COMMON PROVISIONS OF PLEDGE AND MORTGAGE

ESSENTIAL REQUISITES

1 constituted to secure the fulfillment of a principal obligation. (Art. 2085, par. 1)

- Pledge and mortgage are purely accessory contracts like guarantee. They cannot exist
without a valid obligation. However, they may guarantee a voidable, unenforceable, or
natural obligation. (Arts. 2086, 2052.)
2 pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged. (Art.
2085, par. 2)
- It is essential that the contract be constituted only by the absolute owner of the thing
pledged or mortgaged, or at least by the pledgor or mortgagor with the authority or
consent of the owner of the property pledged or mortgaged.
- Future property cannot be pledged or mortgaged
- A pledge or mortgage executed by one who is not the owner of the property pledged or
mortgaged is without legal existence and registration cannot validate it.
3 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.
(Art. 2085, par. 3)
- The act of pledging or mortgaging is an act of strict ownership involving as it does an
alienation or transmission of real rights in property. Hence, the pledgor or mortgagor
must have the capacity or authority to dispose of the property.
Art. 2087 provides that in contracts of pledge and mortgage 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. Although this condition is not expressly stated in
the contract, it is necessarily implied as an inherent element of the transaction of mortgage
or pledge.The creditor does not automatically become the owner if at the time stipulated the
obligation is still unfulfilled. (Art. 2112). The pledgor remains the owner during the pendency
of the pledge and prior to foreclosure and sale.

PROHIBITION AGAINST PACTUM COMMISORIUM

Pactum Commissorium - A stipulation whereby the thing pledged or mortgaged or under

antichresis (Art. 2137) shall automatically become the property of the creditor in the event of
nonpayment of the debt

Pactum commissorium referred to in Articles 2088 and 2137, therefore, presupposes the
existence of mortgage or pledge or that of an antichresis. In case of such stipulation, the
security contract remains valid; only the prohibited stipulation is void.

Exception to the prohibition the pledgee may appropriate the thing pledged if after the first
and second auctions, the thing is not sold (Art. 2112)

KINDS OF OBLIGATIONS THAT CAN BE SECURED

Capability to secure all kinds of obligations, whether pure or conditional, voidable,

unenforceable, and natural (Arts. 2052 and 2091)
INDIVISIBILITY

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. (Art. 2089, par 1)

A pledge or mortgage is one and indivisible as to the contracting parties and the rule applies
even if the obligation is joint and not solidary. Generally, the divisibility of the principal
obligation is not affected by the indivisibility of the pledge or mortgage.

CONSEQUENCES OF INDIVISIBILITY

1. Single thing. Every portion of the property pledged or mortgaged is answerable for the
whole obligation as soon as it falls due.
2. Several things. When several things are pledged or mortgaged to secure the same
debt in its entirety, all of them are liable for the totality of the debt and the creditor does
not have to divide his action by distributing the debt, among the various things pledged
or mortgaged.
3. Debtors heir/creditors heir. The debtors heir who has paid a part of the debt cannot
ask for the proportionate extinction of the pledge or mortgage (Art. 2089, par. 2.) nor can
the creditors heir who has received his share of the debt return the pledge or cancel the
mortgage if the debt is not completely satisfied. (Art. 2089, par. 3.)
EXCEPTION TO THE RULE OF INDIVISIBILITY

1. Where each one of several things guarantees determinate portion of credit (Art. 2089,
pars. 4 and 5) Not actually an exception because in such a case, there would be as
many pledges or mortgages as there are things given in pledge or mortgage.
2. Where only portion of loan was released.
3. Where there was failure of consideration.
4. Where there is no debtor-creditor relationship as when a third party is the pledgor or
mortgagor
CONCEPT OF POSSESSION OF A MORTGAGEE AND PLEDGEE

Possession is not in the concept of owner. Thus, the subject property cannot be acquired
through acquisitive prescription, unless they remounce their status as such.

RETENTION OF OWNERSHIP

Pledgor and Mortgagor retain ownership of the thing given as a security.

PROMISE TO CONSTITUTE PLEDGE OR MORTGAGE

A promise to constitute a pledge or mortgagem if accepted, gives rise to a personal right

binding upon the parties and creates no real right in the property. (Art. 2092)

PLEDGE VS. REAL MORTGAGE

Pledge Real Mortgage

As to the Subject Matter
Constituted on movable Constituted on Immovable
 As to Delivery of Property
Property is delivered to pledgee or by Not necessary
consent to a third person
As to Validity Against Third Persons
Not valid against third persons without Not valid against third persons without
knowledge, unless a description of the thing knowledge, unless registered
pledged and date of the pledge appear in a
public instrument
As to Authority to Sell
Pledgor can sell the thing pledged on ly with Mortgagor can sell the property mortgaged
the consent of the pledgee. even without the consent o the mortgagee

PROVISIONS APPLICABLE ONLY TO PLEDGE

Pledge is a contract by virtue of which the debtor delivers to the creditor or to a third person a
movable (Art. 2094.) or document evidencing incorporeal rights (Art. 2095.) for the purpose of
securing the fulfillment of a principal obligation with the understanding that when the obligation
is fulfilled, the thing delivered shall be returned with all its fruits and accessions.

