Subject: MEC 45 MB - REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS

Date: May 26, 2023

Article 2088
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.

1. Even if the debtor defaults, this fact does not operate to vest in the creditor the ownership
of the real property, subject of mortgage. The creditor must still take possession in order
to obtain ownership.

ANSWER: False

Explanation:
● The phrase “creditor must still take possession in order to obtain ownership” makes the statement
invalid. According to Article 2088 of the Civil Code, it states “the creditor must still resort to
foreclosure proceedings”. Thus, the mortgaged items cannot be taken by the creditor for personal
use or other uses.

Filing of Collection Suit Barred the Foreclosure of the Chattel Mortgage

2. A mortgagee who files a suit for collection abandons the remedy of foreclosure of the
chattel mortgage constituted over the personal property as security for the debt or value
of the promissory notes which he seeks to recover in the said collection suit.

ANSWER: True

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;

(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.

3. In the accessory contract of real estate mortgage, the consideration of the debtor in
furnishing the mortgage is the existence of a valid, voidable, or unenforceable debt.

ANSWER: True

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 consists may be alienated for the payment to the creditor.

4. 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.

ANSWER: True
Article 2088
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.

5. The creditor may appropriate the things given by way of pledge or mortgage, or dispose
of them. Any stipulation to the contrary is unenforceable.

ANSWER: False

Explanation:
● The property given in pledge or mortgage stands merely as security for the fulfillment of the principal
obligation.

Article 2088 (Intention of Pacto Commissorio)

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 debt.

6. The prohibition against a pacto commissorio is intended to protect the obligor, pledgor, or
mortgagor against being abused by his creditor who holds a pledge or mortgage over
property whose value is less than the debt.

ANSWER: False

Explanation:
● The statement “less than the debt” makes the whole statement wrong. As per Article 2088,
specifically under the “Intention of Pacto Commissorio”, it states that “mortgage over property whose
value is much more than the debt”.

Article 2088
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.

7. The essence of pactum commissorium is that ownership of the security will pass to the
creditor by the mere default of the debtor. Such arrangements are contrary to morals and
public policy.

ANSWER: True

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 consists may be alienated for the payment of the creditor.

8. A stipulation allowing the mortgagee to take actual or constructive possession of a

mortgaged property upon foreclosure is not valid.

ANSWER: False

Explanation:
● The stipulation is valid. The creditor may take actual possession of the property pledged if the debtor
fails to fulfill his obligation by the time it falls due.

Article 2085

9. Pledges and mortgages are principal contracts in themselves.

ANSWER: False
Explanation:
● Pledges and mortgages are accessory contracts that are dependent on a principal obligation. The
accessory contract, such as a pledge or mortgage, is used to secure the fulfillment of the principal
obligation. Pledges and mortgages are important tools for creditors to ensure that they will be repaid.

10. A loan obligation cannot be valid if the pledge or mortgage constituted to secure its
payment is void.

ANSWER: False

Explanation:
An accessory obligation is an obligation that is dependent on another obligation, the principal
obligation. The accessory obligation cannot exist without the primary obligation, but the primary
obligation can exist without the accessory obligation.

Article 2130.
That is why Article 2130 of the New Civil Code provides that a stipulation forbidding the owner from
alienating the immovable mortgaged shall be void.

11. A mortgage is regarded as nothing more than a mere lien or 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.

ANSWER: True

Article 2128.
The mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities
required by law.

12. The mortgagee owns only the mortgage credit, not the property itself.

ANSWER: True

Article 2085
Article 2085 of the Civil Code provides that the following requisites are essential to contracts of pledge and
mortgage:

(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

13. Settled is the rule that a contract of mortgage must be constituted only by the absolute
owner of the property mortgaged; a mortgage constituted by an impostor is voidable.

ANSWER: False

Explanation:
● A mortgage constituted by an impostor is VOID.

Article 2120
Art. 2120. If a third party secures an obligation by pledging his own movable property under the provisions of
Article 2085 he shall have the same rights as a guarantor under Articles 2066 to 2070, and Articles 2077 to
2081. He is not prejudiced by any waiver of defense by the principal obligor.
 14. 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 thereby rendered null and void.

ANSWER: False

Explanation:
● The principal obligation remains valid through an ordinary personal action, even if the mortgage is not
valid due to reasons such as execution by a non-owner or simulated/false consideration. The only
right lost in case of nullity is the right to foreclose the mortgage as a special remedy.

Republic Act No 2085

Article 2085 of the Civil Code provides that the following requisites are essential to contracts of pledge and
mortgage:

(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.

Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging
their own property. (1857)

15. It is contrary to morals and public policy to allow persons not directly parties to a loan
agreement to give as security their own properties for the principal transaction.

ANSWER: False

Explanation:
● Third parties that offer their own properties as collateral for a loan may be ethical or in line with public
policy in the absence of the absolute owner and after the person constituting the pledge or mortgage have
disposed their property.

Article 2085
Art. 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;

(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.

Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging
their own property. (1857)

16. A pledge contract is an accessory contract; however, it is not discharged if the principal
obligation is extinguished.

ANSWER: False

Explanation:
● A pledge contract is an accessory contract in which the right to the pledged property serves as
security for the fulfillment of the principal obligation. Once the principal obligation is extinguished, the
purpose of the pledge is fulfilled, and the contract is discharged.

Article 2093
In addition to the requisites prescribed in Article 2085, 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. (1863)
 17. A pledge is a formal contract, hence, 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.

ANSWER: False

Explanation:
● A pledge 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, hence, it is a real contract.

Article 2096
A pledge shall not take effect against third persons if a description of the thing pledged and the date of the
pledge do not appear in a public instrument. (1865a)

18. A pledge shall not take effect against third persons if a description of the thing pledged
and the date of the pledge do not appear in a private instrument.

ANSWER: False

Explanation:
● A pledge must be documented in a public instrument with a description of the pledged property and
the date of the pledge. Failure to do so renders the pledge ineffective against third parties, ensuring
transparency and protection for all parties involved.

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