08 - Law-on-Business-Transactions-Credit-Transactions
08 - Law-on-Business-Transactions-Credit-Transactions
08 - Law-on-Business-Transactions-Credit-Transactions
Transactions
Credit Transactions
Contents
1 2 3 4 5
Pledge, Requirements Obligations Obligations Modes of
Real to Bind the and Rights of and Rights of Extinguishment
Mortgage Parties and Pledgor and Mortgagor
and Chattel Third Persons Pledgee and
Mortgage Mortgagee
Pledge, Real Mortgage
and Chattel Mortgage
Pledge, Real Mortgage and Chattel Mortgage
Movable or personal
Immovable property or
Object of the property, or document
Personal property real rights over
Contract evidencing incorporeal
immovable property
rights.
Pledge, Real Mortgage and Chattel Mortgage
Possession Possession remains with the creditor Possession is vested in the debtor
Contract Real Contract Formal Contract
Must be in a public instrument containing
Must be recorded in a public instrument to bind third
Registration description of the thing pledged and the date
persons
thereof to bind third persons
Not valid unless a description of the thing and the Not valid against third persons unless registered
Validity Against Third Persons
date of pledge appear in a public instrument (although binding between the parties)
Pledge vs. Real Estate Mortgage
Pledgor can sell the thing pledged only with the Mortgagor can sell the property mortgaged
Authority to Sell
consent of the pledgee even without the consent of the mortgagee
• As a General Rule: A pledge and mortgage is indivisible.
• The mortgage is indivisible even if the obligation of
the debtor is joint and not solidary.
Indivisibility of • Generally, the divisibility of the principal obligation is
not affected by the indivisibility of the pledge or
Pledge and mortgage.
• Exceptions:
Mortgage • Where each one of several things guarantees
determine portion of the credit;
• Where only a portion of the loan was released; or
• Where there was failure of consideration.
Valid Obligations
Voidable Obligations
Obligations
that can be Unenforceable Obligations
Secured
Natural Obligations
Conditional Obligations
• General Rule
Limited Liability • A third person who pledged and mortgaged
his/her property is not liable for any deficiency.
of a Third Person
as Pledge and • Exception
• If the third party pledgor or mortgagor
Mortgage expressly agreed to be bound solidarily with
the principal debtor
• Property acquirable in the future cannot be
mortgaged.
• Where the mortgagor mortgaged a property and in
Future Property the contract he agreed to mortgage additional
properties which he may acquire in the future,
there was no valid mortgage as to the latter
because he was not yet the owner of the properties
at the time of the mortgage.
• Mortgage constituted to secure future
advances is valid.
• It is a continuing security and not discharged
by repayment of the amount named in the
Securing Future mortgage, until the full amount of the
advances is paid.
Advances • However, a chattel mortgage can only cover
obligations existing at the time the mortgage
is constituted and not to obligations
subsequent to the execution of the
mortgage.
Pactum Commissorium
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Elements of Pactum Commissorium
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Pledge
Nature of Pledge
It is a real contract which are not perfected until delivery of the object of the obligation.
It has no independent
existence of its own; cannot
Accessory Contract exist without a valid
Characteristics contract
Conventional Legal
Requisites for a Contract of Pledge
Persons constituting the pledge have the free disposal of their property, and in
the absence thereof, that they be legally authorized for the purpose; and
That the thing pledged be placed in the possession of the creditor, or of a third
person by common agreement.
Continuous Possession
Delivery and Possession of Thing Pledged
• 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.
• If a pledgee fails or neglects to take the property pledged into his possession, he is
presumed to have waived the right granted by him by the contract.
• The requisite that the pledge must be in a
public instrument does not affect its
validity.
• It is still valid between the parties, but it
Public will not bind third persons if the pledge is
not in a public instrument.
Instrument • The following must appear in the public
instrument in order to affect third persons:
• A description of the thing pledged
• Statement of date when the pledge
was executed
Constructive or Symbolic Delivery
Incorporeal rights evidenced by It is, however, required that the Moreover, if the instrument is a
proper document can be pledged. actual instrument be delivered to negotiable document, it must be
the pledgee. indorsed.
