Chapter 4 Legal and Judicial Bonds

PLEDGE AND MORTGAGE

PROVISIONS COMMON TO PLEDGE AND MORTGAGE

Article 2085. The following requisites are essential to the contracts of pledge and mortgage:

(1)That they be constituted to secure the fulfillment of a principal obligation;

(2)That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

(3)That 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.

(4)Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own
property.

Article 2086. The provisions of article 2052 are applicable to a pledge or mortgage. [A guaranty cannot exist without a valid
obligation. However, it may guarantee the performance of a voidable or unenforceable contract or a natural obligation]

Article 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things in which
the pledge or mortgage consists may be alienated for the payment to the creditor.

WHAT IS PLEDGE?

It is a contract by virtue of which the debtor delivers to the creditor or to a third person a movable or a document involving
incorporeal rights for the purpose of securing the fulfillment 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.

What are the kinds of pledge? Pledge may be either:

1. Voluntary or conventional (created by agreement of the parties);

2. Legal (by operation of law).

What are the characteristics of pledge? [RAUS] Pledge is:

1. Real, because it is perfected by delivery of the thing pledged.

2. Acessory, because it has no independent existence.

3. Unilateral, because it creates an obligation solely on the part of the creditor to return the thing pledged upon fulfillment of
the principal obligation.

4. Subsidiary, because the obligation of the creditor does not arise until fulfillment of the principal obligation.

WHAT IS THE CONSIDERATION IN PLEDGE?

If the pledgor is also the debtor, the consideration is the principal contract.

If the pledgor is a third person, the cause it the compensation received or the liberality of the pledgor.

WHAT ARE THE DIFFERENCES BETWEEN PLEDGE AND MORTGAGE?

1. Mobility – pledge is constituted on movables; mortgage on immovables.

2. Delivery – pledge requires delivery for perfection; mortgage does not.

3. Requisites to bind third person/s – pledge, to bind third persons must be in a public instrument; mortgage, must be
registered in the proper registry.
A LOAN IS SECURED BY BOTH A PLEDGE AND A GUARANTY. CAN THE CREDITOR REFUSE PAYMENT BY THE GUARANTOR AND
CHOOSE TO FORECLOSE IN ORDER TO SATISFY THE DEBT? No, payment by the guarantor cannot be refused.

WHAT ARE THE ESSENTIAL REQUISITES OF PLEDGE AND MORTGAGE? [PRADO]

1. Purpose - To secure fulfillment of principal obligation;

2. Real – There must be delivery of the thing.

3. Alienation – when the principal obligation becomes due and the debtor defaults, the thing

may be alienated to satisfy the former.

4. Disposal – Pledgor/mortgagor must have free disposal of the thing or capacity to dispose.

5. Ownership – Pledgor/mortgagor must be the absolute owner of the thing;

PURPOSE: To secure fulfillment of a principal obligation

WHAT IF THE THING PLEDGED/MORTGAGED IS SUBSEQUENTLY LOST; WHO BEARS THE LOSS? IS THE PRINCIPAL OBLIGATION
EXTINGUISHED?

The pledgor bears the loss. Remember that there hasn’t been transfer of ownership. The principal obligation is of course not
extinguished, the pledge/mortgage is only accessory. However, the debtor must replace the thing or lose the benefit of the
period.

Pledge/mortgage is a direct lien on the property. It is better than guarantee because the property pledged can be sold upon
default by the debtor, unlike in guaranty where several requirements have to be complied with
first._______________________

PROBLEM: D TRANSFERS PROPERTY TO C AND AT THE SAME TIME EXECUTES AN INDEMNITY AGREEMENT; OR D TRANSFERS
PROPERTY TO C TO SECURE AN EXISTING OBLIGATION. HOW WILL THE TRANSFER BE CHARACTERIZED?

Both transfers will be characterized as pledges. ___________________________

REAL: There must be delivery of the thing to perfect the contract.

An agreement to pledge, when there is breach, gives rise to damages.

ALIENATION: When the principal obligation becomes due and the debtor defaults, the thing may be alienated to satisfy the
former.

DOES THE CREDITOR HAVE TO GO TO COURT TO ENFORCE THE PLEDGE OR MORTGAGE?

No, to require litigation would be to nullify the lien and defeat the purpose of the contract.

FREE DISPOSAL:

WHAT DO “FREE DISPOSAL” AND “CAPACITY TO DISPOSE” OF THE PROPERTY MEAN?

Free disposal means that the property is not subject to any claim by a third person. Capacity to dispose means that though the
pledgor/mortgagor does not have free disposal, the third person with a claim authorized him to dispose (tingin ko lang).

In case of corporations, the board should adopt a resolution to approve the pledge/mortgage. If what is to be pledged or
mortgaged constitutes all of the corporation’s assets, 2/3 of outstanding capital stock must approve.

Rule on consent: If pledgor/mortgagor is married, consent of spouse is needed; if agent, authorization of principal.

For married persons – how to wiggle out of a pledge or mortgage agreement: Pledge or mortgage your conjugal property
without your spouse’s signature. In case the property is foreclosed, you can raise the defense that there was no consent
(remember, half consent is no consent!)
What if the pledge was constituted to secure an obligation of the family business, doesn’t this redound to the benefit of the
conjugal partnership?

No, JPSP said that the pledge of conjugal property con only be considered to redound to the benefit of the partnership if the
family business is constituting pledges.

If you are the pledgee/mortgagee, check if pledgor/mortgagor has authority to dispose of the property.

Another example on free disposal or legal authority:

Ex. Pledgor corporation is placed under receivership. The corporation cannot pledge shares of stock because pledge is a
disposition requiring court approval. ________________________________

OWNERSHIP:

CAN FUTURE PROPERTY BE PLEDGED?

No, it is essential that the pledgor be the absolute owner of the thing.

Note: It is the sale and not the registration in the LTO that transfers ownership of a vehicle.

Note: A co-owner can only pledge/mortgage his ideal share in the co-ownership.

Note: A mortgagor can rely on what is on the face of the Torrens title.

WHAT IS MEANT BY ABSOLUTE OWNERSHIP?

BOTH BENEFICIAL AND LEGAL TITLE must vested in the pledgor/mortgagor

Ex. Trustee is legal owner of shares of stock; trustor is beneficial owner: Neither can pledge the shares.

Pledge/mortgage can’t be constituted without a principal obligation even if there is a subsequent principal obligation. This is
different from situation where the lender extends a credit line for 1M, though borrower has not yet drawn, the credit line
can still be secured via pledge/mortgage.

Ex. deed of assignment/absolute sale to secure fulfillment of obligation Æ this is a mortgage or an implied trust according to
the SC.

The pledgor/mortgagor must be absolute owner of the thing or the property. The creditor may rely on the title/stock
certificate if there is no notice of defect in title.

However, failure of the pledgor to present the thing is a red flag that should put the pledgee on guard as to the pledgor’s
right to pledge the thing. _______________________________

Though the pledgor must own the thing and have free disposal of it, see the following problem discussed in class:

Ex. On day 1, stocks are sold to X with the condition that the sale will be effective if X tops the bar.

On day 2, X pledges the stocks.

On day 3, the bar exam results come out, with X in the number one spot. Is the pledge valid?

Yes, the pledge is valid. Remember Oblicon, conditional obligations? The effects of a conditional obligation to give, when the
condition happens, retroact to the date of the constitution of the obligation. OWNERSHIP RETROACTS TO DAY 1.

In the above condition, what if the condition is resolutory?

As long as the pledge is registered in a public document, it is valid and binding as to third persons.

Ex: Day 1 - X receives from A shares of stock with the resolutory condition that they shall be returned to A if X does not pass
the bar. Day 2 – X pledges the shares. Day 3 – X fails the bar.
Is the pledge valid? Yes. As long as the pledgee registered the pledge in a public instrument, such pledge is binding on A.

*But if you use the argument that the effects retroact, doesn’t that mean that when X pledged the things, he wasn’t the
owner? I suppose the public instrument is stronger than the legal fiction.

CAN THE CREDITOR IMMEDIATELY ACCEPT A PLEDGE FURNISHED BY A DEBTOR IF THE PLEDGE BELONGS TO A THIRD
PERSON?

No, the creditor cannot require on the word of the pledgor/mortgagor alone, he must exercise due care and make sure the
pledge/mortgage has given consent. This is especially true in the banking industry, which is impressed with public interest.

WHAT IS THE CONSEQUENCE THEN IF THE CREDITOR DOES NOT VERIFY WITH THE PLEDGOR/MORTGAGOR?

The pledge/mortgage is null and void. Article 599 gives the owner of a movable who has been unlawfully deprived thereof the
right to recover the same.

(1)Article 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void.

WHAT DOES THE CREDITOR WITH THE PLEDGE/MORTGAGE WHEN THE DEBTOR DEFAULTS?

The creditor can move for the sale of the thing pledged or mortgaged.

WHAT IF THE CREDITOR WANTS TO ACQUIRE THE THING? He may purchase it at the public auction.

WHAT IF THERE IS A STIPULATION THAT THE CREDITOR WILL ACQUIRE THE THING UPON DEFAULT?

The stipulation (pactum commissorium) is null and void

WHAT ARE THE REQUISITES FOR PACTUM COMMISSORIUM TO EXIST?

1. There should be a pledge/mortgage;

2. There should be a stipulation for AUTOMATIC appropriation or the thing in case of default by the debtor.

ARE THERE ANY EXCEPTIONS TO PACTUM COMMISSORIUM?

Yes, Article 2112 provides that if the thing pledged or mortgaged is not sold in two public auctions, the creditor may
appropriate the same.