CHARACTERISTICS

Pledge is:

1) a real contract because it is perfected by the delivery of the thing pledged by the
debtor who is called the pledgor to the creditor who is called the pledgee, or to a third
person by common agreement;
2) an accessory contract because it has no independent existence of its own;
3) a unilateral contract because it creates an obligation solely on the part of the creditor
to return the thing subject thereof upon the fulfillment of the principal obligation; and (4)
a subsidiary contract because the obligation incurred does not arise until the fulfillment
of the principal obligation which is secured.

ESSENTIAL REQUISITES

1) constituted to secure the fulfillment of a principal obligation. (Art. 2085, par. 1)

2) pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged. (Art.
2085, par. 2)
3) 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.(Art. 2085, par. 3)
4) delivery of the thing pledged to the creditor, or to a third person designated by common
agreement. (Art. 2093)
- Unless the thing given as security by way of pledge be delivered to and placed in
the possession of the creditor or of a third person designated by common
agreement, the creditor acquires no right to the property because pledge is
merely a lien and possession is indispensable to the right of a lien.
 - Actual delivery or actual possession of the property pledged is what is
contemplated in Art. 2093. However, depending on the peculiar nature of the
thing pledged, constructive delivery may be sufficient to validate a pledge.
5) the subject matter should either or both be:
a) Movable property; (Art. 2094) or
- Must be within the commerce of men and susceptible of possession
b) Incorporeal rights. (Art. 2095)
- The instrument proving the right pledged must be delivered.
- If negotiable, said instrument must also be indorsed
6) In order to be effective against third persons, should appear in a public instrument which
should contain:
a) the description of the thing pledged; and
b) the date of the pledge.
KINDS OF PLEDGE

1. Voluntary or conventional or one which is created by agreement of the parties; or

2. Legal or one which is created by operation of law. (Art. 2121) Examples:
a. Art. 546 refers to necessary and useful expenses
b. Art. 1731 to work on a movable
c. Art. 1994 refers to a depositary
d. Art. 194 refers to the right of an agent to retain
e. Art. 2004 refers to the right of a hotel-keeper

RIGHTS AND OBLIGATIONS OF A PLEDGOR

RIGHTS: (D-BAA)
1. To demand return in case of reasonable grounds to fear destruction or impairment of the
thing without the pledgees fault, subject to the duty of replacement (Art. 2107)

Two remedies granted to the Pledgor: (DS)

a. Demand the return of the thing pledged upon offering another thing in pledge; or
b. Cause the same to be sold at a public sale (Art. 2108)
Requisites: (RAFSA)
i. Reasonable grounds to fear destruction or impairment of the thing pledged;
ii. Offer another thing which is of the same kind and quality as the former;
iii. No fault on the part of the pledgee;
 iv. Pledgee did not exercise his right to cause the thing to be sold at a public
auction;
v. Pledgee advised the pledgor without delay.

2. To bid and be preferred at a public auction (Art. 2113)

3. To alienate the thing pledged provided the pledgee consents to the sale (Art. 2097)

4. To ask that the thing pledged be deposited in any of the following cases:
a. If the creditor uses the thing without authority or misuses the thing, he may deposit
the thing judicially or extrajudicially(Art. 2104);

b. If the thing is in danger of being lost or impaired because of the negligence or willful
act of the pledgee, he may deposit the thing with a third person (Art. 2106).

OBLIGATIONS: (AN)
1. To advise the pledgee of the flaws of the thing (Art. 2101)
Note: Failure to do so, the pledger may be held liable for damages.

2. Not to demand the return of the thing until after full payment of the debt, including
interest due thereon and expenses incurred for the preservation. (Art. 2105)
Exception: Pledgor is allowed to substitute the thing pledged which is in danger of
destruction or impairment with another thing of the same kind and quality ((Art. 2107)

RIGHTS AND OBLIGATIONS OF A PLEDGEE

RIGHTS:
1) Right to retain the thing pledged (Art. 2098)
The debtor cannot demand for its return until the principal obligation for which the pledge
was created is paid.

2) Right to reimbursement of the expenses made for its preservation (Art. 2099)
Stems out from the obligation to take care of the thing pledged with the diligence of a
good father of a family.

3) Right to compensate the fruits, income, dividends or interests of the thing pledged
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. (Art. 2102)

General rule: The pledge shall extend to the interest and earnings of the right pledged.
Exception: A stipulation to the contrary.
 General rule: In pledge of animals, their offspring shall pertain to the pledgor or owner of
animals pledged, but shall be subject to the pledge.
Exception: A stipulation to the contrary.

The pledgee can apply the fruits, income, dividends, or interests, if owing and thereafter
to the principal of his credit.

If from the use of the property profits are derived, the pledgee must account therefore to
pledgor, and apply the net proceeds of such use to the payment of his claim.

4) Right of pledgee against third persons (Art. 2103)

The pledgee is authorized to bring such action as pertaining to the owner in order to
recover it or defend it, against claims of third persons.

