Lesson 3 - Provisions on Pledge and Mortgage

Objectives:
At the end of the lesson:
(1) Students can understand the relevant characteristics of a pledge, with
emphasis as to its similarities with and differences from a mortgage
1. Essential Requisites common to both Pledge and Mortgage:
a. They are constituted to secure fulfillment of the principal obligation.
b. The pledgor or mortgagor is the absolute owner of the thing pledge or
mortgage.
c. The person constituting the pledge or mortgage have free disposal of
the their property and in the absence thereof, that may be legally
authorized for the purpose (Art. 2085); and
d. The when the principal obligation becomes due, the things in which the
pledge or mortgage consists may be alienated for the payment of the
creditor. (Art. 2087)

Note: a. Third persons who are not parties to the principal obligation may secure
the latter by pledging or mortgaging their own property (Art. 2085).
b. Any kind of obligation whether pure or conditional, including natural,
voidable and unenforceable obligations may be secured by a contract of
pledge and mortgage. (Art. 2091, 2052).

2. Meaning of PACTUM COMMISSORIUM

It is a stipulation authorizing the creditor to appropriate the things given by
way of pledge and mortgage or to dispose of them. It is declared null and void by
law. (Art 2088). Reason : The amount of the loan is ordinarily much less than the
value of the security.

Note: The appropriation must be automatic without need of further act 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.

3. Rules on the indivisibility of Pledge and Mortgage:

a. 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;
b. Therefore, the debtor’s heirs who has paid of the debt cannot ask for
the proportionate extinguishments of the pledge or mortgage as long
as the debt is not completely satisfied;
 c. 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;
d. The above rules, 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.

Examples:
a. A borrowed from B P 10,000 and to guarantee payment, A pledge his
diamond ring worth P 4,000 and a pair of earnings worth P 6,000. if A
pays P 4,000, he cannot ask for the return of the ring because both the
ring and the earnings are given to secure payment of the entire
obligation of P 10,000. The same is true if A dies leaving W and X as
heirs and W pays P4,000 to B.

If the creditors are B and C, and A pays B P4, 000, B cannot return the
ring to the prejudice of C who has not received his share.

However, if it is agreed that the ring was given to secure the payment
of P4,000 and the earnings, the balance of P6,000 and A (or his heir
W) pays P 4,000, A (or W) can demand the return of the ring.
b. A and V are jointly liable to C in the sum of P9,000 secured by A’s ring
worth P 5,000 and B’s watch worth P4,000. If A pays P5,000 he cannot
demand the return of the ring even if their liability is only joint or
proportionate because pledge is indivisible.

4. Legal effect of a promise to constitute a pledge or mortgage:

It gives rise only to a personal right binding upon the parties but it creates
no real right in the property. (See Art. 2092).
Lesson 4 – Pledge
At the end of the lesson, the students can:
1. Define pledge.
2. Identify the obligations and rights of the pledger.
3. Identify the obligations and the rights of the pledgee.

Meaning of Pledge
 It is a contract by virtue of which the debtor delivers to the creditor or to
the third person a movable or instrument evidencing incorporeal rights for the
purpose of securing the fulfillment of a principal obligations is fulfilled the thing
delivered shall be returned with all the fruits and accessions.

Characteristics/Nature as a contract:
a. Real
b. Accessory
c. Unilateral
d. Subsidiary contracts because the obligation incurred does not arise
until the fulfillment of the principal obligation that is secured.
e. In addition to the common requisites of pledge and mortgage (Art
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. (Art 2093).

Cause or Consideration in PLEDGE

Insofar as the pledgor is concerned, it is the principal obligation. But if he
is the debtor (Art 2085), the cause is the compensation stipulated for the pledge
or the mere liberality of the pledgor.

Kinds of pledge:
a. Voluntary or conventional – one which is created by agreement of the
parties;
b. Legal – one which is created by operation of law (Art 2121)

Additional requirements in order that pledge shall take effect against third
parties:
a. The description of the thing pledge; and
b. The date of pledge (Art 2076)

May thing pledge be alienated?

