Module 8 pledge-and-mortgage PDF

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I. PLEDGE AND MORTGAGE (Art 2085-2092)Meaning of Pledge A contract by which the debtor delivers to the creditor or to a third person a movable or document evidencing incorporeal rights to secure the fulfilment of a principal obligation, with the understanding that when the obligation is fulfilled th...

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I. PLEDGE AND MORTGAGE (Art 2085-2092) Meaning of Pledge A contract by which the debtor delivers to the creditor or to a third person a movable or document evidencing incorporeal rights to secure the fulfilment 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. Meaning of Mortgage Contract where the debtor secures to the creditor the fulfilment of a principal obligation, specially substituting to such security immovable property or real rights over immovable property which obligation shall be satisfied with the proceeds of sale of said property or rights in case the said obligation is not complied with at the time stipulated. Essential requirements (common to) of pledge and mortgage (Art. 2085 and Art. 2087) (a) The pledge or mortgage be constituted to secure the fulfilment of a principal obligation; Note: (Art. 2086 in relation to Art. 2052) Pledge and mortgage are constituted to secure fulfilment of a principal obligation. Thus, pledge and mortgage are purely accessory contracts like guarantee. They cannot exist without a valid obligation. However, they may guarantee a voidable, unenforceable, or natural obligation. (b) The pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; It is essential that the contract be constituted only by the absolute owner of the thing pledged or mortgaged, or at least by the pledgor or mortgagor with the authority or consent of the owner of the property pledged. A pledge or mortgage constituted by an impostor is void and the pledgee or mortgagee in such a case acquires no right whatsoever in the property. (c) 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; and The act of pledging or mortgaging is an act of strict ownership involving as it does an alienation or transmission of real rights in property. Hence, the pledgor or mortgagor must have the capacity or authority to dispose of the property. (d) When the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor. Note: However, pledge, mortgage, and chattel mortgage are different species of that kind of contracts which are all intended to secure the performance of a principal and pre-existing obligation by specially subjecting to such security a property or the fruits thereof. Properties that may be pledged or mortgaged: (a) Motor vehicles registered subsequently — a chattel mortgage of a car executed on a date earlier than the transfer of the registration certificate in the name of the buyer-mortgagor but after the perfection of the contract of sale, does not render the said mortgage invalid, because the registration of the transfer of motor vehicles and of the certificates of license for their use merely constitutes an administrative proceeding which does not bear any essential relation to the contract entered into between the parties. (b) Share in a co-ownership — But the effect of the alienation or the mortgage, with respect to the coowners, shall be limited to the portion which may be allotted to him in the division upon the Page of 14 1

termination of the co-ownership. Hence, a mortgage of a conjugal property by one of the spouses is valid only as to one-half (1/2) of the entire property. Properties that may not be pledged or mortgaged: (a) Property covered by Torrens title — Article 2085 which requires that the mortgagor must have the free disposal of the property or at least have legal authority to do so, does not apply where the property involved is registered under the torrens system. (b)Future property — Future property cannot be pledged or mortgaged. (c) Property acquired subsequently — A pledge or mortgage executed by one who is not the owner of the property pledged or mortgaged is without legal existence and registration cannot validate it. Who bears the risk of loss of property pledged or mortgaged? As the pledgee or mortgagee does not become the owner of the property pledged or mortgaged and the ownership thereof remains with the debtor, under the maxim, res perit domino suo, the debtor-owner bears the loss of the property. However, the principal obligation is not extinguished by the loss of the pledged or mortgaged property. Pledge and real mortgage distinguished PLEDGE  constituted on movables

MORTGAGE  constituted on immovables

 property is delivered to the pledgee, or by common  delivery is not necessary delivery is not necessary consent to a third person  not valid against third persons unless a description of the thing pledged and the date of the pledge appear in a public instrument.

 not valid against third persons if not registered

Right of creditor where debtor fails to comply with his obligation The pledgor’s or mortgagor’s default does not operate to vest in the pledgee or mortgagee the ownership of the property for any such effect is against public policy. The creditor in a contract of real security like pledge and mortgage, cannot appropriate to himself without foreclosure the thing held as pledge or under mortgage, nor can he dispose of the same as owner. (Art. 2088.) The prohibition applies to an immovable which is the object of the contract of antichresis. Upon failure of the mortgagor to pay his obligation within the required period, the remedy of the mortgagee is to foreclose the mortgage, with formalities required by law, and if he wishes to secure a title to the mortgaged property, he can buy it in the foreclosure sale. An action for consolidation of ownership is an inappropriate remedy on the part of the mortgagee in equity. Prohibition against pactum commissorium Pactum commissorium or pacto commisorio which is forbidden by law and declared null and void is a stipulation whereby the thing pledged or mortgaged or under antichresis shall automatically become the property of the creditor in the event of non-payment of the debt within the term fixed. The reason for the prohibition is that the amount of the loan is ordinarily much less than the real value of the thing pledged or mortgaged. Requisites of pactum commissorium: Page 2 of 15

