V.

PLEDGE AND MORTGAGE

B. OBLIGATIONS SECURED
A. GENERAL CONCEPTS
Art. 2086 The provisions of article 2052 are applicable to a
Art. 2085 The following requisites are essential to the pledge or mortgage. (n)
contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of
a principal obligation;
Art. 2052 A guaranty [pledge or mortgage] cannot exist
(2) That the pledgor or mortgagor be the absolute without a valid obligation.
owner of the thing pledged or mortgaged;
Nevertheless, a guaranty may be constituted to guarantee
(3) That the persons constituting the pledge or the performance of a voidable or an unenforceable contract.
mortgage have the free disposal of their property, It may also guarantee a natural obligation. (1824a)
and in the absence thereof, that they be legally
authorized for the purpose.
Third persons who are not parties to the principal obligation
may secure the latter by pledging or mortgaging their own Art. 2091 The contract of pledge or mortgage may secure
property. (1857) all kinds of obligations, be they pure or subject to a
suspensive or resolutory condition. (1861)

Art. 2087 It is also of the essence of these contracts that As accessory obligations, the validity of a pledge and
when the principal obligation becomes due, the things in mortgage is dependent on the existence of a valid principal
which the pledge or mortgage consists may be alienated for obligation, whether the latter is voidable, unenforceable,
the payment to the creditor. (1858) natural, pure, or conditional.

The consideration of a pledge or mortgage is the very

Security transactions constituted to secure the fulfillment of
a principal obligation
Unlike guaranty and surety, a pledge and mortgage are real
security transactions
Essence: when the principal obligation becomes due, the
property pledged or mortgaged (the collateral) may be
alienated for purposes of payment to the creditor of the
principal obligation
It is essential that the pledgor or mortgagor be the absolute
owner of the collateral and that it have the free disposal of
the property; or that it be legally authorized to constitute
the pledge or mortgage, otherwise the same is void
consideration of the principal contract, from which they
receive their right, and without which they cannot exist as
independent contracts.
C. CONTRACT TO PLEDGE OR TO MORTGAGE
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)

A pledge or mortgage is void and ineffective if it were

constituted over future property A promise to constitute a pledge or mortgage is a valid
consensual contract.
However, the law allows third persons, which are not parties
to the principal obligation, to secure the latter by pledging
or mortgaging their own property

Pledgo or mortgagor remains the owner of the collateral; no

title passes to the creditor

If there may have been delivery of the collateral, the

delivery is only to secure the fulfillment of the principal
obligation and does not empower the creditor to convey the
collateral in favor of another person

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D. REMEDIES OF PLEDGEE AND MORTGAGEE
The creditor (the pledgee or mortgagee) may institute a
foreclosure, either to gain title, or to force a sale, in order
to satisfy the unpaid obligation secured by the collateral. A
foreclosure is a legal proceeding to terminate a pledgors
or mortgagors interest in the collateral
Generally, the contract and a statute may authorize a
power-of-sale foreclosure, or the sale of the collateral at
a non-judicial public sale by a public official, the creditor, or
trustee.
If the principal obligation becomes due and the debtor
defaults, the pledgee or mortgagee may elect to do two
things:
To foreclose the pledge or mortgage, in
accordance with its terms; or
To elect and waive the security and bring an action
for specific performance to recover the
indebtedness.
The remedies are available are alternative and not
cumulative, and the election of one remedy operates as a
waiver of the other.
E. INDIVISIBILITY OF A PLEDGE OR MORTGAGE
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.
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 excepted 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)
Indivisibility of a pledge or mortgage is understood in
the sense that each and every parcel of the collateral
answers for the totality of the debt.
It proscribes the foreclosure of only a portion of the
collateral or a number of the several properties pledged or
mortgaged corresponding to the unpaid portion of the debt
where before the foreclosure proceedings the debtor
partially paid the total outstanding obligation.
A debtor who has partially fulfilled the obligation/ paid a
part of the debt cannot ask for the proportionate
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extinguishment of the pledge or mortgage as long as the
debt is not completely satisfied.
Intended for the protection of the pledgee and
mortgagee, as it refers to the release of the pledge or
mortgage which secures the satisfaction of the
indebtedness and naturally presupposes that the pledge or
mortgage exists.
But Art. 2089 presupposes several heirs of the debtor or
creditor and does not apply in the absence of such
stipulation.
F. PACTUM COMMISSORIUM
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)
The essence of a pledge or mortgage is that when the
debtor defaults in the fulfillment of the obligation, the
collateral may be alienated for purposes of payment to the
creditor. However, the law requires resort to a legal
proceeding (foreclosure) to terminate the debtors (pledger
or mortgagor) ownership of the collateral.
A stipulation that allows the creditor to appropriate or
otherwise dispose of the collateral, in contravention of the
provisions of foreclosure, is considered a pactum
commissorium or pacto comisorio, and is null and void.
For there to be a case of pactum commissorium, it is first
necessary that a pledge or mortgage does exist and is valid.
No pledge or mortgage, no pactum commissorium.
1. ELEMENTS
(a) There is property pledged or mortgaged
(collateral) by way of security for the payment of
the principal obligation, and
(b) There is a stipulation for automatic
appropriation by the creditor of the collateral in
case of non-payment of the principal obligation
within the stipulated period.
A case of pactum commissorrum is null and void for being
contrary to law and public policy, as it contravenes the
express prohibition stated in Art. 2088. [Editors Note]
When the debtor defaults, the creditor is merely entitled to
forecloses, but he is not authorized to appropriate the
collateral in order to recover the amount due.
Nevertheless, a pledger or mortgageor may validly sell the
collateral to the pledgee or mortgagee for the amount of the
debt, when the latter becomes due, if the parties stipulate
upon the sale, or mere promise to sell, of the collateral
should the obligation secured by it not be complied with in
time, stipulating the conditions of the alienation;
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2. EFFECT ON PLEDGE OR MORTGAGE
The nullity of the pactum commissorium does not
substantially affect the validity of the contract of pledge or
mortgage, and it subsists although the parties have not
agreed on the manner by which the creditor shall recover its
credit.

