CREDIT TRANSACTIONS

Similarities Between Pledge, Real Estate Mortgage And Chattel Mortgage

Requisites Of Contract 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.
ILLUSTRATION: On September 30, 2020, D executed a contract of pledge over the cellphone of his father to secure
his (D's) obligation to C for P10,000. On October 31, 2020, the father of D died and as sole heir, he obtained
ownership over all the assets, including the cellphone. What is the status of the contract of pledge?
ANSWER: The contract of pledge is void since the requirement Of "absolute ownership" must be complied with at the
time the contract was entered into.
ACCESSORY CONTRACT: a pledge or mortgage, being an accessory contract, cannot exist without a valid
obligation or a principal contract.
Types of obligations/contracts that a pledge/mortgage may secure:
1. Pure obligations
2. Conditional obligations — whether resolutory or suspensive
3. obligations with a term - whether resolutory or suspensive
4. Natural obligations
5. Rescissible contracts
6. Voidable contracts
7. Unenforceable contracts
They cannot, however, secure a void obligation/contract.
Right to foreclose: 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.
THIRD PERSONS who are not parties to the principal obligation may secure the latter by pledging or mortgaging
their own property.
ILLUSTRATION: D is indebted to C for PIOO,OOO. X executed a pledge/mortgage in favor of C to secure D' debt.
Can X execute a pledge or mortgage to secure an obligation of another?
ANSWER: Yes, because third persons/parties who are not parties to the principal obligation may secure the same. It
would follow that the requirement of absolute ownership and free disposal shall apply to X, being the
pledgor/mortgagor, even if he is not the principal debtor.
AUTOMATIC APPROPRIATION PROHIBITED: PACTUM COMMISSORIUM - VOID: The creditor cannot appropriate
the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.
The stipulation is otherwise known as Pactum Commissorium.
INDIVISIBILITY OF CONTRACT: A pledge or mortgage is indivisible, even though the debt may be divided among
the successors in interest of the debtor or of the creditor.
Therefore:
1. The debtor's heir who has paid a part of the debt cannot ask for the Proportionate extinguishment of the
pledge or mortgage as long as the debt is not completely satisfied.
2. Neither can the creditor's heir who received his share of the debt return the pledge or cancel the mortgage,
to the prejudice of the other heirs who have not been paid.
The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable.
ILLUSTRATION: D executed a contract of pledge in favor of C, delivering his diamond ring and a gold watch, as
security for his loan amounting to PIOO,OOO. Without the debt being paid, C died leaving X and Y, his sole heirs; D
likewise died leaving A and B, his sole heirs. A eventually made a payment to X representing his share of the
PI00,000 debt owed by his father to X's father.

In this case, A cannot demand, and X cannot allow, the release of any of the objects given by way of pledge, since:
1. "the debtor's heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the
pledge or mortgage as long as the debt is not completely satisfied."
2. "Neither can the creditor's heir who received his share of the debt return the pledge or cancel the mortgage,
to the prejudice of the other heirs who have not been paid."
Rule of Indivisibility NOT applicable: If 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.
ILLUSTRATION: D has 2 debts with C for P50,000 each. To secure the obligations, D gave by way of pledge his
diamond ring and gold watch.
In this case, each of the contract of pledge is to secure separate obligations. As such, Once D paid P50,000, he can
demand the release of the diamond ring or gold watch, depending to which obligation each pertains.
PLEDGE
PLEDGE is a contract by virtue of which the debtor delivers to the creditor or to a third person movable (Art. 2094) or
document evidencing incorporeal rights (Art. 2095) for the purpose of securing the fulfilment of a principal obligation
with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and
accessions.
Delivery: in addition to the above-mentioned essential requisites of contracts of pledge or mortgage, it is necessary,
in order to constitute the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a
third person by common agreement.
KINDS OF PLEDGE:
1. Voluntary or conventional - created by agreement of the parties; or
2. Legal - created by operation of law.
CHARACTERISTICS:
1. REAL CONTRACT — perfected by the delivery of the thing pledged;
2. ACCESSORY CONTRACT - no independent existence of its own;
3. UNILATERAL — creates an obligation solely on the part of the creditor to return the thing;
4. SUBSIDIARY — obligation incurred does not arise until the fulfilment of the principal obligation which is
secured.
