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PLEDGE

(ARTICLES 2085-2123)

PROVISIONS COMMON TO PLEDGE AND MORTGAGE

Art. 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.

Third persons who are not parties to the principal obligation


may secure the latter by pledging or mortgaging their own
property. (1857)

Art. 2086. The provisions of Article 2052 are applicable to a


pledge or mortgage. (n)

Art. 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. (1858)
PLEDGE

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


(2) Legal

REQUISITES TO A CONTRACT OF PLEDGE

(1) It be constituted to secure the fulfillment of a


principal obligation
(2) The pledgor be the absolute owner of the thing
pledged
(3) That the persons constituting the pledge have
the free disposal of the property and in the
absence thereof, that they be legally authorized for
the purpose
(4) The pledge is perfected by the delivery of the
thing pledged
(5) When the principal obligation becomes due, the
things, which the pledge consists, may be
alienated for the payment of the creditor.
CHARACTERISTICS OF A CONTRACT OF PLEDGE

(1) Real contract—perfected by the delivery of the


things pledged by the debtor who is called the
pledgor to the creditor who is called by the pledgee,
or to a third person by common agreement
(2) Accessory contract
(3) Unilateral contract
(4) Subsidiary contract

WHAT IS THE CAUSE OR CONSIDERATION IN PLEDGE?

Pledge is an accessory contract


Its cause is the principal obligation

CONSTITUTED TO SECURE THE FULFILLMENT OF THE PRINCIPAL


OBLIGATION

CONSTITUTED BY THE ABSOLUTE OWNER

(1) Future property cannot be the subject of a pledge


or mortgage
(2) A 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) Share in a co-ownership—shall be limited to the
portion which may be alienated by him in the
division upon the termination of the co-ownership
What is the absolute owner? It means unencumbered
property. The absolute owner has legal and beneficial
ownership. In the earlier example, P is the legal owner and S is
the beneficial owner. This being the case, neither of them can
pledge the property.

WHAT IS THE DIFFERENCE BETWEEN FREE DISPOSAL AND


CAPACITY TO DISPOSE?

FREE DISPOSAL OF THE PROPERTY—property must not be


subject to any claim of a third person

CAPACITY TO DISPOSE—pledgor or mortgagor has


the capacity or authority to make a disposition of the
property

THING PLEDGED OR MORTGAGED MAY BE ALIENATED

Necessarily implied as an inherent element of


the transaction of the mortgage or pledge

The only remedy for the pledgee is to have the


security given sold at public auction and the proceeds
of the sale be applied to the payment of the
obligation secured by the mortgage or pledge

PLEDGOR OR MORTGAGOR MAY BE A THIRD PERSON

Accommodation pledge or mortgage


Duty of mortgagee to make proper inquiry
Where mortgage is gratuitous—same should be
strictly construed
Liability for deficiency—pledgor not liable for any
deficiency should the property be not sufficient to cover
the debt

Mortgage contracts in the Philippines

A mortgage is one of the kinds of contracts specially regulated


by Philippine law. Because it is regulated, the signatories to a
mortgage cannot just decide among themselves what their
rights and obligations are in their mortgage contract. The terms
of a mortgage contract should not violate the regulations set
by the Civil Code of the Philippines or else those terms will be
invalid.

It’s the sort of thing that gives rise to nasty and protracted
litigation. This is one of the reasons why people entering into
loan agreements, whether as debtor or creditor, should have a
basic understanding of the law on mortgage contracts.

What follows is not meant to be an exhaustive discussion of all


aspects of mortgage law, but a brief primer to enable anyone
to understand its basic aspects. A simple mortgage contract is
also included, and the comments are open for any questions.

Who are the parties to a mortgage agreement?

A mortgagor is the one whose property is offered as security. He


must be the absolute owner of the property mortgaged. A
mortgagee is the one who accepts the security of the property.
The mortgagor is typically the debtor and the mortgagee is
typically the creditor.

However, third persons who are not parties to the principal


obligation may secure it by mortgaging their own property.

What is a mortgage?

A mortgage is a contract through which a debtor gives security


for the fulfillment of a principal obligation to a creditor. This is
done by designating an immovable property (like a house and
lot) or real rights over immovable property as answerable for
the principal obligation. In case that obligation is not fulfilled in
the time agreed on, the designated property or rights will be
publicly auctioned and the obligation shall be satisfied with the
proceeds of the sale.

The essence of a contract of mortgage indebtedness is that a


property has been identified or set apart from the mass of the
property of the debtor-mortgagor as security for the payment
of money or the fulfillment of an obligation to answer the
amount of indebtedness, in case of default of payment.

A valid mortgage should be annotated on the Title to the


property at the Register of Deeds in order to be valid against
third persons (those not party to the contract), and so create a
real right enforceable against the whole world.

The mortgage follows the property regardless of change of


ownership or possession. This means that, even if the
mortgaged property passes into the ownership or possession of
someone other than the mortgagor, the mortgagee still has a
right to satisfaction from the property if it is foreclosed.
What does a mortgage do to the property?

The real nature of a mortgage is described in Article 2126 of the


Civil Code:

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.

A mortgage creates a real right which follows the property


even if the property is transferred by the mortgagor to
someone else. The sale or transfer of the mortgaged property
cannot affect or release the mortgage. A transferee is
necessarily bound to acknowledge and respect the mortgage.
In fact, the mortgage on the property may still be foreclosed
despite the transfer:

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 terms and with the formalities which the law
establishes.

What is more, a mortgage has a full scope. A mortgage covers


not just the property by itself, but also extends to the natural
accessions, to the improvements, growing fruits, and the rents
or income not yet received when the obligation becomes due.
It also covers 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.

What are the requirements for a mortgage?

(1) A mortgage is an accessory contract to a principal


obligation. In order to exist, a mortgage must be
constituted to secure the fulfillment of that principal
obligation;

(2) The mortgagor must be the absolute owner of the thing


pledged or mortgaged;

(3) The persons constituting the mortgage must have the


free disposal of his property, or be legally authorized for
the purpose.

Third persons who are not parties to the principal obligation


may secure the latter by pledging or mortgaging their own
property.

What is the form of a mortgage contract?

It is a written contract. It is indispensable that the document in


which the mortgage appears be recorded in the Registry of
Property (this makes it enforceable against the whole world). If
it is not recorded, the mortgage is nevertheless binding
between the parties.

The contract should be notarized in order to be a public


document. When having it notarized, the parties should each
appear in person before a notary public and present valid
identification bearing their photograph and signature. (A
community tax certificate (CTC) or cedula is by
itself not considered competent identification.) If these rules on
identification and notarization are not followed, the
authenticity of the mortgage contract might be denied by one
of the parties.

What does a mortgage contract look like?

This is an example of a very simple, but valid mortgage


contract. It is important to note that mortgage contracts can
be written simply or in greater detail to reflect the particular
agreement of the parties and the specific protections that they
want to add or include.

It is also important to remember that a mortgage agreement


should be annotated on the Title to the property at the Register
of Deeds in order for it to be effective against persons who are
not party to the contract.

Is there such a thing as an unwritten mortgage?

Yes. There are situations where the law deems a mortgage to


have been constituted even absent such formal requirements.
In such a case, there is deemed to be an “equitable
mortgage”.

An equitable mortgage has been defined as one which


although lacking in some formality, or form or words, or other
requisites demanded by the law, nevertheless reveals the
intention of the parties to charge real property as security for a
debt, there being no impossibility nor anything contrary to law
in this intent.
A situation is deemed an equitable mortgage where:

the parties entered into a contract denominated as a


contract of sale; and,
their intention was to secure an existing debt by way of
a mortgage.

Article 1602 of the Civil Code provides examples of such


situations:

The contract shall be presumed to be an equitable mortgage,


in any of the following cases:

(1) When the price of a sale with right to repurchase is


unusually inadequate;
(2) When the vendor remains in possession as lessee or
otherwise;
(3) When upon or after the expiration of the right to
repurchase another instrument extending the period of
redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part of the
purchase price;
(5) When the vendor binds himself to pay the taxes on the
thing sold;
(6) In any other case where it may be fairly inferred that the
real intention of the parties is that the transaction shall
secure the payment of a debt or the performance of
any other obligation.

In any of the foregoing cases, any money, fruits, or other


benefit to be received by the vendee as rent or otherwise shall
be considered as interest which shall be subject to the usury
laws.
Any one of the circumstances laid out in Article 1602 is sufficient
to support the conclusion that a contract of sale is in fact an
equitable mortgage. This approach follows the rule that when
doubt exists on the nature of the transaction, the law favors the
least transmission of property rights.

What happens in case the debtor fails to pay the principal debt
secured by the mortgage?

There is a misconception that, if the mortgagor is unable to


pay, the property immediately passes into the ownership of the
creditor. This is not so.

A demand should be made on the mortgagor to pay the debt


due. If he fails, then the property can be foreclosed.

There are two modes of foreclosure, judicial and extra-judicial


(although in fact they both make use of the Court’s
offices), each with their own particular procedures.

The effect of foreclosure is not that the mortgagee becomes


the owner of the property, but that the property is put up for
public auction. It is through bidding at the public auction that
the mortgagee can eventually become the owner of the
property.
Provisions Common to Pledge and Mortgage
(Common Provisions), Articles 2085- 2092

Is a promise to constitute a pledge or mortgage valid?

