PLEDGE

It is a contract by virtue of which the debtor (pledgor) delivers to the creditor or to a third person
(pledgee) a movable, or document evidencing incorporeal rights, for the purpose of securing a
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.

NATURE OF PLEDGE
It is a real contract which are not perfected until delivery of the object of the obligation (Art. 1316).

CHARACTERISTICS
1. Real Contract – perfected by delivery of the thing pledged;
2. Accessory Contract – it has no independent existence of its own; cannot exist without a
valid contract;
3. Unilateral Contract – obligation solely on the part of the creditor to return the thing
pledged upon fulfillment of obligation;
4. Subsidiary Contract – obligation incurred does not arise until the fulfillment of the
principal obligation

KINDS OF PLEDGE
1. Voluntary or Conventional – By agreement of parties
2. Legal – By operation of law

Take Note: A thing lawfully pledged to one creditor, cannot be pledged to another as long as the
first pledge subsists.

REQUISITES TO A CONTRACT OF PLEDGE

1. Constituted to secure the fulfillment of a principal obligation (Art. 2085);
2. Pledgor is the absolute owner of the thing pledged; (Art. 2085);
3. Persons constituting the pledge have the free disposal of their property, and in the
absence thereof, that they be legally authorized for the purpose (Art. 2085); and
4. That the thing pledged be placed in the possession of the creditor, or of a third person by
common agreement (Art. 2093). NOTE: If Art. 2093 is not complied with, the pledge is
void

POINTERS TO REMEMBER:
• Continuous possession is required in pledge.

• An agreement to constitute a pledge only gives rise to a personal action between the
contracting parties. Unless the movable given as a 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.

• Pledge must be embodied in a public instrument to affect third persons (Article 2906). If it
is not in a public instrument, the contract is still valid between the parties.
o In a public instrument, the following must appear to affect third persons: (1)
description of the thing pledged; and (2) statement of the date when the pledge
was executed.

• General Rule: Constructive or symbolic delivery of the thing is not sufficient to constitute
pledge.
o Exception: If the pledge consists of goods stored in a warehouse for purposes, of
showing the pledgee’s control over the goods, the delivery to him of the keys to
the warehouse is sufficient delivery of possession (constructive/symbolic delivery).
 • Pledge of incorporeal rights must be evidenced by a proper document. It is, however,
required that the actual instrument be delivered to the pledgee. More, if the instrument is
a negotiable document, it must be indorsed. (Art. 2095).

• Right of an owner of personal property pledged without authority – he may invoke Article
559. The defense that pawnshop owner acquired ownership of the thing in good faith is
not available.
o Art. 559 reads as: “The possession of movable property acquired in good faith is
equivalent to a title. Nevertheless, one who has lost any movable or has been
unlawfully deprived thereof, may recover it from the person in possession of the
same. If the possessor of a movable lost or of which the owner has been unlawfully
deprived, has acquired it in good faith at a public sale, the owner cannot obtain its
return without reimbursing the price paid therefore”

• When two or more things are pledged, the pledge may choose which he will cause to be
sold, unless there is a stipulation to the contrary (1st sentence, Art. 2119).
o The restriction on the right of the pledgee under the 1 st sentence of Art. 2119 is
that he may only demand the sale of only as many of the things as are necessary
for the payment of the debt (2nd sentence, Art. 2119).

• Double pledge is not allowed. A property already pledged cannot be pledged again while
the first pledge is still subsisting.

PARTIES IN A CONTRACT OF PLEDGE:

1. Pledgor – the debtor; the one who delivers the thing pledged to the creditor.
2. Pledgee – the creditor; the one who receives the thing pledged.

RIGHTS OF A PLEDGEE
1. To retain the thing until debt is paid (Art. 2098);
2. To possess the thing (Art. 2098)
3. To be reimbursed for the expenses made for the preservation of the thing pledged (Art.
2099)
4. To apply fruits, interests, or earnings of the pledge to the interest, if any then to the
principal of the credit (Art. 2102(2));
5. To bring any action pertaining to the pledgor in order to recover it from or defend it against
a third person (legal subrogation) (Art. 2103);
6. To sell at public auction in case of reasonable grounds to fear destruction or impairment
of the thing without his fault (Art. 2108);
7. Option to demand replacement or immediate payment of debt in case of deception as to
substance and quality (Art. 2109)
8. To appropriate the thing in case of failure of second public auction (Art. 2112);
a. NOTE: This is an exception to pactum commisorium.
9. To bid at public auction, unless he is only the bidder (Art. 2113)
10. To collect and receive amount due on credit pledged (Art. 2118);
11. To choose which of several things pledged will be sold (Art. 2119);
12. To retain excess value in the public sale;
13. To retain thing until after full payment of the debt; and
14. To object the alienation of the thing
OBLIGATIONS OF THE PLEDGEE
1. Take care of the thing pledged with the diligence of a good father of a family (Art. 2099)

NOTE: Pledgee is liable for the loss or deterioration of the thing by reason of fraud,
negligence, delay, or violation of the terms of the contract.

