08 - Law-on-Business-Transactions-Credit-Transactions

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Law on Business

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

Pledge Chattel Mortgage Real Estate Mortgage

An accessory contract whereby a


debtor delivers to the creditor or a
It is a contract whereby the debtor
third person a movable or personal
secures to the creditor the fulfillment
property, or document evidencing A contract by virtue of which a
of a principal obligation, specially
incorporeal rights, to secure the personal property is recorded in
subjecting to such security,
Definition fulfillment of a principal obligation the Chattel Mortgage Register as
immovable property or real rights
with the condition that when the a security for the performance
over immovable property, in case the
obligation is satisfied, the thing of an obligation.
principal obligation is not paid or
delivered shall be returned to the
complied with at the time stipulated
pledgor with all its fruits and
accessions, if any.
Pledge, Real Mortgage and Chattel Mortgage

Pledge Chattel Mortgage Real Estate 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

Pledge Chattel Mortgage Real Estate Mortgage

Necessity of Property must be Delivery is not Delivery is not


Delivery delivered necessary necessary
Similarities of Pledge and Mortgage

• Both are accessory contracts;


• Both pledgor and mortgagor must be the absolute owner of the property;
• Both pledgor and mortgagor must have the free disposal of their property or
be authorized to do so; and
• In both, the thing offered as security may be sold at public auction, when
the principal obligation becomes due, and no payment is made by the
debtor.
Pledge vs. Chattel Mortgage
Basis Pledge Chattel Mortgage
Delivery Delivery is necessary Delivery is not necessary
If the property is sold, the debtor is not entitled to If the property is foreclosed, the excess goes to the
Excess
the excess unless otherwise agreed debtor

The creditor is entitled to recover the deficiency


The creditor is not entitled to recover the deficiency
Recover of the Deficiency from the debtor except if the chattel mortgage is a
notwithstanding any stipulation to the contrary
security for the purchase of property in installments

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

Basis Pledge Real Estate Mortgage


Contract Real Contract Consensual Contract
Kind of Property Subject matter is personal property Subject matter is real property
Property delivered to pledgee or by consent to a
Delivery Not necessary
third person
Possession of the thing pledged is vested in the Possession of the thing mortgaged remains
Possession of thing pledged/ mortgaged
creditor with the debtor

Pledgee has the right to receive the fruits of the


thing pledged, with the obligation of applying
Right to Receive the Fruits Mortgagee does not possess such right
the same to the interest of the debt, if owing and
the balance, if any, to the principal

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

The creditor cannot appropriate the


things given by way of pledge or
mortgage or dispose of them,
A stipulation for automatic vesting
otherwise that would result in
of title over the security in the
pactum commissorium. The proper
creditor in case of debtor’s default.
remedy is foreclosure of the
mortgage. If there is no foreclosure,
the debtors retain the ownership.

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Elements of Pactum Commissorium

There should be a stipulation


There should be a pledge or for an automatic appropriation
mortgage wherein property is by the creditor of the thing
pledged or mortgaged by way pledged or mortgaged in the
of security for the payment of event of nonpayment of the
the principal obligation; and principal obligation within the
stipulated period.

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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.

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. What exists is
only a right of action to compel the fulfillment of the promise but there is no pledge yet.
Perfected by delivery of the
Real Contract thing pledged

It has no independent
existence of its own; cannot
Accessory Contract exist without a valid

Characteristics contract

of Pledge The obligation is solely on


the part of the creditor to
Unilateral Contract return the thing pledged
upon fulfillment of
obligation

The obligation incurred


does not arise until the
Subsidiary Contract fulfillment of the principal
obligation
Kinds of Pledge

Conventional Legal
Requisites for a Contract of Pledge

Constituted to secure the fulfillment of a principal obligation;

Pledgor is the absolute owner of the thing pledged;

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

General Rule Exception

• Constructive or symbolic delivery of • If the pledge consists of goods


the thing is not sufficient to stored in a warehouse for purposes
constitute pledge. of showing the pledgee’s control
over the goods, the delivery to him
of the keys to the warehouse is
sufficient delivery of possession
(constructive or symbolic delivery).
• The type of delivery will depend
upon the nature and peculiar
circumstance of each case.
Pledge of Incorporeal Rights

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 restriction on the right of the pledgee hereunder


may only demand the sale of only as many of the
things as are necessary for the payment of the debt.
Parties in a Contract of Pledge

• 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.

