LAW ON CREDIT TRANSACTIONS

CHAPTER 1

Provisions Common to Pledge and Mortgage

MODULE ACTIVITIES

I. Key Terms. Define or give the meaning of the following:

1. Pledge

A form of security to assure that a person will repay a debt or perform an

act under contract.

2. Pacto comisorio

A stipulation of the thing pledged or mortgaged shall automatically

become the property of the creditor when the debtor failed to pay the debt within

the term fixed.

II. Discussions. Discuss the following:

1. Distinguish pledge from mortgage.

In pledge, it is constituted on movables, in a mortgage it is constituted on

immovables.

In pledge, property is delivered to the pledgee, or by common consent to a

third person, in mortgage, delivery is not necessary.

 In pledge, it is not valid against third persons unless a description of the

thing pledged and the date of the pledge appear in a public instrument, in

mortgage, it is not valid against third persons if not registered.

The pledgor can sell the thing pledged with the consent of the pledgee,

while the mortgagor can sell the property mortgaged even without the consent of

the mortgagee.

3. What are the essential requisites of pledge or mortgage?

a. Constituted to secure the fulfillment of a principal obligation.

b. The pledgor or mortgagor be the absolute owner of the thing pledged or

mortgaged.

c. The persons constituting the pledge or mortgage have the free disposal of the

property, and in the absence thereof, that they be legally authorized for the

purpose.

d. That when the principal obligation becomes due, the things in which the

pledge or mortgage consists may be alienated for the payment of the creditor.

III. Problems. Explain or state briefly the rule or reason for your answer.

1. D, pledgor/debtor, and C, pledgee/creditor. When D failed to pay, it was agreed

that the thing pledged shall already become the property of C. Is the agreement

valid?

No. In this case, this is a stipulation in a pledge or mortgage which

provides for automatic forfeiture, that the ownership of thing pledge or mortgaged

shall pass to the creditor by the mere default of the debtor. However, this
 stipulation is void for being contrary to morals and public policy. The creditor is

only allowed to move for the sale of the thing pledged or mortgaged after the

principal obligation becomes due, in order to collect the amount of his claims

from the proceeds. The stipulation, however, that the pledgee or mortgagee at its

current price if the debt is not paid on time is valid.

2. Same parties. The amount of the obligation is P25,000 for which D pledged his

wristwatch and a camera the value of which is stated as P15,000 and P10,000

respectively. After paying P12,000, D demands the return of the camera. Has C

the right to reject D’s demand?

No, he cannot ask for the return of the thing against the will of the creditor,

unless and until he has paid the debt and its interest, with expenses in a proper

case.

CHAPTER 2

Pledge

I. Discussions. Discuss the following:

1. What are the formalities or requisites required before a pledgee may

cause the sale of the thing pledged?

a. The debt is due and unpaid;

b. The sale must be at a public auction;

c. There must be notice to the pledgor and owner, stating the amount

due; and

d. The sale must be made with the intervention of a notary public.

 2. Mention four (4) obligations of the pledgee.

a. Obligation of the pledgee to take care of the thing pledged with the

diligence of a good father of a family, to be liable for the loss or

deterioration of the thing pledged unless it is due to fortuitous event

(Art. 2099);

b. Not to deposit the thing pledged with a third person, unless

authorized. To be responsible for the acts of his agents or employees

with respect to the thing pledged (Art. 2100);

c. Not to use the thing pledged, except when he is authorized by the

owner, or the use of the thing is necessary for its preservation;

d. To advise pledgor or owner of result of sale.

3. Mention at least four (4) rights of the pledgor.

a. To ask that the thing pledged be judicially or extrajudicially deposited if

it is used without authority or for a purpose other than for its

preservation (Art. 2104).

b. To substitute the thing pledged.

c. To alienate, with the consent of the pledgee, the thing pledged.

d. To require that the thing pledged be deposited with a third person if it is

in danger of being lost or impaired through the negligence or willful act

of the pledgee.

II. Problems. Explain or state briefly the rule or reason for your answer.
1. D, pledgor/debtor, and C, pledgee/creditor. The contract of pledge of

jewelry was put in writing signed by them. Subsequently, D sold to T the

jewelry now in the possession of C. The jewelry was previously offered for

sale to T before the pledge. May T recover the jewelry from C?

Yes, provided it is embodied with a public instrument wherein shall

appear the description of the thing pledged and the date of the pledge

(Art. 2096). The object of the requirement is to forestall fraud. Accordingly,

Article 2097 states that the pledgor may still sell the same provided that

the pledgee consents to the sale but the pledgee would not bind or

adversely affect third persons unless Art. 2096 has been followed.

2. Same parties. C caused the sale at public auction of the jewelry for only

P20,000. The indebtedness of D is P25,000. Their agreement is that C

may recover the difference. Is D still liable for P5,000?

