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PLEDGE, REAL ESTATE MORTGAGE, AND CHATTEL THEREFORE:

MORTGAGE 1. The debtor's heir who has paid a part of
the debt cannot ask for the
REQUISITES OF CONTRACT OF PLEDGE AND proportionate extinguishment of the
MORTGAGE: pledge or mortgage as long as the debt
1. That they be constituted to secure the is not completely satisfied.
fulfillment of a principal obligation;
2. Neither can the creditor's heir who
2. That the pledgor or mortgagor be the received his share of the debt return the
absolute owner of the thing pledged or pledge or cancel the mortgage, to the
mortgaged; prejudice of the other heirs who have not
been paid.
3. That the persons constituting the pledge
or mortgage have the free disposal of The indivisibility of a pledge or mortgage is not
their property, and in the absence affected by the fact that the debtors are not
thereof, that they be legally authorized solidarily liable.
for the purpose.
Rule of Indivisibility is NOT applicable: If there
PLEDGE AND MORTGAGE ARE ACCESSORY being several things given in mortgage or
CONTRACTS pledge, each one of them guarantees only a
determinate portion of the credit.
1. Being an accessory contract, pledge
and mortgage cannot exist without a The debtor, in this case, shall have a right to the
valid obligation or a principal contract. extinguishment of the pledge or mortgage as
the portion of the debt for which each thing is
2. Nevertheless, similar to a guaranty, a especially answerable is satisfied.
pledge or a mortgage may be
constituted to guarantee the PLEDGE
performance of a voidable or an
unenforceable contract. It may also It is a contract by virtue of which the debtor
guarantee a natural obligation. delivers to the creditor or to a third person
movable (Art. 2094) or document evidencing
3. It is also of the essence of these contracts incorporeal rights (Art. 2095) for the purpose of
that when the principal obligation securing the fulfilment of a principal obligation
becomes due, the things in which the with the understanding that when the
pledge or mortgage consists may be obligation is fulfilled, the thing delivered shall be
alienated for the payment to the returned with all its fruits and accessions.
creditor.
Delivery: in addition to the above-mentioned
4. The contract of pledge or mortgage essential requisites of contracts of pledge or
may secure all kinds of obligations, be mortgage, it is necessary, in order to constitute
they pure or subject to a suspensive or the contract of pledge, that the thing pledged
resolutory condition. be placed in the possession of the creditor, or of
a third person by common agreement.
THIRD PERSONS who are not parties to the
principal obligation may secure the latter by KINDS OF PLEDGE:
pledging or mortgaging their own property. 1. Voluntary or conventional – created by
(Accommodation mortgagor) agreement of the parties; or
2. Legal – created by operation of law.
AUTOMATIC APPROPRIATION IS PROHIBITED
The creditor cannot appropriate the things CHARACTERISTICS:
given by way of pledge or mortgage or dispose 1. REAL CONTRACT – perfected by the
of them. Any stipulation to the contrary is null delivery of the thing pledged;
and void. The stipulation is otherwise known as
Pactum Commissorium. 2. ACCESSORY CONTRACT – no
independent existence of its own;
INDIVISIBILITY OF CONTRACT:
A pledge or mortgage is indivisible, even 3. UNILATERAL – creates an obligation solely
though the debt may be divided among the on the part of the creditor to return the
successors in interest of the debtor or of the thing;
creditor.
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4. SUBSIDIARY – obligation incurred does kind as the former and not of inferior
not arise until the fulfilment of the quality; or
principal obligation which is secured. 2. The pledgee may cause the same to be
sold at a public sale.
OBJECT
1. Movable property; The proceeds of the auction shall be a
2. Incorporeal rights, evidenced by security for the principal obligation in the
negotiable instruments, bills of lading, same manner as the thing originally
shares of stock, bonds, warehouse pledged.
receipts and similar documents may also
be pledged. The instrument proving the The pledgee is bound to advise the
right pledged shall be delivered to the pledgor, without delay, of any danger to
creditor, and if negotiable, must be the thing pledged.
indorsed.
Form: there is no form required to constitute a
Rules: contract of pledge.
1. Within the commerce of man and
capable of possession; In order to affect third persons:

2. If the pledge earns or produces fruits, 1. There must be a public instrument

income, dividends, or interests, the 2. The public instrument contains:
creditor shall compensate what he a. The description of the thing pledged;
receives with those which are owing him; and
but if none are owing him, or insofar as b. the date of the pledge.
the amount may exceed that which is
due, he shall apply it to the principal. Alienation (Sale) of the thing pledged: is
allowed with the consent of the pledgee.
3. Unless there is a stipulation to the
contrary, the pledge shall extend to the Effects:
interest and earnings of the right 1. The ownership of the thing pledged is
pledged. transmitted to the vendee or transferee
as soon the pledgee consents to the
4. In case of a pledge of animals, their alienation,
offspring shall pertain to the pledgor or 2. But the creditor-pledgee shall continue
owner of animals pledged, but shall be in possession.
subject to the pledge, if there is no
stipulation to the contrary. Rights and Obligations of Creditor-Pledgee
1. The creditor shall take care of the thing
5. Unless the thing pledged is expropriated, pledged with the diligence of a good
the debtor continues to be the owner father of a family;
thereof. 2. He has a right to the reimbursement of
the expenses made for its preservation,
6. Nevertheless, the creditor may bring the and is liable for its loss or deterioration, in
actions which pertain to the owner of the conformity with the Civil Code.
thing pledged in order to recover it from, 3. The pledgee is responsible for the acts of
or defend it against a third person. his agents or employees with respect to
the thing pledged.
Deposit of the Thing Pledged with a Third Person: 4. If the creditor is deceived on the
1. On the part of the pledgee – if there is substance or quality of the thing
stipulation granting such right; pledged, he may either claim another
thing in its stead, or demand immediate
2. On the part of the pledgor: payment of the principal obligation.
a. If through the negligence or willful act of
the pledgee, the thing pledged is in Use of the Thing Pledged:
danger of being lost or impaired. General Rule: The creditor cannot use the
b. If the pledgee uses or misuses the thing thing pledged, without the authority of the
owner.
Fear of destruction, loss or impairment WITHOUT
pledgee’s fault Exceptions:
1. The pledgor may demand the return of 1. Authority from the owner (pledgor); or
the thing, upon offering another thing in 2. When the preservation of the thing
pledge, provided the latter is of the same pledged requires its use, it must be used by
the creditor but only for that purpose.
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Use (when there is no right) of the thing Creditor’s right of appropriation:
pledged or its misuse will authorize the owner 1. If at the first auction the thing is not sold,
to ask that the thing be judicially or a second one with the same formalities
extrajudicially deposited. shall be held; and
2. If at the second auction there is no sale
Obligations of a Pledgor either, the creditor may appropriate the
thing pledged.
1. The pledgor who, knowing the flaws of
the thing pledged, does not advise the Pledgor’s Right to bid
pledgee of the same, shall be liable to At the public auction, the pledgor or
the latter for the damages which he may owner may bid. He shall, moreover, have a
suffer by reason thereof. better right if he should offer the same terms as
the highest bidder.
2. The debtor cannot ask for the return of
the thing pledged against the will of the The pledgee may also bid, but his offer
creditor, unless and until he has paid the shall not be valid if he is the only bidder.
debt and its interest, with expenses in a
proper case. All bids at the public auction shall offer to
pay the purchase price at once. If any other bid
Extinguishment of a Contract of Pledge: can be is accepted, the pledgee is deemed to have
by any mode of extinguishment of obligations or received the purchase price, as far as the
the extinguishment of the principal obligation or pledgor or owner is concerned.
contract, but also:
Sale of the thing; proceeds thereof:
1. Thing Pledged is Returned: If the thing
pledged is returned by the pledgee to 1. If the price of the sale is more than said
the pledgor or owner, the pledge is amount, the debtor shall not be entitled
extinguished. Any stipulation to the to the excess, unless it is otherwise
contrary shall be void. agreed.
2. If the price of the sale is less, the creditor
Presumption: If subsequent to the perfection shall not be entitled to recover the
of the pledge, the thing is in the possession deficiency, notwithstanding any
of the pledgor or owner, there is a prima stipulation to the contrary.
facie presumption that the same has been
returned by the pledgee. This same The sale of the thing pledged shall extinguish the
presumption exists if the thing pledged is in principal obligation, whether or not the
the possession of a third person who has proceeds of the sale are equal to the amount
received it from the pledgor or owner after of the principal obligation, interest and
the constitution of the pledge. expenses in a proper case.