Thing • If there are reasonable grounds to fear the


destruction or impairment of the thing
pledged, without the fault of the pledgee,
Pledged 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.
Sale of the • If, without the fault of the pledgee,
there is a danger of destruction,
Thing Even if impairment, or diminution in value of
the thing pledged, he may cause the
the same to be sold at public action.
• The proceeds of the auction shall be
Obligation is security for the principal obligation in the
same manner as the thing originally
pledged.
Not Yet Due
• To demand
Rights of Creditor • From the pledgor an acceptable
substitute of the thing; or
Who is Deceived • The immediate payment of the
principal obligation.
on the Substance
or Quality of the • The remedies are alternative and not
cumulative. Only one may be chosen.
Thing Pledged The law used the conjunctive “or”. Either
one is more convenient than annulment.
Return of the • The return of the thing pledged to the pledgor
by the pledgee shall extinguish the pledge.
Thing Pledged • Any stipulation to the contrary shall be void.
• There is a prima facie presumption that the
thing pledged as been returned by the pledgee
to the pledgor or owner, in any of the
following circumstances:
• If the thing is found in the possession of
the pledgor or owner after the pledge had
Presumption of been perfected; or
• If the thing is found in the possession of a
Return to the third person who received it form the
pledgor or owner after the perfection of
Pledgor/Owner the pledge.
• It is presumed that the accessory obligation of
pledge has been remitted when the thing
pledged, after its delivery to the creditor, is
found in the possession of the debtor, or of a
third person who owns the thing.
• The renunciation or abandonment of the
pledge by the pledgee requires a statement in
Renunciation of writing to that effect.
• The renunciation of the pledge is not contrary
the Pledge by to law, public order, public policy, morals or
good customs.
the Pledgee • Acceptance or return of the thing is not
necessary for the validity of the renunciation.
• Even if the thing was not returned, as long as there is
Necessity to an effective renunciation, abandonment or waiver, the
pledge is already extinguished even if the thing is not
Return the returned.
• The pledgor will be considered as a depositor and the
Thing Pledged pledgee shall become a depositary of the thing.
Accordingly, the law on deposit will apply.
Rights of the Pledgor
• Right to dispose the thing pledged, provided there is consent of the pledgee.
• Right to ask that the thing pledged be deposited in one of the following
instances:
• If the creditor uses the thing without authority.
• Misuses the thing, he may deposit the thing judicially or extrajudicially.
• If the thing is in danger of being lost or impaired because of negligence or
willful act of the pledgee, he may deposit the thing with a third person.
Rights of the Pledgor
• Right to demand the return of the thing pledged in case of reasonable grounds to fear
destruction or impairment of the thing without the pledgee’s fault, subject to the duty of
replacement. The requisites for this are:
• The pledgor has reasonable grounds to fear the destruction or impairment of the
thing pledged
• There is no fault on the part of the pledgee
• The pledgee is offering in place of the thing another thing in pledge which is of the
same kind of quality as the former
• The pledgee does not choose to exercise his right to cause the thing pledged to be
sold at public auction.
• To bid and preferred at the public auction.
Obligations of Pledgor
• To advise the pledgee of the flaws of the thing
• Not to demand the return of the thing until after full payment of the debt,
including interest due thereon and expenses incurred for its preservation.
• Note that the pledgor may be allowed to substitute the thing pledged which is in
danger of destruction or impairment with another thing of the same kind and
quality.
Foreclosure of the Thing Pledged
• A pledgee can foreclose the thing pledged when there is no payment of the debt on
time, the object of the pledge may be alienated for the purpose of satisfying of the
pledgee.
• Exceptions:
• 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; or
• In Yau Chu v. CA, the collateral was money or an exchange of “peso for peso”. In such
case, all that has to be done to convert the pledgor's time deposit certificates into
cash is to present them to the bank for encashment after due notice to the debtor.
Options of an Unpaid Creditor