Yes. A promise to constitute a pledge or mortgage is


valid; however, it gives rise only to a personal action
between the contracting parties. (Art. 2092)

What requisites are essential to constitute a valid pledge and


mortgage?

(a) That they be constituted to secure the fulfillment of a


principal obligation;

(b) That the pledgor or mortgagor be the absolute owner


of the thing pledged or mortgaged;

(c) That the persons constituting the pledge or mortgage


have free disposal of their property, and in the absence
thereof, that they be legally authorized for the purpose.
(Art. 2085)

What kinds of obligations may be secured by a pledge and


mortgage?

Generally, all kinds of obligations, be they pure or


subject to a suspensive or resolutory condition, may be
secured, subject to the rules below, as well as to
principles peculiar to real estate mortgage and chattel
mortgage.

Consistent with Art. 2085, Art. 2052 applies to contracts


of pledge and mortgage, stating that these cannot exist
without a valid obligation.
Nevertheless, voidable, unenforceable and natural
obligations may likewise be secured.

Which of the following is the appropriate remedy under a


contract of pledge or mortgage?
(a) disposition by the creditor of the thing given in pledge
or mortgage
(b) alienation of the thing for payment to the creditor
(c) appropriation by the creditor of the thing (See Articles
2087 and 2088)

May the pledgor or mortgagor obtain a release of the thing/s


given by way of pledge or mortgage, to the extent that the
principal obligation has been partially fulfilled?

As a general rule, this is not possible; a pledge or


mortgage being indivisible.(Art. 2089)

Is partial release possible, where there are several debtors who


are not solidarily bound?

No. This is not possible. The indivisibility of a pledge or


mortgage is not affected by the fact that the debtors
are not solidarily liable (Art. 2090)

PLEDGE, Articles 2093- 2123

What is a pledge?

A pledge is 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. It may be
voluntary or conventional, and legal (or one created by
law).

Which of the following, in addition to the essential requisites


under Art. 2085, is/are required to constitute a contract of
pledge?

(a) amount of the principal and of the interest shall be


specified in writing; otherwise, the contract of pledge
shall be void
(b) description of the thing pledged and the date of the
pledge must appear in a public instrument
(c) the subject of the pledge must be recorded in the
appropriate registry of property
(d) there must be a written instrument of pledge
(e) the thing pledged must be placed in the possession of
the creditor or a third person

Is it correct to say that only actual delivery is sufficient to


constitute a pledge?

No. Whether actual or constructive delivery is required


depends on the peculiar nature of the things given in
pledge. (see Yuliongsui v. PNB)

What is the scope of a contract of pledge (subject of contract


of pledge)?

Pledge may be constituted over movable property: (a)


within the commerce of man and (b) susceptible of
possession. It may also cover incorporeal rights. Future
property may not be the subject of pledge.

Pledge may extend to the fruits, income, dividends, or


interests, subject to compensation, first as to interest,
and/or application to principal. (There may be
stipulation to the contrary.)

In case of pledge of animals, their offspring shall pertain


to the pledgor or owner of the animals pledged, but
shall be subject to the pledge, if there is no stipulation to
the contrary. (Arts. 2094, 2095)

What is a rationale for requiring that a description of the


property and date of the pledge be in a public instrument?

The rule is a substantive one, without which the pledge


cannot bind third parties. One aim to is prevent fraud,
particularly upon creditors, by a debtor who may
attempt to conceal his property or remove them from
his estate by simulating a pledge. (Review Caltex v. CA)

(Take note, further, that the creditor may bring actions


pertaining to the owner of the thing pledged under Art.
2103 (a real right enforceable against third persons) only
if the pledge is embodied in a public instrument,
containing description of the thing and the date of the
pledge.)

May a pledge be created by operation of law? If so, in what


instances?

Yes. A pledge may be created by operation of law.

Examples are:
(a) a possessor in good faith awaiting reimbursement (Art.
546);

(b) under lease (contract for piece of work), one who has
executed a work upon a movable has a right to retain it
by way of pledge until he is paid (Art. 1731); and
(c) in a deposit, where depositary may retain the thing in
pledge until the full payment of what may be due him
by reason of the pledge (Art. 1994). These are governed
by provisions on pledge, as to possession, care, sale and
termination. (Art. 2121)

How is it different from a voluntary or contractual pledge?

(a) Remainder of purchase price may be delivered to the


obligor-pledgor.
(b) When demand for return of thing may also be made
(Art. 2122)

What principal right/s is/are granted to the creditor in a


contract of pledge?

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. (Art. 2098)

Corollarily, the debtor is obliged not to 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 the proper case (Art. 2105)

Although, there is no transfer of ownership (Art. 2103),


the creditor may bring actions which pertain to the
owner of the thing pledged in order to recover it from,
or defend it against a third person.

Note that pledgor has same responsibility as bailor in


case under Art. 1951.

When, then, may the pledgor resort to return of the thing or


other remedies?
RETURN and OFFER ANOTHER THING SAME KIND

without prejudice to Art. 2108, when there are


reasonable grounds to fear the destruction or
impairment of the thing pledged, without fault of
pledgee (Art. 2107)

DEPOSIT WITH THIRD PERSON

when through negligence or willful act of pledgee, the


thing is in danger of being lost or impaired (Art. 2106)

PUBLIC AUCTION - add to pledgor

when, through no fault of the pledgee, there is danger


or destruction, impairment, or diminution in value of
thing pledged, he may cause

While the thing is in possession of the creditor, what standard of


care must be observed?

Diligence of a good father of a family. (Art. 2099)

May the creditor use the thing?

As a general rule, he may not use the thing. The


exceptions are:
(a) when authorized, or
(b) when necessary for the preservation of the thing. (Art.
2104)

What is the remedy of the owner/pledgor in case of


unauthorized use or misuse by the creditor?

Owner/pledgor may cause for the thing to be under


judicial or extrajudicial deposit.
What then is the remedy of the pledgee in case there is danger
of destruction, impairment, or diminution of value?

The pledgee may cause the thing to be sold in a public


auction. (Art. 2108)

May the pledgee appropriate the proceeds (or resort to


compensation) in satisfaction of the debt?

No. The proceeds are held by the pledgee as security in


place of the thing sold.

Is it correct to conclude that, notwithstanding transfer of


possession only and retention by owner/pledgor of ownership,
that the owner of the thing cannot alienate the same?

No. This is incorrect. The thing may be alienated by the


owner, with the pledgee’s consent. The purchaser then
takes the thing subject to the pledge. It is consent of
pledgee which operates as transfer. Pledgee retains
ownership. (Note what may happen if there is no public
instrument with description and date of pledge.)

What is the principal remedy of the creditor, whose credit has


not been satisfied in due time?

Cause the sale of the thing in public auction.


The formalities/requisites for such a sale are:
(a) The debt is due and unpaid.
(b) The sale must be at a public auction.
(c) There must be due notice to the pledgor and
owner, stating the amount due.
(d) The sale must be made with intervention of
Notary Public.
Conduct of the Sale

(a) If two or more things are pledged, pledgee may


choose which he will cause to be sold, unless there is
stipulation to the contrary. Only as much of the things as
are necessary for payment of debt may be sold.
(b) Pledgor may bid
(c) Owner may bid
(d) Pledgee may bid, but his offer shall not be valid if he is
the only bidder
(e) All bids shall offer to pay purchase price (cash) at once.
A non-conforming bid may be accepted, pledgee
being deemed to have received the purchase price.
(f) Pledgee may appropriate thing if after first and second
auctions, the thing is not sold.

Effect of Sale

The sale of the thing pledged extinguishes the principal


obligation, whether the price is more or less than the
amount due.
Price > Amount Due, debtor not entitled to excess,
unless stipulated otherwise
Price < Amount Due, creditor not entitled to deficiency.
Stipulation to the contrary is void.

Rights of Third Parties (including Third Party Pledgor)

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. (Creditor
cannot refuse payment.) (Art. 2117)

A third party pledgor has same rights as guarantor under


Arts. 2066 to 2070, Arts. 2077-2081. He shall not be
prejudiced by any waiver of rights by the principal
obligor.

Grounds to Extinguish Pledge

(Apart from general causes such as prescription, payment, loss


of the thing, etc.)

Sale/Auction of the thing


Principally by return of the thing given by way of pledge
Renunciation or abandonment, in writing, by the
pledgee (although pledgee may continue in the
possession to the thing, the nature of such possession
shall be as depositary) MORTGAGE, Arts. 2124-2131

What is a mortgage?

Mortgage is a contract whereby the debtor secured to


the creditor the fulfillment of a principal obligation,
specially subjecting to such security immovable property
or real rights over immovable property, which obligation
shall be satisfied with the proceeds of the sale of the
said property or rights, in case the said obligation is not
complied with at the time stipulated. Chattel mortgage
has a specific definition.

Real Estate Mortgage


Chattel Mortgage

In addition to the requisites under Art. 2085, what must be


complied with in order to establish a valid mortgage as against
third parties?