Right of an Owner of Personal
Property Pledged WITHOUT Authority
• An owner of personal property pledged without authority may
invoke Article 559 of the New Civil Code. The defense that a
pawnshop owner acquired ownership of the thing in good faith is not
available.
• Article 559
• 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 form 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 therefor.
Pledge of Two or More Things
When 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.
• The debtor
• The creditor
• The one who
• The one who
delivers the
Pledgor thing
Pledgee receives the
thing
pledged to
pledged
the creditor
Rights of a Pledgee
• To retain the thing until the debt is paid.
• To possess the thing.
• To be reimbursed for the expenses made for the preservation of the thing pledged.
• To apply fruits, interests, or earnings of the pledge to the interest, if any, then to the principal of the credit.
• To bring any action pertaining to the pledgor in order to recover it from or defend it against a third person.
• To sell at public auction in case of reasonable grounds to fear destruction or impairment of the thing without his
fault.
• Option to demand replacement or immediate payment of debt in case of deception as to substance and quality.
• To appropriate the thing in case of failure of second public auction (i.e., an exception to Pactum Commissorium)
Rights of a Pledgee
• To bid at public auction, unless he is the only bidder.
• To collect and receive the amount due on the credit.
• To choose which of several things pledged will be sold.
• To retain the excess value in the public sale.
• To retain the thing until and after the full payment of the debt.
• To object the alienation of the thing.
Depositing Thing Pledged to a Third Person
• The pledgee cannot deposit the thing pledged with a third person unless there is a
stipulation authorizing him to do so.
• If the deposit with a third person is allowed, the pledgee is liable for the loss if he
deposited the thing with a person who is manifestly careless or unfit.
• The pledgee is also responsible for the acts of his agents or employees with respect to
the thing pledged.
Obligations of a Pledgee
• Take care of the thing pledged with the diligence of a good father of a family.
• The pledgee cannot deposit the thing pledged to a third person unless there is a
stipulation to the contrary.
• Apply the fruits, income, dividends, or interests produced or earned by the
property, to interests or expense first, then to the principal.
• The pledgee cannot use the thing without authority, except:
• If the pledgor had given him authority or permission to use it; or
• If the use of the thing is necessary for its preservation but only for that
purpose.
Obligations of a Pledgee
• To advise the pledgor of the result of the public auction.
• Return the thing pledged upon the payment of the debt.
• Advise the pledgor of any danger to the thing.
Expropriation of the Thing Pledged
• The debtor is no longer the owner of the thing in case the same is expropriated
by the State as ownership is transferred to the expropriating authority.
• Note that the creditor may bring actions pertaining to the owner of the thing
pledged in order to recover it from or defend it against a third person.
• General Rule
• A debtor cannot ask for the return of the
thing pledged against the will of the
creditor.
• Exceptions
Return of the • If the debtor has paid the debt and its
interest, with expenses in a proper case.
Abandon the
Foreclose the pledge and file a
thing pledged. claim for
collection.
The obligation must be due and unpaid
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.
Third Person Paying
Pledgor’s Debt
• 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.
Effect of Sale of the Thing Pledged
The extinguishment is automatic regardless of whether or
not the proceeds realized from the public auction sale are
It extinguishes the principal obligation. more or less than the amounts of the principal obligation
and other incidental expenses.
• 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 the thing in caafter
appropriating se a no sale was
made in a second auction.
• The same cause of extinguishment of all
other obligations.
• If the thing pledged is returned by the
pledgee to the pledgor or owner, the
pledge is extinguished.
• Note that if subsequent to the
Extinguishment perfection of the pledge, the thing is in
the possession of the pledgor or owner,
of Pledge 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.
• A statement in writing by the pledgee that he
renounces or abandons the pledge.
• Note that renunciation or the
abandonment must be in writing.
