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Provisions Common to Pledge and Mortgage (Arts. 2058-2092 NCC) Credit security Involves tangible security mas gusto ng bank (Personal/Real property) Personal as security - do it in a form a pledge or chattel mortgage Immovable REM real estate mortgage Art. 2085. The following requisites are essential to the contracts of pledge and mortgage: TO BE VALID! (1) That they be constituted to secure the fulfillment of a principal obligation; MUST BE VALID PO (2) That the pledgor or mortgagor be the absolute owner (at present) of the thing pledged or mortgaged; 3rd Party pledge/mortgage pwede pledgor not debtor kaya pwede! Cannot mortgage future property!!! (3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. SPA agent! Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. (1857) SAF In case of default the creditor may run after the principal borrower by way of collection suit or foreclosure of pledge or mortgage Rights of creditor are exclusive, exclude the other when exercise one Art. 2086. The provisions of Article 2052 are applicable to a pledge or mortgage. (n) Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor. (1858) Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. (1859a) Stipulation automatic owner (Pactum Commissorium) against public policy! the creditor who is the mortgagee has ONLY 1 right after the event of default RIGHT TO FORECLOSE!!!!!!! IF WANT TO ACQUIRE PROPERTY CANNOT BE BY STIPULATION; CAN BE BY AUCTION SALE. Creditor is declared owner at the expiration of redemption period Art. 2089. 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. Contract of pledge/mortgage is INDIVISIBLE!!!! Always taken as 1 or whole!!!! Example 1 real estate mortgage subject of many real estate Cannot give partial release of real estate mortgage

Cancel old RM and constitute new RM for remaining parcels of land if not that is unsafe & unsound Banking practice INDIVISIBLE!!!! Kasi!!!! Both spouses must sign RM if not VOID! Pirma dapat sa harapan mo!

Therefore, the debtor's heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied. Neither can the creditor's heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been paid. From these provisions is expected the case in which, there being several things given in mortgage or pledge, each one of them guarantees only a determinate portion of the credit. The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied. (1860) Art. 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable. (n) Art. 2091. The contract of pledge or mortgage may secure all kinds of obligations, be they pure or subject to a suspensive or resolutory condition. (1861) Contract of mortgage will not exist until that period Art. 2092. A promise to constitute a pledge or mortgage gives rise only to a personal action between the contracting parties, without prejudice to the criminal responsibility incurred by him who defrauds another, by offering in pledge or mortgage as unencumbered, things which he knew were subject to some burden, or by misrepresenting himself to be the owner of the same. (1862) Promise broken specific performance/rescission + damages DURAN VS. IAC (138 SCRA 491) Facts: Petitioner Duran owned 2 parcels of land in Caloocan City which she had purchased from the Moja Estate. She left the Philippines in June 1954 and returned in May 1966. On May 13, 1963, a Deed of Sale of the 2 lots was made in favor of Durans mother who mortgaged the same property to respondent Marcelo Tiangco. When Duran came to know about the mortgage made by her mother, she wrote the Register of deeds of Caloocan City informing the latter that she had not given her mother any authority to sell or mortgage any of her properties in the Philippines. Failing to get an answer from the registrar, she returned to the Philippines. Meanwhile, when her mother failed to redeem the mortgage properties, foreclosure proceedings were initiated by private respondent Marcelo-Tiangco and, ultimately, the sale by the sheriff and the issuance of Certificate of Sale in favor of the latter. Petitioner Duran claims that the Deed of Sale in favor of her mother is a forgery, saying that at the time of its execution in 1963 she was in the US. Issue: WON the Deed of Sale is valid Held: The Deed of Sale is VALID, with respect to the mortgagees, the defendantsappellants. While it is true that under Art. 2085 of the Civil Code, it is essential that

