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SECURITY TRANSACTIONS
MEMORY AID
ATENEO CENTRAL BAR OPERATIONS 2001
PLEDGE (definition) - A contract by virtue of which the debtor delivers to the creditor or
to a third person a movable or document evidencing 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.
Kinds of Pledge:
1. Voluntary or conventional – created by agreement of the parties
2. Legal - created by operation of law
Characteristics of Pledge:
1. real - perfected by delivery
2. accessory - has no independent existence of its own
3. unilateral - creates obligation solely on the part of the creditor to return the thing
subject upon the fulfillment of the principal obligation
4. subsidiary – obligation incurred does not arise until the fulfillment of the principal
obligation
Important Points:
1. future property cannot be pledged or mortgaged
2. pledge or mortgage executed by one who is not the owner of the property
pledged or mortgaged is without legal existence and registration cannot validate
it.
3. mortgage of a conjugal property by one of the spouses is valid only as to ½ of the
entire property
4. in case of property covered by Torrens title a mortgagee has the right to rely
upon what appears in the certificate of title and does not have to inquire further.
5. pledgor or mortgagor has free disposal of property
6. thing pledged or mortgaged may be alienated.
7. creditor not required to sue to enforce his credit
8. pledgor or mortgagor may be third person
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SECURITY TRANSACTIONS
MEMORY AID
ATENEO CENTRAL BAR OPERATIONS 2001
PLEDGE MORTGAGE
Constituted on movables Constituted on immovables
Property is delivered to the pledgee, or by Delivery not necessay
common consent to a 3rd person
Not valid against 3rd persons unless a Not valid against 3rd persons if not
description of the thing pledged and the registered
date of the pledge appear in a public
instrument
Important Points:
1. debtor-owner bears the risk of loss of the property
2. pledge or mortgage is indivisible:
a. every portion of the property is answerable for the whole obligation
b. when several things are pledged or mortgaged, all of them are liable for
the totality of the debt. Creditor does not have to divide his action by
distributing the debt, among the various things pledged or mortgaged
c. the debtor’s heir who has paid a part of the debt cannot ask for the
proportionate extinction of the pledge or mortgage nor can the creditor’s
heir who has received his share of the debt return the pledge or cancel
the mortgages if the debt is not yet completely satisfied
d. EXCEPTIONS to the rule of INDIVISIBILITY:
i. where each one of several things guarantees determinate portion of
credit
ii. where only portion of loan was released
iii. where there was failure of consideration
3. rule that real property, consisting of several lots should be sold separately,
applies to sales in execution, and not to foreclosure of mortgages
4. the mere embodiment of a real estate mortgage and a chattel mortgage in one
document does not have the effect of fusing both securities into an indivisible
whole
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SECURITY TRANSACTIONS
MEMORY AID
ATENEO CENTRAL BAR OPERATIONS 2001
5. contract of pledge or mortgage may secure all kinds of obligation, be they pure or
subject to a suspensive or resolutory condition
6. a promise to constitute pledge or mortgage creates no real right, only a personal
right biding upon the parties, only right of action to compel the fulfillment of the
promise but there is no pledge or mortgage yet
7. under RPC, estafa is committed by a person who, pretending to be the owner of
any real property, shall convey, sell, encumber or mortgage the same knowing
that the real property is encumbered shall dispose of the same as
unencumbered. It is essential that fraud or deceit be practiced upon the vendee
at the time of the sale.
8. pledgee:
a. cannot deposit the thing pledged with a third person, unless
there is a stipulation authorizing him to do so
b. is responsible for the acts of his agents or employees with
respect to the thing pledged
c. has no right to use the thing or to appropriate the fruits without
the authority of the owner can apply the fruits, income , dividends or
interest earned or produced by the thing pledged to the payment of the
interest, and thereafter to the principal of his credit. Unless there is
stipulation to the contrary, the interest and earnings of the right pledged
and in case of animals, their offsprings are included in the pledge.
d. may cause public sale of the thing pledged if, without fault on his
part, there is danger of destruction, impairment or dimunition in value of
the thing. The proceeds of the auction shall be a security for the principal
obligation.
9. pledgor :
a. has the responsibility for flaws of the thing pledged.
b. cannot ask for the return of the thing against the will of the
creditor, unless and until he has paid the debt and its interest, with
expenses in a proper case
c. is allowed to substitute the thing which is in danger of
destruction or impairment without any fault on the part of the pledgee,
with another thing of the same kind and quality
d. may require that the thing be deposited with a 3 rd person if
through the negligence or wilfull act of the pledgee the thing is in danger
of being lost or impaired
Extinguishment of Pledge
• If the thing pledged is returned by the pledgee to the pledgor or owner, pledge is
extinguished
• A statement in writing by the pledgee that he renounces or abandons the pledge
is sufficient to extinguish. For t his purpose, neither the acceptance by the
pledgor o owner, nor the return of the thing pledged is necessary, the pledgee
becoming a depositary.