2. General Rule: Pledgee cannot deposit the thing pledged to a third person. Exception:
Unless there is stipulation to the contract (Art. 2100).

NOTE: Pledgee is liable for the loss or deterioration of the thing pledged caused
by the acts or negligence of the agents or employees of the pledgee.

3. Apply the fruits, income, dividends, or interests produced or earned by the property, to
interests or expenses first, then to the principal (Art. 2102);

4. General Rule: Cannot use the thing pledged without authority (Art. 2104); Exceptions:
a. If the pledgor had given him authority or permission to use it;
b. If the use of the thing is necessary for its preservation but only for that purpose.

5. To advise pledgor of the result of the public auction (Art. 2116);

6. Return the thing pledged to the upon payment of debt;

7. Advise pledgor of danger to the thing.

RETURN OF THE PLEDGE, WHEN DEMANDABLE

General Rule: A debtor cannot ask for the return of the thing pledged against the will of the
creditor (Art. 2105).

Exceptions:
1. If the debtor has paid the debt and its interest, with expenses in a proper case (Art. 2105);
2. If there are reasonable grounds to fear the destruction or impairment of the thing pledged,
without the fault of the pledgee, the pledgor may demand the return of the thing, upon
offering another thing in pledge, provided the latter is of the same kind as the former and
not of inferior quality, 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).

NOTE: If the obligation is with a term, there can be demand of the property until after the term
had arrived. The prescriptive period for the recovery of the property begins from the time the debt
is extinguished by payment end and demand for return of the property is made (Sarmiento v.
Javellana, 43 Phil. 880, October 2, 1922).

When the pledgee may cause the sale of the thing even if the obligation is not yet due
If, without the fault of the pledgee, there is a danger of destruction, impairment, or diminution in
value of the thing pledged, he may cause the same to be sold at public auction. The proceeds of
the auction shall be security for the principal obligation in the same manner as the thing originally
pledged (Art. 2108).

Rights of the creditor who is deceived on the substance or quality of the thing pledged
To demand:
1. From the pledgor an acceptable substitute of the thing; or
2. The immediate payment of the principal obligation (Art. 2109).

NOTE: The remedies are alternative and not cumulative. Only one may be chosen. The law used
the conjunctive “or”. Either one is more convenient than annulment.

Return of the thing pledged

The return of the thing pledged to the pledgor by the pledgee shall extinguish the pledge. Any
stipulation to the contrary shall be void (Art. 2110).

Presumption of return to the pledgor/owner by the pledgee

There is a prima facie presumption that the thing pledged has been returned by the pledgee to
the pledgor or owner, in any of the following circumstances:
1. If the thing is found in the possession of the pledgor or owner after the pledge had been
perfected; or
2. If the thing is found in the possession of a third person who received it from the pledgor or
owner after the perfection of the pledge (Art. 2110(2)).

NOTE: 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 (Art. 1274).

Renunciation of the pledge by the pledgee

The renunciation or abandonment of the pledge by the pledgee requires a statement in writing to
that effect (1st sentence, Art. 2111).

NOTE: The renunciation of the pledge is not contrary to law, public order, public policy, morals or
good customs. Further, Art. 1356 of the NCC, which speaks of the form of contracts, must be
complied with.

Necessity of acceptance in renunciation

Acceptance or return of the thing is not necessary for the validity of the renunciation under Art.
2111. It is not a case of donation where acceptance is necessary to make the donation valid.

Necessity of return in extinguishment of pledge

Even if the thing was not returned, as long as there is an effective renunciation, abandonment or
waiver, the pledge is already extinguished even if the thing is not returned. The pledgor will be
considered as a depositor and the pledgee shall become a depositary of the thing. Accordingly,
the law on deposit will apply.

RIGHTS OF THE PLEDGOR:

1. Right to dispose the thing pledged, provided there is consent of the pledgee (Art. 2097);
NOTE: The pledge however, shall continue in possession.

2. Right to ask that the thing pledged be deposited in one of the following instances:
a. If the creditor uses the thing without authority (Art. 2104);
b. Misuses the thing, he may deposit the thing judicially or extrajudicially (Art. 2104);
or
c. If the thing is in danger of being lost or impaired because of negligence or willful
act of the pledge, he may deposit the thing with a third person (Art. 2106).