Yes, provided the pledgee consents to the sale. Ownership passes to the
vendee but subject to the rights of the pledgee. (Art 2097)

Rights of the Pledgee;

a. To retain the thing in his possession or in that of a third person to
whom it has delivered, until the debt is paid (Art 2099).
b. To be reimbursed for the expenses incurred in its preservation (Art
2099).
 c. To compensate (set – off) the fruits, income, dividends or interests
earned or produced by the thing pledged and received with those
which are due to him (Art 2102).
d. To bring the actions which pertain to the owner of the thing pledged in
order to recover if from or defend it against a third person (Art 2103).
e. To sell the thing pledged at the public auction, if without his fault, there
is danger of destruction, impairment or diminution in the value of the
thing (Art 2108).
f. To claim a substitute or demand immediate payment, if he is deceived
on the substance or quality of the thing pledged (Art 2109)
g. To sell the thing pledged at public auction if the obligation secured is
not paid (Art 2112).
h. To bid at the public sale (Art 2114).
i. To collect the amount that become due on a credit pledged before
such credit is redeemed.
j. To choose which one of the several thing pledged shall be sold (Art
2119) .

Obligations of the pledgee:

a. To take care of the thing pledge with the diligence of a good father of
the family (Art 2099).
b. To answer for its loss or deterioration in the proper case;
c. Not to deposit the thing pledge with a third person unless authorized
(Art )
d. To be responsible for the acts of his agents or employees with respect
to the thing pledged (Art 2100);
e. Not to use the thing pledged unless authorized or its preservation so
requires (Art 2104);
f. To advise the pledgor, without delay, of any danger to the thing
pledged (Art 2107).
g. To promptly advise the pledgor or owner in case of sale at public
auction of the result thereof (Art 2116); and
h. To return the thing pledged when the principal obligation is paid.

Conditions required in an extra – judicial foreclosure sale of the thing

pledged:
a. The debt is due and unpaid
b. The sale must be at a public auction
c. There must be notice to the pledgor and owner, stating the amount
due; and
d. The sale must be made with the intervention of a notary public.
Note: The pledgee may appropriate the thing pledged if after the first and second
auctions, the thing is not sold. If the creditor appropriated the thing, it shall be
considered as full payment for his entire claim. He is thus obliged to give an
acquittance for the same (Art. 2115).
The sale must be made at the public auction 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.

Rules on the proceeds after sale of the thing pledged:

a. Price of sale more than the amount due – The debtor is not entitled to
the excess, unless otherwise agreed; and
b. Price of sale less than the amount due – The creditor is not entitled to
recover any deficiency, notwithstanding any stipulation to the contrary.
(Art. 2115) Reason: To compel the creditor to hold an honest public
sale.

Note:
a. The creditor, however, may sue on the principal obligation instead of
electing to sell the thing pledged.
b. In pledge by operation of law, after payment of the debt and expense,
the remainder of the price shall be delivered to the obligor (Arts 2121,
2122)
c. Under the Chattel Mortgage Law, the mortgagor can also recover the
excess (Act. No. 1506, Sec 14).

Instances of Legal Pledges or Pledges by Operation of Law:

a. Possessor in good faith – for necessary and useful expenses incurred
over the thing (Art 546);
b. Usufructuary – for taxes and extraordinary expenses (Art 612) ;
c. Bailee – For damages suffered by reason of the flaws in the thing
loaned. (Arts 1944, 1951);
d. Agent – for expenses advance and damages caused by the agency
(Art 1914);
e. Depositary – for the payment of what may be due him by reason of the
deposit (Art 1994); and
f. Hotel Keeper – for credits for lodging and supplies furnished (Art
2004); and
g. Independent contractor – he who has executed work upon a movable
has a right to retain it by way of pledge until he is paid. (Art 1731, see
also Art 1701).
 In case of pledge by operation of law, the proceeds shall be applied to
the debt and expenses, the remainder of the price of the sale shall be
delivered to the obligor. (Art. 2121).
The thing under pledge by operation of law may be sold only after
demand of the amount for which the thing is retained. The public
auction shall take place within one month after such demand. If,
without just grounds, the creditor does not cause the public sale to be
held within such period, the debtor may require the return of thing.
(Art. 2122)