WHAT IS THE REASON FOR THE PROHIBITION?

The value of the thing pledged or mortgaged is usually more than the amount of the obligation.

WHAT HAPPENS TO THE CONTRACT OF PLEDGE/MORTGAGE IF THERE IS A STIPULATION OF PACTUM COMMISSORIUM; IS IT

VOID?

No, only the stipulation is void; the principal contract will subsist.

HOW CAN YOU OPT OUT OF THE PROHIBITION ON PACTO COMMISSORIO?

1. You can enter into another contract subsequent to the pledge/mortgage. The prohibition applies only to stipulations made
in the contract of pledge/mortgage.

2. The debtor can voluntarily cede the property to the creditor. This would in effect be a novation of the pledge/mortgage.

3. There can be a stipulation where the debtor merely promises to sell; non-compliance would give the creditor, not a right to
the property, but an action for damages.

4. There can be a stipulation granting the creditor authority to take possession and not ownership of the property upon
foreclosure.
Examples on pactum commissorium:

Ex. X corporation pledges shares; the pledge agreement states that pledgee has authority to instructCorporate Secretary of X
to transfer shares in name of pledgee in case of default. VALID?

NO. The execution of document transferring the shares is only a confirmation of the sale that wasalready consummated
automatically.

Ex. If the agreement is that, upon default, pledgee sells the things pledged at market price andapplies profits to the
outstanding obligation. Valid?

Yes. There is no automatic transfer of ownership. In fact, the sale of the thing to satisfy the obligation

is the essence of pledge.

Ex. Upon default, pledgor conveys property to pledgee by dation; and for the purpose, pledgee isattorney in fact of pledgor.
Valid?

YES. It is not automatic; there is need for another agreement to be entered into.

Ex. Pledgee has the option to purchase the thing upon default at price certain. Valid?

Yes. There must be a subsequent sale; it is not automatic.

Remember, for PC to exist, the EFFECTIVE ACT IS DEFAULT, upon which, there is automatic transfer

of ownership.

Article 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the
debtor or of the creditor.

Therefore, the debtor’s heir who has paid a part of the debt cannot ask for the proportionate share of extinguishment of the
pledge or mortgage as long as the debt is not completely satisfied. Neither can the creditor’s heir who has received his share of
the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not yet been paid. From these
provisions is excepted the case in which, there being several things given in mortgage or pledge, each one of them guarantees
only a determinate portion of credit. The debtor, in this case, shall have the right to the extinguishment of the pledge or
mortgage as the portion of the debt for which each thing is specially answerable is satisfied.

Article 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable.

WHAT DO YOU MEAN PLEDGE/MORTGAGE IS INDIVISIBLE?

Ex: 1M Loan. It was secured by REM. The REM covered several (100) condominium units. In accordance with the schedule,
there was payment of 100K, can you ask release of corresponding amount of units?

No release. Pledge is indivisible.

WHAT ARE THE EXCEPTIONS TO INDIVISIBILITY:

1. Where each one of several thing guarantees a determinate portion of credit. Ex: If you have 100 mortgages securing
corresponding portion of the loan, then when the corresponding portion is paid, the corresponding pledge/mortgage is
extinguished. All 100 mortgages may be in the same document. Or, if the parties agree to allow partial discharge of the
pledge/mortgage. How? Cancel pledge/mortgage and constitute a new pledge/mortgage.The downside is that you must
again pay doc. stamps and reg. fees, unlike in the document with 100 mortgages, where the fees are only paid once.

2. If there was only partial release of the loan. CB v. CA. The bank only released a portion of the loan; the court ordered a
corresponding portion of the REM to be released.

3. Where there was failure of consideration. Creditor took over management but the business failed.
Article 2091. The contract of pledge or mortgage may secure all kinds of obligations, be they pureor subject to a suspensive or
resolutory condition.

Pledge/mortgage may secure all sorts of valid, voidable, unenforceable obligations.

Article 2092. A promise to constitute a pledge or mortgage gives rise only to a personal actionbetween the contracting parties,
without prejudice to the criminal responsibility incurred by himwho defrauds another, by offering in pledge or mortgage as
unencumbered, things which he knew were subject to some burden, or by misrepresenting himself to be the owner of the
same.

PROVISIONS APPLICABLE ONLY TO PLEDGE

Article 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.

Remember. Pledge/mortgage are real contracts.

If you agree, but don’t deliver to the pledgee or a third person/s, there is no pledge but there is an

agreement to enter into a pledge.

Can delivery be made to the pledgor?

Yes, if he is acting as agent of pledgee or where the thing pledged is so unwieldy as to make delivery

impossible, constructive delivery is allowed.

What may be the objects of pledge?

Movables within the commerce of man.

Delivery may be the actual thing or a title (certificates of deposit, stocks).

Must be indorsed. Shares of stock not negotiable so no indorsement is required, however, for safety

reasons, the same may be required.

Article 2094. All movables which are within commerce may be pledged, provided they are susceptible of possession.

Article 2095. Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares of stock, bonds, warehouse
receipts and similar documents may also be pledged. The instrument proving the right pledged shall be delivered to the
creditor, and if negotiable, must be indorsed.

Article 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.

The problem here is: how do third persons check if the thing is pledged when the thing isn’trepresented by some sort of title
which can be annotated?

They can’t but they should exercise diligence. Red flags would be failure or inability of debtor to show the thing or the title
to the thing.

No requirement as to form but to affect third persons, it must be in a public instrument (notarized document).

Article 2097. With the consent of the pledgee, the thing pledged may be alienated by the pledgor or owner, subject to the
pledge. The ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledgee consents to the
alienation, but the latter shall continue in possession.

Ex: pledgor pledges property to pledgee to secure a loan. Pledge is in a public instrument. Pledgor sell property to third
person/s without notice to pledgee – sale is valid but transfer of ownership is suspended until pledgee consents.
Why would the pledgee want to be informed – administrative purposes; who gets property when obligation is paid.

Article 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.

Article 2099. The creditor shall take care of the thing pledged with the diligence of a good father of a family; he has a right to
the reimbursement of the expenses made for its preservation, and is liable for its loss or deterioration, in conformity with the
provisions of this Code.

Article 2100. The pledgee cannot deposit the thing pledged with a third person, unless there is a stipulation authorizing him to
do so.

The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged.

Remedy of pledgor if pledgee deposits it with a third party without authority?

The pledgor may demand extrajudicial deposit of the thing under 2104 or deposit with a third person/s in 2106.

If the pledgee deposits the thing with a third person without authorization, can the pledgor demand resolution of the pledge
agreement?

Yes. Substantial breach under 1191 gives the injured party the right to resolve the obligation. It can be argued that the
principal consideration was that the custodian be the pledgee; now if the creditor transfers possession, it’s a principal
breach.

Article 2101. The pledgor has the same responsibility as a bailor in commodatum in the case under article 1951. [The pledgor
who, knowing the flaws of the thing pledged, does not advise the pledgee of the same, shall be liable to the latter of the
damages which he may suffer by reason thereof.]

Article 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.

In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of animals pledged, but shall be subject to
the pledge, if there is no stipulation to the contrary.

The creditor who receives the fruits should apply them to whatever amount is owing (obligations due and payable), if not
due, the fruits just form part of the pledge.

If the period is for the benefit of the pledgee, even if the obligation is not due, he may compensate against the interest or
the principal, as the case may be.

Ex: Lender lends Borrower money, payable upon demand. To secure the loan, B pledges a goat. Here the benefit of the
period is for the creditor, L. L may then take the goat’s milk and offspring and compensate against what is owing him even if
the obligation is not yet due.

Article 2103. Unless the thing pledged is expropriated, the debtor continues to be the owner thereof. Nevertheless, the
creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it from, or defend it against
a third person.

If the thing is expropriated, the thing will continue with respect to the thing given. Æ labo!

Article 2104. The creditor cannot use the thing pledged, without the authority of the owner, and if he should do so, or should
misuse the thing in any other way, the owner may ask that it be judicially or extrajudicially deposited. When the preservation of
the thing pledged requires its use, it must be used by the creditor but only for that purpose.

The creditor can only use the thing if he is authorized or its preservation requires use. If he misuses it, the pledgor can
demand extrajudicial deposit.
Article 2105. The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has
paid the debt and its interest, with expenses in a proper case.

Article 2106. If through the negligence or willful act of the pledgee, the thing pledged is in danger of being lost or impaired, the
pledgor may require that it be deposited with a third person.

Though the pledgor cannot demand return of the thing unless the obligation is fulfilled, if the thing pledged is in danger of
being lost or impaired through the pledgee’s willful act or negligence, he may require its deposit with a third person.

Article 2107. If there are reasonable grounds to fear the destruction or impairment of the thing pledged, without the fault of
the pledgee, 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 under the provisions
of the following article. The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged.

Article 2108. If, without the fault of the pledgee, there is danger of destruction, impairment, or diminution in value of the thing
pledged, he may cause the same to be sold at a public sale. The proceeds of the auction shall be a security for the principal
obligation in the same manner as the thing originally pledged.

If the thing is in danger of diminution or destruction, without the pledgee’s fault, the pledgor may demand its return, provided
he replaces it with another of the same kind and quality.

Despite the pledgor’s right above, in the same situation, the pledgee may opt to sell the thing and keep the proceeds; the
pledgee’s right takes precedence over the pledgor’s. In this case, the proceeds of the sale shall be security for the debt.

In 2108, upon due date, if the cash value is less than the principal obligation, the creditor can still recover the balance from
the debtor, unlike in foreclosure. Æ this looks important.

The pledgor can question the sale, alleging that he could have obtained a better price.