Yes, because one of the essential requisites of pledge is that the

object pledged may be alienated for the payment to the creditor when the

principal obligation becomes due (Art. 2087). Thus, the debt must be

unpaid and due, and the sale must be at a public sale. The pledgee shall

keep the proceeds of the sale as a security for the fulfillment of the

principal obligation. However, when the pledgee appropriates the thing

pledged if after the first and second auction, the thing is not sold, it shall

be considered as full payment for his entire claim.

3. Same parties. The jewelry is later found in D’s possession. D claims that C

returned the jewelry after he paid. His obligation and, therefore, both his
 obligation and the pledge are extinguished. C disputes D’s allegations.

Decide.

When the thing pledged is later found in the hands of the pledgor or

the owner, only the accessory obligation of pledge is presumed remitted,

not the principal obligation.

CHAPTER 3

Mortgage

I. Key Terms. Define or give the meaning of the following:

1. Mortgage

It is the transfer of an interest in specific immovable property for the

purpose of securing the payment of money advanced or to be advanced by

way of loan, an existing or future debt, or the performance of an engagement

which may give rise to a pecuniary liability.

2. Foreclosure
 It is the remedy available to the mortgagee by which he subjects the

property mortgaged to the satisfaction of the obligation secured.

II. Discussions. Discuss the following:

1. What may be the object or subject matter of a contract of mortgage?

The objects of a contract of mortgage are immovables and alienable

real rights imposed upon immovables.

2. Distinguish equity of redemption and right of redemption.

Equity of redemption is the right of the mortgagor to redeem the

mortgaged property after his default in the performance of his obligation but

before the property is sold. Right of redemption is the right of the mortgagor to

repurchase the property within a certain period after it was sold for the

payment of the mortgage debt.

III. Problems. Explain or state briefly the rule or reason for your answer.

1. D, debtor mortgagor/debtor, and C, mortgagee/creditor. The subject matter of

the mortgage is a parcel of land with a market value of P180,000 to secure a

debt of P200,000. D sold the property to T for P160,000. Subsequently, C

foreclosed the mortgage. The land was sold for P180,000 at the foreclosure

sale. Is T liable to C for the deficiency of P20,000?

2. Same example. There was a stipulation between C and D against sale of the

property by D. Is the sale to T valid?

 Chapter 4

Chattel mortgage

I. Key Terms. Define or give the meaning of the following:

1. Chattel mortgage;

A contract by virtue of which a 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.

2. Affidavit of good faith.

It is a sworn statement attesting to the fact that the mortgage is made for

the purpose of securing the obligation specified in the conditions thereof, and that

the obligation is a just and valid obligation, and one not entered into for the

purpose of fraud

This special affidavit is required only for the purpose of transforming an

already valid mortgage into preferred mortgage. The absence of it vitiates a

mortgage only as against third persons without notice like creditors and

subsequent encumbrances.

II. Discussions. Discuss the following:

1. Give at least four (4) distinctions between chattel mortgage and pledge.

In pledge, the thing is delivered to the creditor or a third person by

common agreement. In chattel mortgage, the thing is not required to be delivered

to the creditor.

A pledge must be in public instrument showing a description of the thing

pledged and the date of the pledge to bind third persons. A chattel mortgage

must be registered and accompanied by an affidavit of good faith to take effect

against third persons.

In pledge (conventional), the deficiency cannot be recovered even if there

is a stipulation to that effect. In chattel mortgage, the deficiency can be

recovered, except in the case of personal property sold in installments.

In pledge, the pledgee may appropriate the thing pledged if the same is

not sold in two public auctions. In chattel mortgage, the mortgagee cannot

appropriate the thing mortgaged.

2. Give at least five (5) similarities between chattel mortgage and pledge.

a. Both are executed to secure performance of a principal obligation.

b. In both cases, the creditor cannot appropriate the property to himself in

payment of the debt.

c. In both cases, when the debtor defaults, the property must be sold for the

payment of the creditor.

d. Both are extinguishments by the fulfillment of the principal obligation and by

the destruction of the property pledged and mortgaged.

e. Both cases are constituted only on a personal property.

3. In the event the chattel mortgage is foreclosed, how shall the proceeds of the

sale be applied?

The proceeds of sale shall be distributed as follows:

a. The cost of sale.

b. Claim of the person foreclosing the mortgage.

c. Claim of persons holding subsequent mortgages in their order.

d. Balance, if any, shall be paid to the mortgagor.

4. A contract of chattel mortgage does not include an affidavit of good faith

appended to it as required by law. Is the mortgage valid?

No, a chattel mortgage shall not be valid because an affidavit in good faith

must be appended to the Deed of Chattel Mortgage and recorded therewith in

the Chattel Mortgage Register. It is a sworn statement attesting to the fact that

the mortgage is made for the purpose of securing the obligation specified in the

conditions thereof, and that the obligation is a just and valid obligation, and one

not entered into for the purpose of fraud.