The right of the pledgee is a REAL right, it is enforceable against third persons provided:
a) The contract of pledge is in a public instrument
b) Shall contain a description of the thing pledged and the date of the pledge (Art.
2096)

5) Right of pledgee to demand substitute or immediate payment (Art. 2109)

The right arises if the pledgee is deceived on the substance and quality of the thing
pledged. The remedies here are alternative, that is, the pledgee has the right to choose
only one and not both.

6) Right of pledgee to cause sale of thing pledged (Art. 2108 and 2112)
The pledgee may cause the thing pledged to be sold at a public sale if without his fault,
there is danger of destruction, impairment, or diminution in value.

The proceeds shall be a security for the principal obligation.

Formalities required for the sale:

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

There is no need for publication, notification to pledgor and the owner of the thing
pledged is sufficient.

Includes the right to retain the excess value received from the public sale and to retain
the thing until after full payment of the debt.

7) Right to bid at public sale (Art. 2113)

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

8) Right of pledgee to appropriate thing pledged (Art. 2115)

The pledgee may appropriate the thing pledged if after the first and second auctions, the
thing is not sold. This is an exception to the prohibition against pacto commisorio.

If he exercises this, it shall be considered as full payment for his entire claim.
 Effect of sale of thing pledged:
a) If the price of the sale is more than the amount due the creditor, the debtor is
not entitled to the excess, unless it is otherwise agreed.
b) If the price of the sale is less, neither is the creditor entitled to recover the
deficiency. A contrary stipulation is void.

9) Right to collect and receive amount due on credit pledged (Art. 2118)
He has the duty to collect if delay would endanger the recovery of the credit.

10) Right to choose which of several things pledged shall be sold (Art. 2119)
Requisites:
a) Two or more things are pledged
b) Demand the sale if only as many of the things as are necessary for the payment
of the debt.

OBLIGATIONS:
1) Duty of the Pledgee to take care of the thing pledged (Art. 2099)
Diligence Required: diligence of a good father or a family

2) Liability for the loss or deterioration of the thing pledged by reason or fraud,
negligence, delay or violation of the terms of the contract (Art. 2099)
The liability arises if he fails to exercise the diligence required.

3) Obligation of pledgee not to deposit the thing pledged with another (Art. 2100)
Exception: There is stipulation authorizing him to do so (Art. 2100 and Art. 2093)

4) Responsibility of pledgee for acts of his employees or agents (Art. 2100)

The acts of the agents are, in legal effect, deemed his acts.

5) Responsibility of pledgee for flaws of the thing pledged (Art. 2101)

A bailor in commodatum is liable for damages suffered by the bailee if he does not
advise the latter of the flaws of the thing loaned. The flaws referred to are hidden
defects, not obvious ones.

6) Obligation of pledgee not to use the thing pledged (Art. 2104)

Exceptions:

a) There is permission to use from the owner

b) The character of the thing pledged makes the use necessary in properly caring for it.
7) Obligation to advise pledgor or owner of result of sale (Art. 2116)
The purpose of this is to enable the pledgor or owner to take steps for the protection of
his rights where he has reasonable grounds to believe that the sale was not an honest
one.

General Rule: the creditor is not bound to accept payment or performance by a third
person who has no interest in the fulfillment of the obligation (Art.1236)
 Under Article 2117, a third person who has any right in or to the thing pledged (as
when the pledgor has contracted to sell it to him) may pay the debt as soon as it
becomes due and demandable and the creditor cannot refuse to accept the payment

It is not obligatory for the pledge to collect and receive the amount due on the credit
pledged. He is given merely the right to do so. However, he has the duty to collect if
delay would endanger the recovery of the credit.

The right of choice given to the pledge as to which of the things pledged he shall
cause to be sold is limited only by stipulation. After sufficient property has been sold to
satisfy the obligation plus interest and expenses no more shall be sold.

Note: Usually the value of the property pledge exceeds the amount of the debt
guaranteed.

PLEDGE BY OPERATION OF LAW

LEGAL PLEDGES/PLEDGE BY OPERATION OF LAW (Art. 2121)

(1) Necessary expenses shall be refunded to every possessor, but only a possessor in good
faith may retain the thing until he has been reimbursed.
(a) Useful expenses shall be refunded only to the possessor in good faith with the same
right of retention, the person who has defeated him in the possession having the
option of refunding the amount of the expenses or of paying the increase in value
which the thing may have acquired and by reason thereof (Art. 546)

(2) He who has executed work upon a movable has a right to retain it by way of pledge until he
is paid.
- This is called the mechanics lien. (Art. 1731)

(3) The agent may retain the things which are the objects of agency until the principal effects the
reimbursement and pays the indemnity.
- This is called the agents lien. (Art. 1914)

(4) The laborers wages shall be a lien on the goods manufactured or the work done. (Art. 1707)
Note:
(1) In legal pledges, the remainder of the price of the sale shall be delivered to the
obligor.

(2) Public auction of legal pledges may only be executed after demand of the amount for
which the thing is retained. It shall take place within one month after the demand,
otherwise the pledgor may demand the return of the thing pledged, provided s/he is able
to show that the creditor did not cause the public sale without justifiable grounds. (Article
2122)