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PLEDGE,MORTGAGE &

ANTICHRESIS
Essential Requisites common to both Pledge
and Mortgage:
COMMON PROVISIONS FOR PLEDGE AND MORTGAGE
1. They are constituted to secure fulfillment of the
principal obligation.
2. The pledgor or mortgagor is the absolute owner
of the thing pledge or mortgage.
COMMON PROVISIONS FOR PLEDGE AND MORTGAGE

3. 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
4. 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)
COMMON PROVISIONS FOR PLEDGE AND MORTGAGE

• 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).
COMMON PROVISIONS FOR PLEDGE AND MORTGAGE

– Rules on the indivisibility of Pledge and


Mortgage:
– 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, 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;
COMMON PROVISIONS FOR PLEDGE AND
MORTGAGE
 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;
 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.
COMMON PROVISIONS FOR PLEDGE AND MORTGAGE

Consideration of Pledge or Mortgage


Pledges and mortgages are accessory contracts;
therefore their consideration is the same as the
consideration of the principal obligation. If the
principal contract is void, so also is the pledge
given as therefore.
COMMON PROVISIONS FOR PLEDGE AND MORTGAGE

Ownership:
• The pledgor or the mortgagor must be the owner,
otherwise the pledge or mortgage is VOID. Future
property therefore cannot be mortgaged or
pledged because of the lack of ownership.
COMMON PROVISIONS FOR PLEDGE AND MORTGAGE

• An agent cannot therefore pledge or mortgage in


his own name the property of the principal,
otherwise the contract he entered with the third
person is void. But the agent can do so, in the
name of the principal, for here the real pledgor or
mortgagor is the principal. Hence, if the agent is
properly authorized, the contract is valid.
COMMON PROVISIONS FOR PLEDGE AND MORTGAGE

• The pledgor or mortgagor need not be the debtor


or borrower; thus one who owns property can
pledge or mortgage it to secure another’s debt.
Note here the pledgor or mortgagor is the OWNER
of the property.
COMMON PROVISIONS FOR PLEDGE AND MORTGAGE

Nature as an accessory contract


• Even if the principal debt is voidable,
unenforceable or merely natural, the pledge or
mortgage is valid;
• If the principal obligation is void, the pledge or
mortgage is also void.
COMMON PROVISIONS FOR PLEDGE AND MORTGAGE

Right to Alienate
 The creditor cannot automatically become the
owner if at the time the debt falls due, the debt is
still unpaid. This violates the prohibition against
pactum commisorium.
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).
COMMON PROVISIONS FOR PLEDGE AND MORTGAGE

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:
• Subsequent voluntary act of the debtor of making
cession of the property or;
• A promise to assign or sell said property in
payment of the debt.
COMMON PROVISIONS FOR PLEDGE AND MORTGAGE

What is prohibited is the automatic appropriation by


the creditor of the pledged or mortgaged
property. There is no prohibition for the
alienation of the said property. This is in fact
allowed under Article 2087, CC. As a rule, the
pledged property can be sold in a public auction
while mortgage can be foreclosed only when the
debt remains unpaid at the time it is due. In
mortgage, the violation of certain conditions in
the mortgage may authorize immediate
foreclosure.
COMMON PROVISIONS FOR PLEDGE AND MORTGAGE

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).
CONTRACT OF PLEDGE
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.
CONTRACT OF PLEDGE
Characteristics/Nature as a contract:
• Real – because it is perfected by actual delivery.
• Accessory-because it is supportive of the principal
obligation
• Unilateral – because it creates an obligation on
the part of the creditor (pledgee) to return the
object of the pledge upon fulfillment of the
obligation
CONTRACT OF PLEDGE
• Subsidiary contracts because the obligation
incurred does not arise until the fulfillment of the
principal obligation that is secured.
• Ownership is retained by the debtor.
• It is indivisible contract because the principal
obligation must be fully paid and extinguished
before the object of pledge can be released.
CONTRACT OF PLEDGE
Note:
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).
CONTRACT OF PLEDGE
THING PLEDGED MUST BE IN THE POSSESSION OF
THE CREDITOR OR THIRD PERSON BY COMMON
AGREEMENT- This requisite is most essential and is
characteristic of a pledge without which the
contract cannot be regarded as entered into
because precisely in this delivery lies the security
of the pledge and mortgage. ( art. 2093)
CONTRACT OF PLEDGE
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.
Object of Pledge: - All movables which are within
commerce may be pledged, provided they are
susceptible of POSSESSION. ( Art. 2094)
CONTRACT OF PLEDGE
Rules:

• Only movable can be pledged ( including


incorporeal right- See Art. 2095)
• Real property cannot be pledged.
CONTRACT OF PLEDGE
 Certificates of stock or stock dividends under
Corporation law are quasi-negotiable instruments
in the sense that they may be given in pledge to
secure an obligation.
 Incorporeal rights evidenced by negotiable
instruments, bill of lading, shares of stock, bonds,
warehouse receipts and similar documents may
be pledged.
 * Pledge of incorporeal rights necessitates the
proving of said right. Hence, the instrument must
be delivered and if negotiable it must be
endorsed. ( Art. 2095)
CONTRACT OF PLEDGE
What are the Kinds of pledge:
Voluntary or conventional – one which is created by
agreement of the parties; or
Legal – one which is created by operation of law (Art
2121)
Additional requirements in order that pledge shall take
effect against third parties:
A public document must be made and it must
indicate
– The description of the thing pledge; and
– The date of pledge (Art 2096)
CONTRACT OF PLEDGE
Even if requisites provided in Article 2096 are not
complied, it binding between the pledgor and the
pledgee but not against third persons.
The purpose of these requirements is to forestall fraud
because a debtor may attempt to conceal his
property from his creditors when he sees it in
danger of execution by simulating a pledge
thereof with an accomplice.
CONTRACT OF PLEDGE
May thing pledge be alienated?
• Yes, provided the pledgee consents to the
sale. Ownership passes to the vendee as
soon as the pledgee consents to the
alienation but subject to the rights of the
pledgee. (Art 2097)
• Pledgee shall remain in possession of the
thing pledge until the principal obligation is
fully paid.
RIGHTS AND OBLIGATIONS OF THE PLEDGEE

1. 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 2098). Note: No double pledge.
Property which has been lawfully pledged cannot
be pledged to another as long as the first one
subsists.
2. To take care of the thing pledged with the
diligence of a good father of the family (Art 2099).
To be reimbursed for the expenses incurred in its
preservation (Art 2099) and To answer for its loss
or deterioration in the proper case (Art. 2099).
RIGHTS AND OBLIGATIONS OF THE PLEDGEE

3. Not to deposit the thing pledge with a third person


unless authorized (Art. 2100 )
He is responsible for the acts of his agents or
employees with respect to the thing pledged (Art
2100);
4. He shall have the same responsibility of a bailor in
commodatum in Article 1951.
“ The pledgor who knowing the flaws of thing
pledged does not advise the pledgee of the same
shall be liable to the latter for the damages which
may he may suffer by reason thereof
RIGHTS AND OBLIGATIONS OF THE PLEDGEE

Unless the thing pledged is expropriated, the debtor


continues to be the owner.
To pledgee however can 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).
Despite ownership by the pledgor, the pledgee
exercises certain rights of the owner.
The right of the pledgee is a real right enforceable against
third persons but it is necessary that the contract of
pledge be embodied in a public instrument which shall
contain a description of thing pledged and date of the
pledge.
RIGHTS AND OBLIGATIONS OF THE PLEDGEE
3. 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). Fruits and interests may be
compensated for those to which the pledgee
himself is entitled or may be applied to the
principal. Generally, the pledge extends to the
offspring of animals but there can be a contrary
stipulation. ( in case of pledge of animals, their
offspring shall pertain to the pledgor or owner of
the animals pledged, but shall be subject to the
pledge unless there is a contrary stipulation)
RIGHTS AND OBLIGATIONS OF THE PLEDGEE

4. 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). Despite ownership by the pledgor, the
pledge exercises certain rights of the owner.
The debtor continues to be the owner unless
the thing pledged is expropriated.
RIGHTS AND OBLIGATIONS OF PLEDGEE

4. Not to use the thing pledged unless


authorized or its preservation so requires (Art
2104) and the pledgor has the right to
demand the deposit ( judicially or extra
judicially) of the thing pledged should the
creditor use it without authority, or misuse it
in any other was (Art 2104)
RIGHTS AND OBLIGATIONS OF PLEDGEE