The document in which it appears must be recorded in


the Registry of Property. (Note other requisites with
respect to Chattel Mortgage.)
Does this mean that a mortgage must be in writing in order to
be valid?
No. Indeed, the persons in whose favor the law
establishes a mortgage have no other right than to
demand the execution and recording of the document
in which the mortgage is formalized.

What is the effect of a mortgage?

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. (Note that this is a
significant concept, even in the treatment of mortgage
under provisions on Concurrence and Preference of
Credits.)

Effect of Mortgage, continued

By mortgage, property is thus identified or set apart from


the mass of the property of the debtor mortgagor as
security for the payment of money or fulfillment of an
obligation, to answer the amount of indebtedness in
case of non-payment. (Note further, this is the basic
rationale for availability of deficiency to the
creditor/mortgagee, unlike in the case of pledge.)

Is there transfer of ownership from mortgagor to mortgagee?


NO.

Must there be delivery, actual or constructive, to constitute a


mortgage? NO.

Does this mean that the mortgaged property may be further


alienated?
Yes. A stipulation forbidding the owner from alienating
the immovable mortgaged shall be void. (Art. 2130)
What may be the object of a mortgage?
(a) Immovables
(b) Alienable real rights
(c) Movables (Chattel Mortgage)
(d) Mortgage extends to the natural accessions, to the
improvements, growing fruits, and the rents or income
not yet received

What is the scope of a mortgage?

As a general rule, a mortgage must sufficiently describe


the debt sought to be secured by mortgage unless it
comes fairly within the terms of the mortgage.

A mortgage, however, may also cover past obligations


and/or future advances, and be continuing in nature.
The amounts specifically stated in the contract of
mortgage do not limit the amount for which the
mortgaged property may stand as security, if the intend
to secure future loans or advances may be sufficiently
determined from the instrument.

Examples of clauses recognized as allowing future


loans/advances or past loans

“For the payment of the loan of PhP[specific amount]


and such other loans or other advances already
obtained or still to be obtained by mortgagors as
makers.”

What is a dragnet clause? Also known as blanket clause

The previously discussed provisions are known in


American jurisprudence, as well as in our own, as
dragnet clause, specifically phrased to subsume all
debts of past or future origin.
May a real estate mortgage cover “after acquired properties”?

Note that this questions is significant vis-à-vis the


requirement that the mortgage must be constituted by
the owner of the property; hence, the general disability
to subject future property to a mortgage. (At best, it
may be covered under a promise to constitute a
mortgage.)

We learn from People’s Bank and Trust v. Dahican


Lumber that, under the factual setting of that case, the
parties may stipulate on after-acquired properties and
that the character of the properties there were properly
made the subject of the provision.

Note here the Supreme Court found an attempt to


circumvent this provision -

Under the fourth paragraph of both deeds of mortgage,


it is crystal clear that all property of every nature and
description taken in exchange or replacement, as well
as all buildings, machineries, fixtures, tools, equipments,
and other property that the mortgagor may acquire,
construct, install, attach; or use in, to upon, or in
connection with the premises — that is, its lumber
concession — "shall immediately be and become
subject to the lien" of both mortgages in the same
manner and to the same extent as if already included
therein at the time of their execution.

The case of Prudential v. Alviar teaches us important


information regarding a “dragnet clause” -

Also known as a “blanket clause”


Specifically phrased to subsume all debts of past or
future origin

Carefully scrutinized and strictly construed

Enables the parties to provide continuous dealings, the


nature or extent of which may not be known or
anticipated at the time, and they avoid the expense
and inconvenience of executing a new security on
each new transaction.

A “dragnet clause” operates as a convenience and


accommodation to the borrowers as it makes available
additional funds without their having to execute
additional security documents, thereby saving time,
travel, loan closing costs, costs of extra legal services,
recording fees, et cetera.

Considered valid and legal

Amounts specified do not necessarily limit the amount


for which the mortgage may stand as security

Intent to secure future and other indebtedness must be


asceretained

The problem in Alviar - “If the parties intended that the


“blanket mortgage clause” shall cover subsequent
advancement secured by separate securities, then the
same should have been indicated in the mortgage
contract. Consequently, any ambiguity is to be taken
contra proferentum, that is, construed
against the party who caused the ambiguity which
could have avoided it by the exercise of a little more
care.”
In Mojica v. Court of Appeals, the pertinent real estate
mortgage contract states among others: “... agreement
for the payment of the loan of P20,000.00 and such
other loans or other advances already obtained or still
to be obtained by the mortgagors …”

There the Supreme Court ruled that It has long been


settled by a long line of decisions that mortgages given
to secure future advancements are valid and legal
contracts; that the amounts named as consideration in
said contract do not limit the amount for which the
mortgage may stand as security if from the four corners
of the instrument the intent to secure future and other
indebtedness can be gathered.

A mortgage given to secure advancements is a


continuing security and is not discharged by repayment
of the amount named in the mortgage, until the full
amount of the advancements are paid.

Note that, consistent with Article 2085 of the Civil Code,


a sale though unregistered, would take precedence
over a registered mortgage, considering that the sale
deprived the mortgagor of ownership (Flancia v. Court
of Appeals, 457 SCRA 224)

Foreclosure of Real Estate Mortgage

May an assignee cause the foreclosure of mortgaged property.

We know the answer to this question is yes, as explained


in Santiago v. Pioneer Savings, where the Supreme Court
that FINASIA, as assignee may cause the foreclosure,
considering that a mortgage directly and immediately
subjects the property upon which it is imposed to the
fulfillment of the obligation for whose security it was
constituted.

Remedies

While we know that the principle remedy under a


mortgage is foreclosure, we learn in Caltex v. IAC, that
the secured creditor has two alternative remedies.

Where a debt is secured by a mortgage and there is a


default in payment on the part of the mortgagor, the
mortgagee has a choice of one (1) of two (2) remedies,
but he cannot have both. The mortgagee may:
1) foreclosure the mortgage; or
2) file an ordinary action to collect the debt.

When the mortgagee chooses the foreclosure of the


mortgage as a remedy, he enforces his lien by the sale
on foreclosure of the mortgaged property. The
proceeds of the sale will be applied to the satisfaction
of the debt. With this remedy, he has a prior lien on the
property. In case of a deficiency, the mortgagee has
the right to claim for the deficiency resulting from the
price obtained in the sale of the real property at public
auction and the outstanding obligation at the time of
the foreclosure proceedings.

On the other hand, if the mortgagee resorts to an action


to collect the debt, he thereby waives his mortgage
lien. He will have no more priority over the mortgaged
property. If the judgment in the action to collect is
favorable to him, and it becomes final and executory,
he can enforce said judgment by execution. He can
even levy execution on the same mortgaged property,
but he will not have priority over the latter and there
may be other creditors who have better lien on the
properties of the mortgagor.

Extrajudicial Foreclosure

When applicable
(a) Where there is a power of sale in the mortgage deed
(b) Nature of an agency, not mere representation
(c) Is not extinguished by death of the mortgagor
(d) Does not prohibity mortgagee from bidding

Notice Requirement

Posting of 20 days, 3 public places in city or municipality


where property located, but need not be on property
itself

Publication once a week for three consecutive weeks in


newspaper of general circulation (not widest
circulation)

Personal or other notice to any particular party not


required, unless otherwise stipulated

The rule is statutory provisions governing public notice of


foreclosure must be strictly complied with; even slight
deviation will invalidate sale or, at the very least, render
it voidable.

Sale

Within province, by public auction, without prior levy

Under direction of sheriff, judge, notary (see Supreme


Court Circular)
Price need not be amount of debt or value of property

Creditor or representative may participate as bidder

Result of sale is certificate of sale to the purchaser

Purchaser

Entitled to registration of certificate of sale

Acquires rights to property which owner-mortgagor has,


subject to prior liens

Right of redemption

Is the prerogative to re-acquire the property after


registration of foreclosure sale

Is different from a right to repurchase

Vested in debtor, successor-in-interest, judicial creditor


and lienholders subsequent to mortgage

Subsists for one year from registration of certificate of


sale

Exercised by offer with tender (an action to repurchase


has been construed as such offer)

Purchaser at public auction entitled to possession during


period of redemption by filing a petition for issuance of
writ of possession, upon filing of bond

Upon lapse of redemption period, purchaser is entitled


to consolidate title by affidavit of consolidation at
Register of Deeds and obtain possession by writ of
possession or other action
Extrajudicial Foreclosure

Deficiency Judgment

Has been defined as one for the balance of the


indebtedness after applying the proceeds of the sale of
the mortgaged property to such indebtedness and
necessarily filed after foreclosure proceeding.

Remedies of mortgagor are (1) personal action or (2)


foreclosure, each one affording complete relief; hence,
mutually exclusive

Judicial Foreclosure (Rule 68)

When applicable

Where there is no special power in the mortgage


permitting extrajudicial foreclosure

Where such power is granted, annotators are of opinion


that it should not bar resort to judicial foreclosure

In petition for sale of property in antichresis

Note that chattel mortgage not mentioned under the


rules, but J. Feria (ret.) is of the opinion that rules may
apply to chattel mortgage

Procedure

By action in court
Court renders judgment for (1) sum found due with order
to pay the court or the judgment obligee, not less than
90 days and not more than 120 days from entry of
judgment and (2) upon default, cause the sale

Motion to sell

Motion for order of confirmation of sale

Equity of Redemption

It is the right of defendant mortgagor (in equity) to


extinguish the mortgage and retain ownership by
paying secured debt (or amount specified in judgment)
within the period under the Rule. This period is
mandatory and cannot be changed by stipulation.