Article 2109. If the creditor is deceived on the substance or quality of the thing pledged, he may either claim another thing in
its stead, or demand immediate payment of the principal obligation.

This is an instance where the debtor loses the benefit of the period: If the debtor dupes the creditor as to the quality of the
thing, the creditor may demand immediate payment or delivery of another security.

Article 2110. If the thing pledged is returned by the pledgee to the pledgor or owner, the pledge is extinguished. ANY
STIPULATION TO THE CONTRARY SHALL BE VOID.

If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner, 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.

If after the perfection of the pledge, the property is in the possession of the pledgor, as owner, the presumption is that it was
returned and extinction of the pledge, UNLESS the owner holds it as agent of the pledgee.

*Article 2111. A statement in writing by the pledgee that he renounces or abandons the pledge is sufficient to extinguish the
pledge. For this purpose, neither the acceptance by the pledgor or owner, nor the return of the thing pledged is necessary, the
pledgee becoming a depositary.

PROBLEM: TO SECURE HIS LOAN, BORROWER PLEDGED HIS CAR TO LENDER. OUT OF THE KINDNESS OF HIS HEART, LENDER
COMPOSED A LETTER RENOUNCING THE PLEDGE. HE USED THE CAR TO DRIVE TO THE POST OFFICE AND MAILED THE
LETTER.

WHILE DRIVING HOME, LENDER SPOTTED BORROWER WITH LENDER’S WIFE AND FELT VERY ANGRY AND JEALOUS.

WHEN BORROWER RECEIVED THE LETTER, HE WENT TO LENDER’S HOUSE TO RECOVER THE CAR BUT LENDER REFUSED AND
TOLD BORROWER TO PISS OFF. CAN LENDER REFUSE TO RETURN THE CAR?
Article 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.

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.

WHAT ARE THE FORMALITIES REQUIRED FOR THE NOTARIAL SALE?

(1) the debt is due and unpaid;

(2) the sale must be at a public auction;

(3) there must be notice to the pledgor and owner, stating the amount due; and

(4) the sale must be with the intervention of a notary public.

How is the public sale conducted?

Default rule: Proceed before a Notary Public and ask him to conduct a notarial sale. The notary supervises the sale of the
pledged property, drafts the rules and notifies the debtor and the owner.

Is there a period required for notification?

No particular period is required by law. Notice can be given right before close of office the day preceding the sale. Before
that date, debtor already defaulted; he should have known a notarial sale was forthcoming.

The reason, according to JPSP, is, if there were a period, the pledgor would be able to litigate and obtain an injunction.

Can it be a private sale? Ex: stocks pledged, listed on the PSE and just coursed through a broker. Yes – there is no express
prohibition. But see the de Leon book under Article 2112.

Exception to pactum commissorium Æ if the thing is not sold after two sales, the creditor may appropriate the thing and it
shall be considered as full payment for the entire obligation.

Article 2113. At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right if he 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.

The pledgor is allowed to bid and all things being equal, his bid shall be preferred over that of others. The law wants to
conserve the property in the owner.

The pledgee may also bid, but his offer shall not be valid if he is the only bidder because the law seeks to prevent fraud.
Fraud is possible if the parties had stipulated that the debtor shall be allowed to the excess and the creditor, who is bidding
alone, bids low.

Article 2114. 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.

Pledgee can waive cash requirement, but that is his lookout.

Article 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are
equal to the amount of the principal obligation, interest and expenses in a proper case.

If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If
the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to
the contrary.
The obligation is extinguished when the pledge is sold regardless of whether the proceeds are less or more than the amount
of the obligation. Unlike in a mortgage, there can be recovery of deficiency.

IN PLEDGE, YOU CAN STIPULATE THAT THE DEBTOR WILL BE ENTITLED TO THE EXCESS BUT YOU CAN’T STIPULATE THAT THE
CREDITOR WILL BE ALLOWED TO RECOVER DEFICIENCY.

PROBLEM: IN THE PLEDGE AGREEMENT, THE PARTIES STIPULATED THAT, IN CASE OF NOTARIAL SALE, THE PLEDGOR SHALL BE
ENTITLED TO THE EXCESS AND THE PLEDGEE SHALL BE ENTITLED TO RECOVER THE DEFICIENCY. ARE THE STIPULATIONS
VALID?

The stipulation that the debtor shall be entitled to the excess is valid. The stipulation giving the creditor the right to recover
the deficiency is void. See Article 2115.

HOW DO YOU GUARD AGAINST THE SITUATION OF NOT BEING ABLE TO RECOVER THE DEFICIENCY IF YOU ARE THE PLEDGEE?

Set a minimum bid (if this is actually allowed; JPSP says yes, book says no) OR

Instead of selling the thing, just sue for the entire obligation.

OR

Stipulate that if the value of the pledge goes under a certain amount, then the debtor shall be obliged to pledge additional
securities.

Ex: 1M obligation, 1.5M worth of stocks pledged; stipulate that if the value goes below 1.3M then the debtor will be obliged
to pledge additional securities.

Without such a stipulation, can Article 2108 have the same effect?

Ex: 1M obligation, 1.5M worth of stocks pledged. When the stocks go down top 1.4M, can you claim that the value of the
pledge is diminishing and then choose to sell the stocks for 1.4M, keeping the profits as security, pursuant to 2108?

JPSP says: “Maybe but speculative.” Probably not if the change in price is just a day-to-day fluctuation.

PROBLEM: 1M IS SECURED BY A 700K MORTGAGE AND A 900K PLEDGE. IF YOU ARE THE LENDER, AND THE BORROWER
DEFAULTS, WHICH SECURITY TO YOU GO AFTER FIRST?

Go against the REM first, then take the whole pledge and make $$$! In REM, unlike in pledge, the debtor is entitled to the
excess and the creditor is entitled to recover the deficiency, as a default rule.

Article 2116. After the public auction, the pledgee shall promptly advise the pledgor or owner of the result thereof.

This is to allow the debtor to take reasonable steps if he suspects that the sale was not honest

Article 2117. 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.

The creditor cannot refuse payment by a third person WITH AN INTEREST in the thing pledged.

Third party can be a buyer of the thing or someone with a junior lien.

Why would a third person with a junior lien want to pay the obligation? The property may be more valuable than the
obligation and he may want his lien to become senior.

Article 2118. 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.

Under this article, the thing pledged is a credit which has become due. The creditor can thus collect the amount due and
compensate, DELIVERING THE SURPLUS TO THE DEBTOR.

The pledgee has the duty to collect any due credits, in line with the ordinary diligence required of him.
Article 2119. If 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.

He may demand the sale of only as many of the things as are necessary for the payment of the debt.

PROBLEM: A 1.5M DEBT IS SECURED BY 2M WORTH OF SMC SHARES. IF YOU ARE THE PLEDGEE, HOW WOULD YOU SELL?

Sell all. You are not required to sell by piece.

Pledgor can restrict only if there are two pledges securing the obligation.

Article 2120. If a third party secures an obligation by pledging his own movable property under the provisions of article 2085 he
shall have the same rights as a guarantor under articles 2066 to 2070, and articles 2077 to 2081.

He is not prejudiced by any waiver of defense by the principal obligor.

The third party pledgor is entitled to:

1. Indemnity;

2. Subrogation;

3. Pledgor is released if creditor accepts property in payment of debt;

4. Release in favor of one pledgor benefits all;

5. Extension granted to debtor extinguishes pledge;

6. Pledgors are released from obligation if by some act of the creditor, there can be no subrogation;

7. Pledgor may set up defenses inherent in the debt.

Article 2121. Pledges created by operation of law, such as those referred to in articles 546, 1731, and 1994, are governed by the
foregoing articles on the possession, care and sale of the thing as well as on the termination of the pledge. However, after
payment of the debt and expenses, the remainder of the price of the sale shall be delivered to the obligor.

Article 2122. 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. 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.

In pledges by operation of law, the remainder of the sale price shall be delivered to the debtor

The foregoing articles govern the following pledges by operation of law; BUT after sale, the excess, if any, is returned to the
pledgor:

• Possessor in good faith may retain the thing on which he spent for necessary expenses until he is reimbursed.

• He who works on a movable may retain the same until paid for the work.

• Depositary may retain thing until paid for the deposit.

• Agent may retain objects of agency until reimbursed by principal.

• Laborer’s wages are considered a lien on goods manufactured or work done.

How about any deficiency? -> I think creditor will be entitled to recover because here, he did not accept the pledge
voluntarily and the reason for prohibiting recovery is absent (the reason being that creditors should know not to lend more
than what can be secured).
Article 2123. With regard to pawnshops and other establishments, which are engaged in making loans secured by pledges, the
special laws and regulations concerning them shall be observed, and subsidiarily, the provisions of this Title.

REAL MORTGAGE

Art. 2124. Only the following property may be the object of a contract of mortgage:

(1) Immovables;

(2) Alienable real rights in accordance with the laws, imposed upon immovables.

Nevertheless, movables may be the object of a chattel mortgage.

Mortgage (def). A real estate mortgage is a contract whereby the debtor secures to the creditor the fulfillment of a principal
obligation, specially subjecting to such security immovable property or real rights over immovable property in case the
principal obligation is not complied with at the time stipulated.

What are the characteristics of the contract of mortgage?

Mortgage is a real, accessory, and subsidiary contract.

Who takes possession of the mortgaged property?

As a general rule, the mortgagor retains possession of the property mortgaged.

However, it is not an essential requisite of the contract of mortgage that the property remains in the possession of the
mortgagor. If the mortgagor delivers the property to the mortgagee, it can still be a contract of mortgage, plus some other
contract.