5. INDIVISIBLE - It creates a lien on the whole or all of the properties pledged, which lien continues until the
obligation is secures has been fully paid.
6. NOMINATE — It has a name given to it by law and there are specific rules that govern the same.

CAUSE OR CONSIDERATION
1. Pledgor/debtor - the principal obligation;
2. Pledgor not the debtor -- compensation stipulated or mere liberality
OBJECT
1. Movable property;
2. Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares of stock, bonds, warehouse
receipts and similar documents may also be pledged. The instrument proving the right pledged shall b
delivered to the creditor, and if negotiable, must be indorsed.
Rules:
1. Within the commerce of man and capable of possession;
2. 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.
ILLUSTRATION: D is indebted to C for PIOO,OOO, secured by a pledge on shares of securities owned by D in XYZ
Corporation. While the debt remained unpaid, the Corporation declared dividends.
In this case, C may apply such dividends to any interest that may be due to him; if none, he can apply whatever he
received as payment for the principal.
 3. Unless there is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the right
pledged.
ILLUSTRATION: D promised to deliver to C a diamond right worth P100,000. To secure the obligation, D delivered a
promise note executed by X in favor of D, which earns 10% annual interest.
In this case, the interest being earned by the promissory note given by way of pledge will also form part of what
secures the obligation to
4. In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of animals pledged, but
shall be subject to the pledge, if there is no stipulation to the contrary.
5. Unless the thing pledged is expropriated, the debtor continues to be the owner thereof.
6. Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to
recover it from, or defend it against a third person.
Deposit of the Thing Pledged with a Third Person:
1. On the part of the pledgee - if there is stipulation granting such right;
2. On the part of the pledgor:
A. If through the negligence or willful act of the pledgee, the thing pledged is in danger of being lost or
impaired.
B. If the pledgee uses or misuses the thing.
Fear of destruction, loss or impairment WITHOUT pledgee's fault
1. The pledgor may demand the return of the thing, upon offering another thing in pledge, provided the latter is
of the same kind as the former and not of inferior quality; or
2. The pledgee may cause the same to be sold at a public sale.
The proceeds of the auction shall be a security for the principal obligation in the same manner as the thing originally
pledged.
The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged.
Form: there is no form required to constitute a contract of pledge.
In order to affect third persons:
1. There must be a public instrument
2. The public instrument contains:
A. The description of the thing pledged; and
B. the date of the pledge.
Alienation (Sale) of the thing pledged: is allowed with the consent of the pledgee.

 The ownership of the thing pledged is transmitted to the vendee or transferee as soon the pledgee consents
to the alienation,
 But the creditor-pledgee shall continue in possession.
Creditor-pledgee:
1. The creditor shall take care of the thing pledged with the diligence of a good father of a family;
2. He has a right to the reimbursement of the expenses made for its preservation, and is liable for its loss or
deterioration, in conformity the Civil Code.
3. The pledgee is responsible for the acts of his agents or employees With respect to the thing pledged.
4. If the creditor is deceived on the substance or quality of the thing pledged, he may either claim another thing
in its stead, or demand immediate payment of the principal obligation.
Use Of The Thing Pledged:
General Rule: The creditor cannot use the thing pledged, without the authority of the owner.
Exceptions:
1. Authority from the owner (pledgor); or
2. When the preservation of the thing pledged requires its use, it must be used by the creditor but only for that
purpose.
Use (when there is no right) or misuse will authorize the owner may ask that the thing be judicially or extrajudicially
deposited.
Pledgor:
1. The pledgor who, knowing the flaws of the thing pledged, does not advise the pledgee of the same, shall be
liable to the latter for the damages which he may suffer by reason thereof.
2. The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he
has paid the debt and its interest, with expenses in a proper case.
Extinguishment of a Contract of Pledge: can be by any mode Of extinguishment of obligations or the extinguishment
of the principal obligation or contract, but also:
1. Thing Pledged is Returned: 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.
Presumption: 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.
2. Renunciation or Abandonment of Pledge: 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.
Foreclosure sale:
1. 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.
2. This sale shall be made at a public auction, and
3. 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.