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 the proper case. (Art. 2105)
RIGHTS AND OBLIGATIONS OF THE PLEDGEE
If through the negligence or willful act of the
pledgee, the thing pledged is in danger of
being lost or impaired, the pledgor may
require that it to be deposited with a third
person. ( Art. 2106)
RIGHTS AND OBLIGATIONS OF THE PLEDGEE

If there are reasonable grounds to fear the destruction or


impairment of the thing pledged, without fault on the
part of the pledgee, pledgor may demand the return of
the thing upon offering another thing in pledge,
provided the same kind as the former and not of
inferior quality and without prejudice to the right of
the pledgee under the provisions of the following
article.
The Pledgee is bound to advise the pledgor, without delay
of any danger to the thing pledged. (Art. 2107)
RIGHTS AND OBLIGATIONS OF THE PLEDGEE

If without the fault of the pledgee, there is danger of


destruction, impairment, or diminution in value of the
thing pledged, he may cause the same to be sold at a
pubic sale. The proceeds of the auction shall be a
security for the principal obligation in the same
manner as the thing originally pledged. (Art. 2108)

The right of the pledgee to sell the thing pledged at a


public auction is superior to the given right to the
pledgor to substitute the thing pledged (Art. 2107).
Sale must be in a public sale.
RIGHTS AND OBLIGATIONS OF THE PLEDGEE

If the thing pledged is returned by the pledgee to the pledgor


or owner, the contract of pledge is extinguished. Any
stipulation to the contrary is Void.
This applies even if the return is for the protection of the
thing pledged. The presumption is the thing was returned
by the pledgee voluntarily. (Art.2110)
• Article 1273. The renunciation of the principal debt shall
extinguish the accessory obligations; but the waiver of the
latter shall leave the former in force.
• Article 1274. It is presumed that the accessory obligation of
pledge has been remitted when the thing pledged, after its
delivery to the creditor, is found in the possession of the
debtor, or of a third person who owns the thing.
RIGHTS AND OBLIGATIONS OF THE PLEDGEE

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. In this case, the
pledgee becomes a depositary. ( Art. 2111)
PROCEDURE OF PUBLIC SALE

Procedure of Sale of the thing pledge


1. Debtor failed to pay the creditor in due time.
2. Creditor may proceed to the Notary Public for the
sale of the thing pledged.
3. Sale shall be made at a public auction with notice
to the debtor and owner of the thing pledged.
4. Notice indicates the amount of which the public
sale is to be held.
5. Conduct first auction of the thing, if not sold,
conduct second auction with the same formalities.
PROCEDURE OF PUBLIC SALE

6. If there is no sale at the second auction, creditor can


appropriate the thing pledged.
7. Pledgee is obliged to give an acquittance for his
entire claim to the debtor. (Art. 2112)
8. At the public auction, the pledgor or owner may bid.
He has better right if he should offer the terms as
the higher bidder.
9. Pledgee may bid but his offer is not valid if he is the
only bidder. (Art. 2123)
10.All bids at the public auction shall offer to pay the
purchase price at once.
PROCEDURE OF PUBLIC SALE

11. Bids must be for the whole purchase price and in cash. If
bid is accepted by pledgee, the latter is deemed to have
received the purchase as far as the pledgor or owner is
concerned. ( Art. 2114)
12. The sale of the thing pledged has the effect of
extinguishment of obligation, whether or not the proceeds of
the sale are equal to the amount of the principal obligation,
interest and expenses. If the price is higher than said
amount, debtor is not entitled to the excess unless otherwise
agreed (Art. 2115)
13. If the price of the sale is less , the creditor cannot anymore
recover the deficiency even if there is a stipulation to this
effect. (Art. 2115)
PROCEDURE OF PUBLIC SALE

14. After the public auction, the pledgee shall


promptly advise the pledgor or owner of the
result thereof (Art. 2116) – mandatory
provision
RIGHT OF AFFECTED THIRD PERSON

Any third person who may have a right in or to


thing pledged, may pay the principal obligation
as soon as the latter becomes due and
demandable. (Art. 2117)
RIGHT OF THE PLEDGEE

If a credit which has been pledged becomes due before it is


redeemed, pledgee has the right to collect and receive the
amount due. He may apply the same to the payment of his
claim and deliver the surplus, should there be any, to the
pledgor. ( Art. 2118)
Example: A owes B P 1,000. A indorses to B as pledge a
negotiable promissory note for P 2,000 made by C in favor
of A. If the promissory note becomes due before it is
redeemed, B can collect from C P 2,000 and if C pays B, the
latter keeps the P 1,000 and return to A the excess of P
1,000. The obligation of A to B is thus extinguished.
RIGHT OF THE PLEDGEE
• The pledgee has the right to choose which among
the several things pledged, he may cause to be
sold to satisfy the principal obligation, interest
and expenses. If sufficient property has been
sold and the total amount due is the fully
satisfied and the pledgee may return the other
things left to the pledgor or owner. (Art. 2119) –
How about Article 2115 considering if there is
excess in public sale, pledgee shall not return the
same unless there is stipulation.
RIGHT OF THIRD PARTY PLEDGOR
The law allows a third person who is not a
party to the principal obligation to offer his
own movable property as pledge to secure the
obligation of the debtor. In this case, he shall
have the same rights as guarantors under
Articles 2066 to 2070 and Articles 2077 and
2081 and any waiver of defense of the
principal debtor will not prejudice him.
(Art.2121)
LEGAL PLEDGE
• Instances of Legal Pledges or Pledges by Operation of
Law:
• Possessor in good faith – for necessary and useful
expenses incurred over the thing (Art 546);
• Usufructuary – for taxes and extraordinary expenses
(Art 612) ;
• Bailee – For damages suffered by reason of the flaws in
the thing loaned. (Arts 1944, 1951);
• Agent – for expenses advance and damages caused by
the agency (Art 1914);
• Depositary – for the payment of what may be due him
by reason of the deposit (Art 1994); and
LEGAL PLEDGE
• Hotel Keeper – for credits for lodging and
supplies furnished (Art 2004); and
• 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).
LEGAL PLEDGE
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)
EXTINGUISHMENT OF PLEDGE
• Return of the thing pledged by the pledgee to the
pledgor or owner, any stipulation to the contrary
being void (Art 2110);
• Renunciation or abandonment executed in
writing by the pledgee even without return of the
thing (Art 111)
• Destruction or loss of the thing pledged;
• Extinction of the principal obligation (by payment
or sale of the thing pledged); and
• Other causes of extinguishments or ordinary
obligations (Art 1231)
REAL ESTATE MORTGAGE
Define mortgage:
Mortgage otherwise known as
Real Estate mortgage or Real
Mortgage is a contract whereby
the debtor secures to the creditor
the fulfillment of the principal
obligation, especially subjecting to
such security immovable property
or real rights over immovable
property in case the principal
obligation is not complied with at
the time stipulated.
REAL ESTATE MORTGAGE
Requisites:
• That it be constituted to secure the fulfillment of principal
obligation.
• That the mortgagor be the absolute owner of the thing
mortgaged.
• That the person constituting the mortgage must have the free
disposal of his property, and in the absence thereof, that he
be legally authorized for the purpose. (Art. 2085)
• That the document in which the mortgage appears be
recorded in the Registry of Property. (Art 2125)
• This requirement is necessary to bind third persons but not
for the validity of the real mortgage which may be entered
into in any form.
REAL ESTATE MORTGAGE
Characteristics as a Contract:
• Real right – A mortgage binds a purchaser who
knows of its existence or if the mortgage was
registered. It creates a lien on the property
mortgaged whereby the mortgaged property sold
to satisfy his claim.
• Real Property – because it is a real right over
immovable property. (Art. 415, par. 10)
• Accessory- because it cannot exist without a
principal obligation. Hence, if principal obligation
is void, the mortgage is also void.
REAL ESTATE MORTGAGE
• Unilateral – because the creditor has the obligation
to discharge the real estate mortgage upon
fulfillment of the principal obligation.
• Indivisible –- because it creates a lien on the whole
or all of the properties mortgaged, when lien
continues until the obligation it secures has been
fully paid. i.e. A and B mortgaged their land in C’s
favor. While the mortgage debt was pending A and
B partitioned the land between them, and A paid
his share of the debt. Is the mortgage on A’s share
of the land extinguished? Held: No because a
mortgage is indivisible.
REAL ESTATE MORTGAGE
Inseparable – because it subjects the property upon
which it is imposed, whoever the possessor may be,
to the fulfillment of the obligation for whose security
it was constituted. (Art. 2126)