the mortgagor be the absolute owner, of the property mortgaged, and while as between the daughter and the mother, it was the daughter who still owned the lots, STILL insofar as innocent 3rd persons are concerned the owner was already the mother inasmuch as she had already become the registered owner. A fraudulent or forged document of sale may become the root of valid title if the certificate of the title has already transferred from the name of the owner to the name of the forger or the name indicated by the forger The mortgagee had a right to rely upon what appeared in the certificate of title, and did not have to inquire in the certificate of the title, and did not have to inquire further. What is important is that at the time the mortgage was executed, the mortgagees in good faith actually believed Durans mother to be the owner, as evidences by the registration of the property is in the name of Fe Duran. Therefore, an innocent purchaser for value relying on torrens title issued is protected. ARENAS VS. RAYMUNDO (19 PHIL 46) Facts: Arenas (principal) brought an action for replevin of certain jewelry owned by her which she delivered for sale on commission to de Vega (agent), and pledged without her knowledge by de Vega in a pawnshop of Raymundo who refused to deliver the said jewelry unless first redeemed. Raymundo acted in good faith in accepting the pledge. Issue: WON Raymundo has the right to collect the sum loaned to de Vega out of the value of the said jewelry Held: The contract of pledge was null and void, since de Vega was not the owner of the jewelry pledged. Between the supposed good faith of Raymundo and the undisputed good faith of Arenas, the owner of the jewelry, neither law nor justice permit that the latter, after being the victim of embezzlement, should have to choose of the 2 extremes of a dilemma, both of which without legal ground or reason, are injurious and prejudicial to his interest and rights, that is she must either lose her jewelry or pay a large sum received by the embezzler as a loan from Raymundo, when Arenas is not related to the latter by any legal or contractual bond out of which legal obligations arise. ALCANTARA VS. ALINEA (8 PHIL 111) Facts: Defendant Alinea borrowed from plaintiff Alcantara P480 with the stipulation that if at the expiration of the period of payment said debt should not be paid, it would be understood that the house and lot described in the contract belonging to the defendant be considered as absolutely sold to the plaintiff for said sum. The defendant failed to pay, so plaintiff filed an action for the delivery of said house and lot to him by the defendant who refused to do so. The trial court decided for the plaintiff. Defendant appealed. Issue: WON the stipulation was pactum commissorium Held: No. Pactum commissorium presumed the exsistence of mortgage, pledge or antichresis. There is no pactum commissorium when the parties agreed to a contract of loan and a promise of sale of house and lot.

The contract is a loan and a promise of sale of house and lot, the price of which should be the amount loaned, if within fixed period of time such amount should not be paid. Either one of the contracts is perfectly legal or both are authorized. The fact that the parties have agreed at the same time in such manner that the fulfillment of the promise of sale would depend upon the nonpayment or return of the amount loaned, has not produced any change in the nature and legal conditions of either contracts, or any essential defect which would nullify the same. UY TONG VS. CA (161 SCRA 383) Facts: Spouses Uy Tong purchased from BAYANIHAN 7 units of motor vehicles for P47,700.00 payable in 3 installments. The transaction was evidenced by a Written Agreement which provided that if VENDEE should fail to pay the latter shall become automatically the owner of the formers apartment in Binondo, Manila, with the only obligation on its part to pay unto the VENDDE P3,535.00 and that VENDEE shall execute the corresponding Deed of Absolute Sale in favor of the Vendor and/or Assignment of Leasehold Rights. This agreement, according to the petitioners is in the nature of a pactum commissorium which is null and void. Issue: WON the agreement is in the nature of pactum commisorium Held: No. A perusal of the terms of the questioned agreement evinces no basis for the application of the pactum commissorium provision. First, there is no identification of any contract of mortgage entered into by the parties. It is a fact that the parties agreed on the sale and purchase of trucks. Second, there is no case of automatic appropriation of property because it took the intervention of the trial courts to exact fulfillment of the obligation. DBP VS CA (284 SCRA 14) Facts: CUBA, a guarantee of a Fishpond Lease Agreement from the Government, obtained from DBP 3 separate loans, each of which was covered by a promissory note. Simultaneous with the execution of the notes was the execution of the Assignment of Leasehold Rights by CUBA, as borrower of the mortgaged properties by way of security in the payment of the loans. Condition no. 12 provides for the appointment of DBP as attorney-in-fact with authority, among other things, to sell or otherwise dispose of the said real rights in case of default by CUBA and to apply the proceeds to the payment of the loan. Issue: 1. WON the condition in question constitute pactum commissorium 2. WON the act of DBP in appropriating to itself CUBAs leasehold rights with foreclosure proceedings was contrary to Article 2088 and, therefore, invalid. Held: 1. The elements of pactum commissorium are not present Condition 12 did not provide that the ownership over the leasehold rights would automatically pass to DBP upon CUBAs failure to pay the loan on time 2. DPB exceeded authority vested by condition - DBP cannot take refuge in condition 12 of the deed of assignment to justify its act of appropriating the leasehold rights. As stated, condition 12 did not provided that CUBAs default would operate to vest DBP ownership of the said rights. Besides, an

