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LAW ON CREDIT TRANSACTIONS LAW ON CREDIT TRANSACTIONS

ATTY. N. SORIANO, CPA/ATTY. D. AZORES, CPA ATTY. N. SORIANO, CPA/ATTY. D. AZORES, CPA

1. The debtor's heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or
mortgage as long as the debt is not completely satisfied.
2. Neither can the creditor's heir who received his share of the debt return the pledge or cancel the mortgage, to the
LAW ON CREDIT TRANSACTIONS prejudice of the other heirs who have not been paid.

The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable.
ATTY. NICKO SORIANO, CPA/ATTY. DIANE AZORES, CPA
Rule of Indivisibility NOT applicable: If there being several things given in mortgage or pledge, each one of them
TOPIC OUTLINE guarantees only a determinate portion of the credit.
1. Similarities between Pledge, Real Mortgage and Chattel Mortgage
a. Requisites The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for
b. Indivisibility which each thing is specially answerable is satisfied.
c. Pactum Commissorium
d. Third party pledgors/mortgagors PLEDGE
2. Pledge
3. Real Estate Mortgage PLEDGE is a contract by virtue of which the debtor delivers to the creditor or to a third person movable (Art. 2094) or

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4. Chattel Mortgage document evidencing incorporeal rights (Art. 2095) for the purpose of securing the fulfilment of a principal obligation with
5. Distinctions the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions.

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SIMILARITIES BETWEEN PLEDGE, REAL ESTATE MORTGAGE AND CHATTEL MORTGAGE Delivery: in addition to the above-mentioned essential requisites of contracts of pledge or mortgage, it is necessary, in
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order to constitute the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a third
REQUISITES OF CONTRACT OF PLEDGE AND MORTGAGE: person by common agreement.
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;
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KINDS OF PLEDGE:
3. That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence 1. Voluntary or conventional – created by agreement of the parties; or
thereof, that they be legally authorized for the purpose. 2. Legal – created by operation of law.
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Accessory contract: a pledge or mortgage, being an accessory contract, cannot exist without a valid obligation or a CHARACTERISTICS:
principal contract. 1. REAL CONTRACT – perfected by the delivery of the thing pledged;
2. ACCESSORY CONTRACT – no independent existence of its own;
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Nevertheless, similar to a guaranty, a pledge or a mortgage may be constituted to guarantee the performance of a voidable 3. UNILATERAL – creates an obligation solely on the part of the creditor to return the thing;
or an unenforceable contract. It may also guarantee a natural obligation. 4. SUBSIDIARY – obligation incurred does not arise until the fulfilment of the principal obligation which is secured.
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It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge CAUSE OR CONSIDERATION:
or mortgage consists may be alienated for the payment to the creditor. 1. Pledgor/debtor – the principal obligation;
2. Pledgor not the debtor – compensation stipulated or mere liberality.
The contract of pledge or mortgage may secure all kinds of obligations, be they pure or subject to a suspensive or
resolutory condition.
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THIRD PERSONS who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own
property.
AUTOMATIC APPROPRIATION PROHIBITED: PACTUM COMMISSORIUM – VOID: 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.
The stipulation is otherwise known as Pactum Commissorium.
INDIVISIBILITY OF CONTRACT: 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:
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OBJECT:
1. Movable property;
2. 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.
Rules:
1. Within the commerce of man and capable of possession;
2. If the pledge earns or produces fruits, income, dividends, or interests, the creditor shall compensate what he receives
with those which are owing him; but if none are owing him, or insofar as the amount may exceed that which is due, he
shall apply it to the principal.
3. Unless there is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the right pledged.
4. In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of animals pledged, but shall be
subject to the pledge, if there is no stipulation to the contrary.
5. Unless the thing pledged is expropriated, the debtor continues to be the owner thereof.

