after the
foreclosure sale but prior to its
confirmation.
(2) Acquired by second mortgagee. — A
second mortgagee acquires only the equity
of redemption vested in the mortgagor, and
his rights are strictly subordinate to the
superior lien of the first mortgagee.
JURIDICAL PERSON
In the case of juridical persons
(corporations and partnerships), they have
the right to redeem the property until, but
not after the registration of the certificate of
foreclosure sale which in no case shall be
more than three (3) months after
foreclosure, which ever is earlier,
RIGHT OF REDEMPTION
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.
(1) Period within which to exercise right. —
What is extant in extrajudicial foreclosure is
the 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 (Sec. 6, Act No. 3135.), i.e., date
of registration of the certificate of sale with
the appropriate Registry of Deeds.
(2) Effect of failure to exercise right. — Title
to the property sold under a mortgage
foreclosure remains with the mortgagor or
his
grantee until the expiration of the
redemption period. The right of the
purchaser at the foreclosure sale is merely
inchoate until
after the period of redemption has expired
without the right being exercised.
(3) Effect of exercise of right. — What
actually is effected where redemption is
seasonably exercised by the judgment or
mortgage debtor is not the recovery of the
property which ownership is never lost.
5
 CONTRAST IN CONTRACTS 2
CREDIT TRANSACTIONS

(3) Taking physical possession not
necessary for levy. — To levy upon the
mortgagor’s equity of redemption, it is not
necessary for the sheriff to take physical
possession of the mortgaged property.
Levying upon the property is distinguishable
from levying on the mortgagor’s interest in it.
Being an incorporeal or intangible right, the
value of an equity of redemption can neither
be quantified nor equated with the actual
value of the property
upon which it may be exercised.
(4) Where mortgaged property sold to a
third party. — A sale by the mortgagor to a
third party of the mortgaged property during
the period for redemption transfers only the
right to redeem the property and the right to
possess, use and enjoy the same
during said period. Under the Rules of
Court (Rule 39, Sec.31.), the judgment
debtor remains in possession of the
property
foreclosed and sold, during the period of
redemption, but he cannot make a
conveyance of the ownership of the
property as said ownership belongs to the
purchaser at the foreclosure sale.

(4) Levy by means of a writ of execution. — (5) Where sale not registered and made
The mortgagor’s equity of redemption can be without consent of mortgagee. — Where
levied upon by means of a writ of execution, the mortgagor, two days after the execution
with the result that this interest will pass to of the mortgage to a bank, executed in
the purchaser at sale favor of a third party a Deed of Sale with
Assumption of Mortgage, no consent
having
been secured from the bank to the sale
which was not registered so that the title
remained in the name of the mortgagor, it
was held that the buyer was not validly
substituted as debtor, and hence, had no
right to redeem. The mortgagee-bank was
charged with the obligation to recognize the
right of redemption only of the mortgagor.
(Bonnevie vs. Court of Appeals, supra.)
Remedy of mortgagee to obtain possession.
— If a mortgagee cannot obtain possession
of the mortgaged property for its sale on
foreclosure, he must bring a civil action
either to recover such possession as a
preliminary step to the sale or to obtain
judicial foreclosure. Replevin is, of course,
the appropriate action to recover possession
preliminary to the extrajudicial foreclosure of
a chattel mortgage. It is not only the owner
but a person “entitled to the possession’’ of
the property can institute a replevin suit.

(1) Equity of redemption. — The equity of redemption is different from and should not be
confused with the right of redemption. The latter in relation to a mortgage — understood in
the sense of a prerogative to re-acquire mortgaged property after registration of the
foreclosure sale — exists only in the case of extrajudicial foreclosure of mortgage. No such
right is recognized in a judicial foreclosure except only where the mortgagee is the
Philippine National Bank or a banking institution. (infra.)

ANTICHRESIS PLEDGE

6
 CONTRAST IN CONTRACTS 2
CREDIT TRANSACTIONS

(1) Antichresis refers to real property, while pledge, to personal property;

Antichresis is perfected by mere consent, while pledge is perfected by the delivery of

the thing pledged;
(3) Antichresis is a consensual contract, while pledge is a real contract.

Both are similar in that the debtor loses control of the subject matter of the
contract.