Rights of the Pledgor:

a. To continue to be the owner of the thing pledged, until its sale, unless it
is expropriated(Art 2103) ;
b. To demand the deposit of the thing pledged should the creditor use it
without authority, or misuse it in any other was (Art 2104);
c. To substitute the thing pledged if it is endangered without fault of the
pledgee without prejudice to the pledgee’s right to have the thing sold
at public sale (Art 2108).
d. To bid and have preference at the foreclosure sale if he should offer
the same terms as the bidder (Art 2113) His offer is not valid however
if he is the only bidder. All bids shall offer to pay the purchase price in
cash. If a bid other than for cash is accepted, the pledgee is deemed
to have received the purchase price in cash, as far as the pledgor or
owner is concerned. (Art. 2114). The sale of the thing pledged
extinguishes the principal obligation, whether or not the proceeds are
equal to the amount of the principal obligation, interest and expenses
in proper case; and
e. To demand the return of the thing pledged upon the extinction of the
principal obligation. (Art 2085 (1))

Note: A statement in writing by the pledgee that he renounces or

abandons the pledge is sufficient to exinguish the pledge. For this
purpose, neither the acceptance by the pledgor or owner, nor the
return of the thing pledged is necessary. The pledgee becomes a
depositary or bailee.

Obligations of the pledgor:

a. To notify the pledgee of any flaw or defect of the thing pledged known
to him; otherwise he answers for damages suffered by the pledgee (Art
2101);
 b. To reimburse the pledgee for expenses made for its preservation (Art
2099); and
c. To fulfill his principal obligation (Art 2085)

Principles in Pledge:
a. As a general rule, the pledge extends to the interest and earnings of
the thing pledged, unless there is a stipulation to the contrary. (Art.
2102)
b. Unless the pledge is expropriate, the debtor continues to be the owner
thereof. Nevertheless, the creditor may bring actions which pertains to
the owner of the thing pledged in order to recover it from or defend it
against third person. (Art. 2104)
c. The creditor cannot use the thing pledged without the consent of the
owner, and if he should do so, or should misuse t he thing in any other
way, the owner may ask the Court that it be JUDICIALLY OR EXTRA-
JUDICIALLY DESPOSITED. However, when the preservation of the
thing pledged requires its use, it must be used by the creditor but only
for that purpose. (Art. 2104)
d. The remedy of the pledgor should the thing pledgedd be in danger of
being lost or impaired through the negligence or willful act of the
pledgee is to require the thing to be deposited with a third person. (Art.
2106)
e. The creditor who is deceived on the substance or quality of the thing
pledged may either (1) claim another thing instead; or demand
immediate payment of the principal obligation (Art. 2109).

Remedies should there be reasonable grounds to fear the destruction or

impairment of the thing pledged, without fault of the pledgee:
- The pledgee is bound to advise the pledgor, without delay or danger to
the thing pledged.
- The pledgor, on the other hand, may demand the return of the thing,
upon offering another in pledge provided the latter is of the same kinf
as the former and not of inferior quality and without prejudice to the
RIGHT OF THE PLEDGEE to cause the sale of the thing pledged at
public sale. The proceeds of the auction sale shall be security for the
principal obligation in the same manner as the thing originally pledged.
(Arts. 2107; 2108). Between the right of the pledgor to demand the
return of the thing pledged and the right of the pledgee to cause it to be
sold at public auction, the latter prevails.

Causes for the extinguishments of the pledge:

 a. Return of the thing pledged by the pledgee to the pledgor or owner,
any stipulation to the contrary being void (Art 2110);
b. Renunciation or abandonment executed in writing by the pledgee even
without return of the thing (Art 111)
c. Destruction or loss of the thing pledged;
d. Extinction of the principal obligation (by payment or sale of the thing
pledged); and
e. Other causes of extinguishments or ordinary obligations (Art 1231)