The creditor may claim from a third person in


possession of the mortgaged property, the payment
of the part of the credit secured by the property
which said third person possesses, in the terms and
with the formalities which the law establishes (Art.
2129).
REAL ESTATE MORTGAGE

The third person’s liability, however, is limited to


the value of the property mortgaged. The third
person cannot be compelled to pay any deficiency
after the mortgage is foreclosed unless he expressly
assumed liability for the principal obligation.
(Philtrust vs. Echaus, 52 Phil 852).
REAL ESTATE MORTGAGE
Example: D obtained a loan from C amounting
to P 100,000.00. To secure the debt, D
constituted a mortgage on his lot which C
registered with the Register of Deeds. Before
the due date of the loan, D sold the lot to X who
knew nothing of the mortgage. If D later
defaults in the payment of his loan, C can
foreclose the mortgage although X was not a
party thereto and even if he was not aware of
the existence of the mortgage at the time he
purchased the lot. ( note: This is also an
exception to the principle of relativity)
REAL ESTATE MORTGAGE
• Subsidiary contract – availed only after failure of
the debtor to pay the principal obligation.
• It is real property – A mortgage on real property
us by itself real property also.
• It is a limitation on ownership – A mortgage
encumbers but does not end ownership, it may
thus be foreclosed.
• It can secure all kinds of obligations.
• The property cannot be appropriated.
• The mortgage is a lien.
REAL ESTATE MORTGAGE
PARTIES TO THE CONTRACT
Mortgagee – He is the creditor in whose favor the real
estate mortgage is constituted to secure his credit.
Mortgagor – He is usually the debtor who executes a
contract of real estate mortgage to secure his loan.

A third person who owns a real property may also


be a mortgagor by mortgaging his property in favor of
the creditor to answer for the debt of the principal
debtor.
REAL ESTATE MORTGAGE
Object of Real Mortgage
a. Immovables
• The following are immovable property:
• Land, buildings, roads and construction of all kinds
adhered to the soil.
• Trees, plants and growing fruits, while they are
attached to the land or form an integral part of an
immovable.
• Everything attached to an immovable in fixed manner,
in such a way that it cannot be separated there from
without breaking the material or deterioration of the
object.
REAL ESTATE MORTGAGE
• Statues, reliefs, painting or other objects for use
or ornamentation, placed in buildings or on lands
by the owner of the immovable in such a manner
that it reveals the intention to attach them
permanently to the tenements.
• Machinery, receptacles, instruments or
implements intended by the owner of the
tenement for an industry or works which may be
carried on in a building or on a piece of land, and
which tend directly to meet the needs of the said
industry or works.
REAL ESTATE MORTGAGE
• Animal houses, pigeon houses, beehives,
fishponds or breeding places of similar nature,
in case their owner has placed them or
preserves them with the intention to have
them permanently attached to the land, and
forming a permanent part of it; the animals in
these places are included.
• Fertilizer actually used on a piece of land.
REAL ESTATE MORTGAGE
• Mines, quarries, slag dumps, while the manner
thereof forms part of the bed, and waters either
running or stagnant.
• Docks and structures which, though floating, are
intended by their nature and object to remain at
a fixed place on a river, lake or coast.
• Contracts for public works, and servitudes and
other real rights over immovable property. (Art.
415)
b. Alienable real rights in accordance with the laws,
imposed on immovables. (art. 2124)
REAL ESTATE MORTGAGE
• Distinguish Mortgage from Pledge
• Pledge is constituted on movables (Art 2094), while
mortgage on immovables (Art 2124);
• In pledge, the property is delivered to the pledgee, or
by common consent to third person (Art 2093), while
in mortgage, delivery is not necessary; and
• Pledge is not valid against third persons unless a
description of the thing pledged and the date of the
pledge appear on a public instrument (Art 2096), while
mortgage is not valid against third persons if not
registered even if embodied in a public instrument.
(Art 2125).
REAL ESTATE MORTGAGE

Note: Both are extinguished by the


fulfillment of the principal obligation and by
the destruction of the property pledged or
mortgaged.
REAL ESTATE MORTGAGE
REAL MORTGAGE CHATTEL MORTGAGE

Constituted on immovables On movables

May guarantee future Cannot guarantee


obligations future obligations.
Must be in a public
c) Contract must be
instrument and accompanied with an
registered with the Affidavit of Good Faith
Registry of Property & duly Registered.
REAL ESTATE MORTGAGE
Cause or consideration in mortgage:

Its consideration is that the principal


contract from which it receives its life,
although the obligation secured is incurred by
a third person, that is, the principal debtor is
other than the mortgagor.
REAL ESTATE MORTGAGE
FORM OF REAL MORTGAGE
• Between the parties:
The real mortgage may be in any form since it is a
consensual contract. The contract is binding between
the parties even if not registered in the Registry of
Property.
However, since a real mortgage creates a real right,
the same must be in a public instrument for the
convenience of the parties (Art. 1358). The person in
whose favor the law establishes a mortgage has no
other right than to demand the execution and the
recording of the document in which the mortgage is
formalized.
REAL ESTATE MORTGAGE
As regards third person
The real mortgage must be recorded in the
Registry of Property (Art. 2125). However, the
real mortgage is nevertheless binding against
third persons who have knowledge of the
same.
REAL ESTATE MORTGAGE
• Kinds of Mortgage:
• Voluntary – one which is agreed to between the parties
or constituted by the will of the owner of the property
on which it is created (Art 138, Spanish Mortgage Law)
• Legal – one required by law to be executed on favor of
certain persons (Art 2125, par 2; see also Arts 2082,
2083)
• Equitable – one which, although it lacks the proper
formalities of a mortgage, show the intention of the
parties to make the property as a security for a debt.
REAL ESTATE MORTGAGE
Effects of a Mortgage:
• It creates a real right, i.e., it directly and
immediately subjects the property upon
which it is imposed, whoever the possessor
may be, to the fulfillment of the obligation for
whose security it was constituted (Art 2126);
REAL ESTATE MORTGAGE
• The mortgage (creditor) may, therefore demand
payment from any possessor of the mortgaged
property (Art 2129) HOWEVER, when the
mortgagee forecloses the mortgage, the buyer of
the mortgaged property shall not be responsible
for the deficiency if any, after the sale by
foreclosure. The exception of course would be in
the case of novation, where all the parties
consent to buyer’s assumption of personal
liability.
REAL ESTATE MORTGAGE
• He may alienate or assign the mortgage credit
(his right as mortgagee) to a third person (Art
2128);
Mortgage credit – is the claim of the mortgagee
on the property mortgaged. It is a real right
which attaches to the mortgaged property and
gives the mortgagee the right to enforce the
fulfillment of the principal obligation.
REAL ESTATE MORTGAGE
Mortgage credit may be alienated or assigned by
mortgagee to third person in whole or in part by
the creditor to a third person, provided:
1) The deed of sale or assignment is in public
instrument and
2) 2) Duly registered with the Registry of Property.
Consent of the debtor/ Mortgagor is not required.
Notice of the assignment must be given to the
debtor or mortgagor
REAL ESTATE MORTGAGE
• The mortgage does not extinguish the title of
the mortgagor (debtor) who does not,
therefore, lose his right to dispose. Indeed,
the law considers void any stipulation
forbidding the owner from alienating the
property mortgaged. (Art 2130)
REAL ESTATE MORTGAGE
Scope of Mortgage:
It extends to and includes the following:
• Natural accessions;
• Improvements (even if subsequently made);
• Growing fruits; ( naturally should exclude those
already harvested before the obligation falls due)
• Rents or income (belonging to the mortgagor) not
yet received when the obligation becomes due;
REAL ESTATE MORTGAGE
• Proceeds of insurance received or owing from
insurance of the property;
• Amounts received or owing in virtue of the
expropriation of the properly for public sale (Art 2127)
Note:
– The above are deemed included in the mortgage unless
expressly excluded;
– But the mortgage does not extend to improvements made
by a third person subsequent to the mortgage and after the
property has passed to him.
REAL ESTATE MORTGAGE
Remedies of the Mortgagee in case of non-
fulfillment of debtor’s principal obligation.
1. Sue or demand for fulfillment of the
obligation plus damages;
2. Foreclose the real estate mortgage
REAL ESTATE MORTGAGE