Creditor's right of appropriation:
1. If at the first auction the thing is not sold, a second one with the same formalities shall be held; and
2. 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.
Pledgor's Right to bid: 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.
All bids at the public auction shall offer to pay the purchase price at once. If any Other bid is accepted, the pledgee is
deemed to have been received the purchase price, as far as the pledgor or owner is concerned.
Sale of the thing; proceeds thereof
1. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is
otherwise agreed.
2. If the price of the sale is less, the creditor shall not be entitled to recover the deficiency, notwithstanding any
stipulation to the contrary.
The sale of the thing pledged shall extinguish the principal obligation whether or not the proceeds of the sale are
equal to the amount of the principal obligation, interest and expenses in a proper case.
ILLUSTRATION: D is indebted to C for PIOO,OOO secured by a pledge over D's diamond ring. Unable to pay on the
due date, C foreclosed the pledge. If the proceeds of the foreclosure sale is:
1. P120,000 - as a general rule, C will be entitled thereto, except if there is a stipulation that the debtor-pledgor
will be entitled to the excess.
2. P80,000 - C is not entitled to the deficiency regardless of stipulation.
Credit as the object of a contract of pledge: 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.
ILLUSTRATION: D is indebted to C for PIO,OOO due on October 15, 2020. To secure the performance of the
obligation, D pledged his credit by delivering the promissory note issued to him by M. D, accordingly, negotiated said
note to C which is due on September 30, 2020.
On September 30, 2020, the promissory note becoming due, C will be allowed to collect the amount thereof and
apply the P10,000 to the obligation of D, and return the excess to D.
Note that in this illustration, there was no foreclosure, this is different from foreclosure sale where the creditor-
pledgee is entitled to the excess as a general rule.
Third Party Pledgor:
Rights: If a third party secures an obligation by pledging his own movable property, he shall have the same rights as
a guarantor to be:
A. Indemnified for the total amount of the debt, including interest, expenses or damages, if they are due;
B. subrogated to all the rights the creditor had against the debtor;
C. He is not prejudiced by any waiver of defense by the principal obligor.
Release from liability: instances that the third party pledgor may be released from liability:
1. If the creditor voluntarily accepts immovable or other property in payment of the debt even if the creditor
thereafter loses the same by eviction.
2. If an extension of time is granted to the debtor by the creditor without pledgor's consent.
3. If through some act of the creditor, the pledgor cannot be subrogated to the rights, mortgages and
preferences of the creditor.
4. If the thing pledged is deteriorated on the fault of the pledgee.
Void stipulations:
1. A stipulation which provides that the pledge is not extinguished by the return of the thing pledged.
2. A stipulation allowing the automatic appropriation by the pledgee of the thing pledged in case of default of
the debtor.
3. A stipulation for the recovery of deficiency in case the proceeds from the sale of the thing pledged is less
than the amount of the obligation.
Other Rules:
1. After the public auction, the pledgee shall promptly advise the pledgor or owner of the result thereof.
2. 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.
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.
4. With regard to pawnshops and other establishments, which are engaged in making loans secured by
pledges, the special laws and regulations Concerning them shall be observed, and subsidiarily, the
provisions of this Title.
LEGAL PLEDGE: a type of pledge which refers to the right of a person retain a thing until he receives payment of his
claim.
Examples of legal pledge
1. A possessor in good faith may retain the movable upon which he has incurred necessary and useful
expenses until he has been reimbursed therefore.
2. He who has executed work upon movable has a right to retain it by way of pledge until he is paid.
3. The depositary may retain the thing deposited until the full payment of what may have been due from him by
reason of the deposit.
Distinctions between Contract of or Conventional pledge and Legal pledge
1. The foreclosure in legal pledge requires a demand and can only done 30 days thereafter, no such
requirement applies to a conventional pledge's foreclosure.
2. The deficiency in foreclosure sale in contract of pledge can never recovered by the pledgee but the
deficiency in public sale in legal pledge can be recovered by the creditor.
3. The excess in foreclosure sale in contract of pledge will generally go to the pledgee in the absence of
stipulation to the contrary but the excess in the public sale in legal pledge will go to the debtor.