According to J. Feria, it may be exercised even after the


sale but before confirmation of sale by the court.

Judicial Foreclosure

Effect of confirmation

Divests rights in the property and invests rights in the


purchaser, subject to right of redemption under Rep.
Act No. 337.

Foreclosure

Foreclosure action prescribes in ten years.

An action to enforce a right arising from a mortgage


should be made within ten (10) years from the time the
right of action accrues; otherwise, it wall be barred by
prescription and the mortgage creditor will lose his rights
under the mortgage.

Chattel Mortgage (Act No. 1508, as amended)

Definition and Nature

As defined under Article 2140 of the New Civil Code, a


chattel mortgage is a security whereby personal
property is recorded in the Chattel Mortgage Register as
a security for the perfomance of an obligation.

Under Section 3 of Act No. 1508, a chattel mortgage is


defined as a conditional sale of personal property as
security for the payment of a debt or the performance
of some other obligation. This definition was considered
inaccurate by the Code of Commission, hence, the new
definition. Chattel Mortgage (Act No. 1508)

Subject Matter

Generally, movable.

Examples in jurisprudence include shares of stock, an


interest in the business, machinery treated by the parties
as personal property, vessels, motor vehicles, house of
mixed materials, house built on rented land)

Creation of Chattel Mortgage

Law provides for only one way of executing a valid


chattel mortgage, that is registration of the personal
property in the appropriate registry. However, it has
been ruled that if the chattel mortgage is not so
recorded, it is nevertheless binding between the parties.
Additionally, unlike in a deed of real estate mortgage,
parties to a chattel mortgage are required to execute
an Affidavit of Good Faith.

What is an Affidavit of Good Faith?

It is an affidavit or oath substantially attesting to the


following:

(a) The chattel mortgage is being executed for not


purpose other than to secure the obligation
described in the deed;

(b) The same is valid and binding in accordance with its


terms; and

(c) The same is not entered into for the purpose of


fraud.

Extent of Chattel Mortgage

In real estate mortgage, the mortgage may, under


certain circumstances, extend to after-acquired
property. In a chattel mortgage, however, there is a
requirement that personal property being mortgaged is
required to be described in the deed of chattel
mortgage itself, so as to enable the parties thereto, or
other person, after reasonable inquiry or investigation, to
identify the said mortgaged chattels. This renders an
“after-acquired property clause” of doubtful validity. But
Torres v. Limjap teaches that it may extend to shifting
stock.
Foreclosure

The proceeds of the sale shall be applied to the


payment, first, of the costs and expenses of keeping the
chattel and sale thereof, and then to the payment of
the demand or obligation secured by chattel
mortgage.
The residue, if any, shall be paid to persons holding
subsequent mortgages in their order. Thereafter, if there
be any balance still remaining, the same shall be
delivered to the mortgagor.

Deficiency

In the event the foreclosure sale proceeds is insufficient


to cover the entire debt secured by the chattel
mortgage, the mortgagor may maintain an action for
recovery of deficiency. The rationale offered in support
of this position is that, unlike a pledge, chattel mortgage
is given as security and not as payment for the debt in
case of default.

Exception is Article 1484 of the Civil Code, on sale of


personal property in installments, where chattel
mortgage constituted as security for the purchase price.

Deposit

Define a contract of deposit.

A deposit is constituted from the moment a person


receives a thing belonging to another, with the
obligation of safely keeping it and of returning the same.
If the safekeeping of the thing delivered is not the
principal purpose of the contract, there is no deposit but
some other contract. It may be judicial or extrajudicial;
in case of the latter, voluntary or necessary.

What is a voluntary deposit?

A voluntary deposit is that wherein delivery is made by


the will of the depositor.

When is there a necessary deposit?

A deposit is necessary -
(a) When it is made in compliance with a legal
obligation;
(b) When it takes place on the occasion of any
calamity, such as fire, storm, flood, pillage,
shipwreck, or other similar events
(c) Deposit of effects made by travellers in hotels or inns
under Art. 1998

How may a deposit be validly constituted?

Perfection by delivery

Contract may be made orally or in writing

Note, however, that an agreement to constitute a


deposit is binding.

Who are the parties to a contract of deposit?

Depositor and Depositary

Note, however, this does not mean that the depositor is


or must be the owner of the thing
What is scope of deposit?

Covers only movables

Note, however, that movable as well as immovable may


be the object of sequestration

Are fixed, savings and current deposits of money in banks and


similar institutions considered contracts of voluntary deposit?
Fixed, savings and current deposits of money in banks
and similar institutions shall be governed by the
provisions concerning loan.

What is the purpose of deposit?

Safekeeping

When the depositary has the permission to use the thing


deposited, the contract loses the concept of a deposit
and becomes a loan or commodatum, except where
safekeeping remains the principal purpose of the
contract

Rights and obligations of the depositary


(a) Keep thing safely and return it, when required
(b) Cannot deposit thing with third person, unless otherwise
stipulated
(c) May change way of typhoon, if it may be reasonably
presumed depositor would consent, with notice
(d) Collect interest when holding certificates, bonds,
securities or instruments which earn interest
(e) Cannot commingle, unless otherwise stipulated
(f) Cannot use without express permission of depositor
(unless necessary for preservation)
(g) May retain thing IN PLEDGE until the full payment of
what may be due him by reason of the deposit
The depositary is liable for the loss of the thing through a
fortuitous event:
(a) If it is so stipulated;
(b) If he uses the thing without the depositor’s permission;
(c) If he delays its return;
(d) If he allows others to use it, even though he himself may
have been authorized to use the same

Obligations of Depositor

Where gratuitous, reimburse the depositary for expenses


incurred for preservation of the thing

Reimburse for loss arising from character of the thing


deposited (exceptions in Art. 1993)

Conditions of return

As a general rule, thing must be returned to the


depositor upon demand, even though a specified
period or time for return has been fixed

The thing deposited shall be returned with all its


products, accessories and accessioins

Where delivered closed and sealed, return must be in


same condition

If place was designated for return at the time the


deposit was made, return must be made at such place,
with depositor shouldering cost of transportation

Let us say the depositor has made a demand for the return of
the thing. May the depositary refuse to return on the ground
that he doubts the depositor’s legal title to the thing?
No. He may not refuse. The depositary cannot demand
that the depositor prove his ownership of the thing
deposited.

If depositary discovers thing has been stolen and knows


true owner - advise latter of deposit

If owner, so informed, does not claim within one month,


depositary relieved of responsibility by returning thing to
the depositor

If depositary has reasonable grounds to believe that the


thing has not been lawfully acquired by the depositor -
he may return the same

Specific modes of extinguishing a deposit

(a) Loss or destruction of thing


(b) Where gratuitous, upon death of either party

Necessary Deposit (specifically Articles 1998-2003)

Conditions of application of 1998 include notice to


hotel-keeper or employees and traveller takes advice as
to care and vigilance

Extends to vehicles, animals, and articles introduced or


placed in annexes of hotel

Excludes loss or injury arising from


(a) acts of guest;
(b) character of thing;
(c) force majeure; act of thief or robber who enters
hotel, without use of arms or irresistible force NOT
force majeure
Hotelkeeper with right of retention, as security for credits
and supplies

Note that the hotel-keeper cannot free himself from


liability by posting notices to the effect that he is not
liable; any stipulation whereby responsibility under
Articles 1998-2001 suppressed or diminished shall be
void.

Antichresis

What is a contract of antichresis?

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.

How is a contract of antichresis validly established?

The amount of the principal and of the interest shall be


specified in writing; otherwise, the contract of antichresis
shall be void.

Right/s and obligation/s of creditor

Right to receive fruits of an immovable for purposes of


application

Obliged to pay taxes and charges upon the estate,


unless otherwise stipulated

Bound to bear expenses necessary for its preservation


and repair
May exempt himself from the two obligations above by
compelling the debtor to enter again upon the
enjoyment of the property, unless there is stipulation to
the contrary.

Remedies

May the creditor claim ownership of the real estate for non-
payment of debt?

No. Any stipulation to this effect shall be void.

In the event of non-payment, the creditor may petition


the court for the payment of the debt or the sale of real
property. Rules on judicial foreclosure applies.

Concurrence and Preference of Credits

In what proceeding does concurrence and preference of


credits properly apply?

Put simply, a proceeding in rem, where all interested


persons, whether known or not may be bound by the
proceedings, such as insolvency, liquidation of estate, or
similar proceeding.

When does concurrence of credits occur?

Concurrence occurs when the same specific property


of the debtor or all of his property is subjected to claims
of several creditors. Concurrence of credits raises no
question of consequence where value of property or
asset not sufficient. When property not sufficient,
preference arises.
Where there is concurrence, credits stand equally,
without priority among themselves, and satisfied pro
rata.