In such cases, the provisions of the law on foreclosure sale

shall apply.

DBP v. CA (1998) Davide, J.

Petitioner: Development Bank of the Philippines
Respondents: Court of Appeals; Lydia Cuba
Concept: Pactum Commissorium

Brief facts: Cubas loan from DBP was secured by two

deeds of assignment over her fishpond leasehold rights
granted by the government. When she defaulted on her
payments, DBP appropriated said rights without foreclosure
proceedings and sold it in a public bidding. Cuba contends
that this violates the prohibition on pactum commissorium
provided in Art. 2088

Doctrine: For a mortgage to be considered as pactum

commissorium, thus void, the two requisites must be
present: (1) that there should be a property mortgaged by
way of security for the payment of the principal obligation;
and (2) that there should be a stipulation for automatic
appropriation by the creditor of the thing mortgaged.

Natalia P. Bustamante vs. Spouses Rodito F. Rosel and

Normal A. RoselPardo, J.
Petitioner: Natalia P. Bustamante
Respondents: Rodito F. Rosel and Norma A. Rosel (Spouses
Rosel)
Concept: Pactum Commissorium

Brief Facts: The Bustamantes borrowed money from the

Rosels. The loan was secured by collateral (land). It was
stipulated that in case of non-payment, the Rosels could
purchase the land, with the unpaid principal and interest
considered as downpayment.

Doctrine: The elements of pactum commissorium are as

follows: 1) there should be a property mortgaged by way of
security for the payment of the principal obligation, and 2)
there should be a stipulation for automatic appropriation by
the creditor of the thing mortgaged in case of non-payment
of the principal obligation within the stipulated period.

Ong v Roban (2008) Carpio-Morales, J.

Petitioner: Wilfredo N. Ong and Edna Shiela Paguio-Ong
Respondents: Roban Lending Corporation
Concept: Pactum Commissorium

Brief Facts: Sps. Ong obtained obtained several loans from

respondent Roban Lending Corporation. These loans were
secured by real estate mortgage on Spouses Ongs parcel of
lands. Ong and Roban executed several agreements -
dacion in payment wherein spouses Ong assigned their
mortgaged properties to Roban to settle their total
obligation and Memorandum of Agreement (MOA). Spouses
On.g filed a complaint to declare the mortgage contract,
dacion in payment agreement, and MOA void. Spouses Ong
allege that the dacion in payment agreement is pactum
commissorium

Doctrine: Lack of provisions for foreclosure proceedings

may be evidence of pactum commissorium

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G. EQUITABLE MORTGAGE
Art. 1602 The contract shall be presumed to be an
equitable mortgage, in any of the following cases:
(1) When the price of a sale with right to repurchase is
unusually inadequate;
(2) When the vendor remains in possession as lessee
or otherwise;
(3) When upon or after the expiration of the right to
repurchase another instrument extending the
period of redemption or granting a new period is
executed;
(4) When the purchaser retains for himself a part of the
purchase price;
(5) When the vendor binds himself to pay the taxes on
the thing sold;
(6) In any other case where it may be fairly inferred
that the real intention of the parties is that the
transaction shall secure the payment of a debt or
the performance of any other obligation.
In any of the foregoing cases, any money, fruits, or other
benefit to be received by the vendee as rent or otherwise
shall be considered as interest which shall be subject to the
usury laws. (n)
Art. 1603 In case of doubt, a contract purporting to be a
sale with right to repurchase shall be construed as an
equitable mortgage. (n)
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Art. 1604 The provisions of article 1602 shall also apply to
a contract purporting to be an absolute sale. (n)
Art. 1605 In the cases referred to in articles 1602 and
1604, the apparent vendor may ask for the reformation of
the instrument. (n)
Equitable mortgage: a contract, which, although lacking
in some formality, or form or words, or other requisites by a
statute, nevertheless reveals the intention of the parties to
charge property as security for a debt, but contains nothing
impossible or contrary to law.
Essential requisites of an equitable mortgage:
(1) The parties entered into a contract denominated as
a contract of sale; and
(2) Their true intention was to secure an existing debt
by way of mortgage.
Why does the law provide for equitable mortgages? It
is to prevent the circumvention of the laws on usury and the
prohibition against pactum commissrium. Pacto de retro
sales have been frequently used to conceal the true nature
of the contract, i.e., a loan secured by a mortgage.
What quantum of evidence is needed to prove an
equitable mortgage? It may be proven in court by the
apparent vendor or vendor a retro to be one of a loan with
mortgage through, as with any civil case, preponderance of
evidence. Parole evidence becomes competent and
admissible.
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