• Define Foreclosure of Mortgage:


Foreclosure is a remedy available to the
mortgagee by which he subject the mortgaged
property to the satisfaction of the obligation
to secure which the mortgage was given
through the sale of the property at public
auction and the application of the proceeds to
the payment of his claims.
REAL ESTATE MORTGAGE
if the debtor fails to pay his obligation, one of the
principal remedies which creditor/mortgagee may
choose is to foreclose the mortgage and cause the
property to be sold at public auction to the highest
bidder. The proceeds of the sale will be applied first to
the satisfaction of the whole debt and second to the
judicial costs and expenses.
DEFICIENCY- If the proceeds of the public sale will not
sufficiently cover the original debt of the debtor, the
creditor can secure a deficiency judgment and collect
the unpaid balance from the debtor.
REAL ESTATE MORTGAGE
GROUNDS FOR FORECLOSURE

A. Failure to pay the principal obligation on


maturity date.
B. Violation of any condition, stipulation or
warranty of the mortgage contract by the
debtor/debtor
REAL ESTATE MORTGAGE
• Kinds of Foreclosure:
• Judicial Foreclosure – A mortgage may be
foreclosed judicially by bringing an action for that
purpose in the Regional Trial Court of the
province or city the real property is located or any
part thereof lies as outlined under Sections 4 and
70 of the Revised Rules of Court. If there is
deficiency in the public sale, the mortgagee can
petition the court for a deficiency judgment and
collect the unpaid balance from the debtor.
• A third person who owns the land mortgaged but
merely secured the principal obligation shall not
be liable for the deficiency of the debtor. The
latter shall be personally liable thereof.
REAL ESTATE MORTGAGE
Rule 68 Rules of Court
1. The mortgagee should file a petition for judicial
foreclosure in the court which has jurisdiction over the
area where the property is situated
2. The court will conduct a trial. If, after trial, the
court finds merit in the petition, it will render
judgment ordering the mortgagor/debtor to pay the
obligation within a period not
less than 90 nor more than 120 days from the
finality of judgment.
3. Within this 90 to 120 day period, the
mortgagor has the chance to pay the obligation to
prevent his property from being sold.
This is called the EQUITY OF REDEMPTION
PERIOD.
REAL ESTATE MORTGAGE
4. If mortgagor fails to pay within the 90-120 days given to
him by the court, the property shall be sold to the highest
bidder at public auction to satisfy the judgment.
5. There will be a judicial confirmation of the sale.
After the confirmation of the sale, the purchaser shall be
entitled to he possession of the property,
and all the rights of the mortgagor with respect to the
property are severed or terminated.
The equity of redemption period actually extends until
the sale is confirmed. Even after the lapse of the 90 to 120
day period, the mortgagor can still redeem the property, so
long as there has been no confirmation of the sale
yet. Therefore, the equity of redemption can be
considered as the right of the mortgagor to redeem
the property BEFORE the confirmation of the sale.
REAL ESTATE MORTGAGE
a. After the confirmation of the sale, the mortgagor
does not have a right to redeem the property
anymore. This is the general rule in judicial
foreclosures – there is no right of redemption after the
sale is confirmed.
The proceeds of the sale of the property will be
disposed as follows:
a. First, the costs of the sale will be deducted from
the price at which the property was sold
b. The amount of the principal obligation and interest
will be deducted
c. The junior encumbrances will be satisfied
d. If there is still an excess, the excess will go back to the
mortgagor. In mortgage, the mortgagee DOES NOT get
the excess (unlike in pledge).
REAL ESTATE MORTGAGE
If there is a deficiency, the mortgagee can
ask for a
DEFICIENCY JUDGMENT which
can be imposed on other property
of the mortgagor.
The rule on extrajudicial
foreclosure is different. The mortgagee must
go to court and file another action for the
collection of the deficiency.
REAL ESTATE MORTGAGE
The proceeds from the judicial sale of foreclosed
property shall be applied as follows:
a. To the total amount of the debt.
b. To the costs of the sale.
c. To the claims of subsequent mortgagees.
d. If there is any excess from the proceeds of
the sale, such will be returned to the
debtor/mortgagor.
REAL ESTATE MORTGAGE
Right of Redemption in Judicial Foreclosure
The right to redeem the mortgaged property
is exercised by the judgment debtor or
mortgagor at anytime before the confirmation
of the sale. Generally, the court is given a
period of ninety (90) days to confirm the sale.
The generally rule is the mortgagor cannot
exercise his right of redemption after the sale
is confirmed.
REAL ESTATE MORTGAGE
ONE WOULD SHY AWAY FROM A JUDICIAL FORECLOSURE:
1. Judicial foreclosure is costly, since the parties would
need to hire lawyers. But then again, the present rules
provide
that court fees are needed to be paid in extrajudic
ial proceedings also.
2. The parties have very little control over the sal
e because there is court intervention.
3. More susceptible to stalling/dilatory tactics by
the mortgagor, since he can file all sorts of motions in
court to prevent the sale.
4. It is more efficient to have extrajudicial proceedings
since for judicial proceedings, there is a minimum lapse
of time of 6 years.
REAL ESTATE MORTGAGE
Extra –Judicial Foreclosure – A mortgage may be
foreclosed extra-judicially where there is
inserted in the contract a clause giving the
mortgagee the prior upon default of the debtor
to foreclose the mortgage by an extra-judicial
sale of the mortgaged property (Sec 1, Art No.
3155 as amended by Act no 4118).
(UNDER ACT 3135/4118 AND SC ADMIN
ISTRATIVE CIRCULAR)

WHERE SHOULD AN EXTRAJUDICIAL


FORECLOSURE SALE BE DONE?
Sale cannot be made legally outside the city
or province wherein the property
sold is situated. In case the place
has been stipulated, it shall be made in the
municipal building of the said place.
NOTICE OF THE SALE

1. POSTING of the notices of the sale FOR NOT LESS


THAN 20 DAYS in at least 3 public places of the
municipality or city where the property is situated.
2. IF THE PROPERTY IS WORTH MORE THAN
P400, such notice shall also be
published once a week at least 3 consecutive weeks
in a newspaper of general circulation in the municipality
or city.
(You don't need to count 6 days between publications.)
NOTE: there is jurisprudence, which held that
there is sufficient notice when there is publication.
PUBLIC AUCTION/SALE

1. Time shall be between 9AM and 4PM. It shall


be made in the direction of the sheriff of the
province, the justice or auxiliary justice of the
peace of the municipality, or of the notary public
of the municipality, who shall be
compensated with P5 for each day of actual wo
rk or performance in addition to his expenses.

2. Anyone may bid at the sale, unless


there are stipulations in the agreement.
POSSESSION
Upon foreclosure, if the mortgagor is in possession of the
property, he will retain possession during the
redemption period—1 year from the date of sale

> If the winning bidder wants possession during the


redemption period, he may execute a bond in the amount
equivalent to the use of the property for 12 months, to
indemnify the debtor in case it be shown that the sale was
made without violating the mortgage or without complying
with the requirements of the Act. Upon approval, a writ of
possession will be issued in his favor.
> If the winning bidder is able to secure possession, the
mortgagor may petition that the sale is set aside and the
writ of possession be cancelled on the ground that he
wasn't in default or that the sale wasn't made in
accordance with Act 3135. This must be filed within 30
days from issuance of the writ of possession.
RIGHT OF REDEMPTION
The debtor, his successors-in-
interest, or any judicial creditor or judgment
creditor of said debtor, or any person having a
lien on the property subsequent to the
mortgage
or deed of trust under which the property
is sold, may
redeem the same at any time WITHIN THE
TERM OF 1 YEAR FROM AND AFTER THE DATE
OF THE SALE and such will be governed by the
Rules of Court. –registration of the sale.
When the property is redeemed after the purcha
ser has been given possession, the redeemer is
entitled to deduct from the price of redemption
any rentals that said purchaser may have collected
in case the property or any part thereof was
rented. If the property was used as his own
dwelling, it being town property, or used it gainfully,
it being rural property,
the redeemer may deduct from the price the
interest of 1% per month provided in the Rules of
Court.