assignment to guarantee an obligation, as in the present case, is virtually a mortgage and not an absolute conveyance of title which confers ownership on the assignee BUSTAMANTE VS. ROSEL (319 SCRA 413) Facts: Respondent ROSEL (lender) entered into a loan agreement with petitioner BUSTAMANTE (borrower) and her late husband, under, among others, the condition that the Rosel is given the option to buy at a certain price the property given as collateral in the event the borrower fails to pay. When the loan was about to mature, Rosel proposed to buy at the pre-set price of 200K the collateral given to guarantee the payment of the loan, but Bustamante refused to sell. When Bustamante tendered payment of the loan to Rosel which it refused to accept, insisting on petitioners signing a prepared deed of absolute sale of the collateral. Rosel consigned the amount of 47,500 with the trial court with which Rosel filed a complaint for specific performance. Issue: WON the stipulation in the loan contract was valid and enforceable. Held: 1. Stipulation embraced in concept of pactum commisorium Bustamante did not fail to pay the loan when Rosel refused to accept payment, Bustamante consigned the amount with the trial court. A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to acquire the property given as security for the loan. This is embraced in the concept of pactum commissorium. 2. Intent to appropriate property as collateral appears to be evident the debtor is obliged to dispose of the collateral at the pre-agreed consideration amounting to practically the same amount of the loan. In effect, the creditor acquires collateral in event of non-payment of the loan. This is within the concept of PC, thus stipulation is void. ELEMENTS OF PACTUM COMMISSORIUM a. There should be a property mortgaged by way of security for the payment of the principal obligation; b. There should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in the case of non-payment of the principal obligation within the stipulated period. CHAPTER 2. PLEDGE (Arts. 2093-2123 NCC) Art. 2093. In addition to the requisites prescribed in Article 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. (1863) Art. 2094. All movables which are within commerce may be pledged, provided they are susceptible of possession. (1864) Art. 2095. Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares of stock, bonds, warehouse receipts and similar documents may also be

pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. (n) Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument. (1865a) Art. 2097. With the consent of the pledgee, the thing pledged may be alienated by the pledgor or owner, subject to the pledge. The ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledgee consents to the alienation, but the latter shall continue in possession. (n) Art. 2098. The contract of pledge gives a right to the creditor to retain the thing in his possession or in that of a third person to whom it has been delivered, until the debt is paid. (1866a) Art. 2099. The creditor shall take care of the thing pledged with the diligence of a good father of a family; he has a right to the reimbursement of the expenses made for its preservation, and is liable for its loss or deterioration, in conformity with the provisions of this Code. (1867) Art. 2100. The pledgee cannot deposit the thing pledged with a third person, unless there is a stipulation authorizing him to do so. The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged. (n) Art. 2101. The pledgor has the same responsibility as a bailor in commodatum in the case under Article 1951. (n) Art. 2102. If the pledge earns or produces fruits, income, dividends, or interests, the creditor shall compensate what he receives with those which are owing him; but if none are owing him, or insofar as the amount may exceed that which is due, he shall apply it to the principal. Unless there is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the right pledged. In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of animals pledged, but shall be subject to the pledge, if there is no stipulation to the contrary. (1868a) Art. 2103. Unless the thing pledged is expropriated, the debtor continues to be the owner thereof. Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it from, or defend it against a third person. (1869) Art. 2104. The creditor cannot use the thing pledged, without the authority of the owner, and if he should do so, or should misuse the thing in any other way, the owner may ask that it be judicially or extrajudicially deposited. When the preservation of the thing pledged requires its use, it must be used by the creditor but only for that purpose. (1870a)