Preference

Distinction should be made between a preference and


a lien. A preference applies only to claims which to do
not attach to specific properties. The right of first
preference as regards unpaid wages does constitute a
lien on the property of the insolvent debtor in favor of
workers, but a preference in application.

Application (Classification of Credits)

Articles 2241 and 2242 are special preferred credits. Only


taxes enjoy priority. Excess used to satisfy other credits,
which are not preferred. Within provisions, credits are
equal, concurrent and proportionate.

If asset not sufficient, special preferred may become


ordinary preferred under 2244

2245 refers to common credits

Claims of workers become specially preferred only when


under Article 2241 (6) or Article 2242 (3).

RE: Art. 110 of Labor Code

Under Articles 2241 and 2242 of the Civil Code, a


mortgage credit is a special preferred credit that enjoys
preference with respect to a specific/determinate
property of the debtor. On the other hand, the worker’s
preference under Article 110 of the Labor Code is an
ordinary preferred credit. The same has ho preference
over the special preferred credits. Thus, the right of
employees to be paid benefits due them from the
properties of their employer cannot have any
preference over the latter’s mortgage credit.

Sample problem -

A debtor corporation in insolvency has the following creditors:

(a) PC Stop - for various laptops and personal computers


sold on credit, amounting to PhP450,000.00

(b) Rapid Din - for parts and repair service rendered on a


company car in the amount of PhP20,000.00

(c) Employees engaged in manufacturing parts produced


and sold by company for unpaid wages - PhP1M

(d) Nik Nak - former employee and judgment creditor in


illegal dismissal case for PhP 300,000.00

(e) BIR - unpaid VAT - PhP200,000.00

(f) LGU - unpaid real estate taxes - PhP80,000.00

(g) The Credit Company - loan of PhP2.5M

Apply the rules on concurrence and preference of credits

Claim of LGU is preferred under 2242, should be satisfied


first as to the specific immovable

Claim of Rapid Din is preferred under 2241, as to vehicle

Claim of workers preferred under 2241, as to goods


manufactured
Following claims must be paid in following order - (2244)

BIR for VAT

Nik Nak’s claim

The claim of the Credit Company, and PC Stop as


unpaid seller are common credits and should be paid
last.

(Some annotators indicate that PC Stop claim may be


considered preferred as to the equipment, per 2241, par. 3).

Sample Mortgage Agreement :


REAL ESTATE MORTGAGE AGREEMENT

KNOW ALL MEN BY THESE PRESENTS:

This Real Estate Mortgage Agreement executed by and between:

[NAME], Filipino, of legal age, married and with address at _____________, hereafter
called the Debtor/Mortgagor;

- and –

[NAME], Filipino, of legal age, married, and a resident of _____________, hereunder


referred to as the Creditor/Mortgagee;

W I T N E S S E T H : That –

1. The Property. - The Property subject of this contract is a parcel of land, more
particularly described as follows:

Transfer Certificate Of Title No. __________


Registry Of Deeds For _________ City

[TECHNICAL DESCRIPTION FROM THE TITLE]


together with all the improvements thereon, herein collectively referred to as the
Property.

2. The Loan. – Debtor/Mortgagor has obtained a loan from the Mortgagee in the sum of
_____________ Pesos (P__________) subject to the terms and conditions hereunder
prescribed, to wit:

2.1. The loan shall be payable on or before 15 December 2019.

2.2. It shall bear interest at the rate of twelve percent (12%) per annum payable
every 15th day of the month corresponding to the month for which interest is
due.

2.3. The amounts due by way of interest payments shall be covered by [number]
(__) postdated checks of P__________ each and the principal loan of
P_____________ shall also be covered by a postdated check dated 15
December 2019.

2.4. Failure and/or refusal or the Debtor/Mortgagor to pay two (2) consecutive
monthly interests (or when the checks are dishonored) shall automatically
make the principal loan of P________________ due and demandable,
together with the unpaid interest, if any.

3. The Mortgage. – For and in consideration of the loan stated in paragraph 2 hereof and
by way of a security therefor, the Debtor/Mortgagor hereby constitutes a real estate
mortgage on the Property in favor of Creditor/Mortgagee, under the following terms
and conditions:

3.1. The mortgage shall secure the payment of the loan, together with the unpaid
interest, if any.

3.2. In case the maturity of the loan is extended, upon mutual agreement in
writing of the Parties, this mortgage shall be a continuing security for the
obligation/s of the Debtor/Mortgagor to the Creditor/Mortgagee without the
necessity of executing a new contract of real estate mortgage.

3.3. If the Debtor/Mortgagor shall well pay and/or comply with his all and every
obligation under this Deed, then this mortgage shall cease to have any force
and effect. However, if the Debtor/Mortgagor shall fail and/or refuse, for any
reason whatsoever, to fully pay and/or comply with all or any of his said
obligations, then the Creditor/Mortgagee may judicially or extrajudicially, at
her option, foreclose the mortgage on the property in accordance with law.

3.4. In case collection of any amount due under this mortgage agreement is
referred to a lawyer by the Creditor/Mortgagor, the Debtor/Mortgagor is
under obligation to pay the former twenty percent (20%) of the amount due.
4. Expenses. – Expenses for notarial fees shall be for the account of the
Debtor/Mortgagor. All other expenses for the registration with the appropriate office /
the Register of Deeds shall be for the account of the Creditor/Mortgagee.

5. The parties agree that all court actions under this Agreement shall be brought before
the proper courts of ________ City or ________ City to the exclusion of any other
venue.

6. If any one or more of the provisions of this Agreement is declared invalid or


unenforceable, in any respect under any applicable law, the validity, legality or
enforceability of the remaining provisions contained herein shall not in any way be
affected or impaired.

IN WITNESS whereof, the Parties affixed their signatures this ______th day of ________________
2017 in ___________ City.

Signed:

(Mortgagor) (Mortgagee)

Signed in the presence of:

_____________________________ ___________________________

ACKNOWLEDGMENT next page . . .

ACKNOWLEDGMENT

REPUBLIC OF THE PHILIPPINES)


) S.S.
x----------------------x

BEFORE ME personally appeared:

PERSONS ID

[NAME] Driver’s License No. ___________


[NAME] Driver’s License No. ___________
presenting their competent evidence of identity, known to me and to me known to be the same
persons who executed the foregoing Real Estate Mortgage Agreement and they acknowledged to
me that the same is their knowing, free and voluntary act and deed.

This document relates to the mortgage of a parcel of land registered under TCT No.
_______________ of the Registry of Deeds for ___________ City and consists of ____ (___) pages,
including this page, each of which had been signed by the Parties and their instrumental witnesses.

WITNESS my signature and notarial seal this ___th day of _________ 2017.

Doc. No. ____;


Page No. ____;
Book No. ____;
Series of 2017.

Important: Mortgage agreements should be annotated on the Title to the property at the Register
of Deeds in order to be effective against persons who are not party to the contract.

contact@lawyerphilippines.org
Notes on the Law on Pledge, Real Mortgage & Chattel
Mortgage

Common Provisions on Pledge and Mortgage

1. Essential Requisites common to both Pledge and Mortgage:

a. They are constituted to secure fulfillment of the


principal obligation.

b. The pledgor or mortgagor is the absolute owner of


the thing pledge or mortgage.

c. The person constituting the pledge or mortgage


have free disposal of the their property and in the
absence thereof, that may be legally authorized for
the purpose (Art. 2085); and

d. The when the principal obligation becomes due, the


things in which the pledge or mortgage consists may
be alienated for the payment of the creditor. (Art.
2087)

Note:
(a) Third persons who are not parties to the principal
obligation may secure the latter by pledging or
mortgaging their own property (Art. 2085).

(b) Any kind of obligation whether pure or conditional,


including natural, voidable and unenforceable
obligations may be secured by a contract of pledge
and mortgage. (Art. 2091, 2052).
2. Meaning of PACTUM COMMISSORIUM

It is a stipulation authorizing the creditor to appropriate the


things given by way of pledge and mortgage or to dispose of
them. It is declared null and void by law. (Art 2088). Reason :
The amount of the loan is ordinarily much less than the value of
the security.

Note: The appropriation must be automatic without need of


further act on the part of the debtor. Hence, the prohibition
does not apply to:
a. Subsequent voluntary act of the debtor of making
cession of the property or;
b. A promise to assign or sell said property in payment
of the debt.

3. Rules on the indivisibility of Pledge and Mortgage:

a. 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;

b. Therefore, the debtor’s heirs who has paid of the debt


cannot ask for the proportionate extinguishments of the
pledge or mortgage as long as the debt is not
completely satisfied;

c. Neither can the creditor’s heirs who received his share of


the debt return the pledge or cancel the mortgage, to
the prejudice of the other heirs who have not been
paid;

d. The above rules, however, do not apply where there


being in several things given in mortgage or pledge,
each of them guarantees only a determinate portion of
the credit. In this case, the debtor shall have a right to
the extinguishments of the pledge or mortgage as the
portion of the debt for each thing is especially
answerable is satisfied.

Examples:
a. A borrowed from B P 10,000 and to guarantee
payment, A pledge his diamond ring worth P 4,000
and a pair of earnings worth P 6,000. if A pays P
4,000, he cannot ask for the return of the ring
because both the ring and the earnings are given to
secure payment of the entire obligation of P 10,000.
The same is true if A dies leaving W and X as heirs
and W pays P4,000 to B.

