UNIT 3

LAW ON PLEDGE &

MORTGAGE
 PLEDGE & MORTGAGE
IS ALL ABOUT SECURITY
The Law on Pledge and Mortgage is all about security. In loan
contracts, this is a way of making sure that the creditor will be paid by the
debtor by constituting a mortgage.

A mortgage is at the very least an assurance that the creditor will not
be left with nothing in case of non-payment by the debtor.

When there is pledge or mortgage contract, this means that there is a

principal obligation (e.g. loan) which is being secured.
COMMON NATURE AND CHARACTERISTICS
OF MORTGAGE AND PLEDGE
NOTE: ALL THE FOLLOWING CHARACTERISTICS APPLY TO BOTH PLEDGE AND
MORTGAGE
 1.BOTH MORTGAGE AND PLEDGE
HAVE THE FOLLOWING REQUESITIES
• A. Secures the fulfillment of a principal obligation
• Mortgage and pledge are accessory contracts.
• They cannot stand alone as its establishment depends upon a
principal contract, which normally comes in the form of a contract
of loan.
• Mortgage and pledge are established to secure the performance
of the principal obligation.
• In this case, a property should be tendered as a collateral to cover
the principal obligation in case of default by the debtor.
• B. Pledgor and mortgagor must be the absolute owner of the
thing pledged or mortgaged
• A person is said to have an absolute ownership over the thing if
he/she has an actual right over the property.
• By virtue of that right, he/she can freely transfer or assign such
property.
 CASES
• Xian loaned from Eastwest Bank a total amount of P 5 million. In order
to secure this loan, he mortgaged (used as collateral) a house and lot
registered to his parents.
• Magma borrowed P 15 million from ABC Financing Company so she
can start a poultry farm on her 1 hectare land. She mortgaged the
said land in order to secure her loan.
• Ace had his car loan from BPI approved for an amount of P 1.2 million.
The loan agreement stated that the same car that Ace will be
purchasing through Eastwest will be mortgaged as security for the
loan.
• C. Pledgor and mortgagor must have the free disposal of
their property, or be legally authorized for such purpose
• Free disposal of the thing means that the property, which is the
subject matter of mortgage of pledge, must be free from burdens
like unpaid taxes, prior mortgage, or pledge, etc.
 CASE
• In order to secure his P 7 million loan from Taro Corporation,
Kofi mortgaged his house and lot. A month after, Kofi
secured another loan from Landbank worth P 5 million and
mortgaged the same property.
• D. When the principal obligation becomes due, the subject
matter of the pledge or mortgage may be alienated for the
payment to the creditor
• In case of default by the debtor, the property offered as security
may be sold at public auction and the proceeds thereof will be
applied to the principal obligation.
 2. THE CREDITOR CANNOT APPROPRIATE THE
THING PLEDGED OR MORTGAGED. ANY
STIPULATION TO THE CONTRARY IS VOID.
• This is the principle of Pactum Commissorium which is not allowed in
our jurisdiction.