SALIENT FEATURES OF PRESIDENTIAL DECREE NO. 114 otherwise known

as REGULATING THE ESTABLISHMENT AND OPERATION OF
PAWNSHOPS
Background:
• Pawnshops provide an additional source of credit especially for small
borrowers left unserved by the banking and other financial institutions in
the country;
• There is no specific law in the Philippines that governs pawnshop
establishments, particularly providing definite and uniform standards for
their operation.
Declaration of Policy:
– It is hereby declared the policy of the State to regulate the establishment
of pawnshops and to place their operation on a sound and stable basis to
derive the optimum advantages from them as an additional source of
credit;
- to prevent and mitigate, as far as practicable, practices prejudicial to
public interest; and to lay down the minimum requirements and
standards under which they may be established and do business.
( Sec. 2)

Definition of Terms:
• “Pawnshop” shall refer to a person or entity engaged in the business of
lending money on personal property delivered as security for loans and
shall be synonymous, and may be used interchangeably with pawnbroker
or pawn brokerage.
• “Pawner” shall refer to the borrower from a pawnshop.
• “Pawnee” shall refer to the pawnshop or pawnbroker.
• “Pawn” is the personal property delivered by the pawner to the pawnee as
security for a loan.
 • “Pawn ticket” is the pawnbrokers’ receipt for a pawn. It is neither a security
nor a printed evidence of indebtedness.
• “Property” shall include only such personal property as may actually be
delivered to the control and possession of the pawnshop: Provided,
however, that certain specified chattels such as guns, knives and similar
weapons whose reception in pawn is expressly prohibited by other laws or
regulations shall not be included.

A pawnshop may be established as a single proprietorship, partnership or

corporation.
Any person or entity desiring to engage in the pawnshop business shall (a)
register with the Bureau of Commerce ( Department of Trade and Industries) in
the case of single proprietorship or the Securities and Exchange Commission in
the case of a corporation or any other association ( partnership) and (b) secure a
license from the appropriate city or municipality having territorial jurisdiction over
the place of establishment and operation (business permit).

Requirement of registration with the Central Bank. – Any individual,

corporation, or association duly registered and licensed to engage in the
pawnshop business shall file an information sheet, under oath, with the Central
Bank before commencement of actual operations: Provided, however, That
pawnshops duly licensed and operating before the approval of this Decree shall,
within six months from the date of effectivity of the same, register with the Central
Bank. For this purpose, the Central Bank shall furnish pawnshops, upon request,
with necessary copies of the prescribed information sheet.

The minimum paid-in capital of any pawnshop which may be established after
the effectivity of this Decree shall be one hundred thousand pesos
(P100,000.00):
Citizenship requirement. Upon the effectivity of this Decree, only Filipino citizens
may establish and own a pawnshop organized in the form of a single
proprietorship: Provided, however, That in the case of a partnership, at least
seventy per cent (70%) of its capital shall be owned by Filipino citizens: Provided,
further That in the case of a corporation, at least seventy per cent (70%) of the
voting capital stock shall be owned by citizens of the Philippines, or if there be no
capital stock, at least seventy per cent (70%) of the members entitled to vote,
shall be citizens of the Philippines.

Amount of loan. Pawnshops may grant such amount of loans as may be agreed
upon between the parties: Provided, That the amount of loan shall, in no
 case, be less than thirty per cent (30%) of the appraised value of the
security offered for the loan unless the pawner manifests in writing the
desire to borrow a lesser amount.

Rates of interest. – No pawnshop shall directly or indirectly stipulate, charge,

demand, take or receive any higher rate or greater sum or value for any loan or
forbearance than the rate allowed by the Usury Law for such transactions. It shall
be unlawful for a pawnshop to divide the pawn offered by a pawner in order to
collect greater interest and/or to require the pawner to pay an additional charge
as insurance premium for the safekeeping and conservation of the article
pawned. In addition to interest charges, pawnshops may impose a Maximum
service charge of five pesos (P5.00), but in no case to exceed one per cent (1%)
of the principal loan.

Redemption. – The pawner who fails to pay his obligation on the date it falls due
may, within ninety days from the date of maturity of the obligation, redeem the
pawn by payment of the principal of the debt with interest: Provided, however,
That for the purpose of computing interest due after maturity of the obligation, the
basis shall be the sum of the principal obligation and interest earned at the time
the obligation matured.