3. Right to demand the return of the thing pledged in case of reasonable grounds to fear
destruction or impairment of the thing without the pledgee’s fault, subject to the duty of
replacement (Art. 2107);

Requisites for the application of Art. 2107:

a. The pledger has reasonable grounds to fear the destruction or impairment of the
thing pledged;
b. There is no fault on the part of the pledgee;
c. The pledgee is offering in place of the thing, another thing in pledge which is of
the same kind and quality as the former; and d. The pledgee does not choose to
exercise his right to cause the thing pledged to be sold at public auction.

4. To bid and be preferred at the public auction (Art. 2113).

OBLIGATIONS OF PLEDGOR
1. To advise the pledge of the flaws of the thing (Arts. 2101 & 1951);
2. Not to demand the return of the thing until after full payment of the debt, including interest
due thereon and expenses incurred for its preservation (Art. 2105)

NOTE: Pledgor may be allowed to substitute the thing pledged which is in danger of destruction
or impairment with another thing of the same kind and quality, subject to provisions of Art. 2107.

FORECLOSURE OF THE THING PLEDGED

A pledgee can foreclose the thing pledged when there is no payment of the debt on time, the
object of the pledge may be alienated for the purpose of satisfying the claims of the pledgee.

Right of the pledge or mortgagor to foreclose

If the debtor failed to pay on maturity date, the thing pledged or mortgaged may be sold at public
auction as provided by law so that the proceeds may be used for payment of the obligation.

Options of an unpaid creditor

1. Foreclose the thing pledged; or
2. Abandon the pledge and file a claim for collection (Art. 2087).

Procedure for the public sale of a thing pledged

1. The obligation must be due and unpaid;
2. The sale of the thing pledged must be at public auction;
3. There must be notice to the pledgor and owner, stating the amount for which the sale is
to be held;
4. The sale must be conducted by Notary Public (De Leon, 2013).

Effect of sale of the thing pledged

1. It extinguishes the principal obligation.
NOTE: The extinction is automatic regardless of whether or not the proceeds realized from
the public auction sale are more or less than the amounts of the principal obligation and other
incidental expenses.

2. If the price of the sale is more than the amount of the debt, the excess will go the pledgee.
NOTE: This is to compensate him for the eventuality where the purchase price is lesser than
the amount of the debt, wherein he cannot retrieve any deficiency unless there is a contrary
agreement.

3. If the price of the sale is less than the amount of the debt, the pledgee is not entitled to recover
the deficiency in all cases even if there is a stipulation to that effect (Art. 2115).
NOTE: By electing to sell the thing pledged instead of suing on the principal obligation, the
creditor waives any other remedy and must abide by the results of the sale.

Deed of acquittance
A deed of acquittance is a document of the release or discharge of the pledgor from the entire
obligation including interests and expenses. This shall be executed by the pledgee after
appropriating the thing in case a no sale was made in a second auction.

Application of the proceeds of the sale

The pledgee may collect and receive the amount due when what has been pledged is a “credit”.
He shall apply the same to the payment of his claim, and deliver the surplus, should there be any,
to the pledgor (Art. 2118).

LEGAL PLEDGE (BY OPERATION OF LAW)

Pledge by operation of law or legal pledges are those constituted or created by operation of law.
In this case, the right of retention exists.
Instances of legal pledges where there is right of retention
1. Art. 546 – Right of the possessor in good faith to retain the thing until refunded of
necessary expenses.
2. Art. 1707 – Lien on the goods manufactured or work done by a laborer until his wages had
been paid.
3. Art. 1731 – Right to retain of a worker who executed work upon a movable until he is paid.
4. Art. 1914 – Right of an agent to retain the thing subject of the agency until reimbursed of
his advances and damages (Arts. 1912 and 1913).
5. Art. 1994 – Right of retention of a depositary until full payment of what is due him by reason
of the deposit.
6. Art. 2004 – Right of the hotel-keeper to retain things of the guest which are brought into
the hotel, until his hotel bills had been paid.

Sale of the thing pledged in legal pledge

A thing under a 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 (1) month after such demand.

NOTE: 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 the thing (Art. 2122).

The remainder of the price of sale shall be delivered to the obligor (Art. 2121).

REAL MORTGAGE
Real estate mortgage (REM) is a contract whereby the debtor secures to the creditor the fulfillment
of the principal obligation, specially subjecting to such security immovable property or real rights
over immovable property in case the principal obligation is not fulfilled at the time stipulated

LAWS THAT GOVERN CONTRACT OF REAL MORTGAGE

1. New Civil Code;
2. Mortgage Law;
3. Property Registration Decree (PD 1529);
4. Sec. 194, as amended by Act No. 3344, Revised Administrative Code (Phil. Bank of
Commerce v. De Vera, G.R. No. L-18816, December 29, 1962);
5. R.A. 4882 – law governing aliens who become mortgagees.