• An oral waiver is not sufficient. But if the
pledgee orally renounces the pledge, and
returns the thing pledged to the pledgor,
Extinguishment the pledge is thereby extinguished.
• The renunciation of the principal debt shall
of Pledge extinguish the accessory obligations; but
the waiver of the latter shall leave the
former in force.
• Payment of the debt
• Sale of the thing pledged at public auction
• Appropriation of the thing in case of failure of
second public auction
Legal pledges are those
constituted or created by
Pledge by operation of law.
Operation of
Law In this case, the right of
retention exists.
• Right of the possessor in good faith to retain the
Instances of thing until refunded of necessary expenses
Legal Pledges • Lien on the goods manufactured or work done by a
laborer until his wages had been paid
Where There • Right to retain of a worker who executed work upon
is Right of a movable until he is paid
Retention • Right of an agent to retain the thing subject of the
agency until reimbursed of his advances and
damages
• Right of retention of a depositary until full payment
of what is due him by reason of the deposit
• 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 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.
• The remainder of the price of sale shall be delivered to the
obligor.
Real Mortgage
• Real estate mortgage (REM) is a contract whereby the
Real debtor secures to the creditor the fulfillment of the
principal obligation, specifically subjecting to such
Mortgage security immovable property or real rights over
immovable property in case the principal obligation is
not fulfilled at the time stipulated.
Characteristics of Real Mortgage
It is an accessory
It is a real right It is indivisible It is inseparable
contract
The property
It is a limitation on It can secure all
It is a real property cannot be
ownership kinds of obligations
appropriated
The mortgage is a
lien
Conventional • It is constituted voluntarily by the
Mortgage contracting parties
Kinds of
Legal
Real Mortgage
• It is required by law to be executed in
favor of certain persons
Mortgages
• The intention of the parties is to make
Equitable the immovable as a security for the
performance of the obligation but the
Mortgage formalities of a real mortgage are not
complied with.
Consideration in
Mortgage
• Its consideration is the same
as of the principal contract
from which it receives its life,
and without which it cannot
exist as an independent
contract.
Requisites for a Valid Constitution of a Real
Mortgage
• It covers only immovable property and alienable real rights imposed upon immovable.
• Note that 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.
• As a 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.
• It must appear in a public instrument
• Recording in the Registry of Property is necessary to bind third persons
Rights of To alienate the mortgaged property but the
mortgage shall remain attached to the property.
Mortgagor
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.
Rights of a
Mortgagee Prior demand must have been made on the
debtor and the latter failed to pay.
The mortgagee has Such possession is
no right or claim to only a security for
the possession of the payment of the
the property. sum borrowed.
Right to
Possession The debtor merely
subjects the One’s status as a
property to a lien mortgagee cannot
but the ownership be the basis of
thereof is not possession.
parted.
Registration of Mortgage
It creates
It creates a
merely an
real right
encumbrance
Mortgagee in Good Faith
• The creditor may claim from the third person in possession of the
mortgaged property, the payment of the part of the credit secured by the
property which the third party possesses, in terms and with the
formalities which the law establishes.
Causes of Action of
Mortgage-Creditor
General Rule
Exception
• When the mortgage was executed by a third person to secure the obligation of
a debtor, such third person not having assumed personal liability for the
payment of the debt, the extent of recovery in the case of judgment foreclosure
shall be limited to the purchase price at the foreclosure sale. The remedy of the
mortgagee in such case is to proceed against the debtor in an ordinary action
for sum of money to recover the balance of the debt due.
Extrajudicial Foreclosure
• An extrajudicial foreclosure may only be effected if in the mortgage contract
covering a real estate, a clause is incorporated therein giving the mortgagee the
power, upon default of the debtor, to foreclose the mortgage by an extrajudicial
sale of the mortgage property.
Authority to Sell
• Filing of an application before the Executive Judge through the Clerk of Court
• Clerk of Court will examine whether the following requirements of the law have been complied with:
• Posting of notice in not less than 20 days in at least three public places of the municipality or city
where the property is situated.