Disposition of pawn on default of pawner. – In the event the pawner fails to

redeem the pawn within ninety days from the date of the maturity of the
obligation in accordance with the preceding section, the pawnbroker may sell or
otherwise dispose of any article taken or received by him in pawn: Provided,
however, That the pawner shall be duly notified of such sale on or before the
termination of the ninety-day period, the notice particularly stating the date, hour,
and place of sale.

Public auction of pawned articles. No pawnbroker shall sell or otherwise

dispose of any article or thing taken or received in pawn or pledge except at (1)
public auction in his place of business as such pawnbroker or in any other public
place within the territorial limits of the municipality or city where the pawnshop
has its place of business, (2) under the control and direction of an auctioneer with
license duly issued by the corresponding authorities, (3) nor shall any such article
or thing to be sold or disposed of unless said pawnbroker has published a notice
once in at least two daily newspapers printed in the city or municipality during the
week preceding the date of such sale.

In remote areas where newspapers are neither published nor circulated,

notice by newspaper publication shall be substituted by posting notices in
conspicuous public places within the territorial limits of the city or municipality
where the pawnshop has its place of business. Said notice, whether published or
posted, shall be in English, and either in Pilipino or in the local dialect, and shall
contain the name of the pawnshop, its owner, address of the establishment,
hour, and the date of the auctions sale. (SEC.15)

Pawnshop business is under the regulatory power of the Central bank of the
Philippines. (Sec. 17)

Lesson 5 – Other Credit Transactions

Objectives:
At the end of the lesson:
1. The students can discuss the general provisions of chattel mortgage,
antichresis, and real mortgage.
2. Students can appreciate the relevant concepts of commercial law
regarding other credit transactions

CHATTEL MORTGAGE
Definition of Chattel Mortgage:
Chattel Mortgage is a contract by virtue of which personal property is
recorded in the Chattel Mortgage Register as a security for the performance of
an obligation (Art 2140).
Characteristics as a Contract:
a. accessory
b. unilateral
c. formal contract
d. if the chattel mortgage (or real mortgage) is not recorded, the mortgagee
acquires the right to demand registration of the contract. (Art 2125)

Laws principally governing chattel mortgages:

a. Chattel Mortgage Law (Act No. 1508)
b. Civil Code
c. Revised Administrative Code; and
d. Revised Penal Code

Similarities between pledge and chattel mortgage:

a. both are executed to secure performance of a principal obligation;
b. both are constituted only on personal property;
c. both are indivisible
d. both are constitute a lien on the property
e. In both cases, the creditor cannot appropriate the property to himself in
payment of the debt;
f. In both cases, when the debtor defaults, the property must be sold for the
payment of the creditor; and
g. Both are extinguishments by the fulfillment of the principal obligation and
by the destruction of the property pledged or mortgaged.

Distinguish chattel mortgage from pledge:

a. In chattel mortgage, the delivery of the personal property to the mortgagee
is not necessary, while in pledge, such delivery is necessary;
b. In chattel mortgage, the registration of the same in the Chattel Mortgage
Register is necessary for its validity, while in pledge, registration in the Registry
of Property is not necessary.
c. The procedure for the sale of the thing given as a security is different. In
chattel mortgage, the procedure is found in Section 14 of Act No. 1508, as
amended, while in pledge, it is found in Article 2112 of the Civil Code.
d. In chattel mortgage, the excess over the amount due after foreclosure
goes to the debtor (Art No. 1508, Section 14), while in pledge, if the property is
sold, the debtor is not entitled to the excess unless it is otherwise agreed (Art
2115) or except in the case of a legal pledge (Art 2121) and;
e. In chattel mortgage, the creditor is entitled to recover any deficiency
except if the chattel mortgage is a security for the purchase of personal property
in installments, while in pledge, the creditor is not entitled, any stipulation to the
contrary notwithstanding (Art 2115).

Object of Chattel Mortgage Contract:

Only movable or personal properties such as:
a. Shares of stock (the mortgage to be registered both in Chattel Mortgage
Registries of the province where the mortgagor resides, and the province where
the corporation has its principal business);
b. Interest in business;
c. Growing crops;
d. Large cattles;
e. Vehicles (the mortgage to be registered also with the Land Transportation
Office); and
f. Vessels (the mortgage to be registered with the Office of the Philippine
Coast Guard of the Port of Documentation of such vessels.
g. House built on rented land but as between the parties only under the
doctrine of estoppel; and
h. House to be demolished and portable nipa huts for what are really
mortgaged in this case are the materials thereof and they are, therefore, personal
property.