What is the consideration in a contract of mortgage? Since mortgage is an accessory contract, the consideration is the same as
that of the principal contract.

What are the kinds of real mortgage?

1. Voluntary – Agreed to between the parties or constituted by the will of the owner of theproperty

2. Legal – Required by law to be executed in favor of certain persons

3. Equitable – Lacks the proper formalities of mortgage but shows the intention of the parties to make the property as a
security for a debt.

What is the subject matter of real mortgage

1. Immovables

2. Alienable rights imposed upon immovable

Can you mortgage future property?

Future property CANNOT be the object of a contract of mortgage. One cannot constitute a mortgage on “any other property he
might have now and those he might acquire in the

future.” Remember that one of the essential requisites of mortgage is that the mortgagor should be the absolute owner of the
thing mortgaged.

But a stipulation which says that the mortgage covers future improvements upon real propertyalready mortgaged is valid. This
is because these future improvements are deemed included in the real property by accession; they are not separate from the
real property already subject of the mortgage.
Art. 2125. In addition to the requisites stated in Article 2085, it is indispensable, in order that a mortgage may be validly
constituted, that the document in which it appears be recorded in the Registry of Property. If the instrument is not recorded,
the mortgage is nevertheless binding between the parties.

The persons in whose favor the law establishes a mortgage have no other right than to demand the execution and the
recording of the document in which the mortgage is formalized.

Art. 1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the following article,
the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be
exercised simultaneously with the action upon the contract.

Art. 1358. The following must appear in a public document:

(1) Acts and contracts which have for their object the creation, transmission, modification, or extinguishment of real rights over
immovable property…

What are the requisites of real mortgage?

1. It must be constituted to secure a principal obligation.

2. The mortgagor must be the absolute owner of the thing mortgaged.

3. He must have free disposal of the thing or otherwise be authorized to do so.

4. When the principal obligation becomes due, the property mortgaged may be alienated for the payment to the creditor.

5. To prejudice third persons, the mortgage must be recorded in the Registry of Property

If the first four requisites are present, there is already a valid mortgage between the parties – mortgagor and mortgagee

But to affect third persons, there is a need to comply with the fifth requisite: The document of mortgage must be recorded in
the Registry of Property. This is because recording the document in the Registry of Property serves as notice to 3rd persons.
This is similar to the requirement in pledge that the pledge be in a public document.

Can there be an oral mortgage?

As between the parties, YES. As long as the four essential requisites above are present, there is already a mortgage between
the parties. It need not be in writing in order to be enforceable since it is not covered by the Statute of Frauds.

But the oral mortgage is not binding against third persons. And the mortgagee cannot register the mortgage in the Registry of
Property if it is an oral mortgage. So his remedy is to invoke Art. 1357 and 1358. 1357 provides that if there is already a valid
contract, one party can compel the other party to observe the proper form. In this case, since there is already a valid mortgage
between the parties, the mortgagee can compel the mortgagor to execute a public document of mortgage, so that the
mortgagee can then register it in the Registry of Property.

Remember that 1357 is only for convenience. Its purpose is to compel the mortgagor to execute a public document, so that the
mortgagee can register the mortgage. It does not determine the validity or even the enforceability of the mortgage between
the parties. Before you can invoke it, there has to be a valid mortgage first.

Once the previously oral mortgage is in a public document and is subsequently registered in the Registry of Property, it
becomes binding on third persons.

Procedure: What happens when you enter into a contract of mortgage?

Step 1: Execute the document of mortgage

Step 2: Go to a notary public, who will notarize the document.

Step 3: Pay the documentary stamp tax within the first five days of the succeeding month. The doc stamp tax is a percentage of
the value of the property mortgaged.
Step 4: Go to the Office of the Register of Deeds and pay the registration fees. Before you pay the registration fees, the
government will require you to update payment of realty taxes on the property. After payment of the registration fees, the
mortgage will be annotated on the title.

Problem: Mortgagor mortgages a house and lot worth 500K to Mortgagee to secure a principal obligation of “100K and any
and all future indebtedness.” The mortgage is registered. Meanwhile, Mortgagor owes another creditor, X, 500K. The total
indebtedness of Mortgagor to Mortgagee eventually reaches 500K. On due date, Mortgagor fails to pay both X and Mortgagee.
The house and lot is his only property. X is able to obtain a writ or attachment on the house and lot. Who has a better right to
the house and lot – X or mortgagee?

Mortgagee has a better right with respect only to 1/5 of the house and lot. This is because the mortgage was registered only to
the extent of 100K, and not to the “any and all future debts.” Therefore, the mortgage is binding on third persons only with
respect to the 100K debt, or 1/5 of the house. X can argue on two grounds:

1. That Mortgagee paid doc stamp taxes based only on the 100K debt, not on the succeeding 400K debt. So he even cheated
the government of its revenues in this case.

2. Besides, at the time of the mortgage, the 400K debt was non-existent.

Therefore, X has a better right with respect to the 4/5 which was not registered.

How does mortgagee opt out of this problem?

1. He can do a credit line arrangement in which he will give the debtor a ceiling up to which he can borrow. The mortgage deed
will say that the principal obligation is 500K, but debtor has the choice of asking for a release of funds below this ceiling. This
way, the mortgagee is sure that the entire 500K loan is registered. But this is costly, since the doc stamp tax will be based on the
ceiling and not on the actual amount released.

2. The better solution is that the mortgagee should execute and register a new document each time he releases funds to the
mortgagor/debtor.

What happens if the mortgage is void?

If for some reason, the mortgage is void, the principal obligation subsists. What is lost is only the right of the creditor to
foreclose the mortgage in order to satisfy the principal obligation. Moreover, even if the mortgage itself is void, the mortgage
deed remains as proof of the principal obligation.

Art. 2126. 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.

In guaranty, the property of the guarantor is not subjected to a lien. The action of the creditor is against the guarantor himself
and not against his property. The creditor would still have to sue the guarantor, obtain judgment, execute it, etc.

On the other hand, in mortgage, the property is subjected to a lien. It creates a real right which is inseparable from the
property mortgaged. It is enforceable against the whole world (provided it is registered). Until the principal obligation is
discharged, the mortgage follows the property wherever it goes and subsists even if the ownership changes.

So if the mortgagor sells the mortgaged property, the property still remains subject to the fulfillment of the obligation secured
by it. All subsequent purchasers must respect the mortgage, as long as it is registered, or even if it is not registered, if the
purchaser knew that it was mortgaged.

The mortgagee has a right to rely in good faith on what appears on the certificate of title of the mortgagor. In the absence of
anything to excite suspicion, he is under no obligation to look beyond the certificate.

Does the mortgagor lose his title to the property mortgaged?

No. A mortgage does not involve a transfer, cession, or conveyance of property but only constitutes a lien thereon. It does not
extinguish the title of the debtor. The mortgagor/debtor continues to be the owner. The only right of the mortgagee is to
foreclose the mortgage and sell the property to satisfy the obligation. The mortgagor’s default does not operate to vest in the
mortgagee the ownership of the encumbered property

Since the mortgagor retains ownership of the mortgaged property, he can even mortgage it again to another mortgagor (junior
lien/encumbrance).

Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and rents or income not yet
received when the obligation becomes due, and to the amount of the indemnity granted or owing to the proprietor from the
insurers of the property mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications and
limitations established by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of a
third person.

Future property, in themselves, cannot be the subject matter of mortgage. But, the future improvements, accessions, and fruits
of property already mortgaged are also covered by the mortgage. This is because they are deemed to be part of the principal
thing which was already existing at the time of the constitution of the mortgage.

To exclude these things, there must be an express stipulation to that effect

Examples:

1. The mortgage deed contains a provision that “all property taken in exchange or replacement, as well as all buildings,
machineries, and, equipment, and others that the mortgagor may acquire, construct, install, attach, or use in its lumber
concession shall immediately become subject to the mortgage.”

This is a valid stipulation, especially where the property mortgaged is subject to deterioration (such as machinery and
equipment). The purpose of this stipulation is to maintain the value of the property mortgaged.

2. JPSP example: In the mortgage deed, Mortgagor mortgages house and lot #1 and another house and lot which he will
acquire next month. The deed is registered. Is this a valid mortgage?

-> Between mortgagor and mortgagee, the mortgage is valid with respect to both house and lot #1 and #2. The remedy of the
mortgagee, once mortgagor acquires the second house and lot, is to compel the mortgagor to execute a public document
evidencing the mortgage of the 2nd house and lot and to register it, so that it would be binding on third parties.

But, as against third parties, the mortgage is only valid with respect to the first house and lot but not to the second house and
lot, until the latter is registered.

What happens if the thing mortgaged is expropriated?

The security becomes the cash given by the government as indemnity. Upon default, the mortgagee can apply the cash as
payment for the obligation.

Art. 2128. The mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required
by law.

The mortgage credit is a real right, and under property law, real rights over immovables are also considered immovables in
themselves. Thus, they may be alienated or assigned to third persons, in whole or in part, by the mortgagee who is the owner
of the right. The assignee may then foreclose the mortgage in case of nonpayment of the principal obligation.

The alienation or assignment of the mortgage credit is valid even if it is not registered. Registration is only necessary to affect
third persons.

Art. 2129. The creditor may 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, in the terms and with the formalities which the law
establishes.
Art. 2129 does not really apply to all third persons in possession of the property. It only applies to those in possession of the
mortgaged property in the concept of owner. If the possession by a third person is only as lessee, the creditor may not collect
the credit from that third person.

