ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 44  October 2022 CPA Licensure Examination

RFBT-10
REGULATORY FRAMEWORK for BUSINESS TRANSACTIONS J. DOMINGO  N. SORIANO

LAW ON CREDIT TRANSACTIONS

SIMILARITIES BETWEEN PLEDGE, REAL ESTATE MORTGAGE AND CHATTEL MORTGAGE

REQUISITES OF CONTRACT 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.

Accessory contract: a pledge or mortgage, being an accessory contract, cannot exist without a valid
obligation or a principal contract.

Nevertheless, similar to a guaranty, a pledge or a mortgage may be constituted to guarantee the performance of
a voidable or an unenforceable contract. It may also guarantee a natural obligation.

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.

The contract of pledge or mortgage may secure all kinds of obligations, be they pure or subject to a suspensive
or resolutory condition.

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:
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 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.

Rule of Indivisibility NOT applicable: If there being several things given in mortgage or pledge, each one of
them guarantees only a determinate portion of the credit.

The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the
debt for which each thing is specially answerable is satisfied.

PLEDGE

PLEDGE is a contract by virtue of which the debtor delivers to the creditor or to a third person movable (Art.
2094) or document evidencing incorporeal rights (Art. 2095) for the purpose of securing the fulfilment 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.

Delivery: in addition to the above-mentioned essential requisites of contracts of pledge or mortgage, 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.
KINDS OF PLEDGE:
1. Voluntary or conventional – created by agreement of the parties; or
2. Legal – created by operation of law.
CHARACTERISTICS:
1. REAL CONTRACT – perfected by the delivery of the thing pledged;
2. ACCESSORY CONTRACT – no independent existence of its own;
3. UNILATERAL – creates an obligation solely on the part of the creditor to return the thing;
4. SUBSIDIARY – obligation incurred does not arise until the fulfilment of the principal obligation which is
secured.

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CAUSE OR CONSIDERATION:
1. Pledgor/debtor – the principal obligation;
2. Pledgor not the debtor – compensation stipulated or mere liberality.

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.
6. Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to
recover it from, or defend it against a third person.

Deposit of the Thing Pledged with a Third Person:

1. On the part of the pledgee – if there is stipulation granting such right;
2. On the part of the pledgor:
a. If through the negligence or willful act of the pledgee, the thing pledged is in danger of being lost or
impaired.
b. If the pledgee uses or misuses the thing.

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 same kind as the former and not of inferior quality; or
2. The pledgee may cause the same to be sold at a public sale.

The proceeds of the auction shall be a security for the principal obligation in the same manner as the thing
originally pledged.

The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged.

Form: there is no form required to constitute a contract of pledge.

In order to affect third persons:

1. There must be a public instrument
2. The public instrument contains:
a. The description of the thing pledged; and
b. the date of the pledge.

Alienation (Sale) of the thing pledged: is allowed with the consent of the pledgee.
• The ownership of the thing pledged is transmitted to the vendee or transferee as soon the pledgee
consents to the alienation,
• But the creditor-pledgee shall continue in possession.

Creditor-pledgee:
1. The creditor shall take care of the thing pledged with the diligence of a good father of a family;
2. He has a right to the reimbursement of the expenses made for its preservation, and is liable for its loss or
deterioration, 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.
4. If the creditor is deceived on the substance or quality of the thing pledged, he may either claim another thing
in its stead, or demand immediate payment of the principal obligation.

Use of the Thing Pledged:

General Rule: The creditor cannot use the thing pledged, without the authority of the owner.

Exceptions:
1. Authority from the owner (pledgor); or
2. When the preservation of the thing pledged requires its use, it must be used by the creditor but only for that
purpose.

Use (when there is no right) or misuse will authorize the owner may ask that the thing be judicially or
extrajudicially deposited.

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Pledgor:
1. The pledgor who, knowing the flaws of the thing pledged, does not advise the pledgee of the same, shall be
liable to 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 the debt and its interest, with expenses in a proper case.

Extinguishment of a Contract of Pledge: can be by any mode of extinguishment of obligations or the

extinguishment of the principal obligation or contract, but also:
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.

Presumption: If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or
owner, there is a prima facie presumption that the same has been returned by the pledgee. This same
presumption exists if the thing pledged is in the possession of a third person who has received it from the
pledgor or owner after the constitution of the pledge.