(a) There should be a pledge, mortgage, or antichresis of property by way of security for the payment

of the principal obligation; and (b) There should be a stipulation for an automatic appropriation by the creditor of the property in

the event of non-payment of the obligation within the stipulated period. Permissible stipulations (a) Subsequent modification of original contract — the principle does not prohibit modifi cation of the original contract by subsequent agreement such as the parties may see fi t to adopt. (b) Subsequent voluntary cession of property — the prohibition does not include a subsequent voluntary act of the debtor making cession of the property mortgaged in payment of the debt which amounts in its legal effect to a novation of the original contract and to a voluntary sale of the said property for the amount of the debt. (c) Promise to assign or sell. (d) Authority to take possession of property upon foreclosure. Note: What is prohibited by Article 2088 in connection with pacto commissorio is the automatic appropriation by the creditor of the thing pledged or mortgaged upon failure of the debtor to pay his debt within the period agreed upon by virtue of authority or right previously given the creditor. Pledge or mortgage indivisible (Art. 2089 and Art. 2090) A pledge or mortgage is one and indivisible as to the contracting parties and the rule applies even if the obligation is joint and not solidary. Generally, the divisibility of the principal obligation is not affected by the indivisibility of the pledge or mortgage. As a consequence of this indivisibility: (1) Every portion of the property pledged or mortgaged is answerable for the whole obligation as soon as it falls due. (2) When several things are pledged or mortgaged to secure the same debt in its entirety, all of them are liable for the totality of the debt and the creditor does not have to divide his action by distributing the debt, among the various things pledged or mortgaged. Even when only a part of the debt remains unpaid, all the things are liable for such balance. The debtor cannot ask for the release of one or some of the several properties pledged or mortgaged (or any portion thereof) or the proportionate extinguishment of the pledge or mortgage unless and until the debt secured has been fully paid. (3) The debtor’s heir who has paid a part of the debt cannot ask for the proportionate extinction of the pledge or mortgage, nor can the creditor’s heir who has received his share of the debt return the pledge or cancel the mortgage if the debt is not completely satisfied. Exceptions to rule of indivisibility (1) Where there are several things given in pledge or mortgage and each one of them guarantees only a determinate portion of the credit. (2) Where only portion of loan was released: for example, where out of an P80,000.00 loan agreement entered into by a bank and a borrower, only P17,000.00 was released, such that the real estate mortgage on the loan became unenforceable to the extent of P63,000.00 or 78.75% and subsists as a security only for the P17,000.00 debt or 21.25%. Thus, in case of default by the borrower, the mortgage can be foreclosed only to the extent of 21.25%. (3) Neither does it apply where there was failure of consideration on the part of the mortgagee as where the mortgagee (bank) took over the management of the borrowing corporation as one of the conditions for the granting of the loan, and said corporation was led to bankruptcy thru mismanagement, thereby defeating the very purpose of the loan, for it is as if the loan was never delivered.

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(4) Where there is no debtor-creditor relationship. — Although a mortgage (or pledge) is indivisible as to

the contracting parties and as to their successors in interest, it is not so with respect to a third person who did not take part in the constitution thereof either personally or through an agent. All kinds of obligations can be secured by pledge or mortgage (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. The pledge agreement may stipulate that the pledge will also stand as security for any future advancements or renewals thereof that the pledgor may procure from the pledgee. Promise to constitute pledge or mortgage creates no real right (Art. 2092) A promise to constitute a pledge or mortgage, if accepted, gives rise only to a personal right binding upon the parties and creates no real right in the property. In other words, what exists is only a right of action to compel the fulfilment of the promise but there is no pledge or mortgage yet. II. PROVISIONS APPLICABLE ONLY TO PLEDGE (Art. 2093-2123) Kinds of pledge (1) Voluntary or conventional or one which is created by agreement of the parties; or (2) Legal or one which is created by operation of law. Characteristics of a pledge (1) real contract - perfected by the delivery of the thing pledged by the pledgor to the pledgee, or to a third person by common agreement; (2) accessory contract - has no independent existence of its own; (3) unilateral contract - it creates an obligation solely on the part of the pledgee to return the thing subject thereof upon the fulfilment of the principal obligation; and (4) subsidiary contract - the obligation incurred does not arise until the fulfilment of the principal obligation which is secured. Cause or consideration in pledge Pledge is an accessory contract. Its cause insofar as the pledgor is concerned is the principal obligation. But if he is not the debtor (Art. 2085, par. 2.), the cause is the compensation stipulated for the pledge or the mere liberality of the pledgor. As an accessory contract, its validity would depend on the validity of the principal obligation secured by it. Transfer of possession essential in pledge (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. An agreement to constitute a pledge only gives rise to a personal action between the contracting parties. Unless the movable given as security by way of pledge be delivered to and placed in the possession of the creditor or of a third person designated by common agreement, the creditor acquires no right to the property because pledge is merely a lien and possession is indispensable to the right of a lien. Type of delivery The delivery of possession referred to in Article 2093 as essential to the validity of a pledge means actual possession of the property pledged and a mere symbolic delivery is not sufficient. However, It has been held that the symbolical transfer of the goods by means of the delivery of the keys to the warehouse where the goods were stored was sufficient to show that the depositary appointed by common consent of the parties was legally placed in possession of the goods, since the owner, as pledgor, could no longer dispose Page 4 of 15