Abandon the
Foreclose the pledge and file a
thing pledged. claim for
collection.
The obligation must be due and unpaid

Public Sale of The sale of the thing pledged must be


at public auction
a Thing
Pledged; There must be notice to the pledgor
and owner, stating the amount for
Procedure which the sale is to be held

The sale must be conducted by a


Notary Public
Public Sale of a Thing Pledged; Who Can Bid

• The following can bid in the public auction


• The public
• Pledgor/ owner/ debtor
• They shall be preferred if the same terms as the highest bidder is
offered
• Pledgee/ creditor
• He must not be the only bidder, otherwise, his bid is invalid and
void.
Public Sale of a Thing Pledged; Nature

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.

This is to compensate the pledgee for the eventuality where


If the price of the sale is more than the amount of the purchase price is lesser than the amount of the debt,
the debt, the excess will go to the pledgee wherein he cannot retrieve any deficiency unless there is a
contrary agreement.

If the price of the sale is less than the amount of


the debt, the pledgee is not entitled to recover Note that by electing to sell the thing pledged instead of
suing on the principal obligation, the creditor waives any
the deficiency in all cases even if there is a other remedy and must abide by the results of the sale.
stipulation to that effect.
• When the property was not sold at the
Effect if the first auction (such as when there are no
participating bidders), there will be
Thing Pledged another setting for the second auction
following the same formalities.
was not Sold • If no sale was effected in the second
public auction, the pledgee is allowed to
at the First appropriate the thing pledged.
• Note that this is an exception not the
Public Auction prohibition against pactum
commissorium.
Deed of Acquittance

• 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

• Registration of mortgage is a matter of right.


• By executing the mortgage, the mortgagor is understood to have given
his consent to its registration, and he cannot be permitted to revoke it
unilaterally.
Mortgage as a Real and
Inseparable Right
• Mortgage is a real and inseparable right.
• The mortgage directly and immediately subjects the
property upon which it is imposed, whoever the
possessor may be, to the fulfillment of the
obligation for whose security it was constituted.
Extent of Mortgage
• As a general rule, mortgage extends to the following:
• Natural accessions
• Improvements
• Growing fruits
• Rents or income not yet received when the obligation becomes due
• Amount of indemnity granted or owing to the proprietor from
• Insurance proceeds
• Expropriation price
• Exceptions:
• Express stipulation excluding them
• Evidence sufficiently overthrowing the presumption that the
mortgagor owns the mortgaged property.
Effects of Mortgage

It creates
It creates a
merely an
real right
encumbrance
Mortgagee in Good Faith

The doctrine does not


apply to a situation where
A mortgagee has a right to
Hence, even if the the title is still in the name
rely in good faith on the
mortgagor is not the of the rightful owner and
certificate of title of the
rightful owner of, or does the mortgagor is a different
mortgagor of the property
not have a valid title to, the person pretending to be
given as security and in the
mortgaged property, the the owner. In such a case,
absence of any sign that
mortgagee in good faith is the mortgagee is not an
might raise suspicion, has
nonetheless entitled to innocent mortgagee for
no obligation to undertake
protection. value and the registered
further investigation.
owner will generally not
lose his title.
Alienation or Assignment of Mortgage
Credit

