REVIEWER IN REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS
CHAPTER 9
CREDIT TRANSACTIONS
PROVISIONS COMMON TO
PLEDGE AND MORTGAGE
Article 2085. The following requisites are essential to
the contracts of pledge and mortgage:
1. It be constituted to secure the fulfillment of a
principal obligation.
2. 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.
4. It cannot exist without a valid obligation. (Art.
2052)
5. Debtor retains the ownership of the thing given
as a security.
6. When the principal obligation becomes due, the
thing pledged or mortgaged may be alienated for
the payment to the creditor. (Art. 2087)
PLEDGE
o Pledge – it is a contract by virtue of which the
debtor delivers to the creditor or to a third
person a movable or document evidencing
incorporeal rights for the purpose of securing the
fulfillment 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.
KINDS OF PLEDGE
1. Voluntary or Conventional – it is created by
agreement of parties.
2. Legal – it is created by operation of law.
CHARACTERISTICS OF A CONTRACT OF PLEDGE
1. Real Contract – it is perfected by the delivery
of the things pledged by the debtor who is
called the pledgor to the creditor who is called
by the pledgee, or to a third person by common
agreement.
2. Accessory Contract – it has no independent
existence of its own.
3. Unilateral Contract – it creates obligation solely
on the part of the creditor to return the thing
subject upon the fulfillment of the principal
obligation.
4. Subsidiary Contract – the obligation incurred
does not arise until the fulfillment of the principal
obligation.
REQUISITES TO A CONTRACT OF PLEDGE
1. It be constituted to secure the fulfillment of a
principal obligation. (Art. 2085)
2. The pledgor be the absolute owner of the thing
pledged. (Art. 2085)
3. That the persons constituting the pledge have
the free disposal of the property and in the
absence thereof, that they be legally authorized
for the purpose. (Art. 2085)
4. The pledge is perfected by the delivery of the
thing pledged
5. When the principal obligation becomes due, the
things, which the pledge consists, may be
alienated for the payment of the creditor.
(Art. 2087)
PROVISIONS APPLICABLE ONLY TO PLEDGE
1. Transfer of possession to the creditor or to third
person by common agreement is essential in
pledge. (Art. 2093)
A. Actual delivery is important.
 B. Constructive or symbolic delivery of the key to
the warehouse is sufficient to show that the
depositary appointed by common consent of
the parties was legally placed in possession.
2. All movables which are within commerce may be
pledged, provided they are susceptible of
possession. (Art. 2094)
3. 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 be delivered to the
creditor, and if negotiable, must be indorsed.
(Art. 2095)
4. Pledge shall take effect against third persons only
if the following appear in a public instrument:
(Art. 2096)
A. Description of the thing pledged.
B. Date of the pledge.
5. With the consent of the pledgee, the thing
pledged may be alienated by the pledgor or
owner, subject to the pledge. The ownership of
the thing pledged is transmitted to the vendee or
transferee as soon as the pledgee consents to the
alienation, but the latter shall continue in
possession. (Art. 2097)
6. The contract of pledge gives a right to the creditor
to retain the thing in his possession or in that of a
third person to whom it has been delivered, until
the debt is paid. (Art. 2098)
RIGHTS AND DUTIES OF PLEDGEE (CREDITOR)
IN A PLEDGE
1. Shall take care of the thing pledged with the
diligence of a good father of a family. (Art. 2099)
2. Has right to reimbursement of the expenses made
for preserving the thing and shall be liable for loss
or deterioration of the thing by reason of fraud,
negligence, delay or violation of the terms of the
contract, but not for fortuitous events. (Art.
2099)
3. May bring actions pertaining to the owner of the
thing in order to recover it from, or defend it
against, a third person. (Art. 2103)
4. Cannot use the thing without the authority of the
owner. If he uses the thing without authority, or
if he misuses the thing when he was authorized
to use it, the owner may ask that it be judicially or
extrajudicially deposited. (Art. 2104)
5. May use the thing if necessary for its
preservation. (Art. 2104)
6. May either claim another thing in pledge or
demand immediate payment of the principal
obligation if he is deceived on the substance or
quality of the thing.
RIGHTS AND DUTIES OF THE PLEDGOR (DEBTOR)
1. Shall takes responsibility for the flaws of the
thing pledged. (Art. 1951)
2. 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
proper cases. (Art. 2105)
3. Subject to the right of the pledge under Art.
2108, pledgor is allowed to substitute the thing
which is in danger of destruction or impairment
without any fault on the part of the pledgee with
another thing of the same kind and quality. (Art.
