Topic 6.

Provisions common to Pledge and Mortgage

PURPOSE OF PLEDGE:
- Pledge is real security on the basis of which a pledgee may levy execution upon the
pledged asset, having priority to other creditors, including the state, in satisfying the
secured claim. Pledge validity depends on the validity of the obligation secured by the
pledge.

WHAT IS A PLEDGE?
A pledge is an accessory, real and unilateral contract by virtue of which debtor or a third
person delivers to the creditor or to a third person movable property as security for the
performance of the principal obligation, upon fulfillment of which the thing pledge, with all its
accessions and accessories, shall be returned to the debtor or to the third person.

WHAT IS A REAL ESTATE MORTGAGE?

A real estate mortgage, according to the Civil Code, is a contract embodied in a public
instrument recorded in the Registry of Property, by which the owner of an immovable (or an
alienable real right imposed upon immovables) directly and immediately subjects it, whoever the
possessor may be, to the fulfillment of the obligation for whose security it was constituted. It is a
contract in which the debtor guarantees to the creditor the fulfillment of a principal obligation,
subjecting for the faithful compliance therewith a real property in case of non-fulfillment of said
obligation at the time stipulated.

For a person to validly constitute a VALID MORTGAGE ON REAL STATE, he must be the
absolute owner thereof as required by Article 2085 of the New Civil Code. The mortgagor must
be the owner, otherwise, the mortgage is void.

In a contract of mortgage, the mortgagor remains to be the owner of the property although the
property is subjected to a lien. A mortgage is regarded as nothing more than a mere lien,
encumbrance, or security for a debt, and passes no title or estate to the mortgagee and gives
him no right or claim to the possession of the property. In this kind of contract, the property
mortgaged is merely delivered to the mortgagee to secure the fulfillment of the principal
obligation. Such delivery does not empower the mortgagee to convey any portion thereof in
favor of another person as the right to dispose of is an attribute of ownership. The right to
dispose of includes the right to donate, sell, pledge or mortgage. Thus, the mortgagee, not
being the owner of the property, cannot dispose of the whole or part thereof nor cause the
impairment of the security in any manner without violating the foregoing rule. The mortgagee
only owns the mortgage credit, not the property itself.

Settled is the rule that a contract of mortgage must be constituted only by the absolute owner on
the property mortgaged; a mortgage, constituted by an impostor is void. Considering that it
was established indubitably that the contract of mortgage sued upon was entered into and
signed by impostors who misrepresented themselves as the spouses’ husband and wife, the
Court is of the ineluctable conclusion and finding that subject contract of mortgage is a complete
nullity.

Where a mortgage is not valid, as where it is executed by one who is not the owner of the
property, or the consideration of the contract is simulated or false, the principal obligation
which it guarantees is not thereby rendered null and void. That obligation matures and
becomes demandable in accordance with the stipulations pertaining to it.

Article 2085. The following requisites are essential to the contracts of pledge and
mortgage:
1. That they be constituted to secure the fulfillment of a principal obligation;
- The principal obligation must be a valid obligation, as a rule, because being
accessory contracts, pledge and mortgage owe their existence upon the principal
obligation. However, a pledge or mortgage may secure:
a. All kinds of obligations, whether pure or subject to a suspensive or
resolutory condition (Art. 2091) or even
b. Voidable, unenforceable, or natural obligations. (Arts. 2052, 2086)

2. That the pledgor or mortgagor be the absolute owner of the thing pledged or
mortgaged;
a. Ownership at the time pledge or mortgage is constituted.
- The pledgor or mortgagor must be the absolute owner of the thing
pledged or mortgaged at the time it is constituted. Therefore, a pledge or
mortgage constituted on the future property is void.
b. Third persons may pledge or mortgage their property.
- It is not required for the validity of a pledge or mortgage that the debtor be
the owner of the thing pledged or mortgaged. Third persons may pledge
or mortgage their property to secure another person’s debt. (Art 2085)
However, they can be held liable only to the extent of the value of their
property. With respect to a mortgage, they may be held liable for any
deficiency in case of foreclosure if they expressly agreed to assume the
principal obligation.
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.
- Free disposal means the property being given in pledge or mortgage is free from
claims or encumbrances. Thus, if the pledge or mortgage was constituted on the
property of a corporation under receivership, the pledge or mortgage is not valid,
because the corporation does not have the free disposal of the thing.
Third-persons who are not parties to the principal obligation may secure the latter by
pledging or mortgaging their own property.