RULES OF COURT, RULE 39, SECTIONS 29 TO 31, AND


35
Sec. 29. Effect of redemption by judgment obligor, and a
certificate to be delivered and recorded thereupon; to
whom payments on redemption made.

If the judgment obligor redeems, he must make the same


payments as are required to effect a redemption by a
redemptioner, whereupon, no further redemption shall be
allowed
and he is restored to his estate. The person to whom the
redemption payment is made must execute and deliver to
him a certificate of redemption acknowledge before a
notary public or other officer authorized to
take acknowledgments of conveyances of real property.
Such certificate must be filed and recorded in the registry of
deeds of the place in which the property is situated, and the
registrar of deeds must note the record thereof on the margin of
the record of the certificate of sale. The payments mentioned in
this and the last preceding sections may be made to the
purchaser r redemptioner, or for him to the officer who made
the sale.
Sec. 30. Proof required of redemptioner.
A redemptioner must produce to the officer, or
person from whom he seeks to redeem, and serve
with his notice to the officer a copy of the judgment
or final order under which he claims the right to
redeem, certified by the clerk of the court wherein
the judgment or final order is entered; or, if he
redeems upon a mortgage or other
lien, a memorandum of the record
thereof, certified by the registrar of deeds;
or an original or certified copy of any
assignment necessary to establish his claim; and
an affidavit executed by him or his agent,
showing the amount then actually due on the
lien.
Sec. 31. Manner of using premises pending
redemption; waste restrained.
Until the expiration of the time allowed for redemption,
the court may, as in other proper cases,
restrain the commission of waste on the property by
injunction, on the application of the purchaser or the
judgment obligee, with or without notice; but it is not
waste for a person in possession of the property at the
time of the sale, or entitled to possession afterwards,
during the period allowed for redemption, to
continue to use it in the same manner in which it
was previously used; or to use it in the ordinary
course of husbandry; or to make the necessary repairs to
buildings thereon while he occupies the property.
Sec. 35. Right to contribution or reimbursement.
When property liable to an execution against se
veral persons is sold thereon, and more than a due
proportion of the judgment is satisfied out of the
proceeds of the sale of the property of one of
them, or one of them pays, without a sale,
more than his proportion, he may
compel a contribution from the others; and
when a judgment is upon an obligation of one of
them, as security for another, and the surety pays
the amount, or any part thereof, either by sale of
his property or before sale, he may compel
repayment from the principal.
Notwithstanding Act 3135, juridical persons
whose property is being sold pursuant to an
extrajudicial foreclosure, shall have the
right to redeem the property in
accordance with this provision
until, but not after, the registration of the certificate
of foreclosure sale with the applicable Register of
Deeds which in no case shall be more than three (3)
months after foreclosure, whichever is earlier.
Owners of property that has been sold in a
foreclosure sale prior to the effectivity of this Act
shall retain their redemption rights until their
expiration.
NOTES:
1. For judicial or extra-
judicial foreclosure, the redemption period is within
one year from sale or registration.
2. The purpose is to give concession to the banks. Banks
cannot get properties mortgaged by those in financial distress.
3. The redemption price would be the mortgaged obligation
plus the interest as stipulated in the original obligation. Compare
this with judicial foreclosure wherein the
redemption price is the original price. In this case, you have to
pay more when redeeming from a bank.
4. There is immediate possession
5. A motion to enjoin would not be entertained unless secured
by a bond.
6. Court will fix the amount of the bond. Normally, this
would be the liability of the bank plus costs. This
remedied the loopholes in Act 3135—protect the bank
during foreclosures. This makes it hard to secure injunctions
and it shortens the redemption period.
However, the purchaser at the auction
sale concerned whether in a judicial or extra-
judicial foreclosure
shall have the right to enter upon and take possession of
such
property immediately after the date of the confirmation
of the auction sale and administer the same in accordance
with law. Any petition in court to enjoin
or restrain the conduct of foreclosure proceedings
instituted pursuant to this provision shall be given due
course only upon the filing by the petitioner of a bond
in an amount fixed by the court
conditioned that he will pay all the
damages which the bank may suffer by the enjoining or t
he restraint of the foreclosure proceeding.
REAL ESTATE MORTGAGE
• "SEC. 6. In all cases in which an extrajudicial sale is
made under the special power hereinbefore referred
to, the debtor, his successors-in-interest or any judicial
creditor or judgment creditor of said debtor, or any
person having a lien on the property subsequent to the
mortgage or deed of trust under which the property is
sold, may redeem the same at any time within the
term of one year from and after the date of the sale;
and such redemption shall be governed by the
provisions of sections four hundred and sixty-four to
four hundred and sixty-six, inclusive, of the Code of
Civil Procedure, in so far as these are not inconsistent
with the provisions of this Act." ( Act 4118)
REAL ESTATE MORTGAGE

SEC. 7. In any sale made under the provisions


of this Act, the purchaser may petition the Court
of First Instance of the province or place where
the property or any part thereof is situated, to
give him possession thereof during the
redemption period, furnishing bond in an amount
equivalent to the use of the property for a period
of twelve months, to indemnify the debtor in
case it be shown that the sale was made without
violating the mortgage or without complying with
the requirements of this Act. (Act.4118)
REAL ESTATE MORTGAGE
SUPREME COURT CIRCULAR NO. 1-00
• TO : All Executive Judges And Clerks Of
Courts Of The Regional Trial Courts
• SUBJECT : Procedure In Extra-Judicial
Foreclosure Of Mortgage
• For the information and guidance of all
concerned, quoted hereunder is the Resolution of
the Court En Banc dated December 14, 1999 in
Administrative Matter No. 99-10-05-0 Re:
Procedure in Extra-Judicial Foreclosure of
Mortgage.
REAL ESTATE MORTGAGE
"1. All applications for extra-judicial
foreclosure of mortgage whether under the
direction of the sheriff or a notary public,
pursuant to Act 3135, as amended by Act
4118, and Act 1508, as amended, shall be filed
with the Executive Judge, through the Clerk of
Court who is also the Ex-Officio Sheriff.
REAL ESTATE MORTGAGE
• "2. Upon receipt of an application for extra-judicial
foreclosure of mortgage, it shall be the duty of the
Clerk of Court to:
• a) receive and docket said application and to stamp
thereon the corresponding file number, date and time
of filing;
REAL ESTATE MORTGAGE
• b) collect the filing fees therefor and issue the
corresponding official receipt.
• c) examine, in case of real estate mortgage
foreclosure, whether the applicant has complied with
all the requirements before the public auction is
conducted under the direction of the sheriff or a
notary public, pursuant to Sec. 4 of Act 3135, as
amended;
REAL ESTATE MORTGAGE
• d) sign and issue the certificate of sale, subject to
the approval of the Executive Judge, or in his
absence, the Vice-Executive Judge;
• e) after the certificate of sale has been issued
to the highest bidder, keep the complete
records, while awaiting any redemption within
a period of one (1) year from date of
registration of the certificate of sale with the
Register of Deeds concerned, after which the
records shall be archived.
REAL ESTATE MORTGAGE
• "Where the application concerns the extra-judicial
foreclosure of mortgages of real estates and/or chattels in
different locations covering one indebtedness, only one
filing fee corresponding to such indebtedness shall be
collected. The collecting Clerk of Court shall, apart from the
official receipt of the fees, issue a certificate of payment
indicating the amount of indebtedness, the filing fees
collected, the mortgages sought to be foreclosed, the real
estates and/or chattels mortgages and their respective
locations, which certificate shall serve the purpose of
having the application docketed with the Clerks of Court of
the places where the other properties are located and of
allowing the extrajudicial foreclosure to proceed thereat.
REAL ESTATE MORTGAGE
• "5. No auction sale shall be held unless there
are at least two (2) participating bidders,
otherwise the sale shall be postponed to
another date. If on the new date set for the
sale shall not be at least two bidders, the sale
shall then proceed. The names of the bidders
shall be reported by the sheriff or the notary
public who conducted the sale to the Clerk of
Court before the issuance of the certificate of
sale.
REAL ESTATE MORTGAGE
Redemption in Extra-Judicial Foreclosure
The right of the mortgagor to redeem the
mortgaged property with a certain period
after it is sold for the satisfaction of the
mortgaged debt. In all cases of extra – judicial
sale, the mortgagor may redeem the property
at any time within the term of one year from
and after the date of the registration of the
sale.
REAL ESTATE MORTGAGE
Meaning of Equity of Redemption – the right of
the mortgagor to redeem the mortgaged
property after his default in the performance of
the conditions of the mortgage but before the
sale of the mortgaged property.
REAL ESTATE MORTGAGE
Remedies of the Mortgagee Where Mortgagor is
Dead:
a. He may abandon his security and share in the
general distribution of the assets of the estate;
b. He may foreclose, secure a deficiency judgment
and prove his deficiency judgment before the
committee on claims, or
c. He can rely on the security alone, in which case
he can receive no share in the distribution of the
assets of the estate.
CRIMINAL LIABILITY IN PLEDGE AND
MORTGAGE
1. Any person who pretending to be an owner of
any real property shall convey, sell mortgage
or mortgage the same shall be guilty of estafa,
Article 316 par. 1, Revised Penal Code.
2.Any person who knowing that the real
property is encumbered shall dispose of the
same as unencumbered is guilty of estafa,
Article 316, par. 2, Revised Penal Code.
ANTICHRESIS