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LAW ON CREDIT TRANSACTIONS LAW ON CREDIT TRANSACTIONS

ATTY. N. SORIANO, CPA/ATTY. D. AZORES, CPA ATTY. N. SORIANO, CPA/ATTY. D. AZORES, CPA

6. Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it 1. The pledgor who, knowing the flaws of the thing pledged, does not advise the pledgee of the same, shall be liable to
from, or defend it against a third person. the latter for the damages which he may suffer by reason thereof.
2. The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid
Deposit of the Thing Pledged with a Third Person: the debt and its interest, with expenses in a proper case.
1. On the part of the pledgee – if there is stipulation granting such right;
2. On the part of the pledgor: Extinguishment of a Contract of Pledge: can be by any mode of extinguishment of obligations or the extinguishment of
a. If through the negligence or willful act of the pledgee, the thing pledged is in danger of being lost or impaired. the principal obligation or contract, but also:
b. If the pledgee uses or misuses the thing. 1. Thing Pledged is Returned: If the thing pledged is returned by the pledgee to the pledgor or owner, the pledge is
extinguished. Any stipulation to the contrary shall be void.
Fear of destruction, loss or impairment WITHOUT pledgee’s fault
1. The pledgor may demand the return of the thing, upon offering another thing in pledge, provided the latter is of the Presumption: If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner, there
same kind as the former and not of inferior quality; or is a prima facie presumption that the same has been returned by the pledgee. This same presumption exists if the thing
2. The pledgee may cause the same to be sold at a public sale. pledged is in the possession of a third person who has received it from the pledgor or owner after the constitution of the
pledge.
The proceeds of the auction shall be a security for the principal obligation in the same manner as the thing originally pledged.
2. Renunciation or Abandonment of Pledge: A statement in writing by the pledgee that he renounces or abandons

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The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged. the pledge is sufficient to extinguish the pledge. For this purpose, neither the acceptance by the pledgor or owner, nor
the return of the thing pledged is necessary, the pledgee becoming a depositary.

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Form: there is no form required to constitute a contract of pledge.
Foreclosure sale:
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In order to affect third persons: 1. The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the sale of
1. There must be a public instrument the thing pledged.
2. The public instrument contains: 2. This sale shall be made at a public auction, and
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a. The description of the thing pledged; and 3. With notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the
b. the date of the pledge. public sale is to be held.
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Alienation (Sale) of the thing pledged: is allowed with the consent of the pledgee. Creditor’s right of appropriation:
• The ownership of the thing pledged is transmitted to the vendee or transferee as soon the pledgee consents to the 1. If at the first auction the thing is not sold, a second one with the same formalities shall be held; and
alienation, 2. If at the second auction there is no sale either, the creditor may appropriate the thing pledged.
• But the creditor-pledgee shall continue in possession.
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In this case he shall be obliged to give an acquittance for his entire claim.
Creditor-pledgee:
1. The creditor shall take care of the thing pledged with the diligence of a good father of a family; Pledgor’s Right to bid: At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right if he
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2. He has a right to the reimbursement of the expenses made for its preservation, and is liable for its loss or deterioration, should offer the same terms as the highest bidder.
in conformity with the Civil Code.
3. The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged. The pledgee may also bid, but his offer shall not be valid if he is the only bidder.
4. If the creditor is deceived on the substance or quality of the thing pledged, he may either claim another thing in its stead,
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or demand immediate payment of the principal obligation. All bids at the public auction shall offer to pay the purchase price at once. If any other bid is accepted, the pledgee is deemed
to have been received the purchase price, as far as the pledgor or owner is concerned.
Use of the Thing Pledged:
General Rule: The creditor cannot use the thing pledged, without the authority of the owner. Sale of the thing; proceeds thereof:
1. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise
Exceptions: agreed.
1. Authority from the owner (pledgor); or 2. If the price of the sale is less, the creditor shall not be entitled to recover the deficiency, notwithstanding any
2. When the preservation of the thing pledged requires its use, it must be used by the creditor but only for that purpose. stipulation to the contrary.

Use (when there is no right) or misuse will authorize the owner may ask that the thing be judicially or extrajudicially The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to
deposited. the amount of the principal obligation, interest and expenses in a proper case.

Credit as the object of a contract of pledge: If a credit which has been pledged becomes due before it is redeemed, the
pledgee may collect and receive the amount due. He shall apply the same to the payment of his claim, and deliver the
Pledgor: surplus, should there be any, to the pledgor.