If the creditors are B and C, and A pays B P4, 000, B cannot


return the ring to the prejudice of C who has not received his
share.

However, if it is agreed that the ring was given to secure the


payment of P4,000 and the earnings, the balance of P6,000
and A (or his heir W) pays P 4,000, A (or W) can demand the
return of the ring.

b. A and V are jointly liable to C in the sum of P9,000


secured by A’s ring worth P 5,000 and B’s watch
worth P4,000. If A pays P5,000 he cannot demand
the return of the ring even if their liability is only joint
or proportionate because pledge is indivisible.

4. Legal effect of a promise to constitute a pledge or mortgage:

It gives rise only to a personal right binding upon the


parties but it creates no real right in the property. (See Art.
2092).
PLEDGE

1. Meaning of Pledge

It is a contract by virtue of which the debtor delivers to


the creditor or to the third person a movable or
instrument evidencing incorporeal rights for the purpose
of securing the fulfillment of a principal obligations is
fulfilled the thing delivered shall be returned with all the
fruits and accessions.

2. Characteristics/Nature as a contract:
a. Real
b. Accessory
c. Unilateral
d. Subsidiary contracts because the obligation incurred
does not arise until the fulfillment of the principal
obligation that is secured.
e. In addition to the common requisites of pledge and
mortgage (Art 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. (Art
2093).

3. Cause or Consideration in PLEDGE

Insofar as the pledgor is concerned, it is the principal


obligation. But if he is the debtor (Art 2085), the cause is the
compensation stipulated for the pledge or the mere liberality of
the pledgor.

4. What are the Kinds of pledge:

a. Voluntary or conventional – one which is created by


agreement of the parties; or
b. Legal – one which is created by operation of law (Art
2121)

5. Additional requirements in order that pledge shall take effect


against third parties:
a. The description of the thing pledge; and
b. The date of pledge (Art 2076)

6. May thing pledge be alienated?

Yes, provided the pledgee consents to the sale.


Ownership passes to the vendee but subject to the
rights of the pledgee. (Art 2097)

7. Enumerate the rights of the Pledgee;

a. To retain the thing in his possession or in that of a third


person to whom it has delivered, until the debt is paid
(Art 2099).

b. To be reimbursed for the expenses incurred in its


preservation (Art 2099).

c. To compensate (set – off) the fruits, income, dividends or


interests earned or produced by the thing pledged and
received with those which are due to him (Art 2102).

d. To bring the actins which pertain to the owner of the


thing pledged in order to recover if from or defend it
against a third person (Art 2103).

e. To sell the thing pledged at the public auction, if without


his fault, there is danger of destruction, impairment or
diminution in the value of the thing (Art 2108).
f. To claim a substitute or demand immediate payment, if
he is deceived on the substance or quality of the thing
pledged (Art 2109)

g. To sell the thing pledged at public auction if the


obligation secured is not paid (Art 2112).

h. To bid at the public sale (Art 2114).

i. To collect the amount that become due on a credit


pledged before such credit is redeemed.

j. To choose which one of the several thing pledged shall


be sold (Art 2119) .

8. Obligations of the pledgee:

a. To take care of the thing pledge with the diligence


of a good father of the family (Art 2099).
b. To answer for its loss or deterioration in the proper
case;
c. Not to deposit the thing pledge with a third person
unless authorized (Art )
d. To be responsible for the acts of his agents or
employees with respect to the thing pledged (Art
2100);
e. Not to use the thing pledged unless authorized or its
preservation so requires (Art 2104);
f. To advise the pledgor, without delay, of any danger
to the thing pledged (Art 2107).
g. To promptly advise the pledgor or owner in case of
sale at public auction of the result thereof (Art 2116);
and
h. To return the thing pledged when the principal
obligation is paid.
9. Conditions required in an extra – judicial foreclosure sale of
the thing pledged:

a. The debt is due and unpaid


b. The sale must be at a public auction
c. There must be notice to the pledgor and owner,
stating the amount due; and
d. The sale must be made with the intervention of a
notary public.

Note: The pledgee may appropriate the thing pledged if after


the first and second auctions, the thing is not sold. If the creditor
appropriated the thing, it shall be considered as full payment
for his entire claim. He is thus obliged to give an acquittance
for the same (Art. 2115).

The sale must be made at the public auction 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.

10. Rules on the proceeds after sale of the thing pledged:

a. Price of sale more than the amount due – The debtor


is not entitled to the excess, unless otherwise agreed;
and
b. Price of sale less tan the amount due – The creditor
is not entitled to recover any deficiency,
notwithstanding any stipulation to the contrary. (Art.
2115) Reason: To compel the creditor to hold an
honest public sale.

Note:
1. The creditor, however, may sue on the principal
obligation instead of electing to sell the thing
pledged.
2. In pledge by operation of law, after payment of the
debt and expense, the remainder of the price shall
be delivered to the obligor (Arts 2121, 2122)
3. Under the Chattel Mortgage Law, the mortgagor
can also recover the excess (Act. No. 1506, Sec 14).

11. Instances of Legal Pledges or Pledges by Operation of Law:

a. Possessor in good faith – for necessary and useful


expenses incurred over the thing (Art 546);

b. Usufructuary – for taxes and extraordinary expenses


(Art 612) ;

c. Bailee – For damages suffered by reason of the flaws


in the thing loaned. (Arts 1944, 1951);

d. Agent – for expenses advance and damages


caused by the agency (Art 1914);

e. Depositary – for the payment of what may be due


him by reason of the deposit (Art 1994); and

f. Hotel Keeper – for credits for lodging and supplies


furnished (Art 2004); and

g. Independent contractor – he who has executed


work upon a movable has a right to retain it by way
of pledge until he is paid. (Art 1731, see also Art
1701).

In case of pledge by operation of law, the proceeds shall be


applied to the debt and expenses, the remainder of the price
of the sale shall be delivered to the obligor. (Art. 2121).
The thing under 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 thing. (Art. 2122)

12. Rights of the Pledgor:

a. TO continue to be the owner of the thing pledged, until


its sale, unless it is expropriated(Art 2103) ;

b. To demand the deposit of the thing pledged should the


creditor use it without authority, or misuse it in any other
was (Art 2104);

c. To substitute the thing pledged if it is endangered


without fault of the pledgee without prejudice to the
pledgee’s right to have the thing sold at public sale (Art
2108).

d. To bid and have preference at the foreclosure sale if he


should offer the same terms as the bidder (Art 2113) His
offer is not valid however if he is the only bidder. All bids
shall offer to pay the purchase price in cash. If a bid
other than for cash is accepted, the pledgee is deemed
to have received the purchase price in cash, as far as
the pledgor or owner is concerned. (Art. 2114). The sale
of the thing pledged extinguishes the principal
obligation, whether or not the proceeds are equal to
the amount of the principal obligation, interest and
expenses in proper case; and

e. To demand the return of the thing pledged upon the


extinction of the principal obligation. (Art 2085 (1))
Note: A statement in writing by the pledgee that he renounces
or abandons the pledge is sufficient to exinguish the pledge.
For this purpose, neither the acceptance by the pledgor or
owner, nor the return of the thing pledged is necessary. The
pledgee becomes a depositary or bailee.

13. Obligations of the pledgor:

a. To notify the pledgee of any flaw or defect of the thing


pledged known to him; otherwise he answers for
damages suffered by the pledgee (Art 2101);
b. To reimburse the pledgee for expenses made for its
preservation (Art 2099); and
c. To fulfill his principal obligation (Art 2085)

14. Principles in Pledge:

1. As a general rule, the pledge extends to the interest and


earnings of the thing pledged, unless there is a
stipulation to the contrary. (Art. 2102)

2. Unless the pledge is expropriate, the debtor continues to


be the owner thereof. Nevertheless, the creditor may
bring actions which pertains to the owner of the thing
pledged in order to recover it from or defend it against
third person. (Art. 2104)

3. The creditor cannot use the thing pledged without the


consent of the owner, and if he should do so, or should
misuse t he thing in any other way, the owner may ask
the Court that it be JUDICIALLY OR EXTRA-JUDICIALLY
DESPOSITED. However, when the preservation of the
thing pledged requires its use, it must be used by the
creditor but only for that purpose. (Art. 2104)

4. The remedy of the pledgor should the thing pledgedd


be in danger of being lost or impaired through the
negligence or willful act of the pledgee is to require the
thing to be deposited with a third person. (Art. 2106)

5. The creditor who is deceived on the substance or quality


of the thing pledged may either (1) claim another thing
instead; or demand immediate payment of the
principal obligation (Art. 2109).

15. Remedies should there be reasonable grounds to fear the


destruction or impairment of the thing pledged, without fault of
the pledgee:

The pledgee is bound to advise the pledgor, without


delay or danger to the thing pledged.

The pledgor, on the other hand, may demand the return


of the thing, upon offering another 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 to cause the sale of the thing pledged at
public sale.