Antichresis - By the contract of antichresis,


the creditor acquires the right to receive
the fruits of an immovable of his debtor
with the obligation to apply them to the
payment of the interest, if owing, and
thereafter to the principal of his credit.
(Art. 2132)
ANTICHRESIS
• It is also known as a ‘mortgage in
possession” It entailed the lawful
acquisition by the mortgage of the
possession, actually or constructively, of
the premises mortgaged, with creditor
standing upon the rights merely as a
mortgagee and not as an owner, for the
purpose of securing the security upon such
property and allowing its income to pay for
the debt.
ANTICHRESIS
REQUISITES:
1. It is an accessory contract to secure the performance
of a principal contract.
2. It must be in writing and must specify the amount of
the principal and the interest payable, otherwise the
contract of antichresis is void. ( Art. 2134)
3. The creditor is entitled to the fruits of an immovable
property of the debtor.
4. The creditor must apply the fruits gathered to the
payment of interest and the balance to the principal.
ANTICHRESIS
Characteristics of Antichresis

1. Accessory Contract
2. Formal one
3. Indivisible (Art. 2139 in relation to Arts. 2089 &
2090)
4. It can secure all kinds of obligations, pure, or
subject to suspensive or resolutory condition. (
Art. 2139 in relation to Art. 2091)
ANTICHRESIS
Measurement of the Value of the fruits
Measurement is based on the actual
market value of the fruits at the time of the
application thereof to the interest and
principal. ( Art. 2133)
Antichresis is a formal contract.
To be valid, the principal and the interest
shall be specified in writing. Otherwise, it is
null and void.
ANTICHRESIS
Obligations & Rights of the Creditors Under Article 2135

1. In the absence of any contrary stipulation, creditor


shall pay the taxes and other charges on the
immovable. He becomes liable to pay the debtor
damages if he fails to pay such taxes and charges.
2. He shall bear the expenses necessary for its
preservation and repair.

He is however entitled to recover the above expenses


by deducting the same from the fruits obtained.
ANTICHRESIS
The debtor can reacquire enjoyment of his
property only after he has fully paid his principal
obligation.

However, if the creditor opts to exempt himself


from the obligation to pay the taxes and
necessary expense for preservation and repairs on
the property, he may compel the debtor to
reacquire enjoyment of the property, except when
there is a stipulation to the contrary.
( Art 2136)
ANTICHRESIS

Creditor’s Right In Case of Non-Payment of Debt


The actual security for the principal obligation is
the fruits of the immovable property of the
debtor. Ownership of the property is not
transferred to the creditor – it remains with the
debtor. In view of this, the creditor cannot
acquire ownership of the property in case the
debtor cannot pay as this violates pactum
commissorium
ANTICHRESIS
In case of failure to pay the principal obligation on
the part of the debtor, he may exercise the
following remedies:
1. File an action for payment of the principal
obligation.
2. Petition the court for the sale of property of the
debtor
3. Avail of the rules on judicial foreclosure unless
extrajudicial foreclosure is agreed by the parties.
(Art. 2137)
ANTICHRESIS
Fruits of the real property subject to the antichresis will
be applied to the following:
First – to the taxes and charges upon the immovable (art.
2135)
Second – to the payment of the interest on the loan (Art.
2138) and
Third - If there is any excess to the proceeds of the fruits,
it shall be applied to the principal obligation.
Note: The actual market value of the fruits at the time of
the application shall be the measurement of the appraisal
of the fruits and if the value of the fruits exceeds the
interest, the excess shall be applied to the payment of the
principal obligation. Take note, there is no more usury
law which is applicable in the instant case.
ANTICHRESIS

Third persons who are not parties to the


principal obligation may secure the obligation
by antichresis. (Art. 2139)
CHATTEL MORTGAGE
Define 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).

Requisites: The requisites provided under


Article 2085 common to pledge and mortgage
are applicable to chattel mortgage.
CHATTEL MORTGAGE
Validity for form of a chattel mortgage
between the parties:

• The personal property must be RECORDED


OR REGISTERED in the Chattel Mortgage
Register. Registration in the day book is NOT
enough. It must be in the Chattel Mortgage
Register.
CHATTEL MORTGAGE
• Conflict between Article 2140 and Section 4 of Act
1508

Under Section 4 of Act. 1508, failure to register the


Chattel Mortgage to the chattel mortgage register will
not affect the validity of the chattel mortgage between
the parties but it shall be effective against third
persons. But it is argued that Art. 2140 is now viewed
as the DEFINITION of Chattel Mortgage. Hence, the
registration is required even for the validity between

CHATTEL MORTGAGE
Characteristics as a Contract:
• accessory
• unilateral
• formal contract
• if the chattel mortgage (or real mortgage) is not
recorded, the mortgagee acquires the right to
demand registration of the contract. (Art 2125)
CHATTEL MORTGAGE
A chattel mortgage is not a conditional sale
(Serra vs. Rodriguez, 56 SCRA 538.) It’s a
security; an accessory contract where
personal property is mortgaged as security for
the performance of an obligation (Art. 2140,
Civil Code.)
CHATTEL MORTGAGE
Laws principally governing chattel mortgages:
• Chattel Mortgage Law (Act No. 1508)
• Civil Code ( Arts. 2140, 2141, 2085)
• Revised Administrative Code; and
• Revised Penal Code
CHATTEL MORTGAGE
Similarities between pledge and chattel
mortgage:
• both are executed to secure performance of a
principal obligation;
• both are constituted only on personal
property;
• both are indivisible
CHATTEL MORTGAGE
• both are constitute a lien on the property
• In both cases, the creditor cannot appropriate the
property to himself in payment of the debt;
• In both cases, when the debtor defaults, the
property must be sold for the payment of the
creditor; and
• Both are extinguishments by the fulfillment of the
principal obligation and by the destruction of the
property pledged or mortgaged.
CHATTEL MORTGAGE
Distinguish chattel mortgage from pledge:
• In chattel mortgage, the delivery of the personal
property to the mortgagee is not necessary, while
in pledge, such delivery is necessary;
• 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.
CHATTEL MORTGAGE
• 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.
CHATTEL MORTGAGE
• 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;
CHATTEL MORTGAGE
• 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).
CHATTEL MORTGAGE
Object of Chattel Mortgage Contract:
• Only movable or personal properties such as:
• 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);
• Interest in business;
DESCRIPTION OF THE OBJECT OF CHATTEL
MORTGAGE
• Section 7 of the Chattel Mortgage Law does
not demand a minute and specific description
of every chattel mortgaged in the deed of
mortgage, but it only requires that the
description of the mortgaged property be
such as to enable the parties to the mortgage
or any person to identify the same after a
reasonable investigation and inquiry.
CHATTEL MORTGAGE
Objects of Chattel Mortgage
• Growing crops;
• Large cattles;
• Vehicles (the mortgage to be registered also with the Land
Transportation Office); and
• Vessels (the mortgage to be registered with the Office of
the Philippine Coast Guard of the Port of Documentation of
such vessels. (Pres. Decree No. 1521, Sec. 3 9a)).
• House built on rented land but as between the parties only
under the doctrine of estoppel; and
• 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.
SUBJECT MATTER OF THE CHATTEL MORTGAGE
1. Shares of Stocks:
Recorded at the principal office of business of the
corporation and at the residence of the mortgagor
2.Interest in Business –
Machinery treated by the parties as personal property
3. Vessels:
• It is essentially the mortgage accorded in the office
of the Philippine Coast Guard of the port
of documentation of the vessels.
4. Motor Vehicles:
Recorded with the LTO where the vehicle is registered, the
place where the property may be found and the residence
of the owner thereof.
5.House of Mixed Materials
6. House Built on Rented Land:
• It does not form part of the land. It is treated merely as
an object placed only a land by one who had a temporary
right to the same.
7. House of Strong Materials
• may be considered as personal property for purposes of
executing a chattel mortgage as long as the parties to the
contract so agrees and no innocent third party will be
prejudiced thereby.
Can a chattel mortgage be constituted on a building?
Ordinarily, the answer would be no. However, if both
parties entered into a chattel mortgage contract over a
piece of real estate, they are now in estoppel and the
contract becomes effective (Tumulad vs. Vicencio, 41
SCRA 143.) A chattel mortgage on a building may be
valid between the parties, but not against third persons
(Evangelista vs. Alto Surety, 103 Phil. 401.) Also, a piece
of equipment attached to the building –such as when
bolted to the floor- ordinarily forms part of the
building. But if the contracting parties treat it as
chattel, then once again chattel mortgage takes effect
(Tsai vs. CA, see above & Davao Sawmill vs. Castillo 61
Phil. 709.)
CHATTEL MORTGAGE
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.
CHATTEL MORTGAGE
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.
CHATTEL MORTGAGE
After-acquired Property