When a mortgagor alienates/sells the mortgaged property to a third person, the creditor may demand from him the payment
of the principal obligation. This is because the mortgage credit is a real right, which follows the property wherever it goes, even
if its ownership changes. However, before the creditor can collect from the third person, he must have made a demand on the
debtor, and the latter should have failed to pay

Example: A mortgaged his land worth P5M in favor of B to secure a debt of P6M. A sold the land to C.

On due date, B should demand payment of the P6M from A. If A fails to pay, B may foreclose the mortgage. B may also choose
to collect P5M (not P6M) from C, which is the part of the principal obligation secured by the property sold to C. C is not liable
for the deficiency of P1M in the absence of a contrary stipulation. If C pays B, C can go after A for reimbursement.

Art. 2130. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void.

A stipulation forbidding the owner from alienating the mortgaged property is void for being contrary to public policy because it
is an undue impediment or interference on the transmission of property. However, if the mortgagor alienates the property, the
transferee must respect the mortgage because it is a real right.

A stipulation that requires the mortgagor to notify the mortgagee in writing before he sells the property is VALID. This is not a
prohibition but a mere regulation.

The mortgagee would want to regulate the disposition of the property by the mortgagor because first, he would want to know
the type of person from whom he might have to collect the credit later on. Second, any disposition of the mortgaged property
by the mortgagor is a red flag that may indicate that the mortgagor/debtor may not be able to pay the debt later on (Because
why is he suddenly disposing of his property? Maybe he doesn’t have money anymore.)

Art. 2131. The form, extent and consequences of a mortgage, both as to its constitution, modification and extinguishment, and
as to the other matters not included in this Chapter shall be governed by the provisions of the Mortgage Law and of the Land
Registration Law.

FORECLOSURE

The essence of a mortgage is that upon default, the mortgagee can foreclose – he can sell the property and apply the proceeds
of the sale to the payment of the principal obligation.

What is foreclosure?

It is the remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation. It
denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the
sale itself.

How do you foreclose?

There are two types of foreclosure – judicial and extra-judicial foreclosure.

The default rule is judicial foreclosure. You can only do extra-judicial foreclosure if the mortgage deed has a provision which
gives the mortgagee the special power of attorney to sell the mortgaged property in accordance with Act 3135.

But these are only default rules. The parties may also stipulate that the sale will be a private sale.

Mortgage to a Foreigner – RA 133

Can you mortgage to a foreigner?

Yes, since foreigners are only prohibited from owning real property in the Philippines, not from being mortgagees. The situation
is governed by RA 133.
However, if the mortgagor defaults, the foreigner CANNOT foreclose extra-judicially. He can only foreclose judicially. Moreover,
he cannot bid or take part in any sale of the real property in case of foreclosure.

Can the foreigner take possession of the property during the mortgage?

Pursuant to the mortgage, the alien-mortgagee cannot take possession of the property during the mortgage. But, he can
possess it as lessee.

Can the foreigner take possession of the property upon default of the mortgagor?

The foreigner can take possession of the mortgaged property upon default but only for the purpose of foreclosure and
receivership in accordance with the prescribed judicial procedures, AND in no case exceeding five years.

When confronted with a foreclosure problem…

First, check if there’s a stipulation saying that there will be a private sale. If there is such a stipulation, the property can be sold
at a private sale. If there is no such stipulation, then there will be either judicial or extra-judicial foreclosure.

Second, look for the following tell-tale signs:

1. Is the mortgagee a foreigner? If it’s a foreigner, it’s automatically judicial foreclosure (Act 133).

2. If the mortgagee is not a foreigner, look for a stipulation in the mortgage agreement which gives the mortgagee the special
power of attorney to carry out the extrajudicial foreclosure in accordance with Act 3135. If you find this stipulation, it is an
extra-judicial foreclosure.

3. If there is no stipulation for extra-judicial foreclosure under Act 3135, it is a judicial foreclosure governed by Rule 68 of the
Rules of Court.

Third, if it’s an extra-judicial foreclosure, look at the parties. Who is foreclosing?

1. If it is a bank, the governing law is Act 3135, but there will be certain exceptions applicable only to banking institutions,
provided in Section 47 of the General Banking Act.

2. If the mortgagee is not a bank, the extra-judicial foreclosure will be governed by Act 3135.

Fourth, now that you know whether it’s judicial or extra-judicial foreclosure, let’s go through each of the processes…

JUDICIAL FORECLOSURE UNDER RULE 68, RULES OF COURT

STEP 1: The mortgagee should file a petition for judicial foreclosure in the court which has jurisdiction over the area where the
property is situated

STEP 2: The court will conduct a trial. If, after trial, the court finds merit in the petition, it will render judgment ordering the
mortgagor/debtor to pay the obligation within a period not less than 90 nor more than 120 days from the finality of judgment.

STEP 3: Within this 90 to 120 day period, the mortgagor has the chance to pay the obligation to prevent his property from
being sold. This is called the EQUITY OF REDEMPTION PERIOD.

STEP 4: If mortgagor fails to pay within the 90-120 days given to him by the court, the property shall be sold to the highest
bidder at public auction to satisfy the judgment.

STEP 5: There will be a judicial confirmation of the sale. After the confirmation of the sale, the purchaser shall be entitled to
the possession of the property, and all the rights of the mortgagor with respect to the property are severed or terminated.

The equity of redemption period actually extends until the sale is confirmed. Even after the lapse of the 90 to 120 day period,
the mortgagor can still redeem the property, so long as there has been no confirmation of the sale yet. Therefore, the equity
of redemption can be considered as the right of the mortgagor to redeem the property BEFORE the confirmation of the sale.

IMPORTANT: After the confirmation of the sale, the mortgagor does not have a right to redeem the property anymore. This is
the general rule in judicial foreclosures – there is no right of redemption after the sale is confirmed.
The exception to this rule is when the judicial foreclosure is done by a BANK. In such a case, there is still a right of
redemption within one year from the registration of the sale.

STEP 6: The proceeds of the sale of the property will be disposed as follows:

1. First, the costs of the sale will be deducted from the price at which the property was sold

2. The amount of the principal obligation and interest will be deducted

3. The junior encumbrances will be satisfied

4. If there is still an excess, the excess will go back to the mortgagor. In mortgage, the mortgagee DOES NOT get the excess
(unlike in pledge).

If there is a deficiency, the mortgagee can ask for a DEFICIENCY JUDGMENT which can be imposed on other property of the
mortgagor. This is unlike the rule in pledge, where the pledgee cannot collect any deficiency. This is also unlike the rule in
extra-judicial foreclosure where the mortgagee must go to court and file another action for the collection of the deficiency.
In this case, there is no need to file an action. The mortgagee just has to file a motion in court for the deficiency judgment.

Why should you stay away from judicial foreclosure?

Judicial foreclosure is costly, since the parties would need to hire lawyers. Moreover, in judicial foreclosure, the parties have
very little control over the sale because there is court intervention. Judicial foreclosure is also more susceptible to
stalling/dilatory tactics by the mortgagor, since he can file all sorts of motions in court to prevent the sale.

EXTRA-JUDICIAL FORECLOSURE UNDER ACT 3135

When is extra-judicial foreclosure proper?

There must be a provision in the mortgage giving the mortgagee the special power of attorney to carry out the extra-judicial
foreclosure under Act 3135.

Where should the sale be made?

The sale can only be made in the province where the property is situated. So if several properties located in different provinces
are mortgaged to secure one principal obligation, the creditor must foreclose in each and every jurisdiction where the property
is located.

What is the procedure?

STEP 1: File a complaint for extra-judicial foreclosure with the Executive Judge

STEP 2: Notice of the sale

There are two kinds of notices required:

1. Posting in at least 3 public places 20 days before the sale – usually in the Sheriff’s office, the Assessor’s office, and the
Register of Deeds.

2. Publication in a newspaper of general circulation, once a week for at least three consecutive weeks if the value of the
property exceeds P400

-> This need not be done within a span of 21 days. For example, you can publish on August 30, which is a Friday, then on
September 2, which is a Monday, and then on September 9, which is also a Monday. In this case, publication for three
consecutive weeks is completed within 11 days.

The notice should contain the description of the property to be sold, date, time, and place of the sale, and the principal
obligation to be satisfied by the sale of the mortgaged property.

There is no need for personal notice to the mortgagor, unlike in a guaranty. This is because the mortgagor, having defaulted in
the principal obligation, should expect that a foreclosure is forthcoming. This is because the mortgagor, having defaulted in the
principal obligation, should expect that a foreclosure is forthcoming. If you’re the mortgagee, you would want to surprise the
mortgagor so the he cannot employ dilatory tactics such as getting an injunction in order to delay the foreclosure. If you’re
nasty, you should publish it in Abante, which is a newspaper of general circulation, but which nobody consults for the purpose
of checking if their mortgaged property is about to be foreclosed.

STEP 3: Public Auction

Time for conducting the public sale: Between 9 am to 4 pm

Manner of conducting the sale: The sale should be under the direction of the sheriff of the province, the justice or auxiliary
justice of the peace of the municipality, or of a notary public of the municipality, who shall be compensated with FIVE PESOS
for each day of actual work performed (wow $$$).

Who may bid: Anyone may bid at the sale, unless there are exceptions stipulated in the mortgage deed. Even the
mortgagee/creditor may bid. And unlike in pledge, even if the mortgagee/creditor is the sole bidder, the sale is still valid. This
is because there is a right to redeem in extra-judicial foreclosure. Therefore, the lower the price at which it is sold, the better
the chances of the mortgagor/debtor to redeem the property.

Can the parties stipulate a minimum price at which the property shall be sold?

No, because the property must be sold to the highest bidder. Parties cannot, by agreement, contravene the law. However, this
rule may not apply where the purchaser happens to be the creditor or mortgagee himself. The mortgagor can argue that the
stipulation should be binding on the mortgagee on the principle of estoppel.