2107)
4. May require that the thing be deposited with a
third person, if through the negligence or willful
act of the pledgee the thing is in danger of being
lost or impaired. (Art. 2106)
LEGAL PLEDGES (Art. 2121)
1. Necessary expenses shall be refunded to every
possessor, but only a possessor in good faith may
retain the thing until he has been reimbursed.
2. He who has executed work upon a movable has a
right to retain it by way of pledge until he is paid.
This is called the Mechanic’s Lien. (Art. 1731)
3. The agent may retain in pledge the things which
are the object of the agency until the principal
effects the reimbursement and pays the
indemnity. This is called the Agent’s Lien.
(Art. 1914)
4. The laborer's wages shall be a lien on the goods
manufactured or the work done. (Art. 1707)
MORTGAGE
o Mortgage – it is a contract whereby the debtor
secures to the creditor the fulfillment of a
principal obligation, immediately making
immovable property or real rights over
immovable property answerable to the principal
obligation in case it is not complied with at the
time stipulated.
Article 2124. Only the following property may be the
object of a contract of mortgage:
1. Immovables.
2. Alienable real rights in accordance with the laws,
imposed upon immovables.
» Future property cannot be object of mortgage.
However, a stipulation subjecting to the
mortgage improvements which the mortgagor
may subsequently acquire, install or use in
connection with real property already
mortgaged belonging to the mortgagor is valid.
Nevertheless, movables may be the object of a chattel
mortgage.
KINDS OF MORTGAGE
1. Voluntary –it is constituted by the will of the
owner of the property on which it is created.
2. Legal – it is required by law to be executed in
favor of certain persons.
3. Equitable – one which, although lacking the
proper formalities of a mortgage. It shows the
intention of the parties to make the property as a
security for a debt.
A. Lien created through equitable mortgage ought
not to be defeated by requiring compliance
with formalities necessary to the validity of a
voluntary real estate mortgage. (Ex.: Pacto de
retro)
B. Provisions governing equitable mortgage: Arts.
1365, 1450, 1454, 1602, 1603, 1604 and
1607.
REQUISITES TO A CONTRACT OF PLEDGE
1. It be constituted to secure the fulfillment of a
principal obligation. (Art. 2085)
2. The mortgagor be the absolute owner of the thing
mortgaged. (Art. 2085)
3. That the persons constituting the pledge have
the free disposal of the property and in the
absence thereof, that they be legally authorized
for the purpose. (Art. 2085)
4. It cannot exist without a valid obligation.
(Art. 2052)
5. When the principal obligation becomes due, the
thing pledged or mortgaged may be alienated for
the payment to the creditor. (Art. 2087)
6. It must appear in a public document duly
recorded in the Registry of Property to be
validly constituted.
» In a legal mortgage, the persons in whose favor
the law establishes a mortgage have the right to
demand the execution and recording of a
document formalizing the mortgage.
(Art. 2125)
IMPORTANT POINTS
1. As a general rule, the mortgagor retains
possession of the property. He may deliver said
property to the mortgagee without altering the
nature of the contract of mortgage.
2. It is not an essential requisite that the principal of
the credit bears interest, or that the interest as
compensation for the use of the principal and the
enjoyment of its fruits be in the form of a certain
percentage thereof.
3. Mortgage creates an encumbrance over the
property, but ownership of the property is not
parted with. It merely restricts the mortgagor’s
jus disponendi over the property. The
mortgagor may still sell the property, and any
stipulation to the contrary is void. (Art. 2130)
4. Mortgage extends to the natural accessions, to
the improvements of growing fruits and the rents
or income not yet received when the obligation
becomes due, including indemnity from
insurance, and/or amount received from
expropriation for public use. (Art. 2127)
A. It applies only when the accessions and
accessories subsequently introduced belongs
to the mortgagor.
B. To exclude them, there must be an express
stipulation, or the fruits must be collected
before the obligation becomes due.
C. Third persons who introduce improvements
upon the mortgaged property may remove
them at any time.
o Registration – it is the ministerial act by which
deed, contract or instrument is sought to be
inscribed in the office of the Register of Deeds
and annotated at the back of the certificate of title
covering the land subject of the deed, title, or
contract.
EFFECT OF INVALIDITY OF MORTGAGE ON THE
PRINCIPAL OBLIGATION
1. Principal obligation remains valid.
2. Mortgage deed remains evidence of a personal
obligation
FORECLOSURE OF MORTGAGE
o Foreclosure - it is the remedy available to the
mortgagee by which he subjects the mortgaged
property to the satisfaction of the obligation
secured by the mortgage.