It can only cover property that has been expressly


described; substitutes and similar property (after-
acquired property) won’t do (Tsai vs. CA, 366 SCRA 324)
unless the after-acquired property in question pertains
to stores open to the public. Obviously, it would be
ridiculous if you wouldn’t allow the storeowner to
replace goods that were bought by his customers.
Instead, the storeowner must be allowed to substitute
the goods that were sold (Northern Motors vs. Coquia,
66 SCRA 415.)
CHATTEL MORTGAGE
After-incurred Obligations
The chattel mortgage covers only those
obligations that existed when the mortgage was
constituted. The only time after-incurred
obligations can be included in the agreement is
if the old contract is amended or a new one is
drawn up. The amendment or new contract
must be made observing the formalities of a
chattel mortgage.
What formal requirements must be observed in the
preparation and execution of a chattel mortgage?

1. Substantial compliance with the form prescribed in Sec. 5


of Act No. 1508;
2. The chattel mortgage must be signed in the presence of at
least 2 witnesses;
3. Affidavit of good faith;
The affidavit of good faith states that:

"We (the parties) severally swear that the foregoing


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 a just and valid obligation, and one not
entered into for the purpose of fraud." (Sec. 5)

4. Certificate of oath / Notarial acknowledgment;


5. Sufficiency of description
CHATTEL MORTGAGE
What is an 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.
CHATTEL MORTGAGE
Who may exercise right of redemption when
condition of the chattel mortgage is broken:
• The mortgagor;
• A person holding a subsequent mortgage;
• 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).
CHATTEL MORTGAGE
Kinds of Foreclosure of Chattel Mortgage:
• Judicial Foreclosure – the mortgagee institutes an
action in court;
• Extra-judicial Foreclosure – The sale is made by the
mortgagee himself when authorized by the Chattel
mortgage contract or by special law.
Grounds for foreclosure:
A. Failure to pay the principal obligation on maturity
date.
B. Violation of any condition, stipulation or warranty
of the mortgage contract by the debtor/mortgagor
CHATTEL MORTGAGE
• FORECLOSURE OF CHATTEL MORTGAGE
• After payment of the debt or the performance of the
condition specified in the Chattel Mortgage, the
mortgagee must discharge the mortgage otherwise, he
may be held liable for damages by any person entitled to
redeem the mortgage.
Public Sale
– If the mortgagor defaults in the payment of the secured
debt or otherwise fails to comply with the conditions of the
mortgage, the creditor has no right to appropriate to
himself the personal property because he is only permitted
to recover his credit from the proceeds of the sale of the
property at the public auction
CHATTEL MORTGAGE
Private Sale
• – There is nothing illegal, immoral or against
public order in an agreement for the private sale
of personal properties covered by the chattel
mortgage. The mortgagor is in estoppel to
question it except on the ground of fraud or
duress.
CHATTEL MORTGAGE
PERIOD TO FORECLOSE MORTGAGE
1.Chattel Mortgage
– The mortgagee may, after thirty (30) days from the time
of the condition broken, cause the mortgage property to be
sold at public auction by a public officer.
2. Real Estate Mortgage
– In case of judicial foreclosure, the grace period for the
mortgagor to pay the amount is not less than 90 days but
not more than 120 days from the entry of judgment on
foreclosure. In default of such payment, the property shall
be sold at public auction to satisfy judgment. ( Section 2,
Rule 68 of Rules of Court
CHATTEL MORTGAGE
• How proceeds of the foreclosure be applied?
• To the payment of the following in their order:
• Costs and expenses of keeping and sale;
• Payment of the obligation secured by the mortgage;
• Claims of persons holding subsequent mortgages in
their order; and
• The balance, if any. Shall be paid to the mortgagor, or
in person holding under him. ( Sec 14, Act 1508)
CHATTEL MORTGAGE
Effect of sale when there are two or more mortgages.
1. On senior mortgagees – foreclosure and sale by a
junior mortgagee do not affect the rights of persons
holding prior encumbrances. The purchaser acquires
the property subject to the right of foreclosure of a
senior mortgagee. The junior mortgagee may
however redeem the thing, Act 1508, Sec. 13)
2. On junior mortgagees – foreclosure and sale by a
senior mortgagee will extinguish all subsequent
mortgages.
CHATTEL MORTGAGE
Deficiency judgment