KINDS OF REAL MORTGAGES

1. Conventional mortgage – constituted voluntarily by the contracting parties;
2. Legal mortgage – required by law to be executed in favor of certain persons (Arts. 2125,
par. 2; 2082, 2083);
3. Equitable mortgage – intention of the parties is to make the immovable as a security for
the performance of the obligation but the formalities of a real mortgage are not complied
with.

REQUISITES FOR A VALID CONSTITUTION OF A REAL MORTGAGE

1. It covers only immovable property and alienable real rights imposed upon immovables
(Art. 2124)

NOTE: While a mortgage of land necessarily includes, in the absence of a stipulation, the
improvements thereon, a building itself may be mortgaged apart from the land on which
is built. (Prudential Bank v. Panis, G.R. No. L-50008, August 31, 1987).

General Rule: Future property cannot be an object of a contract of mortgage

Exception: A stipulation subjecting to the mortgage lien, properties and
improvements (after-acquired properties) added to a property already mortgaged
which the mortgagor may subsequently acquire, install, or use, in connection with
 real property already mortgaged belonging to the mortgagor is valid (People’s
Bank and Trust Co. v. Dahican, G.R. No. L-17500, May 16, 1967)

2. It must appear in a public instrument (Art. 2125);

3. Recording in the Registry of Property is necessary to bind third persons.

NOTE: The person in whose favor the law establishes a mortgage has the right to demand
the execution and the recording of the document in which the mortgage is formalized (Art.
2152(2)).

RIGHTS OF MORTGAGOR
To alienate the mortgaged property but the mortgage shall remain attached to the property (Art.
2130).

RIGHTS OF A MORTGAGEE
To 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 (Art. 2129).
Prior demand must have been made on the debtor and the latter failed to pay (Bank of the
Philippine Islands v. V. Concepcion E. Hijos, G.R. No. 27701, July 21, 1928).

REGISTRATION OF MORTGAGE
Registration of mortgage is a matter of right. By executing the mortgage, the mortgagor is
understood to have given his consent to its registration, and he cannot be permitted to revoke it
unilaterally.

MORTGAGE AS A REAL AND INSEPARABLE RIGHT

Mortgage is a real and inseparable right. The mortgage 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).

EFFECT OF REGISTRATION AS TO BETTER RIGHT OF THIRD PARTIES

A registered mortgage right over property previously sold is inferior to the buyer’s unregistered
right.

Reason: If the original owner had sold the thing, then he no longer had ownership and free
disposal of it so as to be able to mortgage it (State Investment House, Inc. v. CA, G.R. No. 115548,
March 5, 1996)

PROHIBITION AGAINST ENCUMBRANCE OF MORTGAGED LAND, WITHOUT

MORTGAGORS’ CONSENT
In this case, rights over the property, which came into existence after the execution of the deed,
cannot be annotated as an adverse claim on the title of the land over the mortgagee’s opposition
(Rivera v. Peña, G.R. No. L11781, March 24, 1961)

SUBSEQUENT REGISTRATION OF AN ADVERSE CLAIM

A prior registration of a lien creates a preference. Hence, the subsequent annotation of an adverse
claim cannot defeat the rights of the mortgagee or the purchase at the auction sale whose rights
are derived from a prior mortgage validly registered.

EXTENT OF MORTGAGE
General Rule: Mortgage extends to the following:
1. Natural accessions;
2. Improvements;
3. Growing fruits;
4. Rents or income not yet received when the obligation becomes due;
5. Amount of indemnity granted or owing to the proprietor from:
a. Insurance proceeds
b. Expropriation price (Art. 2127).
Reason: Ownership of such accessions and accessories and improvements subsequently
introduced also belongs to the mortgagor who is the owner of the principal (Castro, Jr. v. Court of
Appeals, G.R. No. 97401, December 6, 1995).

Exception:
1. Express stipulation excluding them;
2. Evidence sufficiently overthrowing the presumption that the mortgagor owns the
mortgaged property.

EFFECTS OF MORTGAGE
1. It creates a real right.
2. It creates merely an encumbrance.

FORECLOSURE OF REAL ESTATE MORTGAGE

CAUSES OF ACTION OF MORTGAGE-CREDITOR
Mortgage-creditor has a single cause of action against the mortgage-debtor, which is to recover
the debt, but he has the option to either:
1. File a personal action for collection of sum of money; or
2. Instituting a real action to foreclose on the mortgaged property

NOTE: The remedies are alternative, not cumulative.

FORECLOSURE
Foreclosure is a remedy available to the mortgagee by which he subjects the mortgaged property
to the satisfaction of the obligation.