• If subsequent to the perfection of the pledge, the thing is in the possession of the
pledgor or owner, there is prima facie presumption that the thing has been
returned by the pledgee
• If the thing is in the possession of 3rd person who has received it from the pledgor
or owner after the constitution of the pledge, there is prima facie presumption that
the thing has been returned by the pledgee.
• After public auction, the pledgee shall promptly advise the pledgor or
owner of the result.
• Any third person who has any right in the thing may satisfy the principal
obligation as soon as the latter becomes due and demandable
• The right of choice given to the pledgee as to which of the things pledged
he shall cause to be sold is limited only by stipulation. After sufficient property has
been sold to satisfy the obligation plus interest and expenses, no more shall be sold.
• A 3rd person who is not a party to the principal obligation may secure the
latter by pledging his own property. He has the same as a guarantor and he cannot
be prejudiced by any waiver of defense by the principal obligor
Legal Pledges:
1. Necessary expenses shall be refunded to every possessor, but only possessor
in good faith may retain the thing until he has been reimbursed
Useful expenses shall be refunded only to the possessor I n good faith with the
same right of retention, the person who has defeated him in the possession
having the option of refunding the amount of the expenses or of paying the
increase in value which the thing may have acquired and by reason thereof (art
546)
2. He who has executed work upon a movable has a right to retain it by way of
pledge until he is paid. (art 1731)
3. The agent may retain the things which are the objects of agency until the
principal effects the reimbursement and pays the indemnity. (art 1914)
4. The laborer’s wages shall be a lien on the goods manufactured or the work done
(art 1707)
Special Laws apply to pawnshops and establishment which are engaged in making
loans secured by pledges. Provisions of the Civil Code shall apply subsidiarily.
Important Points:
1. As a general rule, the mortgagor retains possession of the property he may
deliver said property to the mortgagee without altering the nature of the contract
of mortgage.
2. It is not an essential requisite that the principal of the credit bears interest, or that
the interest as compensation for the use of the principal and the enjoyment of its
fruits be in the form of a certain percent thereof.
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SECURITY TRANSACTIONS
MEMORY AID
ATENEO CENTRAL BAR OPERATIONS 2001
Kinds of Mortagage:
1. voluntary
2. legal
3. equitable – one which, although it lacks the proper formalities of a mortgage
shows the intention of the parties to make the property as a security for a debt
(provisions governing equitable mortgage - arts 1365, 1450, 1454, 1602, 1603,
1604 and 1607)
Effect of Mortgage:
1. creates real rights, a lien inseparable from the property mortgaged, enforceable
against the whole world
2. creates merely an encumbrance
Extent of Mortgage
a. the natural accessions
b. to the improvements,
c. growing fruits
d. the rents or income not yet received when the obligation becomes due,
e. to the amount of the indemnity granted or owing to the proprietor from the
insurers of the property,
f. 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.
Important Points:
1. Stipulation in mortgage contract including after-acquired properties is valid.
2. Attachment of lien is retroactive
3. Stipulation is necessary for mortgage to secure future advancements
4. Mortgage is a continuing security until the full amount of advances are paid.
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SECURITY TRANSACTIONS
MEMORY AID
ATENEO CENTRAL BAR OPERATIONS 2001
Kinds of Foreclosure
1. judicial
2. extrajudicial
• both should be distinguished from execution sale which is governed by
Rule 39 of the Rules of Court
Judicial Foreclosure
(governed by Rule 68 of Rules of Court)
1. May be availed of by bringing an action in the proper court which has jurisdiction
over the area wherein the real property involved or apportion thereof is situated
2. If the court finds the complaint to be well-founded, it shall order the mortgagor to
pay the amount due with interest and other charges within a period of not less
than 90 days nor more than 120 days from the entry of judgment.
3. If the mortgagor fails to pay at time directed, the court, upon motion, shall order
the property to be sold to the highest bidder at a public auction.
4. Upon confirmation of the sale by the court, also upon motion, it shall operates to
divest the rights of all parties to the action and to vest their rights to the
purchaser subject to such rights of redemption as may be allowed by law
5. Before the confirmation, the court retains control of the proceedings.
6. The proceeds of the sale shall be applied to the payment of the:
a. Costs of the sale;
b. Amount due the mortgagee;
c. Claims of junior encumbrancers or persons holding subsequent
mortgages in the order of their priority; and
d. the balance, if any shall be paid to the mortgagor
7. Sheriff’s certificate is executed, acknowledged and recorded to complete the
foreclosure
Extrajudicial Foreclosure
(governed by Act No, 3135, as amended)
1. express authority to sell is given to the mortgagee.