What is the effect of inadequacy of the price at which the property is sold at auction?

If there is a right to redeem, inadequacy of price is not material because the debtor may reacquire the property. It will even
make it easier for him to redeem it if it is sold at a low price.

Mere inadequacy of price will not be sufficient to set aside the sale unless the price is so inadequate as to shock the
conscience.

What happens if there is an excess?

The excess should first be applied to satisfy the junior liens and encumbrances on the property. If there is still an excess, it goes
to the mortgagor.

What happens if there is a deficiency?

The mortgagee must go to court and file an action to collect the deficiency. He may file an action for a deficiency judgment
even during the period of redemption.

STEP 4: Possession of the Property

Upon foreclosure, if the mortgagor is in possession of the property, he will retain possession during the redemption period
(one year from the date of the sale).

However, if the winning bidder already wants possession of the property, he may file a petition in court to gain possession. He
must give a bond equivalent to the rent for the use of the property for 12 months. The bond will answer for any loss to the
mortgagor if it is later found that he was not in default in the mortgage obligation or that the conduct of the sale violated Act
3135. Upon approval of the bond, the court will issue a writ of possession in favor of the purchaser.

Exception to this rule: If the party foreclosing is a BANK, Sec 47 of the General Banking Law provides that the purchaser shall
immediately have the right to take possession of the property upon confirmation of the sale.

Remedy of the Mortgagor

If the winning bidder is able to obtain the writ of possession even before the expiration of the one-year period, the mortgagor
may petition that the sale be set aside and the writ of possession be cancelled on the ground that he was not in default or that
the sale was not made in accordance with Act 3135. The petition must be filed within 30 days from the grant of the writ of
possession.

STEP 5: Redemption

The debtor has the right to redeem the property sold within one year from the date of the sale, reckoned from date of
execution of the certificate of sale since it is only from that date that the sale takes effect as a conveyance.

Exception: If the mortgagee foreclosing is a BANK and the mortgagor is a JURIDICAL PERSON, the juridical person shall have
the right to redeem the property BEFORE the registration of the certificate of sale but NOT EXCEEDING 90 DAYS FROM THE
DATE OF THE FORECLOSURE.

What is the difference between the RIGHT OF REDEMPTION and EQUITY OF REDEMPTION?

The right of redemption is the right of the mortgagor to redeem the mortgaged property within a certain period (in most
cases, within 1 year) AFTER the sale of the property in satisfaction of the mortgage debt. It is available to the mortgagor only
when the mortgage is foreclosed extrajudicially. It is not available in judicial foreclosures, except when the mortgagee
foreclosing is a bank.

On the other hand, equity of redemption is the right of the mortgagor in a judicial foreclosure to pay the amount of his
obligation BEFORE the confirmation of the sale of the mortgaged property.

Who may redeem?

The debtor, his successors in interest, or any judicial creditor or judgment creditor of the debtor, or any person having a
junior encumbrance or lien on the property may exercise the right of redemption.

Example: Mortgagor mortgaged a house and lot to A. Later, Mortgagor also mortgaged it to B. A foreclosed the mortgage
and bought the house and lot at the auction. In this case, upon the sale of the property to A, the only right that B as second
mortgagee has is the right to redeem. He may exercise the right by paying off the debt secured by the first mortgage. B’s
exercise of Mortgagor’s equity of redemption is equivalent to foreclosure of the junior mortgage.

How much should the one exercising the right of redemption pay?

The mortgagor (or whoever is redeeming the property) should pay the PURCHASE PRICE of the property (not the amount of
the original obligation anymore) plus INTEREST OF 1% PER MONTH (this is according to De Leon, citing Rule 39 Section 28 of
the Rules of Court. JPSP says interest is at 2% per month).

Exception: If the mortgagee foreclosing is a BANK, under Sec 47 of the General Banking Law, the mortgagor should pay the
amount of the ORIGINAL OBLIGATION (not the purchase price) plus INTEREST AT THE ORIGINAL RATE stipulated in the
mortgage contract plus all COSTS and expenses incurred by the bank from the sale of the property.

What happens if the debtor/mortgagor fails to redeem the property within the prescribed period?

If the debtor/mortgagor fails to redeem the property within the prescribed period, the purchaser has the absolute right to a
writ of possession. From then on, the mortgagor loses his right over the property.

Title to the property sold under a mortgage foreclosure remains with the mortgagor until the expiration of the redemption
period. The right of the purchaser at the foreclosure sale is merely inchoate or contingent until after the period of redemption
has expired without the right being exercised. When the debtor/mortgagor fails to redeem within the period for redemption,
the purchaser’s right becomes final.

What is the effect of the timely exercise of the right of redemption?

If the debtor/mortgagor is able to exercise the right of redemption on time, he does not really recover property since he does
not lose ownership until after the expiration of the redemption period. He merely frees it of the encumbrance created by the
mortgage.

What happens if the mortgagor sells the property to a third person within the redemption period?
The third person, in buying the property, is actually buying not the property itself but the right to redeem the property and the
right to possess it within the redemption period.

X mortgaged property to a Bank to secure a P1M loan at 17% interest. The mortgage was foreclosed. At the sale, the property
was sold to the Bank as the highest bidder for P800K. The bank then sold the property to Y for P1.5M. If X wants to redeem the
property, to whom should he pay and how much?

X should pay to the Bank. He should pay only P1M - the amount of the principal obligation plus interest at 17%, plus costs (Sec
47 General Banking Law: Remember, this is the exception to the general rule that the mortgagor should pay the purchase price
and 1% interest per month). Y would then have a right to seek reimbursement from the Bank.

The right of redemption may be exercised by the mortgagee under the same terms, even if the property is subsequently sold to
a third party. A different rule would make it easy for the buyer at the foreclosure sale to render the right of redemption
nugatory simply by making a conveyance of the property for an amount beyond the capacity of the mortgagor to pay.

Can the right of redemption be waived by the mortgagor in advance?

It depends if there is a fair exchange of value and information between the parties.

If the mortgagor is a farmer who mortgages his parcel of land and he waives the right to redeem, he can later argue that the
waiver was not valid for being contrary to the public policy of preserving the property in the hands of the owner.

But if the mortgagor is a businessman who waives the right to redeem in exchange for lower interest rates, this waiver is valid
because there is a fair exchange of value.

SUMMARY OF EXCEPTIONS UNDER SECTION 47 OF THE GENERAL BANKING LAW OF 2000

When the party foreclosing the mortgage is a BANK, the same procedure as in judicial or extrajudicial foreclosure, as the case
may be, is followed. However, the following are the exceptions to the general rules, applicable only to banks:

1. In judicial foreclosures, there is still a right to redeem

As a general rule, there is no right of redemption in judicial foreclosure. Upon confirmation of the sale, the mortgagor cannot
redeem the property anymore.

But if the mortgagor foreclosing judicially is a bank, the mortgagor shall have a right to redeem within one year from the sale.

2. Redemption Price

In ordinary extra-judicial foreclosure, the redemption price is the purchase price plus interest at 1% (or 2%?) per month.

In extra-judicial foreclosure by a bank, the redemption price consists of:

a. the amount of the mortgage obligation

b. plus the interest on the loan at the rate stipulated in the mortgage contract

c. plus costs of the sale incurred by the bank

3. Automatic Right of Possession

In ordinary extra-judicial foreclosure, the mortgagor retains possession of the property within the redemption period. If the
purchaser wishes to have possession within the redemption period, he must file a petition for the issuance of a writ of
possession with a corresponding bond.

In extra-judicial foreclosure by a bank, the purchaser automatically has the right to take possession after the confirmation of
the sale.

4. Injunction - If anybody wants to enjoin the conduct of foreclosure proceedings instituted by a bank, the petitioner must file a
bond fixed by the court to satisfy whatever damage the bank may suffer by the injunction.
There is no such provision in the case of ordinary extra-judicial foreclosure.

5. Period of Redemption for Juridical Persons

In ordinary extra-judicial foreclosure, the mortgagor may redeem the property after it is sold within one year from the
execution of the certificate of sale. There is no distinction, whether the party redeeming is a natural or juridical person.

If the party foreclosing extrajudicially is a bank, the same rule as above is applicable to natural persons. BUT, juridical persons
may redeem the property subject only to the following conditions:

a. it must be BEFORE the registration of the sale

b. and, it must not be later than 90 days from the date of the sale

EFFECTS ON THE JUNIOR MORTGAGE

What happens if there was a second mortgage constituted on the property that was foreclosed?

If the property was mortgaged a second time, the second mortgage is subordinate to the first mortgage. The first mortgagor
has the right to foreclose the mortgage upon default by the debtor.

The following are the rights of a junior mortgagee:

1. If the first mortgagee forecloses judicially, before the sale is effected, the junior mortgagee may exercise the equity of
redemption vested in the mortgagor. The junior mortgagee may satisfy the obligation of the mortgagor to prevent the sale of
the property.

What happens to the ownership of the property when the second mortgagee exercises the right of redemption?

There are two interpretations – one under the Rules of Court and another under the Civil Code.

When the second mortgagee exercises the equity of redemption by paying the obligation of the mortgagor/debtor, the
mortgagor/debtor has 60 days to reimburse the second mortgagee what he paid. If the original debtor fails to pay within this
period, ownership will be consolidated in the second mortgagee who paid. This interpretation is according to Section 28 Rule
39 of the Rules of Court.

But according to the Civil Code rules on payment (oblicon), the effect should be like payment of an obligation by a third
person, in which case, the second mortgagee merely becomes subrogated in the right of the first mortgagee to foreclose the
mortgage.