of the same, the pledgee being the only one authorized to do so through the depositary and special agent who represented him. Generally, delivery depends upon nature of thing pledged. Whether or not a symbolic or constructive delivery is sufficient to validate a pledge would depend on the peculiar nature of the thing pledged. Subject matter of pledge (Art. 2094 and Art 2095) All movables which are within commerce may be pledged, provided they are susceptible of possession. Incorporeal rights evidenced by documents whether negotiable or not may also be pledged. The document must be delivered to the creditor; if negotiable, it must be indorsed in favor of the creditor. Public instrument necessary to bind third persons (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. Even if all the essential requisites provided in Articles 2085 and 2093 are present, the contract of pledge is not effective against third persons unless in addition to delivery of the thing pledged, it is embodied in a public instrument wherein it shall appear the description of the thing pledged; and the date of the pledge. The intent 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. Alienation by the pledgor of thing pledged (Art. 2097) The pledgor retains his ownership of the thing pledged. He may, therefore, sell the same provided the pledgee consents to the sale. As soon as the pledgee gives his consent, the ownership of the thing pledged is transferred to the vendee subject to the rights of the pledgee, namely, that the thing sold may be alienated to satisfy the obligation and that the pledgee must continue in possession during the existence of the pledge. But the pledge would not bind or adversely affect third persons. RIGHTS OF A PLEDGEE Right of pledgee to retain thing pledged (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. The possession of the pledgee constitutes his security. Hence, the debtor cannot demand for its return until the debt secured by it is paid. But the right of retention is limited only to the fulfilment of the principal obligation for which the pledge was created. Right of pledgee to compensate earnings of pledge with debt (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. The pledgee has no right to use the thing pledged or to appropriate the fruits thereof without the authority of the owner. But the pledgee can apply the fruits, income, dividends, or interests earned or produced by the thing pledged to the payment of interest, if owing, and thereafter to the principal of his credit. in case of a pledge of animals, their offspring shall pertain to the pledgor or owner of the animals pledged, but shall be subject to the pledge, if there is no stipulation to the contrary.

Right of pledgee against third persons (Art. 2103) The pledgor remains the owner of the property pledged. The creditor to whom the property pledged has been delivered is obliged to take care of it with the diligence of a good father of a family. He is authorized to bring such action as pertaining to the owner in order to recover it or defend it, against claims of third Page 5 of 15

persons. Furthermore, unless given the right, the creditor might be prejudiced by the negligence of the owner. The right of a 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 the thing pledged and the date of the pledge. Right of pledgee to demand substitute or immediate payment (Art. 2109) If the creditor is deceived on the substance or quality of the thing pledged, he may either; (a) claim another thing in its stead; or (b) demand immediate payment of the principal obligation. The remedies are alternative, that is, he is privileged to choose only one and not both Right of pledgee to cause sale of thing pledged (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. Formalities required: (a) The debt is due and unpaid; (b) The sale must be at a public auction; (c) There must be notice to the pledgor and owner, stating the amount due; and (d) The sale must be made with the intervention of a notary public. OBLIGATIONS OF A PLEDGEE Obligation of pledgee to take due care of thing pledged (Art. 2099) Upon fulfilment of the principal obligation, the pledgee must return the thing pledged. Having possession of the property, he has the obligation to take care of the same with the diligence of a good father of the family. He is, however, entitled to reimbursement of the expenses incurred for its preservation. In case of the loss or deterioration of the thing pledged due to fortuitous event, the pledgee cannot be held responsible but he is liable for loss or deterioration by reason of fraud, negligence, delay or violation of the terms of the contract. Obligation of pledgee not to deposit thing pledged with another (Art. 2100) While the pledgee is entitled to retain the possession of the thing pledged until the debt is paid, he is not authorized to transfer possession to a third person. The prohibition is necessary for the protection of the pledgor or the owner of the thing pledged. Except when there is stipulation authorizing him to do so. The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged because their acts are, in legal effect, deemed his. (Art. 2100, par. 2.) Obligation of pledgee not to use thing pledged (Art. 2104) The pledgee who is in possession of the thing pledged has no right to make use of it without permission from the owner. This is the same rule in deposit. It is in consequence of the fact that the pledgor in parting with his property transmits only possession but not ownership. If, however, the thing pledged is of such a character that use is necessary in properly caring for it, then it becomes his duty to use it so that it will not suffer fr...