The mortgage credit may


Note that even if the
be alienated or assigned to
alienation is not registered,
a third person, in whole or
it would still be valid as
in part, with the formalities
between the parties.
required by law.
Stipulations on Mortgage Contract
• Including after-acquired properties
• VALID
• The purpose is to maintain, to the extent of the allowed by the
circumstances, the original value of the property given as a
security.
• Such stipulation is common where the properties given as
collateral are perishable or subject of inevitable wear and tear.
Stipulations on Mortgage Contract
• Blanket or Dragnet Clause
• VALID
• A dragnet clause is a mortgage provision which is specifically phrased to subsume all
debts of past or future origin.
• It is a valid and legal undertaking, and the amounts specified as consideration in the
contracts do not limit the amount for which the pledge or mortgage stands as
security, if from the four corners of the instrument, the intent to secure future and
other indebtedness can be gathered.
• A pledge or mortgage given to secure future advancements is a continuing security
and is not discharged by the repayment of the amount named in the mortgage until
the full amount of all advancements shall have been paid.
Stipulations on Mortgage Contract
• Forbidding of Alienation or Assignment of Mortgage Credit
• VOID
• In case of alienation, the transferee is bound to respect the encumbrance because
being a real right, the property remains to the fulfillment of the obligation for whose
guaranty it was constituted.
• Note that the assignment of credit, right or action shall be in a public instrument in
order to affect third persons.
• An assignment of credit, right or action shall produce no effect as against third
persons, unless it appears in a public instrument, or the instrument is recorded in
the Registry of Property in case the assignment involves real property. (Art. 1625,
NCC)
Stipulations on Mortgage Contract
• Stipulation Requiring Mortgagee’s Consent Before Alienation
• Valid and binding BUT only in the sense that the mortgagee cannot be compelled to
recognize the sale while the loan is unpaid.
• The sale of the property does not affect the right of the registered mortgagee to
foreclose on the same even if the ownership has been transferred to another.
• Note that such stipulation nonetheless contravenes public policy, being an undue
impediment or interference on the transmission of property.
Stipulations on Mortgage Contract
• Grant of First Refusal
• VALID
• The consideration for the loan-mortgage may be said to include the consideration for the
right of first refusal.
• Acceleration Clause
• VALID
• A stipulation stating that on the occasion of the mortgagor’s default, the whole sum
remaining unpaid automatically becomes due and payable.
• Stipulation of Upset Price
• Void (property should be sold to the highest bidder)
• Upset Price is the minimum price at which the property shall be sold at a public auction.
Possession by Third Person
of the Property Mortgaged

• 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

• Mortgage-creditor has a single cause of action against the mortgage-


debtor, which is to recover the debt but he has the option to either
• File a personal action for collection of sum of money; or
• Institute a real action to foreclose on the mortgaged property.
• Note that the remedies are alternative, not cumulative.
Foreclosure of Real Estate
Mortgage

• Foreclosure is a remedy available to the mortgagee by which he subjects the


mortgaged property to the satisfaction of the obligation.
• Note that if the mortgage-creditor chooses to foreclose the mortgage, he enforces his
lien by the sale on foreclosure of the mortgage property. The proceeds of the sale
will be applied to the satisfaction of the debt. With this remedy, he has a prior lien
on the property. In case of deficiency, the mortgagee has the right to claim for
deficiency resulting from the price obtained in the sale of real property at public
auction and the outstanding obligation at the time of the foreclosure proceedings.
Basis Judicial Foreclosure Extrajudicial Foreclosure
Court Intervention With court intervention Without court intervention
Right of Appeal Decisions are appealable Decisions are not
appealable and are
immediately executory
Cutting off of Rights Order of the court cuts off Foreclosure does not cut
all rights of the parties off the rights of all parties
impleaded involved

Kinds of Right of Redemption GR: No right of


redemption.
XPN: If mortgagee is a
There is right of
redemption

Foreclosure bank, quasi-bank, or trust


entity
Equity of Redemption There is equity of No equity of redemption
redemption
Period of Redemption Redemption starts from Redemption starts from the
finality of judgment until date of registration of the
order of confirmation certificate of sale (1 year)