The proceeds of the auction sale shall be security for the


principal obligation in the same manner as the thing
originally pledged. (Arts. 2107; 2108). Between the right
of the pledgor to demand the return of the thing
pledged and the right of the pledgee to cause it to be
sold at public auction, the latter prevails.
16. Causes for the extinguishments of the pledge:

a. Return of the thing pledged by the pledgee to the


pledgor or owner, any stipulation to the contrary
being void (Art 2110);
b. Renunciation or abandonment executed in writing
by the pledgee even without return of the thing (Art
111)
c. Destruction or loss of the thing pledged;
d. Extinction of the principal obligation (by payment or
sale of the thing pledged); and
e. Other causes of extinguishments or ordinary
obligations (Art 1231)

SALIENT FEATURES OF PRESIDENTIAL DECREE NO. 114


otherwise known as REGULATING THE ESTABLISHMENT AND
OPERATION OF PAWNSHOPS

Background:

Pawnshops provide an additional source of credit


especially for small borrowers left unserved by the
banking and other financial institutions in the country;

There is no specific law in the Philippines that governs


pawnshop establishments, particularly providing definite
and uniform standards for their operation.

Declaration of Policy:

It is hereby declared the policy of the State to regulate


the establishment of pawnshops and to place their
operation on a sound and stable basis to derive the
optimum advantages from them as an additional
source of credit;
to prevent and mitigate, as far as practicable, practices
prejudicial to public interest; and to lay down the
minimum requirements and standards under which they
may be established and do business. ( Sec. 2)

Definition of Terms:

“Pawnshop” shall refer to a person or entity engaged in


the business of lending money on personal property
delivered as security for loans and shall be synonymous,
and may be used interchangeably with pawnbroker or
pawn brokerage.

“Pawner” shall refer to the borrower from a pawnshop.

“Pawnee” shall refer to the pawnshop or pawnbroker.

“Pawn” is the personal property delivered by the


pawner to the pawnee as security for a loan.

“Pawn ticket” is the pawnbrokers’ receipt for a pawn. It


is neither a security nor a printed evidence of
indebtedness.

“Property” shall include only such personal property as


may actually be delivered to the control and possession
of the pawnshop: Provided, however, That certain
specified chattels such as guns, knives and similar
weapons whose reception in pawn is expressly
prohibited by other laws or regulations shall not be
included.

A pawnshop may be established as a single proprietorship,


partnership or corporation. (SEC. 4)
Any person or entity desiring to engage in the pawnshop
business shall (a) register with the Bureau of Commerce (
Department of Trade and Industries) in the case of single
proprietorship or the Securities and Exchange Commission in
the case of a corporation or any other association (
partnership) and (b) secure a license from the appropriate city
or municipality having territorial jurisdiction over the place of
establishment and operation (business permit).

SEC. 6. Requirement of registration with the Central Bank. – Any


individual, corporation, or association duly registered and
licensed to engage in the pawnshop business shall file an
information sheet, under oath, with the Central Bank before
commencement of actual operations: Provided, however, That
pawnshops duly licensed and operating before the approval of
this Decree shall, within six months from the date of effectivity of
the same, register with the Central Bank. For this purpose, the
Central Bank shall furnish pawnshops, upon request, with
necessary copies of the prescribed information sheet.

Requirement of registration with the Central Bank – Any


individual, corporation, or association duly registered and
licensed to engage in the pawnshop business shall file an
information sheet, under oath, with the Central Bank before
commencement of actual operations. (Sec. 6)

The minimum paid-in capital of any pawnshop which may be


established after the effectivity of this Decree shall be one
hundred thousand pesos (P100,000.00):

Citizenship requirement. Upon the effectivity of this Decree,


only Filipino citizens may establish and own a pawnshop
organized in the form of a single proprietorship: Provided,
however, That in the case of a partnership, at least seventy per
cent (70%) of its capital shall be owned by Filipino citizens:
Provided, further That in the case of a corporation, at least
seventy per cent (70%) of the voting capital stock shall be
owned by citizens of the Philippines, or if there be no capital
stock, at least seventy per cent (70%) of the members entitled
to vote, shall be citizens of the Philippines.

SEC. 9. Amount of loan. Pawnshops may grant such amount of


loans as may be agreed upon between the parties: Provided,
That the amount of loan shall, in no case, be less than thirty per
cent (30%) of the appraised value of the security offered for the
loan unless the pawner manifests in writing the desire to borrow
a lesser amount.

SEC. 10. Rates of interest. – No pawnshop shall directly or


indirectly stipulate, charge, demand, take or receive any
higher rate or greater sum or value for any loan or forbearance
than the rate allowed by the Usury Law for such transactions. It
shall be unlawful for a pawnshop to divide the pawn offered by
a pawner in order to collect greater interest and/or to require
the pawner to pay an additional charge as insurance premium
for the safekeeping and conservation of the article pawned. In
addition to interest charges, pawnshops may impose a
Maximum service charge of five pesos (P5.00), but in no case to
exceed one per cent (1%) of the principal loan.

SEC. 13. Redemption. – The pawner who fails to pay his


obligation on the date it falls due may, within ninety days from
the date of maturity of the obligation, redeem the pawn by
payment of the principal of the debt with interest: Provided,
however, That for the purpose of computing interest due after
maturity of the obligation, the basis shall be the sum of the
principal obligation and interest earned at the time the
obligation matured.

SEC. 14. Disposition of pawn on default of pawner. – In the


event the pawner fails to redeem the pawn within ninety days
from the date of the maturity of the obligation in accordance
with the preceding section, the pawnbroker may sell or
otherwise dispose of any article taken or received by him in
pawn: Provided, however, That the pawner shall be duly
notified of such sale on or before the termination of the ninety-
day period, the notice particularly stating the date, hour, and
place of sale.

SEC. 15. Public auction of pawned articles. No pawnbroker shall


sell or otherwise dispose of any article or thing taken or
received in pawn or pledge except at (1) public auction in his
place of business as such pawnbroker or in any other public
place within the territorial limits of the municipality or city where
the pawnshop has its place of business, (2) under the control
and direction of an auctioneer with license duly issued by the
corresponding authorities, (3) nor shall any such article or thing
to be sold or disposed of unless said pawnbroker has published
a notice once in at least two daily newspapers printed in the
city or municipality during the week preceding the date of
such sale.

In remote areas where newspapers are neither published nor


circulated, notice by newspaper publication shall be
substituted by posting notices in conspicuous public places
within the territorial limits of the city or municipality where the
pawnshop has its place of business. Said notice, whether
published or posted, shall be in English, and either in Pilipino or
in the local dialect, and shall contain the name of the
pawnshop, its owner, address of the establishment, hour, and
the date of the auctions sale. (SEC.15)

Pawnshop business is under the regulatory power of the Central


bank of the Philippines. (Sec. 17)
REAL MORTGAGE

1. Define mortgage:

Mortgage otherwise known as Real Estate mortgage or


Real Mortgage is a contract whereby the debtor
secures to the creditor the fulfillment of the principal
obligation, especially 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:

2. Characteristics as a Contract:
a. Real
b. Accessory
c. Unilateral; and
d. Subsidiary contract

3. Distinguish Mortgage from Pledge


a. Pledge is constituted on movables (Art 2094), while
mortgage on immovables (Art 2124);

b. In pledge, the property is delivered to the pledgee,


or by common consent to third person (Art 2093),
while in mortgage, delivery is not necessary; and

c. Pledge is not valid against third persons unless a


description of the thing pledged and the date of the
pledge appear on a public instrument (Art 2096),
while mortgage is not valid against third persons if
not registered even if embodied in a public
instrument. (Art 2125).

Note: Both are extinguished by the fulfillment of the principal


obligation and by the destruction of the property pledged or
mortgaged.
4. Cause or consideration in mortgage:

Its consideration is that the principal contract from


which it receives its life, although the obligation secured
is incurred by a third person, that is, the principal debtor
is other than the mortgagor.

5. Kinds of Mortgage:
a. Voluntary – one which is agreed to between the parties
or constituted by the will of the owner of the property on
which it is created (Art 138, Spanish Mortgage Law)
b. Legal – one required by law to be executed on favor of
certain persons (Art 2125, par 2; see also Arts 2082, 2083)
c. Equitable – one which, although it lacks the proper
formalities of a mortgage, show the intention of the
parties to make the property as a security for a debt.

6. Property which may be object of Mortgage:


a. immovables; and
b. Inalienable real rights in accordance with laws,
imposed upon immovables (Art 2124)

WHAT CONSTITUTE IMMOVABLE?

Immovables

The following are immovable property:

1. Land, buildings, roads and construction of all kinds


adhered to the soil.

2. Trees, plants and growing fruits, while they are attached


to the land or form an integral part of an immovable.

3. Everything attached to an immovable in fixed manner,


in such a way that it cannot be separated there from
without breaking the material or deterioration of the
object.

4. Statues, reliefs, painting or other objects for use or


ornamentation, placed in buildings or on lands by the
owner of the immovable in such a manner that it reveals
the intention to attach them permanently to the
tenements.

5. Machinery, receptacles, instruments or implements


intended by the owner of the tenement for an industry
or works which may be carried on in a building or on a
piece of land, and which tend directly to meet the
needs of the said industry or works.