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LAW ON CREDIT TRANSACTIONS LAW ON CREDIT TRANSACTIONS

ATTY. N. SORIANO, CPA/ATTY. D. AZORES, CPA ATTY. N. SORIANO, CPA/ATTY. D. AZORES, CPA

3. Unless there is novation in the person of the debtor

Other Rules:
1. After the public auction, the pledgee shall promptly advise the pledgor or owner of the result thereof. Foreclosure: in case of non-payment of the principal obligation, the creditor-mortgagee may foreclose the mortgage either:
2. Any third person who has any right in or to the thing pledged may satisfy the principal obligation as soon as the latter 1. Judicially – under Rule 68 of the Rules of Court;
becomes due and demandable. 2. Extra-judicially – under Act No. 3135.
3. If two or more things are pledged, the pledgee may choose which he will cause to be sold, unless there is a stipulation
to the contrary. He may demand the sale of only as many of the things as are necessary for the payment of the debt. Notice of Foreclosure Sale:
4. If a third party secures an obligation by pledging his own movable property, he shall have the same rights as a guarantor 1. Extrajudicial – not required, unless stipulated.
to be: 2. Judicial - Posting in 3 public places at least 20 days prior to sale and publication of the notice of sale in a newspaper
a. Indemnified for the total amount of the debt, including interest, expenses or damages, if they are due; of general circulation.
b. Subrogated to all the rights the creditor had against the debtor;
c. He is not prejudiced by any waiver of defense by the principal obligor. Proceeds: if the proceeds of the foreclosure sale:
5. With regard to pawnshops and other establishments, which are engaged in making loans secured by pledges, the 1. Is more than the unpaid amount – the mortgagor shall be entitled to the excess;
special laws and regulations concerning them shall be observed, and subsidiarily, the provisions of this Title. 2. Is less than the unpaid amount – the mortgagee shall be entitled to recover the deficiency.

REAL ESTATE MORTGAGE The generic treatment is that the mortgage is still a separate contract and merely stands as a means to recover the unpaid

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amount. That’s why any excess is returned to the mortgagor and any deficiency, the debtor remains liable thereto.
OBJECT: Only the following property may be the object of a contract of mortgage:

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(1) Immovables; Redemption: exists only in Real Estate Mortgage foreclosures. The period to redeem shall depend if the foreclosure is:
(2) Alienable real rights in accordance with the laws, imposed upon immovables. 1. Extrajudicial:
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a. General Rule: 1 year from date of foreclosure
Nevertheless, movables may be the object of a chattel mortgage. b. Exception: Under the General Banking Law, 3 months from sale or registration of the certificate of sale, whichever
is earlier, whenever:
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Form: there is no form required to constitute a contract of real estate mortgage. i. The debtor – juridical person
ii. The creditor – bank
In order to affect third persons:
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1. There must be a public instrument containing the description thereof; and 2. Judicial – although the Rules of Court provide that the equity of redemption is 90 to 120 days, it has been held that the
2. The same should be recorded in the Registry of Property. equity of redemption exists as long as there is no confirmation of sale by the court.

The creditor-mortgagee has no other right than to demand the execution and the recording of the document in which the CHATTEL MORTGAGE
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mortgage is formalized.
CHATTEL MORTGAGE: personal property is recorded in the Chattel Mortgage Register as a security for the performance
Object: The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income not of an obligation.
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yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to the proprietor from
the insurers of the property mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications and If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge and not a
limitations established by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands chattel mortgage.
of a third person.
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Principal Obligation Covered:
General Rule: covers only that which is stated in the deed even if less than the amount of loan.
Exception: if there is stipulation to cover future advancements called a dragnet clause.
Mortgage credit is transferable: The mortgage credit may be alienated or assigned to a third person, in whole or in part,
with the formalities required by law.
Pactum de non-aliendo: the owner is allowed to alienate the immovable property mortgaged. A stipulation
prohibiting/forbidding such right is called pactum de non-aliendo and is considered void.
Third party transferee: Buyers or transferees of the property mortgaged are not affected by an unregistered mortgage.
However, if the mortgage is registered (Art. 1312) they are
1. Bound by a foreclosure sale on the property
2. Not bound to answer the deficiency
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Affidavit of Good Faith: stating that the parties swear that the mortgage is made for the purpose of securing the obligations
specified in the conditions thereof, and for no other purposes, and that the same is a just and valid obligation and not one
entered into for purposes of fraud, 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.