2. Renunciation or Abandonment of Pledge: A statement in writing by the pledgee that he renounces or

abandons 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.

Foreclosure sale:
1. The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the
sale of the thing pledged.
2. This sale shall be made at a public auction, and
3. With notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for
which the public sale is to be held.

Creditor’s right of appropriation:

1. If at the first auction the thing is not sold, a second one with the same formalities shall be held; and
2. If at the second auction there is no sale either, the creditor may appropriate the thing pledged.

In this case he shall be obliged to give an acquittance for his entire claim.

Pledgor’s Right to bid: At the public auction, the pledgor or owner may bid. He shall, moreover, have a better
right if he should offer the same terms as the highest bidder.

The pledgee may also bid, but his offer shall not be valid if he is the only bidder.

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.

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 agreed.
2. If the price of the sale is less, the creditor shall not be entitled to recover the deficiency,
notwithstanding any stipulation to the contrary.

The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are
equal to 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 surplus, should there be any, to the pledgor.

Other Rules:
1. After the public auction, the pledgee shall promptly advise the pledgor or owner of the result thereof.
2. Any third person who has any right in or to the thing pledged may satisfy the principal obligation as soon as
the latter becomes due and demandable.
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.
4. If a third party secures an obligation by pledging his own movable property, he shall have the same rights as
a guarantor to be:
a. Indemnified for the total amount of the debt, including interest, expenses or damages, if they are due;
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.
5. With regard to pawnshops and other establishments, which are engaged in making loans secured by pledges,
the special laws and regulations concerning them shall be observed, and subsidiarily, the provisions of this
Title.

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REAL ESTATE MORTGAGE

OBJECT: 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.

Nevertheless, movables may be the object of a chattel mortgage.

Form: there is no form required to constitute a contract of real estate mortgage.

In order to affect third persons:

1. There must be a public instrument containing the description thereof; and
2. The same should be recorded in the Registry of Property.

The creditor-mortgagee has no other right than to demand the execution and the recording of the document in
which the mortgage is formalized.

Object: The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or
income not 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 limitations established by law, whether the estate remains in the possession
of the mortgagor, or it passes into the hands of a third person.

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

Foreclosure: in case of non-payment of the principal obligation, the creditor-mortgagee may foreclose the
mortgage either:
1. Judicially – under Rule 68 of the Rules of Court;
2. Extra-judicially – under Act No. 3135.

Notice of Foreclosure Sale:

1. Extrajudicial – not required, unless stipulated.
2. Judicial - Posting in 3 public places at least 20 days prior to sale and publication of the notice of sale in a
newspaper of general circulation.

Proceeds: if the proceeds of the foreclosure sale:

1. Is more than the unpaid amount – the mortgagor shall be entitled to the excess;
2. Is less than the unpaid amount – the mortgagee shall be entitled to recover the deficiency.

The generic treatment is that the mortgage is still a separate contract and merely stands as a means to recover
the unpaid amount. That’s why any excess is returned to the mortgagor and any deficiency, the debtor remains
liable thereto.

Redemption: exists only in Real Estate Mortgage foreclosures. The period to redeem shall depend if the
foreclosure is:
1. Extrajudicial:
a. General Rule: 1 year from date of foreclosure
b. Exception: Under the General Banking Law, 3 months from sale or registration of the certificate of sale,
whichever is earlier, whenever:
i. The debtor – juridical person
ii. The creditor – bank

2. Judicial – although the Rules of Court provide that the equity of redemption is 90 to 120 days, it has been
held that the equity of redemption exists as long as there is no confirmation of sale by the court.

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CHATTEL MORTGAGE

CHATTEL MORTGAGE: 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.

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.

Disposal of the object during the pendency of the mortgage: is considered a criminal act under Art. 319 of
the Revised Penal Code: Removal of Mortgaged Property.

Foreclosure: shall be done extrajudicially. Rule 68 of the Rules of Court does not apply to foreclosure of a chattel
mortgage.

Notice: Required 10 days prior to sale; Posting in two or more public places 10 days before auction.

Proceeds of Foreclosure Sale: if the amount of the proceeds of foreclosure sale:

1. Is more than the unpaid amount – the excess shall belong to the mortgagor;
2. Is less than the unpaid amount:
a. General Rule: the creditor is entitled to the deficiency;
b. Except: if the object is subject of a sale in installment and covered by the Recto Law which prohibits
collection of unpaid amount once the creditor (unpaid seller) already foreclosed the chattel mortgage on
the property itself.