• Article 2088 of the NCC “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.”
 CASE
• Silva entered into a housing loan agreement with XYZ Bank.
The agreement provides that the bank will lend him P 10
million and in return, his 500 square meter lot will serve as
security for the loan. After a year of paying the loan, Silva
fell into financial distress and was unable to pay the
succeeding installments. XYZ Bank informed Silva that they
will be recovering the mortgaged property from him as
payment for his loan. Is XYZ bank’s action valid?
 3. CAPABILITY TO SECURE ALL
KINDS OF OBLIGATIONS
• Mortgage and pledge do not discriminate any type of
obligation that it can secure.
 4. INDIVISIBILITY
• General Rule: Mortgage and pledge is indivisible.
• Its indivisibility is not affected by the divisible character of the
principal obligation.
• E.g. even if a contract of loan is divisible, as it is payable in
installments, the corresponding mortgage or pledge
remains to indivisible.
• EXCEPTION:
Article 2089, a contract of mortgage or pledge may be
considered divisible if each portion of the credit is
guaranteed by a specific property.
Accordingly, payment of a particular portion of the
credit will release the applicable property which secures the
same.
 CASE
• Ginger secured a loan worth P 8 million from Faraway Bank
and mortgaged his 800 square meter commercial land as
security. In the loan agreement, Ginger will pay P 1.1 million
each month for 8 months. It was also stipulated in the
contract that after each monthly payment, a portion of the
mortgaged property (100 sq meters) will be released from
the mortgage. Is this valid?
 CASE
• Coco secured a loan worth P 50 million from Chuchu Bank and
mortgaged his 2,000 square meter agricultural land for half of his loan
and his 1,500 square meter commercial land for the other half as
security. They stipulated in the contract that after paying off half of
the loan, the 2,000 square meter agricultural land will be released from
the mortgage. Is this valid?
 5. PLEDGOR OR MORTGAGOR RETAINS
OWNERSHIP OF THE THING GIVEN AS A
SECURITY
• Since the function of mortgage and pledge is just to secure
the fulfilment of the principal obligation, ownership of the
thing mortgaged or pledged shall remain with the owner
thereof.
• This means that the institution of mortgage or pledge does
NOT amount to transfer of ownership of the thing mortgaged
or pledged.
• But the mortgagee, may of course, use the mortgage
property to his benefit.
PLEDGE
 WHAT IS PLEDGE?
• Pledge is a contract wherein the debtor delivers to the
creditor or to a third person a movable or document
evidencing incorporeal rights for the purpose of securing
fulfillment of a principal obligation, which if fulfilled, the thing
delivered shall be returned with all its fruits and accessions.
 ADDITIONAL REQUISITES
• 1. Possession of the thing pledged must be transferred to the
creditor or a third person by agreement
• Pledge is a real contract.
• Unlike mortgage, pledge requires the transfer of possession of the
property constituted as a security.
• Without the transfer of the possession, a contract of pledge will NOT
be perfected.
• 2. Subject matter should be movable property and
incorporeal rights evidenced by documents of title and the
instruments proving the right pledged shall be delivered to
the creditor, and if negotiable, must be endorsed
• Mortgage may involve both real and personal properties.
• In pledge, however, the property tendered as a security should be
personal only.
• May a farm land be pledged?
• May a motorbike be pledged?
• May a house and lot be pledged?
• May a condominium unit be pledged?
• May a certificate of stocks be pledged?
• May a laptop be pledged?
• 3. The description of the thing pledged and the date must
appear in public instrument to bind third persons, but not for
validity of the contract
• The purpose of this requirement is for the contract of pledge to be
enforceable.
• Failure to comply with this requirement will NOT affect the validity of
the contract of pledge.
 CASE
• Dito pledged his satellites to Globe to secure its P 500 million loan. The
satellites were particularly described and the instrument was dated.
After this, Globe gave Dito half of the amount being loaned.

• Is there a valid mortgage?

• Is the mortgage enforceable?

 KINDS OF PLEDGE
• 1. Conventional/Voluntary
• This kind of pledge is created by agreement of the parties.

• 2. Legal
• Legal pledge is constituted by operation of law.
• Pledge is created because the law says so.
• For instance, under Article 2004 (NCC), a hotel-keeper has the right
to retain things of the guest which are brought into the hotel, until
his hotel bills had been paid.
 CHARACTERISTICS OF A PLEDGE
• Real contract
• It is perfected by delivery of the thing pledged.
• Accessory contract
• Has no independent existence of its own. It cannot exist without an existing valid
contract.
• Unilateral contract
• The obligation is solely on the part of the creditor to return the thing pledged
upon fulfillment of obligation.
• Subsidiary contract
• The obligation incurred does not arise until the fulfillment of the principal
obligation.
 OBLIGATIONS OF THE PLEDGOR
• 1. To advise the pledgee of the flaws of the thing pledged
• Otherwise, he or she shall be liable for damages

• 2. Not to demand the return of the thing until after the full
payment of the debt, including interest due thereon and
expenses incurred for its preservation
• While the pledge subsists, possession of the thing pledged shall
remain with the pledgee.
 OBLIGATIONS OF THE PLEDGEE
• 1. To take care of the thing with the diligence of a good father of the
family and be liable for the loss or deterioration of

• 2. Not to use the thing unless authorized or by the owner or its

preservation requires it use
• While in possession of the thing pledged, the pledgee may use it only if its
necessary for the preservation of the thing or that he/she was authorized by the
pledgor to use it.