2. When an extra-judicial sale is made, the junior mortgagee may exercise the mortgagor’s right to redeem within one year
from the sale. De Leon says that he should pay the amount of the original obligation. JPSP says that the junior mortgagee
exercising the right to redeem should follow Act 3135 – he should pay the price at which the property was sold.

3. If the property is sold for more than the amount of the obligation to the first mortgagee, the excess should be applied to
the payment of the obligation to the second mortgagee.

But if there is no excess, the second mortgage is extinguished.

If you’re the second mortgagee, you can also foreclose, not the property (since you cannot do that because the right of the
first mortgagee is superior), but the right of redemption instead. This is so that you would be the only one who can exercise
it when the proper time comes.

CHATTEL MORTGAGE

Art. 2140. By a chattel mortgage, 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 and not a chattel mortgage.

What is chattel mortgage?

Chattel mortgage is the contract by virtue of which personal property is recorded in the Chattel Mortgage Register as a security
for the performance of an obligation.

This definition under the Chattel Mortgage Law is no longer applicable. It is the definition under Art. 2140 of the Civil Code that
applies now.

What are the characteristics of the contract of chattel mortgage?

1. It is an accessory contract because it secures performance of a principal obligation

2. It is a formal contract because it requires registration in the Chattel Mortgage Register for its validity (but only against
third persons)

3. It is a unilateral contract because it produces only obligations on the part of the creditor to free the thing from the
encumbrance on fulfillment of the obligation.

What is the subject matter of chattel mortgage?

The subject matter of chattel mortgage is personal or movable property.

What are the requisites for a valid chattel mortgage?

1. It must be constituted to secure a principal obligation.

2. The mortgagor must be the absolute owner of the thing mortgaged.

3. He must have free disposal of the thing or otherwise be authorized to do so.

4. When the principal obligation becomes due, the property mortgaged may be alienated for the payment to the creditor.

5. To prejudice third persons, the mortgage must be recorded in the Chattel Mortgage Registry.

If the first four requisites are present, there is already a valid mortgage between the parties – mortgagor and mortgagee.

But to affect third persons, there is a need to comply with the fifth requisite: The document of mortgage must be recorded in
the Chattel Mortgage Registry. This is because recording the document in the Chattel Mortgage Registry serves as notice to 3rd
persons. This is similar to the requirement in pledge that the pledge be in a public document and the requirement in Real
Estate Mortgage that it must be recorded in the Registry of Property.

Note that unlike in pledge, there is no need for actual delivery of the personal property to the mortgagee.

DISTINCTIONS BETWEEN CHATTEL MORTGAGE AND PLEDGE

Art. 2141. The provisions of this Code on pledge, insofar as they are not in conflict with the Chattel Mortgage Law, shall be
applicable to chattel mortgage.

THE CHATTEL MORTGAGE LAW

How do you constitute a chattel mortgage?

To constitute a chattel mortgage, the parties must register the personal property mortgaged in the Chattel Mortgage Register
as security for the performance of an obligation. However, if the chattel mortgage is not registered, it is still valid and binding
as between the parties. The requirement of registration is not for validity but only for binding third parties.

What is the effect of registration?

The registration of the chattel mortgage creates a real right or lien which follows the personal property wherever it goes.
Registration gives the mortgagee symbolic possession.

What is the form required for a chattel mortgage?

According to Sec. 5 of the Chattel Mortgage Law, the following form should be sufficient:

FORM OF CHATTEL MORTGAGE AND AFFIDAVIT

This mortgage made this Fifth day of October 2002 by Sheryl Tanquilut, a resident of municipality of Taytay, Province of Rizal
Philippines, mortgagor, to Anna del Castillo a resident of the municipality of Cainta, Province of Rizal Philippines, mortgagee,
witnesseth:

That the said mortgagor hereby conveys and mortgages to the said mortgagee all of the following-described personal
property situated in the municipality of Taytay Province of Rizal, and now in the possession of said mortgagor, to wit:

A PAIR OF SKY BLUE NIKE PRESTO SNEAKERS, SIZE 3XS

This mortgage is given as security for the payment to the said Anna del Castillo, mortgagee, of the sum of fifty pesos, with
interest thereon at the rate of twenty-five per centum per annum due on 25 December 2002.

The conditions of this obligation are such that if the mortgagor, his heirs, executors, or administrators shall well and truly
perform the full obligation above stated according to the terms thereof, then this obligation shall be null and void.

Executed at the municipality of Taytay in the Province of Rizal this Fifth day of October 2002.

Sgd. Sheryl Tanquilut

In the presence of:

Sgd. Xilca Alvarez

Sgd. Helen Arevalo

FORM OF OATH (affidavit of good faith)

[Tip: know the contents of an affidavit of good faith. JPSP might ask us to make one in the exam. Lumabas sa past exam]

We severally swear that the foregoing mortgage is made for the purpose of securing the obligation specified in the
conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for
the purpose of fraud.

FORM OF CERTIFICATE OF OATH

In the Province of Rizal, personally appeared Sheryl Tanquilut, Xilca Alvarez, and Helen Arevalo, the parties who signed the
foregoing affidavit and made oath to the truth thereof before me.

What happens if there is no affidavit of good faith?

The mortgage is still valid between the parties, but it will not bind third persons, such as creditors and subsequent
encumbrancers. If there is no affidavit of good faith, the mortgage will not be preferred as against these third persons.

Can you constitute a chattel mortgage to secure a future obligation or “a current obligation plus any and all obligations
hereinafter contracted by the mortgagor in favor of the mortgagee”?
No. You can only constitute a chattel mortgage to secure debts or obligations that are existing at the time the mortgage is
constituted. If it is constituted to secure an obligation that is not yet existent, it is void. The affidavit of good faith executed
by the mortgagor states that the mortgage is constituted to secure the obligation specified therein and for no other purpose.

What the parties should do is to execute a new document/ deed of chattel mortgage to cover the newly contracted
obligation.

Can you mortgage future property?

Section 7 of the Chattel Mortgage Law provides that as a general rule, you cannot mortgage property that you do not own at
the time of the constitution of the mortgage. Therefore, you cannot mortgage future property.

But as an exception to this rule, the inventory of retail stores can be the subject of chattel mortgage, even if technically, they
may be acquired by the mortgagor after the mortgage is constituted. This is because the after-acquired property is actually in
renewal or in replenishment of goods on hand when the mortgage was executed. The SC came up with this exception in
order not to hamper the circulation of capital in the industry.

What happens when the mortgagor pays the obligation?

If the mortgagor pays the obligation, he gets a discharge from the mortgagee so that he can then cancel the lien annotated
on the title and in the Chattel Mortgage Registry.

What happens when the mortgagor defaults on the obligation?

1. Right of Redemption

In case of default, the following persons may redeem the property before it is sold, by paying the amount of the obligation
plus costs and expenses incurred from the breach:

a. the mortgagor

b. a subsequent mortgagee

c. a subsequent attaching creditor

If an attaching creditor redeems, he is subrogated to the rights of the mortgagor. He can foreclose the mortgage.

But once the property is sold at auction, there can be no redemption anymore.

2. Right of Mortgagee to Possession

If the creditor/mortgagee wants to foreclose upon default, he has the implied right to take the mortgaged property. If the
debtor/mortgagor refuses to surrender the property, the creditor should file an action for replevin to take possession or for
judicial foreclosure.

3. Foreclosure

The parties can stipulate for a private sale upon default.

If there is no stipulation, the applicable rule is Section 14 of the Chattel Mortgage Law.

According to Section 14, the creditor/mortgagee can cause the property to be sold at public auction thirty days after default.
This is a minimum grace period given to the mortgagor to redeem the property before it is sold at auction. There is no
maximum time period for holding the sale.

The procedure is the same as that for extra-judicial foreclosure of a real estate mortgage, except for the notice requirements.
In chattel mortgage, the only notice requirement is posting at two or more public places in the municipality and personal
notice to the mortgagor and junior mortgagees at least ten days before the date of the sale (no publication).

The proceeds of the sale will be applied as follows:

a. Costs and expenses of the sale

b. Payment of the obligation secured by the mortgage

c. Claims of persons holding subsequent mortgages in their order; and

d. The balance, if any, shall be given to the mortgagor

Can the mortgagee recover any deficiency after the sale of the property?

Unlike in pledge, the creditor can still file an action for recovery of any deficiency in case the proceeds of the sale do not
satisfy the entire obligation, unless the situation is covered by the Recto Law.

PROBLEMS ON REAL AND CHATTEL MORTGAGE

Mortgagor mortgaged property worth 120K to secure a 100K loan. Mortgagor defaulted. Mortgagee foreclosed. The property
was sold to X for 70K. Should mortgagor redeem the property?

Yes, because he can sell it for more than 70K and realize more than the amount of the principal obligation.

But if, in the example above, the mortgagor has creditors running after him for debts worth 300K, should he redeem?

No, he should not redeem. If he redeems, he spends 70K in order to re-acquire property, which he may thereafter lose again
to his other creditors.

Borrower borrows P1M from Lender. Borrower executes a deed of assignment by way of security over the shares of stock in
favor of Lender in order to secure payment of the loan. It is stipulated that upon payment of the loan by Borrower, Lender will
re-convey the shares of stock to Borrower. What is this arrangement?

This can either be a PLEDGE or an IMPLIED TRUST

It’s not really a pledge because there is an absolute conveyance of ownership by the supposed pledgor in favor of the
pledgee. But the Supreme Court has treated this in several cases as a pledge.