Redemption: there is no right of redemption that exists in a foreclosure of chattel mortgage.

PLEDGE REAL ESTATE MORTGAGE CHATTEL MORTGAGE
Object Personal property susceptible Real property but extends to the Personal property subject
of possession including natural accessions, thereof
incorporeal rights improvements, growing fruits,
and the rents or income not yet
received when the obligation
becomes due, and to the amount
of indemnity from insurance or
from expropriation

And may include after acquired

properties as per stipulation.
Perfection Delivery Consensual but covered by the
statute of frauds
Public instrument required to
bind third parties Public instrument that
registered in the Registry of deeds
is required to bind third parties
Formal
Affidavit of Good Faith*
is registered in the Chattel
Mortgage Registry in the
Registry of Deeds required to
bind third parties. Absence of
which, however, makes the
contract still binding
between the parties.

For vessels – registration is

with the MARINA

For motor vehicles - + report

to the LTO

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PLEDGE REAL ESTATE MORTGAGE CHATTEL MORTGAGE
Possession Transferred to the pledgee Retained by the mortgagor Retained by the mortgagor

Return of the thing pledged by

the pledgee to the pledgor
shall result in extinguishment
of the contract of pledge.

Principal That which is existing at the Generally, covers only that which Those indicated in the
obligation time of the pledge is stated in the deed even if less Affidavit of Good Faith unless
covered than the amount of loan. there is stipulation as to
Exception: if there is stipulation to increase in coverage which
cover future advancements. will be binding but the
security itself arises only
after amending the old
contract.

Sale of the thing Valid as long as with consent
during the of the creditor/pledgee who
pendency of the shall continue in possession
contract even if the ownership is
transferred to the buyer.
Sale of the thing Done by notary public – public
to answer for auction – always extrajudicial
the debt – no intervention of the
courts.
Valid – any stipulation to the Mortgagor-owner cannot sell
contrary is void. the property mortgaged
otherwise he can be
criminally liable under Art.
319 of the RPC: Removal of
Mortgaged Property.
Extrajudicial (Act No. 3135) or Extrajudicial (Act No. 1508)
judicial (Rule 68)

Notice of sale to Required – stating the amount
the mortgagor/ due
pledgor
In a legal pledge, a demand
for the amount is required and
foreclosure must be made
within 30 days from such
demand.
Extrajudicial – not required, Required 10 days prior to
unless stipulated. sale
Judicial Posting in 3 public places Posting in two or more public
at least 20 days prior to sale and places 10 days before
publication of the notice of sale in auction
a newspaper of general circulation

Creditor’s right The creditor is entitled to the Creditor is not entitled to the Creditor is not entitled to the
to excess of excess EXCEPT: excess excess
selling price 1. There is stipulation to the
over unpaid contrary; and
obligation 2. In case of legal pledges

Creditor’s right The creditor is NOT entitled to Creditor can recover deficiency Creditor can recover
to recover recover any deficiency except if the mortgagor is a third deficiency unless the sale is
deficiency person (unless there is stipulation covered by the RECTO LAW
making him liable) (i.e., sale of personal
property on installment)

Redemption No right of redemption EXTRAJUDICIAL FORECLOSURE: No right of redemption after

1 year from date of foreclosure, foreclosure sale.
except:

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.

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

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1. The following are essential to a contract of pledge and mortgage, except:
A. That they be constituted to secure the fulfillment of a principal obligation.
B. That the pledgor or mortgagor be the absolute owner of the thing pledged at the time the obligation to
deliver the same arises.
C. 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.
D. None of the above.

2. A mortgage or pledge may be constituted to secure all of the following, except:

A. Voidable contract
B. Unenforceable contract
C. Natural obligation
D. Void contract

3. A void stipulation allowing the creditor to appropriate the things given by way of pledge or mortgage or
dispose of them.
A. Pactum leonine
B. Pactum commissorium
C. Pactum de non-aliendo
D. Dacion en pago

4. D1 and D2, joint debtors, executed a contract of pledge in favor of C, delivering a diamond ring and a gold
watch, as security for his loan amounting to P250,000. Without the debt being paid, C died leaving X and Y,
his sole heirs; D1 eventually made a payment to X representing his share of the debt owed to C. Which of
the following is true?
A. X can partially release either of the things pledge since his share in the loan inherited from C has already
been paid.
B. D1 can ask for the proportionate extinguishment of the pledge since D1 and D2 are not solidary debtors.
C. D1 can ask for the release of either the diamond ring or the gold watch by virtue of his payment of his
share in the loan.
D. D1 cannot ask for the release, and X is not authorized to return, any of the objects.