KINDS OF FORECLOSURE
1. Judicial – Governed by Rule 68, Rules of Court;
2. Extrajudicial – Mortgagee is given a SPA to sell the mortgaged property (Act No. 3135)

BASIS JUDICIAL FORECLOSURE EXTRAJUDICIAL FORECLOSURE

Court With court intervention Without court intervention
Intervention
Right of Appeal Appealable Not Appealable
Cutting off of Order of the court cuts off all Foreclosure does not cut off the
rights rights of the parties impleaded rights of all parties involved

Right of GR: No right of redemption There is right of redemption

Redemption XPN: If mortgagee is a bank,
quasibank, or trust entity
Equity of There is equity of redemption No equity of redemption
Redemption
Period of Redemption starts from finality of Redemption starts from the date of
Redemption the judgment until order of registration of the certificate of sale
confirmation (90- 120 days) (1 year)

Necessity of No need In favor of the mortgagee is essential

SPA

Governing Rule Rule 68 of the Rules of Court Article 3135

ANTICHRESIS
Antichresis is a contract whereby the creditor acquires the right to receive the fruits of an
immovable of the debtor, with the obligation to apply them to the payment of interest, if owing,
and thereafter to the principal of his credit (Art. 2132).

CHARACTERISTICS OF ANTICHRESIS
1. Accessory contract;
 2. Formal contract – the amount of the principal and of the interest must both be in writing
(Art. 2134);
3. It deals only with immovable property;
4. It is a real right;
5. The creditor has the right to receive the fruits of the immovable;
6. It is a real contract;
7. It can guarantee all kinds of valid obligations (Arts. 2091 & 2139);
8. Indivisible in nature (Art. 2090)

NOTE: It is not essential that the loan should earn interest in order that it can be guaranteed with
a contract of antichresis. Antichresis is susceptible of guaranteeing all kinds of obligations, pure
or conditional

STIPULATION AUTHORIZING FOR APPROPRIATION OF PROPERTY UPON NON-

PAYMENT OF THE DEBT
A stipulation authorizing the antichretic creditor to appropriate the property upon the non-payment
of the debt within the period agreed upon is void (Art. 2038).

FORM OF A CONTRACT OF ANTICHRESIS AND ITS CONTENTS

1. Covers only the fruits of real property but not the immovable itself;

NOTE: Art. 1306 of the Civil Code gives the parties the freedom to stipulate otherwise.
The reduction of the amount of the fruits available to the creditor does not vary the nature
of the contract.

2. Delivery of the immovable is necessary for the creditor to receive the fruits and not that
the contract shall be binding;

3. Amount of principal and interest must be specified in writing (Art. 2134)

4. Express agreement that debtor will give possession to the creditor and that the creditor
will apply the fruits to the interest and then to the principal (Art. 2134).

NOTE: The fruits of the immovable which is the object of the antichresis must be appraised
at their actual market value at the time of the application (Art. 2138). The property
delivered stands as a security for the payment of the obligation of the debtor in antichresis.
Hence, the debtor cannot demand its return until the debt is totally paid.

DETERMINATION OF THE AMOUNT PAID IN ANTICHRESIS

The amount of payment in antichresis is determined the actual market value of the fruits at the
time of the application thereof to the interest and the principal shall be the measure of such
application (Art. 2133).

PARTIES TO A CONTRACT OF ANTICHRESIS

1. Antichretic creditor – one who receives the fruits on the immovable property of the debtor.
2. Antichretic debtor – one who pays his debt through the application of the fruits of his
immovable property.

RIGHTS OF ANTICHRETIC CREDITOR

1. Right to fruits and income of the thing (Art. 2132);

2. Retain the thing until debt is paid (Art. 2136);

NOTE: The property delivered stands as security for the payment of the obligation of the
debtor in antichresis. Hence, the debtor cannot demand its return until indebtedness is
satisfied and the property is redeemed (Macapinlac v. Gutierrez Repide, G.R. No. 18574,
September 20, 1992).
 3. Have the thing sold upon non-payment at maturity (Art. 2137);
NOTE: In this case, the Rules of Court on the rules on foreclosure of mortgages shall
apply

4. Preference to the proceeds of the sale of the thing; and

5. To be reimbursed for his expense for machinery and other improvements on the land, and
for the sums paid as land taxes.

OBLIGATIONS OF AN ANTICHRETIC CREDITOR

1. Pay the taxes and charges assessable against the property like real estate taxes and
others (Art. 2136);

NOTE: The creditor has to pay the taxes even if the fruits be insufficient. If he does not
pay taxes, he is, by law, required to pay indemnity for damages to the debtor (Pando v.
Gimenez, G.R. No. 31816, February 15, 1930) . Creditor may avoid such obligation by
compelling the debtor to reacquire enjoyment of the property, unless there is a stipulation
to the contrary (Art. 2136(2)).