Note: Growing crops and large cattle are considered personal property under the
Chattel Mortgage Law (Art 1508 Sec 7). They cannot however, be the object of a
contract of pledge because they are considered immovable under the Civil Code,
which principally governs pledge.

Extent or scope of Chattel Mortgage:

It covers only property described in the contract, and excludes like or
substituted property thereafter acquired by the mortgagor, notwithstanding any
thing in the contract to the contrary (Art No. 1508 Sec 7). Exception: In this case
of stock or merchandise contained in drugstores, grocery stores, etc. which are
constantly sold and substituted with new stock.
Affidavit of Good Faith
The Affidavit of Good Faith is an oath in a contra t of chattel mortgage
wherein the parties “severally swear that the mortgage is made for the purpose of
securing the obligation specified in the conditions thereof and for no other
purpose and that the same is just and valid obligation and one not entered into
for the purpose of fraud. (Section 5)
Note: The absence of the affidavit vitiates a mortgage only as against third
persons without notice, like creditors and subsequent encumbrances.

Who may exercise right of redemption when condition of the chattel

mortgage is broken:
a. The mortgagor;
b. A person holding a subsequent mortgage;
c. A subsequent attaching creditor
The redemption is made by paying or delivering to the mortgage the amount due
on such mortgage and the costs and expenses incurred by such breach of
condition before the sale thereof. (Section 13).

Kinds of Foreclosure of Chattel Mortgage:

a. Judicial Foreclosure – the mortgagee institutes an action in court;
b. Extra-judicial Foreclosure – The sale is made by the mortgagee himself
when authorized by the Chattel mortgage contract or by special law.

Application of proceeds of foreclosure

To the payment of the following in their order:
a. Costs and expenses of keeping and sale;
b. Payment of the obligation secured by the mortgage;
c. Claims of persons holding subsequent mortgages in their order; and
d. The balance, if any. Shall be paid to the mortgagor, or in person holding
under him.

ANTICHRESIS

Definition of Antichresis
The creditor acquires the right to receive the fruits of an immovable of his
debtor, with the obligation to apply them o the payment of the interest, if owing,
and thereafter to the principal of his credit.
It is an arrangement that the fruits will be used to liquify the principal
obligation
It doesn't create a lien but only the grant of the use of the fruits.

Characteristics of an antichresis
1. Accessory contract
2. Formal contract—it must be in writing; the principal obligation and the
interest secured must be in writing

Additional benefit in having a contract of antichresis

In the absence of a contract of antichresis, the debtor could just issue a
special power of attorney in favor of the creditor for the collection of the fruits of
the immovable.
The additional benefit is that at the failure of the debtor to pay the principal
obligation, the creditor may have the property subject of antichresis foreclosed

Measure of application of fruits to interest and principal

It must be appraised at their actual market value at the time of application.

Form of contract
The amount of the principal and interest shall be specified in writing. Otherwise,
the contract is void.

Default rules to be followed

1. The creditor advances for the taxes, charges, as well as the necessary
expenses for the preservation of the property
2. The law uses the term “advances” as the fruits of the immovable may
be applied to the expenses and charges. If the creditor doesn't want to
advance, he may just surrender the immovable to the debtor
3. The debtor may not reacquire the enjoyment of the thing until full payment of
the obligation.
4. The creditor doesn't acquire ownership of the immovable for nonpayment
of the debt within the period agreed upon. Every stipulation to the contrary is
void. The creditor may petition the court to foreclose the property.

MORTGAGE
Definition of Mortgage
A contract whereby the debtor secures to the creditor the fulfillment of a
principal obligation, specially substituting to such security immovable property
or real rights over immovable property which obligation shall be satisfied with
the proceeds of sale of said property or rights in case the said obligation is not
complied with at the time stipulated

Characteristics as a contract
a. Real,
b. accessory,
c. unilateral and
d. subsidiary contract

Possession of property mortgaged

As a general rule, it is retained by the mortgagor. The mortgaged property is only
subjected to a lien by the mortgagee but ownership is retained by the mortgagor.