ANTICHRESIS REAL MORTGAGE

(1) In antichresis, the property is delivered
to the creditor,
(2) In antichresis, the creditor acquires only
the right to receive the fruits of the property;
hence, it does not produce a real right,
(3) In antichresis, the creditor, unless there
is a stipulation to the contrary, is obliged to
pay the taxes and charges upon the estate
(4) In antichresis, it is expressly stipulated
that the creditor given possession of the
property shall apply the fruits thereof to the
payment of interest, if owing, and thereafter
to the principal of the credit,
while in mortgage, the debtor usually
retains possession of the property;
while in mortgage, the creditor does not
have any right to receive the fruits, but
mortgage creates a real right over the
property which is enforceable against the
whole world;
(Art. 2135.), while in mortgage, the creditor
has no such obligation; and
while in a mortgage, there is no such
obligation on the part of the mortgagee.

Both are similar in that the subject matter is real property. Like pledge and mortgage,
antichresis gives a real and not merely a personal right if it is registered in the Registry of
Property

Characteristics of the contract.

Antichresis is:

(1) an accessory contract because it secures the performance of a principal

obligation. Manresa, however, believes that it is an independent contract (see 12 Manresa
547.); and

(2) a formal contract because it must be in a specified form to be valid, i.e., “in
writing.” (Art. 2134.)

Definition of chattel mortgage.

Chattel mortgage is that contract by virtue of which personal property is recorded in

the Chattel Mortgage Register as a security for the performance of an obligation.

Characteristics of chattel mortgage.

Chattel mortgage is:

(1) an accessory contract because it is for the purpose of securing the performance of a
principal obligation;

7
 CONTRAST IN CONTRACTS 2
CREDIT TRANSACTIONS

(2) a formal contract because of its validity, registration in the Chattel Mortgage Register
is indispensable

(3) a unilateral contract because it produces only obligations on the part of the creditor to
free the thing from the encumbrance on fulfillment of the obligation.

CHATTEL MORTGAGE PLEDGE

(1) In chattel mortgage, the delivery of the while in pledge, such deliver is necessary;
personal property to the mortgagee is not
necessary,

(2) In chattel mortgage, the registration of while in pledge,registration in the Registry

the same in the Chattel Mortgage Register of Property is not necessary;
is required by law,
(3) The procedure for the sale of the while in pledge, it is found in Article
thing given as security is different. In 2112 of the Civil Code;
chattel mortgage, the procedure is
found in Section 14 of Act No. 1508, as
amended,

(4) In chattel mortgage, if the property is
foreclosed, the excess over the amount due
goes to the debtor (Sec. 14, Act No.1508.),
(5) In chattel mortgage, if the property is
foreclosed and there is a deficiency, the
creditor is entitled to recover the deficiency
from the debtor except if the chattel
mortgage is a security for the purchase of
personal property in installments. (see Art.
1484.)
while in pledge, if the property is sold, the
debtor is not entitled to the excess unless it
is otherwise agreed (Art. 2125.) or except in
the case of a legal pledge (Art. 2121.); and
In pledge, if the property is sold, and there is
a deficiency, the creditor is not entitled to
recover the deficiency notwithstanding
any stipulation to the contrary. (Art. 2115.)

SIMILARITIES
Similarities between chattel mortgage and pledge.
They are:
(1) Both are executed to secure performance of a principal obligation;
(2) Both are constituted only on personal property;
(3) Both are indivisible;
(4) Both constitute a lien on the property;
(5) In both cases, the creditor cannot appropriate the property to himself in payment of
the debt;
(6) In both cases, when the debtor defaults, the property must be sold for the payment of
the creditor; and
(7) Both are extinguished by the fulfillment of the principal obligation or by the destruction
of the property pledged or mortgaged.

8
 CONTRAST IN CONTRACTS 2
CREDIT TRANSACTIONS

SUSPENSION OF VOLUNTARY INVOLUNTARY

PAYMENTS INSOLVENCY INSOLVENCY
The debtor has enough
assets to meet his liabilities Debtor has more obligations than his assets
only that, he cannot meet
them as they fall due
Petition is always initiated by It can be initiated by the creditors or by the debtor himself
the debtor

INVOLUNTARY INSOLVENCY VOLUNTARY INSOLVENCY

Three or more creditors are required One creditor will be sufficient

Creditors must be resident of the Philippines, This are not required

whose credits and demands accrued within
the Philippines and none of the creditors has
become a creditor by assignment within
thirty days prior to the filing of the petition
The debtor must done any acts of insolvency Debtor need not to do any of the acts of
enumerated by law insolvency
The amount of indebtedness must not be Indebtedness must exceed Php 1000
less than Php1000
Petition must be accompanied by a bond Bond is not required