2. Renunciation or Abandonment of Credit as the object of a contract of pledge: If a

Pledge: A statement in writing by the credit which has been pledged becomes due
pledgee that he renounces or abandons before it is redeemed, the pledgee may collect
the pledge is sufficient to extinguish the and receive the amount due. He shall apply the
pledge. For this purpose, neither the same to the payment of his claim, and deliver
acceptance by the pledgor or owner, the surplus, should there be any, to the pledgor.
nor the return of the thing pledged is
necessary, the pledgee becoming a Other Rules:
depositary. 1. After the public auction, the pledgee
shall promptly advise the pledgor or
Foreclosure sale: owner of the result thereof.
1. The creditor to whom the credit has not 2. Any third person who has any right in or
been satisfied in due time, may proceed to the thing pledged may satisfy the
before a Notary Public for the sale of the principal obligation as soon as the latter
thing pledged. becomes due and demandable.
2. This sale shall be made at a public 3. If two or more things are pledged, the
auction, and pledgee may choose which he will
3. With notification to the debtor and the cause to be sold, unless there is a
owner of the thing pledged in a proper stipulation to the contrary. He may
case, stating the amount for which the demand the sale of only as many of the
public sale is to be held. things as are necessary for the payment
of the debt.
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4. If a third party secures an obligation by Pactum de non-aliendo: the owner is allowed to
pledging his own movable property, he alienate the immovable property mortgaged. A
shall have the same rights as a guarantor stipulation prohibiting/forbidding such right is
to be: called pactum de non-aliendo and is
a. Indemnified for the total amount of the considered void.
debt, including interest, expenses or
damages, if they are due; Third party transferee: Buyers or transferees of
b. Subrogated to all the rights the creditor the property mortgaged are not affected by an
had against the debtor; unregistered mortgage.
c. He is not prejudiced by any waiver of However, if the mortgage is registered (Art.
defense by the principal obligor. 1312) they are:
1. Bound by a foreclosure sale on the
5. With regard to pawnshops and other property;
establishments, which are engaged in 2. Not bound to answer the deficiency
lending secured by pledges, the special 3. Unless there is novation in the person of
laws and regulations concerning them the debtor
shall be observed, and subsidiarily, the
provisions of this Title. Foreclosure: in case of non-payment of the
principal obligation, the creditor-mortgagee
REAL ESTATE MORTGAGE may foreclose the mortgage either:
1. Judicially – under Rule 68 of the Rules of
OBJECT: Only the following property may be Court;
the object of a contract of mortgage: 2. Extra-judicially – under Act No. 3135.
1. Immovables;
2. Alienable real rights in accordance with Notice of Foreclosure Sale:
the laws, imposed upon immovables. 1. Extrajudicial – not required, unless
stipulated.
Nevertheless, movables may be the object of 2. Judicial - Posting in 3 public places at
a chattel mortgage. least 20 days prior to sale and publication
of the notice of sale in a newspaper of
Form: there is no form required to constitute a general circulation.
contract of real estate mortgage.
Proceeds: if the proceeds of the foreclosure
In order to affect third persons: sale:
1. There must be a public instrument 1. Is more than the unpaid amount – the
containing the description thereof; and mortgagor shall be entitled to the excess;
2. The same should be recorded in the
Registry of Property 2. Is less than the unpaid amount – the
mortgagee shall be entitled to recover
Object: The mortgage extends to the natural the deficiency.
accessions, to the improvements, growing fruits,
and the rents or income not yet received when Redemption: exists only in Real Estate Mortgage
the obligation becomes due, and to the foreclosures. The period to redeem shall
amount of the indemnity granted or owing to depend if the foreclosure is:
the proprietor from the insurers of the property 1. Extrajudicial:
mortgaged, or in virtue of expropriation for a. General Rule: 1 year from date of
public use, with the declarations, amplifications foreclosure
and limitations established by law, whether the b. Exception: Under the General
estate remains in the possession of the Banking Law, 3 months from sale or
mortgagor, or it passes into the hands of a third registration of the certificate of sale,
person. whichever is earlier, whenever:
i. The debtor – juridical person
Principal Obligation Covered: ii. The creditor – bank
General Rule: covers only that which is stated in
the deed even if less than the amount of loan. 2. Judicial – although the Rules of Court
provide that the equity of redemption is
Exception: if there is stipulation to cover future 90 to 120 days, it has been held that the
advancements called a dragnet clause. equity of redemption exists as long as
there is no confirmation of sale by the
Mortgage credit is transferable: The mortgage court.
credit may be alienated or assigned to a third
person, in whole or in part, with the formalities
required by law.
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CHATTEL MORTGAGE Proceeds of Foreclosure Sale: if the amount of
the proceeds of foreclosure sale:
Personal property is recorded in the Chattel 1. Is more than the unpaid amount – the
Mortgage Register as a security for the excess shall belong to the mortgagor;
performance of an obligation.
2. Is less than the unpaid amount:
If the movable, instead of being recorded, is a. General Rule: the creditor is entitled to
delivered to the creditor or a third person, the the deficiency;
contract is a pledge and not a chattel b. Except: if the object is subject of a sale in
mortgage. installment and covered by the Recto
Law which prohibits collection of unpaid
Affidavit of Good Faith: stating that the parties amount once the creditor (unpaid seller)
swear that the mortgage is made for the already foreclosed the chattel
purpose of securing the obligations specified in mortgage on the property itself.
the conditions thereof, and for no other
purposes, and that the same is a just and valid Redemption: there is no right of redemption that
obligation and not one entered into for exists in a foreclosure of chattel mortgage.
purposes of fraud.

Affidavit of Good Faith is also required under the

law, making it a formal contract.

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.

While, it is a formal contract, the absence of an

affidavit of good faith would make the parties
in pari delicto that would have no remedy
against each other, thus having the effect of
leaving the chattel mortgage in place.

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.