2. Bear the necessary expenses for the preservation and repair of the property;

3. Apply the fruits received for payment of the outstanding interests, if any, and thereafter of
the principal (Art. 2132);

4. To render an account of the fruits to the debtor (Diaz v. De Mendezona, G.R. No. L-24824,
January 30, 1926).

RULE ON THE APPLICATION OF THE FRUIT UPON THE DEBT

The application of the fruit upon the debt must be expressly agreed between the creditor and the
debtor that the former, having been given possession of the properties given as security, is to
apply their fruits to the payment of interest, if owing, and thereafter to the principal of his credit
(Art. 2132).

RETURN OF THE PROPERTY OF THE ANTICHRETIC DEBTOR

The antichretic debtor can only demand the return of the property after having fully paid his
obligations to the creditor. It is not fair for the debtor to regain the possession of the property when
his debt has not been fully paid. Until there is full payment of the obligation, the property shall
stand as security therefor (Macapinlac v. Gutierrez Repide, No. 18574, September 20, 1922).

REMEDY OF THE CREDITOR IN CASE OF NONPAYMENT OF HIS CREDIT

Creditor does not acquire ownership of the real estate since what was transferred is not the
ownership but merely the right to receive fruits (Art. 2132).
1. File an action for specific performance; or
2. File a petition for the public sale of the property (Barretto v. Barretto, G.R. No. 11933,
December 1, 1917).

NOTE: Parties may agree on an extrajudicial foreclosure in the same manner as they are allowed
in contracts of mortgage and pledge (Tavera v. El Hogar Filipino, Inc., G.R. No. L-45963, October
12, 1939).

A stipulation authorizing the antichretic creditor to appropriate the property upon non-payment of
the debt within the period agreed upon is void (Art. 2088).

AVAILABILITY OF ACQUISITIVE PRESCRIPTION TO THE ANTICHRETIC CREDITOR

The creditor in an antichresis and his successors-ininterest cannot ordinarily acquire by
prescription (Valencia v. Valencia, 42 Phil. 177, 1921). Possession of the property is not in the
concept of an owner but that of a mere holder during the existence of the contract (Ramirez v.
CA, G.R. No. L-38185, September 24, 1986).
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. If the movable instead of
being recorded, is delivered to the creditor or a third person, the contract is a pledge (Art. 2140).

Characteristics of chattel mortgage

1. Formal contract – it must be embodied in a public instrument and recorded in the Chattel
Mortgage Register;
2. Accessory contract – its existence depends upon an existing valid principal obligation;
3. Unilateral contract – the obligation is only on the part of the creditor to free the chattel
from encumbrance upon the payment of the principal obligation;
4. It does not convey dominion but is only a security (In re: Du Tec Chuan, G.R. No. 11156,
March 28, 1916);
5. It creates a real right or a lien which is being recorded and follows the chattel wherever it
goes (Northern Motors, Inc. v. Coquia, G.R. No. L-40018, December 15, 1975).

REQUISITES IN A CHATTEL MORTGAGE

1. General Rule: It covers only movable property
Exception: Parties may treat as personal property that which is by nature would be real
property (Sec. 2, Act No. 1508; Art. 2140).

NOTE: A real property may be considered as a personal property for purposes of

executing a chattel mortgage thereon as long as the parties to the contract so agree and
no innocent third party will be prejudiced thereby. Once the parties so agreed, they are
already estopped from claiming otherwise (Makati Leasing and Financial Corporation v.
Wearever Textile Mills, Inc., G.R. No. L-58469, May 16, 1983).

2. Registration with the Chattel Mortgage Register where the mortgagor resides. If the
property is located in a different province, registration in both provinces is required (Sec.
4, Act No. 1508);

3. Description of the property;

NOTE: Section 7 of the Chattel Mortgage Law does not demand specific description of
every chattel mortgaged in the deed of mortgage, but only requires that the description
of the mortgaged property be such as to enable the parties to the mortgage or any other
person to identify the same after a reasonable investigation and inquiry (Saldana v. Phil.
Guaranty Co., Inc., No. L-13194, January 29, 1960); otherwise, the mortgage is invalid.

4. Accompanied by an affidavit for the purpose of transforming an already valid mortgaged

to a “preferred mortgage” (Cebu International Finance Corp., v. CA, G.R. No. 107554,
February 13, 1997);

Affidavit of good faith

An affidavit of good faith is an oath in a contract 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 purposes and that the same is a just
and valid, existing obligation and one not entered into for the purpose of fraud.”

NOTE: The absence of an affidavit of good faith does not affect the validity of the
contract. The absence of the affidavit vitiates the mortgage only as against third persons
 without notice like creditors and subsequent encumbrances, but its absence is not fatal
between the parties.