REAL ESTATE MORTGAGE
OBJECT: Only the following property may be the object of a contract mortgage:
1. Immovables;
2. Alienable real rights in accordance with the laws, imposed upon immovables.
Nevertheless, movables may be the object of a chattel mortgage.
Characteristics:
1. ACCESSORY - It cannot exist without a principal obligation such as contract of loan.
2. INDIVISIBLE - It creates a lien on the whole or all of the properties mortgaged, which lien continues until the
obligation is secures has been fully paid.
3. INSEPARABLE - It 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.
4. REAL RIGHT - It creates a lien on the property mortgaged which may be enforceable even against third
party possessors in good faith, if it is registered.
5. CONSENSUAL CONTRACT - It is perfected by mere consent.
6. NOMINATE - It has a name given to it by law and specific rules are applicable to it.
Types of Real Estate Mortgage:
1. CONVENTIONAL real estate mortgage is one which is created by the agreement of the parties.
2. LEGAL mortgage is one executed pursuant, to an express requirement of a provision of law.
3. EQUITABLE mortgage is one which although lacks certain formality, form or words or other requisites
provided by statute, but the facts show the intention of the parties to charge the real property as a security
for a debt and contains nothing contrary to law. The remedy of the injured party is to file an action for
reformation of instrument.
Form: there is no form required to constitute a contract of real estate mortgage.
In order to affect third persons:
1. There must be a public instrument containing the description thereof; and
2. The same should be recorded in the Registry of Property.
The creditor-mortgagee has no other right than to demand the execution and the recording of the document in which
the mortgage is formalized.
Object: The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or
income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to
the Proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use, with the
declarations, amplifications arid limitations established by law, whether the estate remains in the of the mortgagor, or
it passes into the hands of a third person.
Principal Obligation Covered:
General Rule: covers only that which is stated in the deed even if less than the amount of loan.
Exception: if there is stipulation to cover future advancements called a dragnet clause.
Mortgage credit is transferable: The mortgage credit may be alienated or assigned to a third person, in whole or in
part, with the formalities required by law.
Pactum de non-aliendo: the owner is allowed to alienate the immovable property mortgaged. A stipulation
prohibiting/forbidding such right is called pactum de non-aliendo and is considered void.
Third party transferee: Buyers or transferees of the property mortgaged are not affected by an unregistered
mortgage. However, if the mortgage is registered (Art. 1312) they are
A. Bound by a foreclosure sale on the property
B. Not bound to answer the deficiency
C. Unless there is novation in the person of the debtor
ILLUSTRATION: D is indebted to C for P1,000,000. To secure the obligation, D mortgaged his lot and executed a
Deed of Real Estate Mortgage. In this case,
1. D can validly dispose or transfer the lot to third persons. Any stipulation prohibition him (pactum de non-
aliendo) shall be void.
2. If D sells the property to X:
A. X shall not be bound by the mortgage if the Deed of Real Estate Mortgage is not registered in the
Registry of Property;
B. If the Deed is registered, X shall be bound by such registered mortgage, and in case of foreclosure:
I. And the proceeds of the foreclosure is P1,200,000 — X shall be entitled to the excess.
II. If the proceeds is only P800,000
a) X shall not be liable for the P200,OOO deficiency, as a rule
b) X shall be bound for the deficiency of P200,000 if there was novation (expromision or
delegacion).
Foreclosure: in case of non-payment of the principal obligation, the creditor-mortgagee may foreclose the mortgage
either:
1. Judicially — under Rule 68 of the Rules of Court;
2. Extra-judicially under Act No. 3135.
Notice of Foreclosure Sale:
1. Extrajudicial - not required, unless stipulated.
2. Judicial - Posting in 3 public places at least 20 days prior to sale and publication of the notice of sale in a
newspaper of general circulation.
Proceeds: if the proceeds of the foreclosure sale:
1. Is more than the unpaid amount — the mortgagor shall be entitled to the excess;
2. Is less than the unpaid amount — the mortgagee shall be entitled to recover the deficiency.
The generic treatment is that the mortgage is still a separate contract and merely stands as a means to recover the
unpaid amount. That's why any excess is returned to the mortgagor and any deficiency, the debtor remains liable
thereto.