IN GENERAL: An action for foreclosure of a mortgage
is limited to the amount mentioned in the mortgage,
except when the mortgage contract intends to secure
future loans or advancements.
o Blanket Mortgage/Dragnet – it is a mortgage
that subsumes all debts of past or future origin.
Mortgage may be used as a “continuing security”
which secures future advancements and is not
discharged by the repayment of the amount in the
mortgage.
Alienation or assignment of mortgage credit is valid
even if it is not registered.
o Acceleration Clause – the stipulation stating
that on the occasion of the mortgagor’s default,
the whole sum remaining unpaid automatically
becomes due and demandable, is
KINDS OF FORECLOSURE
1. Judicial Foreclosure
JUDICIAL FORECLOSURE (RULE 68, ROC)
1. May be availed of by bringing an action in the
proper court which has jurisdiction over the area
wherein the real or personal (in case of chattel
mortgage) property involved or a portion thereof
is situated.
2. If the court finds the complaint to be well-
founded, it shall order the mortgagor to pay the
amount due with interest and other charges
within a period of not less than 90 days nor more
than 120 days from the entry of judgment. If the
mortgagor fails to pay at the time directed, the
court, upon motion, shall order the property to be
sold to the highest bidder at a public auction.
3. Upon confirmation of the sale by the court, also
upon motion, it shall operate to divest the rights
of all parties to the action and to vest their rights
to the purchaser subject to such rights of
redemption as may be allowed by law.
4. Before the confirmation, the court retains control
of the proceedings.
5. Execution of judgment subject to appeal but not
annulment.
6. The foreclosure of the property is completed only
when the sheriff’s certificate is executed,
acknowledged and recorded the proceeds of the
sale shall be applied to the payment of the:
A. Costs of the sale.
B. Amount due the mortgagee.
 C. Claims of junior encumbrancers or persons
holding subsequent mortgages in the order of
their priority.
D. Balance, if any shall be paid to the mortgagor.
2. Extrajudicial Foreclosure
EXTRAJUDICIAL FORECLOSURE (Act No. 3135)
1. Applies to mortgages where the authority to
foreclose is granted to the mortgagee.
2. Authority is not extinguished by death of
mortgagor or mortgagee. This is an agency
coupled with interest.
3. Public sale should be made after proper notice to
the public, otherwise it is a jurisdictional defect
which could render the sale voidable.
4. There is no need to notify the mortgagor. Proper
notice consists of:
A. Posting notice in three public places.
B. Publication in newspaper of general
circulation.
C. Purpose of notice is to obtain the best bid for
the foreclosed property.
5. Surplus proceeds of foreclosure sale belong to the
mortgagor.
6. Debtor who must be a natural person, has the
right to redeem the property sold within 1 year
from and after the date of sale.
A. If the mortgagee is a bank and the debtor is a
juridical person, then there is no right of
redemption. However, it may redeem the
property before the registration of the
certificate of title to the buyer, which is similar
to the equity of redemption. The certificate of
title must be registered within three months
after the foreclosure.
B. The mortgagor can only legally transfer the
right to redeem and the use of the property
during the period of redemption.
7. Remedy of party aggrieved by foreclosure is a
petition to set aside sale and cancellation of writ
of possession. However, if the mortgagee is a
bank, the mortgagor is required to post a bond
equal to the value of the mortgagee’s claim.
8. Republication is of the notice of sale necessary for
validity of postponed extrajudicial sale.
9. In foreclosure of real estate mortgage under Act
3135, the buyer at auction may petition the land
registration court for a writ of possession
pending the one-year period of redemption of the
foreclosed property.
REDEMPTION
1. It is a transaction by which the mortgagor
reacquires the property which may have passed
under the mortgage or divests the property of the
lien which the mortgage may have created.
2. Kinds:
A. Equity of Redemption: In judicial foreclosure
of real estate mortgage under the ROC, it is the
right of the mortgagor to redeem the
mortgaged property by paying the secured debt
within the 120-day period from entry of
judgment or after the foreclosure sale, but
before the sale of the mortgaged property or
confirmation of sale.
» Formal offer to redeem preserves the right of
redemption. (Ex.: By filing an action to
enforce the right to redeem.)
B. Right of Redemption: In extrajudicial
foreclosure of real estate mortgage, the right of
the mortgagor to redeem the property within a
certain period after it was sold for the
satisfaction of the debt.
» For Natural Persons – one year from the
registration of the certificate of title.
» For Juridical Persons – three months from
the foreclosure.
» Formal offer to redeem must be with tender
of redemption price to preserve right of
redemption.