5. It can cover only obligations existing at the time the mortgage is constituted.

NOTE: A mortgage containing a stipulation in regard to future advances in the credit will
take effect only from the date the same are made and not from the date of the mortgage
(Jaca v. Davao Lumber Co., G.R. No. L-30849, March 29, 1982).

LAWS THAT GOVERN CHATTEL MORTGAGES

1. Chattel Mortgage Law (Act No. 1508);
2. Provisions of the Civil Code on pledge;
NOTE: In case of conflict between nos. 1 and 2, the former shall prevail.
3. Revised Administrative Code;
4. Revised Penal Code (Art. 319);
5. Other special laws (i.e. Motor vehicle law);
6. Ship Mortgage Decree of 1978 (PD 1521).

SUBJECT MATTER OF CHATTEL MORTGAGE

1. Shares of stock in a corporation (Monserrat v. Ceron, G.R. No. 37078, September 27,
1933);
2. Interest in business;
3. Machinery and house of mixed materials treated by parties as personal property and no
innocent third person will be prejudiced thereby (Makati Leasing and Finance Corp. v.
Weaver Textile Mills, Inc., No. L58469, May, 16, 1983);
4. Vessels, the mortgage of which have been recorded with the Philippine Coast Guard in
order to be effective as to third persons (PD 1521);
5. Motor vehicles, the mortgage of which had been registered both with the Land
Transportation Commission and the Chattel Mortgage Registry in order to affect third
persons;
6. House which is intended to be demolished; or
7. House built on rented land;
8. House of strong materials;
9. Growing crops and large cattle (Sec. 7(2)(3), Act No. 1508).

For purposes of the Chattel Mortgage Law, both growing crops and large cattle are
personal property although they are considered as immovable under nos. (2) and (6),
Art. 415.

NOTE: Although the parties to a contract may treat certain improvements as chattels,
insofar as the are concerned, it is now settled in our jurisdiction that, in general, and so
far as the public is concerned, such improvements, if falling under the provisions of Art.
415, are immovable property.

As a consequence, a mortgage constituted in the improvements must be susceptible of:

a. Registration as a real estate mortgage; and
b. Annotation on the certificate of title of the land of which they form part, although
the land itself may not be subject to said encumbrance (Tolentino v. Baltazar,
G.R. No. L-14597, March 27, 1961)

EXTENT OF CHATTEL MORTGAGE

A chattel mortgage shall be deemed to cover only property described therein and not like or
substituted property thereafter acquired by the mortgagor and placed in the same depositary as
the property originally mortgaged, anything in the mortgage to the contrary notwithstanding
(Sec. 7(4), Act No. 1508).
STIPULATION INCLUDING AFTER-ACQUIRED PROPERTY
It is valid and binding where the after-acquired property is:
1. In renewal of or in substitution for goods on hand; or
2. Purchased with the proceeds of the sale of such goods (Torres v. Limjap, G.R. No.
34385, September 21, 1931).

REGISTRATION OF CHATTEL MORTGAGE

Registration is tantamount to the symbolic delivery of the mortgage to the mortgagee, which is
equivalent to actual delivery

Registration period of the chattel mortgage

The law does not provide period within which the registration should be made. Yet, the law is
substantially and sufficiently complied with where the registration is made by the mortgagee
before the mortgagor has complied with his principal obligation and no right of innocent third
persons is prejudiced.

Effects of registration
1. Creates a real right – The registration of the chattel mortgage is an effective and binding
notice to other creditors of its existence and creates a real right or a lien which being
recorded, follows the chattel wherever it goes. The registration gives the mortgagee
symbolical possession (Northern Motors, Inc. v. Coquia, G.R. No. L-40018, December
15, 1975).
2. Adds nothing to the mortgage – Registration adds nothing to the instrument, considered
as a source of title and affects nobody’s rights except as a specie of notice (Standard Oil
Co. of New York v. Jaramillo, G.R. No. L-20329, March 16, 1923)

Effects of failure of registration

If the instrument is not recorded, the mortgage is nevertheless binding between the parties.
However, 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.

FORECLOSURE OF CHATTEL MORTGAGE

After payment of the debt or the performance of the condition specified in the Chattel Mortgage
(Sec. 3, Act No. 1508), the mortgagee must discharge the mortgage in the manner provided by
law. Otherwise, he may be held liable for damages by any person entitled to redeem the
mortgage (Sec. 8, Act No. 1508).

1. 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 (Arts. 2088 & 2141) because he is permitted only to recover his credit
from the proceeds of the sale of the property at a public auction through a public officer
in the manner prescribed in Sec. 14 of Act No. 1508 (Mahoney v. Tuason, G.R. No.
14129, July 30, 1919).