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LAW ON CREDIT TRANSACTIONS LAW ON CREDIT TRANSACTIONS

ATTY. N. SORIANO, CPA/ATTY. D. AZORES, CPA ATTY. N. SORIANO, CPA/ATTY. D. AZORES, CPA

Disposal of the object during the pendency of the mortgage: is considered a criminal act under Art. 319 of the Revised PLEDGE REAL ESTATE MORTGAGE CHATTEL MORTGAGE
Penal Code: Removal of Mortgaged Property. Principal That which is existing at the Generally, covers only that which is Those indicated in the
obligation time of the pledge stated in the deed even if less than Affidavit of Good Faith unless
Foreclosure: shall be done extrajudicially. Rule 68 of the Rules of Court does not apply to foreclosure of a chattel mortgage. covered the amount of loan. Exception: if there is stipulation as to
there is stipulation to cover future increase in coverage which
Notice: Required 10 days prior to sale; Posting in two or more public places 10 days before auction. advancements. will be binding but the security
itself arises only after
Proceeds of Foreclosure Sale: if the amount of the proceeds of foreclosure sale: amending the old contract.
1. Is more than the unpaid amount – the excess shall belong to the mortgagor;
2. Is less than the unpaid amount: Sale of the thing Valid as long as with consent Valid – any stipulation to the Mortgagor-owner cannot sell
a. General Rule: the creditor is entitled to the deficiency; during the of the creditor/pledgee who contrary is void. the property mortgaged
b. Except: if the object is subject of a sale in installment and covered by the Recto Law which prohibits collection of pendency of the shall continue in possession otherwise he can be
unpaid amount once the creditor (unpaid seller) already foreclosed the chattel mortgage on the property itself. contract even if the ownership is criminally liable under Art.
transferred to the buyer. 319 of the RPC: Removal of
Redemption: there is no right of redemption that exists in a foreclosure of chattel mortgage. Mortgaged Property.
DISTINCTIONS Done by notary public – public

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Sale of the thing Extrajudicial (Act No. 3135) or Extrajudicial (Act No. 1508)
to answer for the auction – always extrajudicial – judicial (Rule 68)
PLEDGE REAL ESTATE MORTGAGE CHATTEL MORTGAGE debt no intervention of the courts.

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Object Personal property susceptible Real property but extends to the Personal property subject
of possession including natural accessions, improvements, thereof Notice of sale to Required – stating the amount Extrajudicial – not required, unless Required 10 days prior to sale
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incorporeal rights
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growing fruits, and the rents or the mortgagor/ due stipulated.
income not yet received when the pledgor Posting in two or more public
obligation becomes due, and to the In a legal pledge, a demand for Judicial Posting in 3 public places places 10 days before auction
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amount of indemnity from the amount is required and at least 20 days prior to sale and
insurance or from expropriation foreclosure must be made publication of the notice of sale in a
within 1 month from such newspaper of general circulation
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And may include after acquired demand.
properties as per stipulation.
Perfection Delivery Consensual but covered by the Formal Creditor’s right The creditor is entitled to the Creditor is not entitled to the Creditor is not entitled to the
statute of frauds to excess of excess EXCEPT: excess excess
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Public instrument required to
bind third parties
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Affidavit of Good Faith* selling price over 1. There is stipulation to the
Public instrument that is registered registered in the Chattel unpaid contrary; and
in the Registry of deeds is required Mortgage Registry in the obligation 2. In case of legal pledges

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to bind third parties Registry of Deeds required to
bind third parties. Absence of Creditor’s right The creditor is NOT entitled to Creditor can recover deficiency Creditor can recover
which, however, makes the to recover recover any deficiency except if the mortgagor is a third deficiency unless the sale is
contract still binding between deficiency person (unless there is stipulation covered by the RECTO LAW
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the parties. making him liable) (i.e., sale of personal property
on installment)
For vessels – registration is
with the MARINA Redemption No right of redemption EXTRAJUDICIAL No right of redemption after
FORECLOSURE: foreclosure sale.
For motor vehicles - + report 1 year from date of foreclosure,
to the LTO except:

Possession Transferred to the pledgee
Return of the thing pledged by
the pledgee to the pledgor
shall result in extinguishment
of the contract of pledge.
Retained by the mortgagor
Retained by the mortgagor 1. Creditor is a bank
2. Debtor is a juridical person
In which case the redemption
period is until the registration of the
foreclosure sale, not exceeding 3
months.

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LAW ON CREDIT TRANSACTIONS

ATTY. N. SORIANO, CPA/ATTY. D. AZORES, CPA

PLEDGE REAL ESTATE MORTGAGE CHATTEL MORTGAGE

JUDICIAL FORECLOSURE:
Equity of redemption is until the
confirmation of sale by the court

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