Payment of interest on mortgage credit

With regard to fruits or interest, the mortgagee shall be subject to the
obligation of an antichresis creditor.
Subject matter of mortgage
Immovables and alienable real rights over immovable.

Future property cannot be the object of a contract of mortgage

A stipulation however subjecting the mortgage lien, properties which the
mortgagor may subsequently acquire, install, or use in connection with real
property already mortgaged belonging to the mortgagor is valid

Essential requisites of a mortgage

1. To secure the fulfillment of a principal obligation
2. The mortgagor should be the absolute owner of thing mortgaged
3. The mortgagor should have free disposal of the thing
4. When the principal obligation becomes due, the thing mortgaged may be
alienated to secure payment
5. For a mortgage to be validly constituted and to prejudice third persons, the
mortgage should be recorded with the Registry of Property

There is no validly constituted mortgage if the deed of mortgage is a mere

private document. Mortgage is nevertheless binding between the parties
even if unregistered

Procedure of entering into a contract of mortgage

1. Execute the document of mortgage
2. Go to a notary public, who will notarize the document.
3. Pay the documentary stamp tax within the first five days of the succeeding
month. The doc stamp tax is a percentage of the value of the property
mortgaged.
4. Go to the Office of the Register of Deeds and pay the registration fees.
Before you pay the registration fees, the government will require you to
update payment of realty taxes on the property. After payment of the
registration fees, the mortgage will be annotated on the title.

Effect of invalidity of mortgage on principal obligation

1. The principal obligation remains valid
2. Mortgage deed remains as evidence of principal obligation

Effects of mortgage
1. Creates a real right
a. If the mortgagor sells the encumbered property, the property remains
subject to the fulfillment of the principal obligation secured by it
b. The mortgagee has a right to rely in good faith on what appears on the
certificate of title of the mortgagor of the property given as security and in the
absence of anything to excite suspicion, he is under no obligation to look
beyond the certificate
c. Until the action for expropriation has been completed, ownership
over the property remains with the registered owner
d. Banking institution must exercise due diligence before entering contract of
mortgage
e. If a person is the first mortgagee over a property which was sold in an
auction by the second mortgagee, the only right left to him is to collect
his mortgage credit from the purchaser thereof during the sale conducted
f. In a suit to nullify a certificate of title, the mortgagee is an indispensable
party

2. Creates merely an encumbrance

Extent of mortgage
A real estate mortgage constituted on an immovable property is not limited to the
property itself but also extends to all its accessions, improvements, growing
fruits, and rents. To exclude them, it is necessary that there be an express
stipulation to that effect.

Right of creditor against transferee of mortgaged property

1. The fact that the mortgagor has transferred the mortgaged property to a
third person doesn't relieve him from his obligation to pay the debt to
the mortgage creditor in the absence of Novation.
2. A recorded real estate mortgage is merely an accessory contract.
3. The creditor may only demand from any possessor the payment only
of the part of the credit secured by said property
4. Necessary that there be prior demand for payment be made on the
debtor and the latter failed to pay
5. Does not really apply to all third persons in possession of the property
6. It only applies to those in possession of the mortgaged property in
the concept of owner. If the possession by a third person is only as
lessee, the creditor may not collect the credit from that third person.

Stipulation forbidding alienation of mortgaged property

Such stipulation would be contrary to public good inasmuch as the
transmission of property should not be unduly impeded

Can mortgagee prohibit encumberances without prior consent?