JPSP likes the implied trust theory better because there is a statutory basis. Art. 1454 of the Civil Code provides that if an
absolute conveyance of property is made in order to secure the performance of an obligation of the grantor toward the
grantee, a TRUST by virtue of law is established. If the fulfillment of the obligation is offered by the grantor when it becomes
due, he may demand the reconveyance of the property to him.

If it’s a trust, there is no need to foreclose (actually, there’s no right to foreclose).

What happens if there’s default? Art. 1454 does not cover this situation, which is probably why the Supreme Court has
characterized this type of transaction as a pledge instead. JPSP thinks that if there’s default, ownership will be consolidated
in the lender/trustee. But if the parties don’t want any problem, they should stipulate the precise effect of default.

Borrower borrows P10M from Lender. Borrower offers the following securities to Lender:

(1) a GUARANTY by X who is worth P100M

(2) a PLEDGE of shares of stock worth P10M

(3) a REAL ESTATE MORTGAGE worth P15M

Which one should Lender choose?

It really depends on the circumstances, but here are the considerations:

1. If he chooses the pledge, it is easier to foreclose, and he can get the excess in case the shares of stock are sold for more
than P10M.
2. If he chooses the guaranty, it is good only if he is sure that the guarantor will pay. If the guarantor is any of the following,
persons, the guaranty would be a good choice:

a. the Government – because it is never insolvent

b. a Bank – in the form of a bank guaranty through a letter of credit

c. Insurance Company – though in some cases, it is also hard to collect from an insurance company (also, take note that they
would be governed, not by the Civil Code provisions on guaranty, but by the Insurance Code).

But the disadvantage of choosing the guaranty is that the guarantor who is worth P100M can afford to hire good lawyers
who can stall the Lender’s claim.

3. In the case of the real estate mortgage, it depends on how easy it would be to dispose of the property. If it’s property at a
prime spot in Makati, this might be a good choice since it can probably be sold at a good price right away. But if it’s located
in the boondocks, the Lender may have a very difficult time selling it.

Borrower borrows P10M from Lender. The loan is secured by a guaranty by X, who is worth P100M, a real estate mortgage
worth P8M, and a pledge worth P8M. If Borrower defaults, what is the best way for Lender to proceed?

1. Foreclose the real estate mortgage first. Then get a deficiency judgment forthe remaining P2M.

2. Then, foreclose the pledge because in pledge, he gets to keep the excess –resulting in an upside of P6M.

3. The Guarantor is not yet an option since he has the benefit of excussion. The Lender must first go through steps 1 and 2
and other remedies before

running after X.

Borrower borrows P10M from Lender. The loan is secured by a pledge worth P8M and a guaranty by X. How should the Lender
proceed in case of default by Borrower?

If Lender forecloses the pledge, he will have a deficiency of P2M, which he cannot collect anymore. On the other hand, he
cannot proceed against the guarantor without foreclosing the pledge first.

So what should he do? He should sue Borrower in his capacity as debtor, not as a pledgor, for collection of the debt. Then, he
should attach the property pledged. When judgment in his favor is rendered, he can then execute it against the attached
shares. The shares can be sold at an ordinary execution sale, not a foreclosure sale. In this way, the shares will be taken out
of the context of the pledge, and any deficiency in the sale can still be recovered by the lender. After the execution of the
judgment on the shares, the Lender can then go after the Guarantor for the deficiency.

ANTICHRESIS

Art. 2132. By the contract of antichresis the creditor acquires the right to receive the fruits of an immovable of his debtor, with
the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit.

What is antichresis?

Antichresis is a contract by which the creditor acquires the right to receive the fruits of an immovable belonging to the debtor,
with the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit.

What are the characteristics of antichresis?

1. Accessory – It secures the performance of a principal obligation. Manresa, however, believes that it is an independent
contract.

2. Formal Contract – It must be in specified form to be valid (in writing).

Is delivery of the property to the creditor required?

Delivery is not required for the validity of the contract itself. BUT, it is required in order that the creditor may receive the fruits.

Does antichresis apply to all of the fruits of the immovable concerned?

GENERAL RULE: The general rule is that the contract of antichresis covers ALL the fruits of the encumbered property

If the parties do not want all of the fruits to be subject to the antichresis, they must STIPULATE otherwise.

Is it essential for the contract to have a stipulation for interest in order to have an accessory contract of antichresis?

No. It is not essential to the contract of antichresis that the loan that it guarantees should have interest. There is nothing in the
law that says that antichresis can only guarantee interestbearing loans.

What are the differences between antichresis and real mortgage?

Antichresis and real mortgage are similar in that the subject matter is real property.

Like pledge and mortgage, antichresis gives a real right if it is registered in the Registry of Property.

Example: A borrowed P1M from B. To secure the loan, A delivered a parcel of land with coconut trees to B, giving B the power
to administer it and harvest the coconuts. What is the nature of the contract?

Answer: The contract is one of mortgage, not antichresis. In order for it to be a contract of antichresis, it must be expressly
agreed between creditor and debtor that the creditor, having been given possession of the property, is to apply the fruits to the
payment of interest, if owing, and thereafter, to the principal.

Art. 2133. The actual market value of the fruits at the time of the application thereof to the interest and principal shall be the
measure of such application.

When it is time to apply the fruits to the payment of the interest or the principal, the creditor must base the value of the fruits
on their market value at the time of the application.

Example: The property subject of the contract of antichresis has mango trees. In January, one kilo of mangoes costs P50/kilo.
But in May, when mangoes are in season, one kilo costs 25/kilo. If interest is due in January, the creditor must apply the fruits
to the payment of interest based on the price of P50/kilo. If interest is due in May, he should compute at the price of P35/kilo.

Art. 2134. The amount of the principal and of the interest shall be specified in writing; otherwise, the contract of antichresis
shall be void.

Is there a form required for the contract of antichresis?

Yes. The contract must state the amount of the principal and the interest IN WRITING. If this form is not followed, the contract
of antichresis is VOID. The requirement that it be in writing is necessary not merely to bind third persons but to make the
contract valid.

But even if the antichresis is void, the principal obligation is still valid.

He is also bound to bear the expenses necessary for its preservation and repair.
The sums spent for the purposes stated in this article shall be deducted from the fruits.

What are the obligations of the creditor under the contract of antichresis?

1. Pay the taxes and charges upon the estate – If the creditor does not pay the taxes, he is required by law to pay indemnity for
damages to the debtor.

If the debtor pays the taxes on the property which the creditor should have paid, the amount is to be applied to the payment of
the debt. If the amount of taxes paid by the debtor is enough to satisfy the principal obligation, then the loan and the
antichresis are extinguished; the creditor must return the property to the debtor.

What if the creditor does not want to pay the taxes and charges? They must so stipulate in their agreement OR see the next
article.

2. Apply the fruits

The creditor must apply the fruits of the property to the payment of interest, if owing, and thereafter to the principal.

Art. 2136. The debtor cannot reacquire the enjoyment of the immovable without first having totally paid what he owes the
creditor.

But the latter, in order to exempt himself from the obligations imposed upon him by the preceding article, may always compel
the debtor to enter again upon the enjoyment of the property, except when there is a stipulation to the contrary.

When can the debtor get back the property subject of the antichresis?

The debtor can get it back only when he has totally paid the principal obligation. This is because the property stands as a
security for the payment of the principal obligation.

Is there an exception?

Yes. The exception to this rule is if the creditor does not want to pay the taxes and charges upon the estate. In such a case, the
creditor may compel the debtor to get the property back, UNLESS there is a contrary stipulation (exception to the exception).

But this has the effect of extinguishing the contract of antichresis.

Art. 2137. The creditor does not acquire the ownership of the real estate for nonpayment of the debt within the period agreed
upon.

Every stipulation to the contrary shall be void. But the creditor may petition the court for the payment of the debt or the sale of
the real property. In this case, the Rules of Court on the foreclosure of mortgages shall apply.

What happens when the debtor defaults on the principal obligation?

The creditor DOES NOT acquire ownership of the real estate. Any stipulation to the contrary shall be void. This is because the
contract of antichresis covers only the right to receive the fruits from the estate, and not its ownership. Also, this is pactum
commisorium, which is void.

The creditor has the following remedies in case of default:

1. Bring an action for specific performance.

2. Petition for the sale of the real property in judicial foreclosure proceedings under Rule 68 of the Rules of Court.

Can the parties stipulate on an extra-judicial foreclosure? Yes, in the same manner that they are allowed in pledge and
mortgage.

Can the creditor acquire the property given in antichresis by prescription?

No, and any stipulation to the contrary shall be void. In order to acquire property be prescription, possession must be in the
concept of owner. The antichretic creditor possesses the property merely as a holder.
Exception: Just like in a co-ownership, if the creditor repudiates the antichresis, he can acquire the property by prescription.

Art. 2138. The contracting parties may stipulate that the interest upon the debt be compensated with the fruits of the property
which is the object of the antichresis, provided that if the value of the fruits should exceed the amount of interest allowed by
the laws against usury, the excess shall be applied to the principal.

The creditor must first apply the fruits to the payment of the interest. If the value of the fruits exceeds the value of the interest
due, then the creditor should apply the excess to the principal.

The second part of this provision is no longer applicable, since there is no Usury Law anymore.

Art. 2139. The last paragraph of article 2085, and articles 2089 to 2091, are applicable to this contract.

Other characteristics of Antichresis:

1. A third person, who is not a party to the principal contract, may offer his immovable under the contract of antichresis to
secure the debt of another. (2085)

2. The contract of antichresis is indivisible. (2089)

3. The indivisibility of the antichresis is not affected by the fact that the debtors are not solidarily liable. (2090)

4. The contract of antichresis may secure all kinds of obligations – pure or conditional. (2091)