• Publication once a week for atleast three consecutive weeks in a newspaper of general
circulation in the city or municipality.
• The application shall be raffled among different sheriffs
• An auction sale may be had even with juts one (1) participating bidder.
• The Clerk of Court shall issue a certificate of payment indicating the amount of indebtedness, the
filing fees collected, the mortgages sought to be foreclosed, the description of the real estates and
their respective locations
• The certificate of sale must be approved by the Executive Judge
• After the redemption has expired, the Clerk of Court shall archive the records.
Effect of Inadequacy of Price in Foreclosure Sale
If the deficiency is
Note that the action
embodied in a
prescribes ten years
judgment, it is referred
from the time the right
to as deficiency
of action accrues.
judgment
Redemption
of Mortgage • Redemption is a transaction by which the
mortgagor reacquires or buys back the property
which may have passed under the mortgage or
divests the property of the lien which the
mortgage may have created.
Persons Entitled to Exercise the Right of
Redemption
Mortgagor or one
in privity of title Successors-in-
with the interest
mortgagor
• Equity of Redemption
• It refers to the right of the mortgagor to
redeem the mortgaged property after his
Kinds of default in the performance of the conditions
of the mortgage but before the sale of the
Redemption mortgaged property or confirmation of sale.
• The mortgagor pays the secured debt within
the period specified.
• Applicable in judicial foreclosure of real estate
mortgage and chattel mortgage foreclosure.
• Period to exercise: within 90-120 days from
the date of the service of the order of
foreclosure or even thereafter but before the
order of confirmation of the sale.
Kinds of • Right of Redemption
Redemption • Right of the mortgagor to redeem the
mortgaged property within one year from the
date of registration of the certificate of sale
• It applies in case of extrajudicial foreclosure.
• Period to exercise: Within 1 year from the
date of registration of the certificate of sale
• Must be made within 12 months from the time
of the registration of the sale in the Office of the
Right of Registry of Property
Redemption, • Payment of the purchase price of the property
plus 1% interest per month together with the
Requisites taxes thereon, if any, paid by the purchaser with
the same rate of interest computed from the
date of registration of the sale
• Written notice of the redemption must be served
on the officer who made the sale and a duplicate
filed with the proper Register of Deeds.
• Tender of payment within the prescribed period
to make the redemption for future enforcement.
Extrajudicial
• Natural Person
Summary of • one year from registration of the certificate of sale
Redemption with the Registry of Deeds
• Judicial Person
Periods • Same rule as natural persons
• Juridical Person (mortgagor) and Bank (mortgagee)
• three months after foreclosure or before registration
of certificate of foreclosure whichever is earlier.
Judicial
• Within the period of 90-120 days from the date of the
service of the order of foreclosure or even thereafter
but before the order of the confirmation of the sale.
• If the mortgagor or his
successors-in-interest fail to
Effect of redeem within the
redemption period, the title
Failure to over the property
Redeem consolidates in the
purchaser
• The consolidation confirms
the purchaser as the owner
entitled to the possession of
the property.
• The mortgagor, by failing to
redeem loses all interest in
the property.
Chattel Mortgage
Chattel Mortgage
• Formal Contract
• It must be embodied in a public instrument and recorded in the Chattel Mortgage
Register
• Accessory Contract
• Its existence depends upon an existing valid principal obligation
• 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
• It does not convey dominion but is only a security
• It creates a real right or a lien which is being recorded and follows the chattel
wherever it goes
Requisites in a Chattel Mortgage
Property
Basis Chattel Mortgage Pledge
Necessity of Delivery Delivery of personal property to Delivery of the personal
the mortgagee is not necessary property is necessary
Requirement of Registration in Chattel Mortgage Registration in Registry of
Registration Register is required by law for Property not necessary
validity
Entitlement of Excess over Excess of amount due goes to GR: The debtor is not entitled
Chattel the Amount Due debtor to the excess.
The mortgagee may, after 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.
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 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.
Recovery of Deficiency