• 3. Not to deposit the thing with a third person unless so stipulated

• 4. Responsibility for acts of agents and employees as regards the thing
•
• 5. To advise the pledger of danger to the thing

• 6. To advise the pledger of the result of the public auction

• Public auction of the thing pledged occurs when the debtor fails to settle his/her
obligation in due time.
 PROCEDURE FOR AUCTIONING THE THING
PLEDGED
ARTICLE 2112 (NCC)
• 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.”
• Under Article 2113, the pledgor or owner of the thing pledged may bid
during the public auction. In fact, he/she has a better right if he/she
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.
 CASE
• ChinChan loaned P 2 million from Dora and pledged his car as
security. ChinChan failed to pay the loan so Dora went to Atty. Jon for
the sale of the car in a public auction. At the public auction, only
Dora was present to bid. May the car be awarded to her if she was
the only bidder?

• What if Chinchan, Dora and a certain Colby bid in the auction and
Dora made the highest bid, will she get the car?

• What if they all had the same bid, who will have the car?
 CASE
Dear PAO,
I lent the amount of P125,000.00 to my friend, with an interest of P800.00 per
month until the debt is fully paid. His loan is secured by a motor vehicle under a
contract of pledge and a promissory note. The debt became due and demandable
on October 30, 2017. I found out that the motor vehicle was not registered on April 30,
2017, the date of its supposed annual registration. I would like to register the motor
vehicle but my friend did not give me the vehicle’s certificate of registration when the
loan was made. Can I appropriate the motor vehicle even if it was not registered by
my friend? Please advise on how I should go about with such appropriation. Do I have
to bring this before the small-claims court?
- Willy
(Source: https://www.manilatimes.net/2018/04/13/legal-advice/dearpao/constitution-of-a-contract-of-pledge-to-secure-a-
loan/392159)
 EXTINGUISHMENT OF PLEDGE
• 1. For the same causes as all other obligations
• 2. Return of the thing pledged by the pledgee to the pledger
• 3. Statement in writing by the pledgee that he renounces or abandons
the pledge
• 4. Payment of the debt
• 5. Sale of the thing pledged at public auction
• 6. Appropriation
• Appropriation by the pledgee of the thing pledged shall occur only when
there was no qualified bidder after the second public auction.
• In this case, the pledgee shall give an acquittance for his/her entire
claim.
 ON PUBLIC AUCTION
• The sale of the thing pledged at public auction is intended to settle or
extinguish the principal obligation.
• Proceeds of sale shall be applied to amount of the obligation and
shall serve as full extinguishment thereof, irrespective of whether the
proceeds were less than or more than the amount of the principal
obligation.
MORTGAGE
Real Mortgage
Chattel Mortgage
 A CONTRACT OF MORTGAGE MAY
BE (1) REAL OR (2) CHATTEL

• Under Article 2124 (NCC):

• “Only the following property may be the object of a contract of
mortgage:
• A. Immovables;
• B. Alienable real rights in accordance with the laws, imposed upon
immovables.

• Nevertheless, movables may be the object of a chattel

mortgage.”
 REAL ESTATE MORTGAGE
• A 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.
• In addition to the common requisites for mortgage and pledge, the
law also requires that the mortgage must be registered in the Registry
of Property.
• This requirement is for enforceability purposes only.
 CHATTEL MORTGAGE
• Chattel mortgage is a contract by virtue of which personal property is
recorded in the Chattel Mortgage Register as the security for the
performance of an obligation.

• Subject of chattel mortgage

• Interest in business
• Ungathered products or growing crops
• Vessels
• Shares of Stock
• Machinery placed by a tenant in plant belonging to another
DISTINCTION BETWEEN PLEDGE, CHATTEL
AND REAL ESTATE MORTGAGE
 Pledge Chattel Mortgage Real Estate Mortgage

Object Movable property. Movable property. Immovable property or

real rights over
immovable property.

Delivery of the thing Property must be delivered. Delivery is not necessary. Delivery is not necessary.
due
Excess of proceeds The debtor is not entitled to If the property is foreclosed, With deficiency
from auction sale the excess unless otherwise the excess goes to the judgement.
agreed. debtor.

Recovery of the The creditor is not entitled to The creditor is entitled to The creditor is entitled to
deficiency recover the deficiency even recover the deficiency from recover the deficiency
if stipulated. the debtor, except of Recto from the debtor.
Law applies.

Possession of the Possession remains with the Possession is vested in the Possession is vested in the
thing due creditor. debtor. debtor.

Type of Contract Real contract Formal contract Consensual contract