If the proceeds of the sale are not sufficient to


satisfy the claim of the creditor, the creditor
may institute a court action to recover the
deficiency, except in the case of foreclosure of
chattel mortgage constituted on personal
property which is sold at a price payable in
installments. (Art. 1484)
CHATTEL MORTGAGE
Criminal Liability
1. Any person who shall knowingly remove any personal
property mortgaged under the Chattel Mortgage Law
to any province or city other than that which it was
located at the time of the execution of the mortgage
without written consent of the mortgagee or his
executors, administrators or assignees ( Art. 319, par.
1)
2. Any mortgagor who shall sell or pledge personal
property already covered by the chattel mortgage
without consent of the mortgagee ( Art. 319 par. 2)
Law on Pledge, Real & Chattel Mortgage
Mr.AB owes Mr.CD P150,000.00 due on August 31, 1987. Mr. AB
executed a mortgage in favor of Mr. CD on Mr. AB's building
to guaranty the obligation. On August 10, 1987, the
mortgage building was totally lost due to a strong typhoon.
On August 12, 1987, Mr. CD demanded payment from Mr.
AB. Is Mr. CD's demand valid? (May 1988)
a. No, the obligation is one with a definite period, thus the creditor
cannot demand fulfillment of the obligation as such would the
prejudicial to the rights of the debtor
b. No, the obligation is extinguished because the obligation is lost
through a fortuitous event.
c. Yes, the debt becomes due at once because the guaranty was lost
even through a fortuitous event/. Unless the debtor can
mortgage another property that is equally satisfactory
d. Yes, the debt becomes due at once because, from the tenor
benefit is given solely to the creditor thereby giving the creditor
the right to demand performance even before the date.
Ans: C
Mr. Cruz executed a first mortgage of his house in favor of Mr. Dizon on
May 15,1986 to guaranty a mortgage loan of P200,000.00 due for
payment on May 15, 1987. On Sept. 16, 1986 the house was
completely destroyed by a typhoon. On Sept. 18,1986, Dizon
demanded payment from Mr. Cruz of the loan. Is Mr. Dizon's demand
for payment valid? (Oct. 1988)
a. No, the obligation is one with a definite period, so that creditor cannot
demand payment until the definite due date arrives
b. No, the obligation is extinguished because the object of the obligation
is lost through a fortuitous event
c. Yes, the obligation becomes due at once because, from the tenor
benefit of the creditor solely thereby giving the creditor the right to
demand performance even before the due date stipulated
d. Yes, the obligation becomes due at once because the guaranty was lost
even through fortuitous event, unless the debtor can mortgage
another property that is equally satisfactory
Ans: D
Mr. Santos secured and Mr. Dizon granted a loan of
P100,000.00 due for payment on December 31,
1988. Mr. Santos executed a first mortgage of his
residential house in favor of Mr. Dizon to guaranty
the P100,000.00 loan. On October 19, 1988 the
residential house was totally destroyed by typhoon
Unsang. On October 31, 1988 Mr. Dizon demanded
payment of the loan from Mr. Santos. Is the demand
of Mr. Dizon for payment valid? ( May 1989)
a. No, the obligation is one with a definite date for payment on
December 31, 1988 and until that date arrives, Mr. Santos is
not liable to pay
b. No, the object of the obligation was lost through a fortuitous
event and the obligation was extinguished
c. Yes, the obligation became due at once because the guaranty was
lost through a fortuitous event
d. Yes, the obligation became due at once because from the tenor
benefit, the creditor is given the right to demand performance
even before the due date stipulated
Ans: C
D pledged his Singer Sewing Machine to C for P8,000.00. D
was unable to pay the obligation 60 days after it was due.
C sold the machine at public auction for P6,000.00. (Oct.
1989)
a) C cannot recover the deficiency of P2,000.00 even if there
is stipulation that he can.
b) C can recover the deficiency of P2,000.00 even without
stipulation.
c) C cannot recover the deficiency of P2,000.00.
d) C can recover the deficiency of P2,000.00.
Ans: A
B pledged his Rolex to C for P4,000.00. B failed to pay C the
P4,000.00 on due date. C sold the Rolex watch at a public
auction to the highest bidder at P3,500.00. (Oct. 1990)
a. C can recover the deficiency of P500.00 from B
b. C can recover the deficiency of P500.00 even without
stipulation
c. C cannot recover the deficiency of P500.00 unless there
is stipulation
d. C cannot recover the deficiency of P500.00 even if
there is stipulation
Ans: D
The distinction between a chattel mortgage and a
pledge is that in chattel mortgage: (Oct. 1991)
a. The delivery of the personal property is necessary
b. The registration of the property in the Registry of
Property is not necessary
c. The excess over the amount due after foreclosure, goes
to the debtor
d. Answer not given
Ans. C
A mortgaged his residential land to B as a guarantee for the
payment of P400,000.00 obligation of A. They agreed
that A shall not sell the land while the obligation exists.
The maturity of the mortgaged, C offered to buy the land
from A. (Oct. 1992)
a. A cannot sell the land to C because of the agreement
not to sell
b. A can sell the land to C only if B consents in writing
c. A can sell the land to C despite the agreement not to
sell
d. A cannot sell the land to C unless A pays the obligation
Ans: C
Pledge and Mortgage are accessory contracts because
they: (May 1995)
a. Are meant to secure the fulfillment of a principal
obligation.
b. Cannot exist if the principal obligation is void.
c. Can exist by themselves.
d. Cannot secure fulfillment of rescissible
obligation.
Ans: A
Three of the following are essential requisites of a contract of
mortgage. Which one is not? (Oct. 1995)
a. The person instituting the mortgage has the free disposal of his
property.
b. The contract must be in writing.
c. The mortgagor is the absolute owner of the thing mortgaged.
d. The mortgage is constituted to secure the fulfillment of a
principal obligation.
Ans: B
In real mortgage, the following rules are valid, except one: (Oct.
1995)
a. A stipulation in the mortgage contract prohibiting the
owner from alienating the immovable mortgaged is
valid.
b. The mortgagee may alienate the mortgage credit or
assign to a third person in whole or in part.
c. Any stipulation allowing the mortgage creditor to
appropriate the property mortgaged is null and void.
d. If alienation of the mortgage credit is not registered, it
is still valid between the parties.
Ans: A
D obtained a loan from C. To secure the debt,
D pledged his ring to C. Before due date,
C executed a private document stating
that he was abandoning the pledge. In
the meantime, C remained in possession
of the ring and D has yet to express his
acceptance of the abandonment of the
pledge.
a. The pledge of the ring is extinguished.
b. The pledge is not extinguished until C
returns the ring.
c. The pledge is not extinguished unless D
accepts the abandonment since it is an
act of generosity.
d. The pledge is not extinguished because
the abandonment should be in a public
instrument.
D contracted the services of T, a tailor, to
sew D's pair of pants with D providing
the cloth for the purpose. The parties
agreed that T's labor shall be P500.00.
The security that T holds for the payment
of the labor agreed upon is in the nature
of:
a. chattel mortgage.
b. legal pledge.
c. conventional pledge.
d. antichresis.
The requirement that the thing on which
the security is constituted must be
delivered by the debtor to the creditor or
a third person by common agreement
refers to the characteristic of a pledge
being:
a. an accessory contract.
b. a real contract.
c. an indivisible contract.
d. a consensual contract.
The creation of a lien on the property
upon which it is imposed, whoever may
be the possessor of the property, to the
fulfillment of the obligation for whose
security it was constituted refers to the
characteristic of a real mortgage being:
a. an accessory contract.
b. an indivisible contract.
c. an inseparable contract.
d. a real property in itself.
D obtained a loan of P5.000.00 from C. The
obligation is secured by a pledge of D's ring
which he delivered to C. Both the loan and
the pledge were in a private instrument.
While the loan was outstanding, D sold the
ring through a public instrument to X who
was not aware of the pledge. Under the
deed of sale, D obliged himself to deliver the
ring physically to X after a week. Before X
could obtain actual delivery of the ring, he
learned that D had earlier pledged the same
and that C was selling the ring in a public
sale because of D's default in the payment
of his debt.
a. X is bound by the pledge made by D to C.
b. X is not bound by the pledge made by D to
C.
c. C can sell the ring to satisfy his claim.
d. X did not acquire ownership of the ring from
D.
D borrowed P10,000.00 from C the debt
being payable in 6 months. To secure the
debt, D promised to pledge his ring
within 2 weeks. Two weeks had already
lapsed but D had not yet constituted the
pledge.
I. C may demand the constitution of the
pledge.
II. D loses the benefit of the period given to
him to pay the debt; hence, C may
demand immediate payment of the debt.
a. Both statements are true.
b. Both statements are false.
c. I is true; II is false.
d. I is false; II is true.
Which of the following is correct? In chattel
mortgage
a. The place of registration will be on
the province where the property is
situated.
b. In the province where mortgagor
resides.
c. In the residence of mortgagor if he
resides in a different province and also in
the province where the property
situated.
d. All of the above.
Which of the following is necessitated in a Chattel
Mortgage, otherwise the contract is void?
a. Mortgage a. Affidavit of Good faith
b. It must appear in a public instrument
c. Registration to the Chattel Registry
d. All of the above
It is the right of the mortgagor to redeem the
property that was mortgaged after it was sold.
a. Equity of redemption c. Right of subrogation
b. Right of redemption d. Right of pre-emption
One of the following may be the object of a real
property and chattel mortgage.
a. Land, buildings, roads and construction of all kinds
adhered to the soil.
b. Fertilizer actually used on a piece of land.
c. Animal houses, pigeon houses or other breeding
places intended by the owner to be permanently
attached to the land including animals therein.
d. Growing crops
S sold to B a car on installment wherein the latter
mortgage the same car security for the price.
Failing to pay the installments, the mortgage on
the car was foreclosed. Is B liable for any
deficiency if the seller fails to recover foreclosure
a. Yes, because it only in case of pledge is the
debtor not liable for any deficiency.
b. Yes, if so stipulated upon by the parties.
c. No, unless agreed upon by the parties.
d. No, notwithstanding any stipulation to the
contrary.
D mortgaged his car to C as security for a loan. Failing
in the payment of the loan, C foreclosed the chattel
mortgage and sold the car at public auction. In case
of deficiency, is D liable for it?
• a. Yes, in the absence of contrary stipulation.
• b. No, because it would be unjust enrichment on
the part of creditor.
• c. Yes, if so agreed upon by the parties.
• d. No, unless stipulated
Based on the preceding case, supposed it was a
pledge, would the debtor/pledgor be liable for
the deficiency?
a. No, notwithstanding stipulation to the
contrary
b. No, unless otherwise stipulated,
c. Yes if so agreed upon
d. Yes, even in the absence of stipulation
Which of the following is a remedy of a
mortgagee where the mortgagor is dead?
a. Abandon his security and share in the general
distribution of the assets of the estate.
b. Foreclose and secure a deficiency judgment
and prove said deficiency judgment before the
committee of claims.
c. Rely on the security alone.
d. All of the above