Necessity of SPA No need for SPA SPA in favor of mortgagee


is essential
Foreclosure

When to exercise Who may exercise What is the extent


When the principal obligation is not The right of foreclosure cannot be Foreclosure must be limited to the
paid when due exercised by any person other than amount mentioned in the
When the debtor has violated the the creditor-mortgagor or his mortgage document
terms and conditions of the assigns
mortgage
Steps in Judicial Foreclosure
• Judicial action brought to the proper court having jurisdiction
• Order by the court for mortgagor to pay mortgage debt if the court finds the complaint to be well-
founded, within a period of not less than 90 days nor more than 120 days from the entry of
judgment
• Sale to the highest bidder at public auction if the mortgagor fails to pay at the time directed in the
court order
• Confirmation of the sale, which operates to divest the rights of all parties to the action and vest
their rights to the purchaser
• Execution of judgment in the manner provided by law on mortgages, the parties not being
authorized to change the procedure prescribed.
• Application of the proceeds of the sale
• Execution of sheriff’s certificate
Necessity for Confirmation of Court in
Foreclosure sale
• A foreclosure sale (in judicial foreclosure) is not complete until it is confirmed
and before such confirmation, the court retains control of the proceedings by
exercising sound discretion in regard to it either granting or withholding
confirmation as the rights and interests of the parties and the ends of justice
may require.
• There can be no redemption of the property after confirmation. Such
confirmation retroacts to the date of the auction sale. After the confirmation,
the previous owners lose any right they may have had over the property,
which rights in turn vested on the Purchaser of the property.
Right to Recover Deficiency

General Rule

• Mortgagee has the right to recover deficiency by way of mere motion

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

The authority is not


The authority to sell may be extinguished by the death of
done in a separate document the mortgagor or mortgagee
but annexed to the contract as it is an essential and
of mortgage. inseparable part of a bilateral
agreement.
Steps in Extrajudicial Foreclosure

• 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

General Rule Exception


When there is a right to redeem, inadequacy of When the price is so inadequate as to shock the
price is immaterial because the judgment debtor conscience of the court taking into consideration
may reacquire the property easier at a low price the peculiarly circumstances attendant thereto.
or sell his right to redeem.
Recovery of Deficiency
• Judicial Foreclosure
• The mortgagee is specifically given the right to claim for the deficiency.
• Extrajudicial Foreclosure
• The plain result of adopting extrajudicial foreclosure is that the creditor waives his
right to recover any deficiency.
• Which the law governing extrajudicial foreclosures of mortgage does not give a
mortgagee the right to recover deficiency after the public auction sale, neither does
it expressly or impliedly prohibit such recovery.
• Note that in both foreclosures, when a third person is the mortgagor, he is not liable for
any deficiency in the absence of a contrary stipulation.
Action for Recovery of Deficiency

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

• Chattel mortgage is a contract by virtue of which personal property is


recorded in the Chattel Mortgage Register as a security for the performance
of an obligation.
• If the movable instead of being recorded, is delivered to the creditor or a
third person, the contract is a pledge.
Characteristics of 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

• General Rule: It covers only movable property.


• Registration with the Chattel Mortgage Register where ethe mortgagor
resides. If the property is located in a different province, registration in
both provinces is required.
• Description of the property.
• Accompanied by an affidavit for the purpose of transforming an already
valid mortgaged to a “preferred mortgage”.
• It can cover only obligations existing at the time the mortgage is
constituted.
• A chattel mortgage shall be deemed to cover
Extent of only property described therein and not like
or substituted property thereafter acquired by
Chattel the mortgagor and placed in the same
depositary as the property originally
Mortgage mortgaged, anything in the mortgage to the
contrary notwithstanding.
Stipulation
• It is valid and binding where the after-acquired
Including property is:
• In renewal of or in substitution for goods
After- on hand; or
• Purchased with the proceeds of the sale
Acquired of such goods.

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.

Mortgage vs. Exception: Unless otherwise


agreed upon; and legal pledge.