Redemption: exists only in Real Estate Mortgage foreclosures. The period to redeem shall depend if the foreclosure
is:
1. Extrajudicial:
A. General Rule: 1 year from date of foreclosure
B. Exception: Under the General Banking Law, 3 months from sale or registration of the certificate of sale,
whichever is earlier, whenever:
I. The debtor — juridical person
II. The creditor — bank
ILLUSTRATION: ABC Bank borrowed money from XYZ Corporation and secured the obligation with a real estate
mortgage. Due to nonpayment, XYZ Corporation foreclosed the mortgage. What will be the applicable period of
redemption?
ANSWER: The generic rule of 1 year. The exception under the General Banking Law applies only if the bank is the
creditor and the juridical person is the debtor. In this case, the juridical person (XYZ Corporation) is the creditor and
the bank (ABC Bank) is the debtor.
2. Judicial — although the Rules of Court provide that the equity of redemption is 90 to 120 days, it has been
held that the equity of redemption exists as long as there is no confirmation of sale by the court.
Void Stipulations:
1. A stipulation which provides for tipo or upset price in the foreclosure sale of mortgaged property. A tipo or
upset price is a maximum limit as to the selling price in the public sale of mortgaged property. It is void
because the mortgaged property must be sold to the highest bidder and there must be no maximum
limitation on the price.
2. A stipulation allowing the automatic appropriation by the mortgagee of the thing mortgaged in case of
default of the debtor.
3. A stipulation prohibiting the mortgagor from disposing or selling his property.

CHATTEL MORTGAGE
CHATTEL MORTGAGE: personal property is recorded in the Chattel Mortgage Register as a security for the
performance of an obligation.
If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge and
not a chattel mortgage.
Characteristics:
1. ACCESSORY — It cannot exist without a principal obligation such contract of loan.
2. INDIVISIBLE — It creates a lien on the whole or all of the properties mortgaged, which lien continues until
the obligation is secures has fully paid.
3. INSEPARABLE — It subjects the property upon which it is imposed, whoever the possessor may be, to the
fulfillment of the obligation whose security it was constituted.
4. FORMAL CONTRACT - It is perfected by the registration to chattel mortgage register.
5. NOMINATE — It has a name given to it by law
Affidavit of Good Faith: stating that the parties swear that the mortgage is made for the purpose of securing the
obligations specified in the conditions thereof, and for no other purposes, and that the same is a just and valid
obligation and not one entered into for purposes of fraud, is also required under the law. However, the absence of
such affidavit or the non-recording should one exist, does not affect the validity of the contract as between the
parties, it only makes the contract non-binding to third persons who acted in good faith.
Note, however, that a chattel mortgage is a formal contract. Nevertheless, it remains valid between the parties
despite the absence of an affidavit of good faith and its registration, since both parties may be considered in pari
delicto, and thus has no available remedies against each other.
To affect third persons: there must be an Affidavit of Good Faith and the same is registered with the Chattel
Mortgage Registry; or the MARINA — in case of vessels; and in case of vehicles with a report to the Land
Transportation Office.
Coverage: shall be the debts existing at the time the contract was entered into and indicated in the Affidavit of Good
Faith. As a rule, an amendment of the Affidavit shall be necessary to cover subsequent obligations.
Disposal of the object during the pendency of the mortgage: is considered a criminal act under Art. 319 of the
Revised Penal Code: Removal of Mortgaged Property.
Foreclosure: shall be done extrajudicially. Rule 68 of the Rules of Court does not apply to foreclosure of a chattel
mortgage.
Notice: Required 10 days prior to sale; Posting in two or more public places 10 days before auction.
Proceeds of Foreclosure Sale: if the amount of the proceeds of foreclosure sale:
1. Is more than the unpaid amount — the excess shall belong to the mortgagor;
2. Is less than the unpaid amount:
A. General Rule: the creditor is entitled to the deficiency;
B. Except: if the object is subject of a sale in installment and covered by the Recto Law which prohibits
collection of unpaid amount once the creditor (unpaid seller) already foreclosed the chattel mortgage on
the property itself.
Redemption: there is no right of redemption that exists in a foreclosure of chattel mortgage.
DISTINCTIONS