Yes, regulation is not the same as prohibition. The mortgagee may even add a
standard. This is for good measure on the part of the mortgagee which is
allowed by law.
ASSESSMENT
1. Distinguish briefly but clearly between: mutuum and commodatum.
2. What do you understand by ANTICHRESIS? How is it distinguished from
pledge and mortgage?
3. Distinguish antichresis from usufruct.
4. Lito obtained a loan of P1,000,000 from Ferdie, payable within one year.
To secure payment, Lito executed a chattel mortgage on a Toyota Avanza
and a real estate mortgage on a 200-square meter piece of property.
Would it be legally significant - from the point of view of validity and
enforceability - if the loan and the mortgages were in public or private
instruments?
5. A, upon request, loaned his passenger Jeepney to B to enable B to bring
his sick wife fromPaniqui. Tarlac to the Philippine General Hospital in
Manila for treatment. On the way back toPaniqui, after leaving his
wife at the hospital, people stopped the passenger Jeepney.
Bstopped for them and allowed them to ride on board, accepting payment
from them just as in thecase of ordinary passenger Jeepney’s plying their
route. As B was crossing Bamban, there wasan onrush of Lahar from Mt
Pinatubo, the Jeep that was loaned to him was wrecked.
a. What do you call the contract that was entered into by A and B with
respect to the passenger Jeepney that was loaned by A to B to
transport the latter's sick wife to Manila?
b. Is B obliged to pay A for the use of the passenger jeepney?
c. Is B liable to A for the loss of the Jeepney?

6. Before he left for Riyadh to work as a mechanic, Pedro left his Adventure
van with Tito, with theunderstanding that the latter could use it for one
year for his personal or family use while Pedroworks in Riyadh. He did not
tell Tito that the brakes of the van were faulty. Tito had the vantuned up
and the brakes repaired. He spent a total amount of P15,000.00. After
using thevehicle for two weeks, Tito discovered that it consumed too much
fuel. To make up for theexpenses, he leased it to Annabelle. Two months
later, Pedro returned to the Philippines andasked Tito to return the van.
Unfortunately, while being driven by Tito, the van was
accidentallydamaged by a cargo truck without his fault.
a. Who shall bear the P15,000.00 spent for the repair of the van?
Explain.
b. Who shall bear the costs for the van's fuel, oil and other materials
while it was withTito? Explain.
c. Does Pedro have the right to retrieve the van even before the
lapse of one year? Explain.
 d. Who shall bear the expenses for the accidental damage caused by
the cargo truck,granting that the truck driver and truck owner are
insolvent? Explain.
7. Cruz lent Jose his car until Jose finished his Bar exams. Soon after Cruz
delivered the car, Jose brought it to Mitsubishi Cubao for maintenance
check up and incurred costs of P8,000. Seeing the car's peeling and faded
paint, Jose also had the car repainted for P10,000. Answer the two
questions below based on these common [Link] the bar exams, Cruz
asked for the return of his car. Jose said he would return it as soon as
Cruz has reimbursed him for the car maintenance and repainting costs of
P 18,[Link] Jose's refusal justified?
8. The parties in a contract of loan of money agreed that the yearly interest
rate is 12% and it can be increased If there is a law that would authorize
the increase of interest rates. Suppose OB, the lender, would increase by
5% the rate of interest to be paid by TY, the borrower, without a law
authorizing such increase, would OB’s action be just and valid? Why? Has
TY a remedy against the imposition of the rate increase? Explain.
9. Olivia owns a vast mango plantation which she can no longer
properly manage due to alingering illness. Since she is indebted to
Peter in the amount of Php 500, 000, she asks Peterto manage the
plantation and apply the harvest to the payment of her obligation
to him,principal, and interest, until her indebtedness shall have been fully
paid. Peter agrees.
a. What kind of contract is entered into between Olivia and Peter?
Explain.
b. What specific obligations are imposed by law on Peter as a
consequence of their contract?
c. Does the law require any specific form for the validity of their
Contract? Explain.
d. May Olivia re-acquire the plantation before her entire indebtedness
shall have been fully paid? Explain.
10. Benedicto executed a chattel mortgage on a Mercedes-Benz car in
favor ofSilverio. The mortgage was duly registered on August 15. Upon
the failure ofBenedicto to pay the obligation secured by the chattel
mortgage, Silverio filed, onOctober 3, an action for replevin to take
possession of the mortgaged car. Itturned out that as early as August 20,
Leopoldo had already filed an action torecover a sum of money against
Benedicto. Even before the replevin case ofSilverio could be set for
trial, Leopoldo caused a levy to be made on theMercedes-
Benz to satisfy the money judgment which a court had awarded
onOctober 10 against Benedicto in favor of Leopoldo. Whose
claim to theMercedes-Benz car will prevail, Leopoldo’s or Silverio’s?
Explain