Pledge Right of Creditor to


Recover Deficiency from
Debtor
GR: Creditor is entitled to recover
the deficiency form the debtor.
Creditor is not entitled to
recover deficiency
notwithstanding any
Exception: If the chattel mortgage stipulation to the contrary.
is a security for the purchase of
personal property in installments
Continuing Security This can only cover obligations This can be a continuing
existing at the time of the security, that, it may secure
mortgage is constituted future advancement.
Basis Chattel Mortgage Real Estate
Mortgage

Chattel Subject Matter


As to Guaranty of
Personal property
Cannot guaranty
Real property
May guaranty
Mortgage vs. Future Obligations future obligations future obligations
because it requires
Real Estate immediate recording

Mortgage Registration Registered once


recorded in the entry
Registered once
recorded in the
book and Chattel entry book
Mortgage Register
Registration of Chattel Mortgage
• Registration is tantamount to the symbolic delivery of the mortgage to the
mortgagee, which is equivalent to actual delivery.
• The law does not provide a period within which the registration should be made.
Yet, the law is substantially and sufficiently complied with where the registration
is made by the mortgagee before the mortgagor has complied with his principal
obligation and no right of innocent third persons is prejudiced.
Effects of Registration
• Creates a real right
• The registration of the chattel mortgage is an effective and binding notice to
other creditors of its existence and creates a real right or a lien which being
recorded, follows the chattel wherever it goes. The registration gives the
mortgagee symbolical possession.
• Adds nothing to the mortgage
• Registration adds nothing to the instrument, considered as a source of title
and affects nobody’s rights except as a specie of notice.
Effects of Failure of Registration

However, the person in whose


If the instrument is not favor the law establishes a
recorded, the mortgage is mortgage has no other right
nevertheless binding between than to demand the
the parties. execution and the recording
of the document.
Liability of Third Person
with Debtor

• A third person who constitutes chattel mortgage on his own property as


security to another’s obligation not solely by reason thereof becomes
solidarily bound with the principal debtor.
• After payment of the debt or
the performance of the
condition specified in the
Chattel Mortgage, the
Discharge of mortgagee must discharge
the mortgage in the manner
Mortgage provided by law. Otherwise,
he may be held liable for
damages by any person
entitled to redeem the
mortgage.
Foreclosure of Chattel Mortgage
If the mortgagor defaults in the payment of the secured debt or otherwise
Public fails to comply with the conditions of the mortgage, the creditor has no
right to appropriate to himself the personal property because he is
Sale permitted only to recover his credit from the proceeds of the sale of the
property at a public auction through a public officer in the manner
prescribed in the law.

There is nothing illegal, immoral, or against public order in an agreement


Private for the private sale of the personal properties covered by the chattel
mortgage. The mortgagor is in estoppel to question it except on the
Sale ground of fraud or duress.
Period to Foreclose the Mortgage

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

Where mortgage is constituted


Where the mortgage is as security for purchase of Where mortgaged property is
foreclosed personal property payable in subsequently attached and sold
installments
• The creditor may maintain an • No deficiency judgment can • The chattel mortgagee is
action for deficiency although be asked and any agreement entitled to deficiency
the Chattel Mortgage Law is to the contrary shall be void. judgment in an action for
silent on this point. specific performance.
• Action for deficiency may be • The execution sale in such
brought within 10 years from case is not a foreclosure sale.
the time the cause of action
accrues.
• Who may exercise the right of redemption
• Mortgagor
Redemption • Person holding a subsequent mortgage
• Subsequent attaching creditor
HOW Redemption is Made

By paying or delivering to the


mortgagee the amount due
Note that this redemption
on such mortgage and the
partakes of an equity of
costs and expenses incurred
redemption.
by such breach of condition
before the sale thereof.
WHEN Redemption is Made

• It must be made after his default but


before the foreclosure sale. After
foreclosure sale, the right of
redemption no longer exists.
Right of • After default
Mortgagee to • The right of the creditor to take the
mortgaged property is implied from
the Possession the provision which gives him the
right to sell
of the • Before default
• He is not entitled to possession.
Foreclosed Otherwise, the contract becomes a
pledge.
Property
End

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