5. Which of the following is false?

A. The creditor can use the thing pledged, even without the authority of the owner.
B. If the pledgee uses the thing pledged without authority, the owner may ask that it be judicially or
extrajudicially deposited.
C. When the preservation of the thing pledged requires its use, it must be used by the creditor but only for
that purpose.
D. If the creditor is deceived on the substance or quality of the thing pledged, he may either claim another
thing in its stead, or demand immediate payment of the principal obligation.

6. First statement: As a rule, the pledgee has a right to deposit the thing pledged to a third person unless there
is stipulation to the contrary.
Second statement: Any agent or employee of the pledgee dealing with the thing pledge is solely responsible
for any damage caused by him.
A. Both statements are true
B. Both statements are false
C. Only the first statement is true
D. Only the second statement is true

7. First statement: A statement in writing by the pledgee that he renounces or abandons the pledge extinguishes
the pledge upon receipt of the pledgor of the thing pledged.
Second statement: The acceptance by the pledgor or owner, or the return of the thing pledged is necessary
to extinguish the pledge.
A. Only the first statement is correct
B. Only the second statement is correct
C. Both statements are incorrect
D. Both statements are correct
8. If the principal obligation remains unsatisfied, the pledgee-creditor can have the pledge foreclosed. Who will
conduct the foreclosure sale?
A. Pledgee C. Notary Public
B. Judge D. Sheriff

9. First statement: If the thing pledged is not sold at the public auction, a second one with the same formalities
shall be held.
Second statement: If at the second auction there is still no sale, the creditor may appropriate the thing
pledged.
A. Both statements are correct
B. Both statements are incorrect
C. Only the first statement is correct
D. Only the second statement is correct

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10. A pledged his diamond ring to secure his debt to B amounting to P20,000. A was not able to pay the said
debt. Which of the following is incorrect if B sold the ring at a public auction?
A. If the ring sold for P25,000, B would be entitled to the excess if there is stipulation to that effect
B. If the ring sold for P18,000, B would be entitled to the deficiency if there is stipulation to that effect
C. Whether or not the ring was sold for more or less than the amount of the loan, the loan shall be
extinguished.
D. None of the above.

11. The sale of the thing subject of a legal pledge shall be done only after a demand is made for the amount for
which it is retained. The public auction shall take place within _______ after such demand.
A. 30 days C. 60 days
B. One month D. 6 months

12. D is indebted to C for P10,000 payable on November 30, 2020. To secure the obligation, D negotiated a
negotiable promissory note payable to him (D) for the amount of P15,000 due on October 30, 2020. On
October 30, 2020, and C collected on the promissory note and applied the P10,000 to the obligation of D to
him. Who would be entitled to the excess P5,000?
A. D
B. C
C. Both, equally
D. Neither

13. In this type of contract, sale of the thing subject thereof during the pendency of the contract will result in
criminal liability:
A. Pledge
B. Real Estate Mortgage
C. Chattel Mortgage
D. None of the choices

14. D bought from C a motorcycle and the same was subjected to a chattel mortgage. The terms of payment of
the sale required D to pay P10,000 as down payment and the balance of P50,000 is payable at the end of the
year. D was not able to pay the balance. C foreclosed the mortgage on the motorcycle and at the auction, it
was sold for P10,000 only. Which of the following is correct?
A. C can still collect from D the deficiency of P40,000.
B. C has the option to cancel the sale and obtain possession of the motorcycle.
C. The sale is subject to the rules under Recto Law.
D. It was improper to foreclose the chattel mortgage since the installments paid already covered half of the
total price

15. The right given to the mortgagor in the event of a judicial foreclosure to recover the thing:
A. Right of redemption
B. Right of pre-emption
C. Equity of redemption
D. Pre-emptive right

1. B 6. B 11. B
2. D 7. C 12. A
3. B 8. C 13. C
4. D 9. A 14. A
5. A 10. B 15. C

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