2. Private Sale
There is nothing illegal, immoral, or against public order in an agreement for the private
sale of the personal properties covered by the chattel mortgage (Art. 1306) The
mortgagor is in estoppels to question it except on the ground of fraud or duress (PNB v.
Manila Investment & Construction Inc., G.R. No. L-27132, April 29, 1971).

NOTE: Foreclosure suits may be initiated even during involuntary proceedings as along
as leave is first obtained from the insolvency court (Royal Commercial Banking Corp. v.
Royal Cargo Corp., G.R. No. 179756, October 2, 2009).

Period to Foreclose Mortgage

The mortgagee may, after thirty (30) days from the time of the default or from the time the
condition is violated, cause the mortgaged property to be sold at public auction by a public
officer (Sec. 14, Act No. 1508).
The 30-day period to foreclose a chattel mortgage is the minimum period after violation of the
mortgage condition for the mortgage.

The creditor has at least ten (10) days notice served to the mortgagor. The notice of time, place
and purpose of such sale is posted.

After the sale of the chattel at public auction, the right of redemption is no longer available to the
mortgagor (Cabral v. Evangelista, 28 L-26860, July 30, 1969).

Application of proceeds of foreclosure sale

a. Costs and expenses of keeping the property and its sale;
b. Payment of the obligation secured by the mortgage;
c. Claims of persons holding subsequent mortgages in their order; and
d. The balance, if any, shall be paid to the mortgagor or person holding under him (Sec. 14, Act
No. 1508).

Legal consequences of mortgaging a building erected not by the owner of the land
A building is immovable or real property whether it is erected by the owner of the land, by a
usufructuary, or by a lessee. It may be treated as a movable by the parties to a chattel mortgage
but such is binding only between them and not on third parties. As far as third parties are
concerned, the chattel mortgage does not exist.

RECOVERY OF DEFICIENCY
1. Where the mortgage is foreclosed

The creditor may maintain an action for deficiency although the Chattel Mortgage Law is
silent on this point.

Action for deficiency may be brought within ten (10) years from the time the cause of
action accrues (Nos. (1) and (2), Art. 1144).

2. Where mortgage is constituted as security for purchase of personal property payable in

installments

No deficiency judgment can be asked and any agreement to the contrary shall be void
(Art. 1484).

3. Where mortgaged property is subsequently attached and sold

The chattel mortgagee is entitled to deficiency judgment in an action for specific

performance (No. 1, Art. 1484).

NOTE: The execution sale in such case is not a foreclosure sale (Industrial Finance
Corp. v. Ramirez, G.R. No. L-43821, May 26, 1977).

REDEMPTION UNDER ACT NO. 1508

Who may exercise the right of redemption
1. Mortgagor;
2. Person holding a subsequent mortgage; or
3. Subsequent attaching creditor.

NOTE: An attaching creditor who so redeems shall be subrogated to the rights of the mortgagee
and is entitled to foreclose the mortgage (Sec. 13, Act No. 1508).

How redemption is made

By paying or delivering to the mortgagee the amount due on such mortgage and the costs and
expenses incurred by such breach of condition before the sale thereof (Sec. 13, Act No. 1508).
NOTE: This redemption partakes of an equity of redemption.

When redemption is made

It must be made after his default but before the foreclosure sale. After foreclosure sale, the right
of redemption no longer exists.

Right acquired by the second mortgagee and the subsequent purchaser

1. Before payment of debt
After a chattel mortgage is executed, there remains in the mortgagor a mere right of
redemption and only this right passes to the second mortgagee in case of a second
mortgage.

As between the first and second mortgagees, the latter can only recover the property
from the former by paying him the mortgage debt. Even when the second mortgagee
goes through the formality of extrajudicial foreclosure, the purchaser acquires no more
than the right of redemption from the first mortgagee.

2. After payment of debt

If the only leviable interest of a chattel mortgage in a mortgaged property is his right of
redemption, it follows that the judgment or attaching creditor who purchased the property
at the execution sale could not acquire anything except such right of redemption. He is
not entitled to the actual possession and delivery of the property without first paying the
mortgage debt (Tizon v. Valdez and Morales, G.R. No. L-24797, March 16, 1926).

Right of mortgagee to the possession of the foreclosed property

a. After default
The right of the creditor to take the mortgaged property is implied from the provision (Art.
2087) which gives him the right to sell.

b. Before default
He is not entitled to possession. Otherwise, the contract becomes a pledge (Art. 2093)

Remedy when mortgagor refuses to yield property

Where the debtor refuses to yield property, the creditor has the following remedies:
1. Judicial foreclosure;
2. Replevin.

NOTE: In case of default and the mortgagor refuses to surrender the chattel, replevin or judicial
foreclosure does not require the mortgagee to first ask the sheriff to foreclose the mortgage or
take possession of the property