2. authority is not extinguished by death of mortgagor or mortgagee
3. public sale should be made after proper notice
4. surplus proceeds of foreclosure sale belong to the mortgagor
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SECURITY TRANSACTIONS
MEMORY AID
ATENEO CENTRAL BAR OPERATIONS 2001
5. debtor has the right to redeem the property sold within 1 year from and after the
date of sale
6. remedy of party aggrieved by foreclosure is a petition to set aside sale and
cancellation of writ of possession.
Kinds of Redemption
1. equity of redemption
- right of the mortgagor to redeem the mortgaged property after his default in
the performance of the conditions of the mortgage but before the sale of
the mortgaged property or confirmation of sale
2. right of redemption
- right of the mortgagor to redeem the property within a certain period after it
was sold for the satisfaction of the debt.
Equity of Redemption
1. exercised before confirmation of sale
2. second mortgagee acquires only the equity of redemption vested in the
mortgagor
3. taking physical possession not necessary for levy
4. can be levied upon by means of writ of execution
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SECURITY TRANSACTIONS
MEMORY AID
ATENEO CENTRAL BAR OPERATIONS 2001
Right of Redemption
1. may be exercised within 1 year from and after the date of registration of the
certificate of sale with the appropriate Registry of Deeds.
2. if no redemption is made within prescribed period, the purchaser has the
absolute right to a writ of possession which is the final process to consummate
extrajudicial foreclosure
3. effect of seasonable redemption is not to recover ownership which was never lost
but the elimination from his title the lien created by the levy or attachment.
4. sale by the mortgagor to a 3rd person during redemption period transfers only the
right to redeem the property and the right to possess, use and enjoy the same
during said period.
5. if sale to a 3rd person is not registered and made without the consent of the
mortagee, buyer was not validly substituted as a debtor thus has no right to
redeem
6. if extrajudicial foreclosure if effected with fraud, it is null nad void ab initio.
Important points:
Effect of Registration
1. creates real rights
2. adds nothing to mortgage
Right of Redemption
1. when the condition of a chattel mortgage is broken, the ff may redeem:
a. mortgagor;
b. person holding a subsequent mortgage;
c. subsequent attaching creditor.
2. an attaching creditor who so redeems shall be subrogated to the rights of the
mortgagee and entitled to foreclose the mortgage in the same manner that the
mortgagee could foreclose it
3. the redemption is made by paying or delivering o the mortgagee the amount due
on such mortgage and the costs and expenses incurred by such breach of
condition before the sale
Period to Foreclose
1. After 30 days from the time of the condition is broken
2. The 30-day period is the minimum period after violation of the mortgage condition
for the creditor to cause the sale at public auction with at least 10 days notice to
the mortgagor and posting of public notice of time, place, and purpose of such
sale, and is a period of grace for the mortgagor, to discharge the obligation.
3. After the sale at public auction, the right of redemption is no longer available to
the mortgagor
General Provisions:
1. the debtor is liable with all his property, present and future, for the fulfillment of
his obligations, subjects to exemptions provided by law
- exempt property:
a. present property
1. family home (Arts 152, 153 & 155, NCC)
2. right to receive support as well as money or property
obtained by such support shall not be levied upon on
attachment or execution (Art 205, NCC)
3. Sec 13, Rule 39, Rules of Court
4. Sec 118, the public Land Act,( CA No. 141, as amended)
b. future property
- a debtor who obtains a discharge from his debts on account
of insolvency, is not liable for the unsatisfied claims of his
creditors with said property (Secs. 68 & 69, Insolvency Law,
Act No. 1956
c. property in custodia legis and of public dominion
2. insolvency shall be governed by the Insolvency Lae (Act No. 1956, as amended)
3. Exemption of conjugal property or absolute community or property provided that:
a. Partnership or community subsists
b. Obligations of the insolvent spouse have not redounded to the benefit of
the family
4. if there is co-ownership, and one of the co-owners is the insolvent debtor, his
undivided share or interest in the property shall be possessed by the assignee in
insolvency proceedings because it is part of his assets
5. property held by the insolvent debtor as a trustee of an express or implied trust,
shall be excluded from the insolvency proceedings
Classification of Credits
1. special preferred credits (Arts 2241 & 2242 of NCC)
a. considered as mortgages or pledges of real or
personal property or liens within the purview of legal provisions governing
insolvency
b. taxes due to the State shall first be satisfied
2.ordinary preferred credits (Art 2244)
- preferred in the order given by law
3.common credits (Art 2245)
- credits of any other kind or class, or by any other right or title not comprised
in Arts 2241-2244 shall enjoy no preference