Art. 2105. The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in a proper case. (1871) Art. 2106. If through the negligence or wilful act of the pledgee, the thing pledged is in danger of being lost or impaired, the pledgor may require that it be deposited with a third person. (n) Art. 2107. 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. (n) Art. 2108. 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 public sale. The proceeds of the auction shall be a security for the principal obligation in the same manner as the thing originally pledged. (n) Art. 2109. If the creditor is deceived on the substance or quality of the thing pledged, he may either claim another thing in its stead, or demand immediate payment of the principal obligation. (n) Art. 2110. If the thing pledged is returned by the pledgee to the pledgor or owner, the pledge is extinguished. Any stipulation to the contrary shall be void. If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner, there is a prima facie presumption that the same has been returned by the pledgee. This same presumption exists if the thing pledged is in the possession of a third person who has received it from the pledgor or owner after the constitution of the pledge. (n) Art. 2111. A statement in writing by the pledgee that he renounces or abandons the pledge is sufficient to extinguish the pledge. For this purpose, neither the acceptance by the pledgor or owner, nor the return of the thing pledged is necessary, the pledgee becoming a depositary. (n) Art. 2112. The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the sale of the thing pledged. This sale shall be made at a public auction, and with notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the first auction the thing is not sold, a second one with the same formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In this case he shall be obliged to give an acquittance for his entire claim. (1872a) Art. 2113. At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right if he should offer the same terms as the highest bidder. The pledgee may also bid, but his offer shall not be valid if he is the only bidder. (n)

Art. 2114. All bids at the public auction shall offer to pay the purchase price at once. If any other bid is accepted, the pledgee is deemed to have been received the purchase price, as far as the pledgor or owner is concerned. (n) Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary. (n) Art. 2116. After the public auction, the pledgee shall promptly advise the pledgor or owner of the result thereof. (n) Art. 2117. Any third person who has any right in or to the thing pledged may satisfy the principal obligation as soon as the latter becomes due and demandable.(n) Art. 2118. If a credit which has been pledged becomes due before it is redeemed, the pledgee may collect and receive the amount due. He shall apply the same to the payment of his claim, and deliver the surplus, should there be any, to the pledgor. (n) Art. 2119. If two or more things are pledged, the pledgee may choose which he will cause to be sold, unless there is a stipulation to the contrary. He may demand the sale of only as many of the things as are necessary for the payment of the debt. (n) Art. 2120. If a third party secures an obligation by pledging his own movable property under the provisions of Article 2085 he shall have the same rights as a guarantor under Articles 2066 to 2070, and Articles 2077 to 2081. He is not prejudiced by any waiver of defense by the principal obligor. (n) Art. 2121. Pledges created by operation of law, such as those referred to in Articles 546, 1731, and 1994, are governed by the foregoing articles on the possession, care and sale of the thing as well as on the termination of the pledge. However, after payment of the debt and expenses, the remainder of the price of the sale shall be delivered to the obligor. (n) Art. 2122. 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 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 the thing. (n) Art. 2123. With regard to pawnshops and other establishments, which are engaged in making loans secured by pledges, the special laws and regulations concerning them shall be observed, and subsidiarily, the provisions of this Title. (1873a) YULIONGSI VS. PNB (22 SCRA 585) Facts: Plaintiff Yuliongsi was the owner of 3 vessels. In 1947, plaintiff obtained a loan from defendant PNB for P50,000 guaranteed by a pledge of the 3 vessels to PNB,