WHEN THING PLEDGED OR MORTGAGED MAY BE SOLD OR ALIENATED TO PAY DEBT:

 1. Before Maturity - the thing pledged or mortgaged cannot be sold or alienated since
payment of the debt cannot yet be compelled. However, if the pledgor or mortgagor fails
to fulfill conditions, such a violation would make the debt due and entitled the pledgee or
mortgagee to have the thing sold through the formalities required by law. Thus if the
debtor has lost the right to make use of the period, or when there is an acceleration
clause in an obligation payable in installments and the debtor has defaulted in the
payment of an installment, the thing pledged or mortgaged may be alienated because
such violations would make the balance of the debt become due and demandable.
Necessarily implied as an inherent element of the transaction of the mortgage or pledge.
2. After maturity - According to Article 2087. It is also of the essence of these contracts
that when the principal obligation becomes due, the things in which the pledge or
mortgage consist may be alienated for the payment to the creditor. When the principal
obligation becomes due and the debtor fails to perform his obligation, the creditor may
foreclose on the pledge or mortgage for the purpose of alienating the property to satisfy
his credit.

APPROPRIATION OF THE THING PLEDGED OR MORTGAGED

The appropriation must be automatic without the need for further action on the part of the
debtor. Hence, the prohibition does not apply to:
a. Subsequent voluntary act of the debtor of making cession of the property or;
b. A promise to assign or sell said property in payment of the debt.

1. PACTUM COMMISSORIUM, concept

- This is among contractual stipulations that are deemed contrary to law. It is
defined as a stipulation empowering the creditor to appropriate the thing given as
guaranty for the fulfillment of the obligation in the event the obligor fails to live up
to his undertakings, without further formality, such as foreclosure proceedings,
and a public sale.
2. PACTUM COMMISSORIUM, intention
- The prohibition against a pacto commissorio is intended to protect the obligor,
pledgor, or mortgagor against being overreached by his creditor who holds a
pledge or mortgage over property whose value is much more than the debt.
3. PACTUM COMMISSORIUM, elements
- The elements of pactum commissorium, which enables mortgagee (or pledgee)
to acquire ownership of the mortgaged (pledged) property without the need of
foreclosure proceedings are:
a. There should be a property mortgaged (or pledged) by way of security for the
payment of the principal obligation.
b. There should be a stipulation for automatic appropriation by the creditor of the
thing mortgaged (or pledged) in case of non-payment of the principal obligation
within the stipulated period.

4. PACTUM COMMISSORIUM, effects

 - This stipulation is void for being contrary to morals and public policy. The creditor
is allowed only 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 may
purchase the thing pledged or mortgaged at its current price if the debt is not paid
on time is valid. The only remedy for the pledgee is to have the security given
sold at public auction and the proceeds of the sale be applied to the payment of
the obligation secured by the mortgage or pledge.

APPROPRIATION OF THE PROPERTY PLEDGED OR MORTGAGED

a. Pledge - Appropriation in pledge is allowed only if the thing pledge is not sold at two
public auctions. The pledgee is required in this case to give an acquittance for his entire
claim.
b. Mortgage - in no case is appropriation of the property mortgaged is allowed.

INDIVISIBILITY OF PLEDGE OR MORTGAGE

- 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, the debtor’s heirs who
have paid of the debt cannot ask for the proportionate extinguishments of the pledge or
mortgage as long as the debt is not completely satisfied. Neither can the creditor’s heirs
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 rules stipulated, however, do
not apply where there being in several things given in mortgage or pledge, each of them
guarantees only a determinate portion of the credit. In this case, the debtor shall have a
right to the extinguishments of the pledge or mortgage as the portion of the debt for each
thing is especially answerable is satisfied.

PROMISE TO CONSTITUTE PLEDGE OR MORTGAGE

- A promise to constitute a pledge or mortgage gives rise only to a personal action
between the contracting parties. The debtor can be compelled by the creditor to fulfill his
promise by executing the pledge or mortgage. Until the mortgage has been executed, no
real right on the property is created. In the case of a pledge, the same shall not be
perfected until the delivery of the object of the pledge. Should the debtor fail to comply
with his promise to constitute the pledge or mortgage, he loses the benefit of the period.
Accordingly, the creditor may demand immediate payment. (Art. 1198)

DIFFERENCES PLEDGE AND MORTGAGE