which pledge contract was duly registered with the office of the Customs Collector of Cebu. Plaintiff effected partial payment of said loan and delivered 2 promissory notes for the balance. In 1948, the defendant filed criminal charges against plaintiff for estafa thru falsification of documents. With the institution of the criminal action, defendant took physical possession of the 3 pledged vessels. After the first note fell due, without the plaintiff effecting payment, the defendant, pursuant to the terms of the contract, executed a document of sale transferring the vessels to itself. 2 of the vessels were later sold to a 3rd party. Plaintiff filed an action to recover the vessels or their value plus damages. Trial court decided for defendant PNB. Issue: WON the contention of PNB is tenable Held: The pledgee can temporarily entrust the physical possession of the chattels (in this case, the vessels) to the pledgor without invalidation the pledge. The pledgor is regarded as holding the property pledged merely as trustee for the pledgee. Since the defendant was, pursuant to the terms of the contract, in full contract of the vessels thru the plaintiff, the former could take actual possession at any time during the life of the pledge to make more effective its security. Its taking of the vessels. Therefore, was not unlawful, nor was it unjustified considering that plaintiff had just defrauded the defendant. ESTATE OF G. LITTON VS. MENDOZA (163 SCRA 246) Facts: Estate of G. Litton brought an action against Mendoza for the collection of a sum of money. While the case was pending resolution, EGL assigned in favor of (pledgee/assignee) by way of securing or guaranteeing EGLs obligation to the pledge his litigated credit against Mendoza duly submitted to the court with notice to the parties. The lower court ruled in favor of EGL. Subsequently, pending resolution of the appeal of Mendoza to the CA, Mendoza entered into a compromise agreement with EGL wherein EGL acknowledged that all his claims against Mendoza had been settled. Issue: WON the compromise agreement is valid Held: No. Although Mendoza may validly alienate the litigated credit under Article 1634, said provision should not be taken to mean as a grant of an absolute right on the part of the assignor EGL to indiscriminately dispose of the thing or the right given as security. CRUZ & SERRANO VS. CHUA A.H. LEE (54 PHIL 10) Facts: Chua took from Cruz and Serrano a pawn ticket in pledge to secure an obligation. The pledge was lost for failure of Chua to renew the loan of Cruz and Serrano with the pawnbroker Issue: WON Chua is bound to renew the ticket from time to time, by the payment of interest or premium Held: Yes. The ordinary pawn ticket is a document by virtue of which the property in the thing pledged passes from hand to hand by mere delivery of the ticket. It results that one who takes a pawn ticket in pledge acquired domination over the pledge. Article 2099 contemplates that the pledge may have to undertake expenses in order to prevent the pledge from being lost; and these expenses the pledge is entitled to

recover from the pledgor. This follows that where, in a case like this, the pledge is lost by failure of Chua to renew the loan, he is liable for the resulting damage. This duty of Chua is not destroyed by the fact that he has obtained a judgment for the debt of Cruz and Serrano which was secured by the pledge. The duty to use the diligence of good father of a family in caring for the thing pledged as long as the same remains in the power of the pledge. BELGIAN CATHOLIC MISSIONARIES vs. MAGALLANES PRESS (49 PHIL 647) Facts: X Co.(Magallanes Press) had a mortgage credit against Y Co. (JP Helbronn) for the sum of P14,000 secured by a first chattel mortgage. Z Co.(Belgian Catholic Missionaries) also had a mortgage credit for the amount of P30,000 secured by a second chattel mortgage on the same personal property. After this second mortgage has been executed, the payment of the mortgage credit of X Co. (Magallanes Press) became due, which credit had been reduced to the sum of P8,000 through partial payments. W (Jose Ma. Mamije transferee) acquired said mortgage credit and increased it by P6,000. Issue: WON Z co.(Belgian), the second mortgagee, or W (Mamije), the transferee has preferential right to the mortgage right to the mortgaged property Held: Z Co. (Belgian) X CO. (Magallanes), at the time of the transfer of its mortgage right to W (Mamije), had a preferential right over that of Z Co. (Belgian) for the reminder of the amount of the credit, that is P8,000. Z Co. (Belgian) had a preferential right to the rest of the value of the mortgaged property after deducting the remaining mortgage credit of X Co. (Magallanes) The increase of the mortgage security becomes anew mortgage in itself, inasmuch as the original mortgage did not contain any stipulation in regard to the increase of the mortgage credit, and even if it did, said increase would take effect only from the date on the increase