6. Animal houses, pigeon houses, beehives, fishponds or


breeding places of similar nature, in case their owner
has placed them or preserves them with the intention to
have them permanently attached to the land, and
forming a permanent part of it; the animals in these
places are included.

7. Fertilizer actually used on a piece of land.

8. Mines, quarries, slag dumps, while the manner thereof


forms part of the bed, and waters either running or
stagnant.

9. Docks and structures which, though floating, are


intended by their nature and object to remain at a fixed
place on a river, lake or coast.

10. Contracts for public works, and servitudes and other real
rights over immovable property. (Art. 415, Civil Code)
7. Effects of a Mortgage:
a. It creates a real right, i.e., it 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 (Art 2126);
b. The mortgage (creditor) may, therefore demand
payment from any possessor of the mortgaged property
(Art 2129);
c. He may alienate or assign the mortgage credit (his right
as mortgagee) to a third person (Art 2128);
d. The mortgage does not extinguish the title of the
mortgagor (debtor) who does not, therefore, lose his
right to dispose. Indeed, the law considers void any
stipulation forbidding the owner from alienating the
property mortgaged. (Art 2130)

8. Scope of Mortgage:

It extends to and includes the following:


a. Natural accessions;
b. Improvements (even if subsequently made);
c. Growing fruits;
d. Rents or income (belonging to the mortgagor) not yet
received when the obligation becomes due;
e. Proceeds of insurance received or owing from insurance
of the property;
f. Amounts received or owing in virtue of the expropriation
of the properly for public sale (Art 2127)

Note:
1. The above are deemed included in the mortgage
unless expressly excluded;
2. But the mortgage does not extend to improvements
made by a third person subsequent to the mortgage
and after the property has passed to him.
9. Define Foreclosure:

Foreclosure is a remedy available to the mortgagee by


which he subject the mortgaged property to the
satisfaction of the obligation to secure which the
mortgage was given through the sale of the property at
public auction and the application of the proceeds to
the payment of his claims.

10. Kinds of Foreclosure:


a. Judicial Foreclosure – A mortgage may be
foreclosed judicially by bringing an action for that
purpose in the Regional Trial Court of the province or
city the real property is located or any part thereof
lies; and

b. Extra – judicial foreclosure – A mortgage may be


foreclosed extra-judicially where there is inserted in
the contract a clause giving the mortgagee the
prior upon default of the debtor to foreclose the
mortgage by an extra-judicial sale of the mortgaged
property (Sec 1, Art No. 3155 as amended by Act no
4148).

11. Define Redemption

Redemption may be defined as a transaction by which


the mortgagor reacquires or buys back the property,
which may have been passed under the mortgage or
divests the property of the lien, which the mortgage
may have created.

12. Kinds of Redemption:

a. Equity of Redemption – the 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. In
judicial foreclosure, the mortgagor may exercise his
equity of redemption before and not after the sale is
confirmed by the court; and

b. Right of Redemption – the right of the mortgagor to


redeem the mortgaged property with a certain
period after is was sold for the satisfaction of the
mortgaged debt. In all cases of extra – judicial sale,
the mortgagor may redeem the property at any
time within the term of one year from and after the
date of the registration of the sale. In judicial
foreclosure, the general rule is that the mortgagor
cannot exercise his right of redemption after the sale
is confirmed by an order of the Court.

Rules on Foreclosure

VALIDITY AND EFFECT OF FORECLOSURE

The right to foreclose the mortgage and to have t


he property seized and sold with a view to
applying the proceeds to the payment of the principal
obligation

A mortgage contract may contain an acceleration


clause — on occasion of the mortgagor’s default,
the whole sum remaining unpaid automatically
becomes due and payable

Essence of mortgage contract — property has


been identified and separated from a mass of the
property of the mortgagor to secure the payment of
a principal obligation
Once the proceeds have been applied to the pay
ment of the principal obligation, the debtor cannot
anymore be asked to pay unless there is deficiency.

GROUNDS FOR FORECLOSURE

(a) Failure to pay the principal obligation on maturity date.


(b) Violation of any condition, stipulation or warranty of the
mortgage contract by the debtor/debtor

Kinds of Foreclosure:

Judicial Foreclosure – A mortgage may be foreclosed


judicially by bringing an action for that purpose in the
Regional Trial Court of the province or city the real
property is located or any part thereof lies as outlined
under Sections 4 and 70 of the Revised Rules of Court. If
there is deficiency in the public sale, the mortgagee
can petition the court for a deficiency judgment and
collect the unpaid balance from the debtor.

A third person who owns the land mortgaged but


merely secured the principal obligation shall not be
liable for the deficiency of the debtor. The latter shall
be personally liable thereof.

Rule 68 Rules of Court

1. The mortgagee should file a petition for judicial


foreclosure in the court which has jurisdiction over the
area where the property is situated.

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.

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.

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.

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.

a. 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 proceeds of the sale of the property will be disposed


as follows:
a. First, the costs of the sale will be deducted from the
price at which the property was sold

b. The amount of the principal obligation and interest will


be deducted.

c. The junior encumbrances will be satisfied.

d. 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. The rule on extrajudicial
foreclosure is different. The mortgagee must go to court and
file another action for the collection of the deficiency.

The proceeds from the judicial sale of foreclosed property shall


be applied as follows:
a. To the total amount of the debt.
b. To the costs of the sale.
c. To the claims of subsequent mortgagees.

If there is any excess from the proceeds of the sale, such will be
returned to the debtor/mortgagor.

Right of Redemption in Judicial Foreclosure

The right to redeem the mortgaged property is


exercised by the judgment debtor or mortgagor at
anytime before the confirmation of the sale. Generally,
the court is given a period of ninety (90) days to confirm
the sale. The generally rule is the mortgagor cannot
exercise his right of redemption after the sale is
confirmed.

WHY ONE WOULD SHY AWAY FROM A JUDICIAL FORECLOSURE?

1. Judicial foreclosure is costly, since the parties would


need to hire lawyers. But then again, the present rules
provide that court fees are needed to be paid in
extrajudicial proceedings also.

2. The parties have very little control over the sale


because there is court intervention.

3. More susceptible to stalling/dilatory tactics by the


mortgagor, since he can file all sorts of motions in court
to prevent the sale.

4. It is more efficient to have extrajudicial proceedings


since for judicial proceedings, there is a minimum lapse
of time of 6 years.

Extra –Judicial Foreclosure – A mortgage may be foreclosed


extra-judicially where there is inserted in the contract a clause
giving the mortgagee the prior upon default of the debtor to
foreclose the mortgage by an extra-judicial sale of the
mortgaged property (Sec 1, Art No. 3155 as amended by Act
no 4118).

(UNDER ACT 3135/4118 AND SC


ADMINISTRATIVE CIRCULAR)

WHERE SHOULD AN EXTRAJUDICIAL FORECLOSURE SALE BE


DONE?
Sale cannot be made legally outside the city or province
wherein the property sold is situated. In case the place
has been stipulated, it shall be made in the municipal
building of the said place.

NOTICE OF THE SALE:

1. POSTING of the notices of the sale FOR NOT LESS


THAN 20 DAYS in at least 3 public places of the
municipality or city where the property is situated.

2. IF THE PROPERTY IS WORTH MORE THAN P400, such


notice shall also be published once a week at least
3 consecutive weeks in a newspaper of general
circulation in the municipality or city.

(You don't need to count 6 days between publications.)

NOTE: there is jurisprudence, which held that there is


sufficient notice when there is publication.

PUBLIC AUCTION/SALE:
1.
Time shall be between 9AM and 4PM. It shall be made
in the direction of the sheriff of the province, the
justice or auxiliary justice of the peace of the
municipality, or of the notary public of the
municipality, who shall be compensated with P5
for each day of actual work or performance in
addition to his expenses.

2. Anyone may bid at the sale, unless there are


stipulations in the agreement.
POSSESSION

Upon foreclosure, if the mortgagor is in possession of the


property, he will retain possession during the
redemption period—1 year from the date of sale

If the winning bidder wants possession during the


redemption period, he may execute a bond in the
amount equivalent to the use of the property for 12
months, to indemnify the debtor in case it be shown
that the sale was made without violating the mortgage
or without complying with the requirements of the Act.
Upon approval, a writ of possession will be issued in his
favor.

If the winning bidder is able to secure possession,


the mortgagor may petition that the sale is set aside
and the writ of possession be cancelled on the
ground that he wasn't in default or that the sale
wasn't made in accordance with Act 3135. This
must be filed within 30 days from issuance of the writ
of possession.

RIGHT OF REDEMPTION

The debtor, his successors-in-interest, or any judicial creditor


or judgment creditor of said debtor, or any person having a lien
on the property subsequent to the mortgage or deed of trust
under which the property is sold, may redeem the same
at any time WITHIN THE TERM OF 1 YEAR FROM AND AFTER
THE DATE OF THE SALE and such will be governed by the Rules
of Court. – registration of the sale.

 When the property is redeemed after the purchaser


has been given possession, the redeemer is entitled to
deduct
from the price of redemption any rentals that said
purchaser may have collected in case the property or
any part thereof was rented. If the property was used
as his own dwelling, it being town property, or used it
gainfully, it being rural property,
the redeemer may deduct from the price the interest
of 1% per month provided in the Rules of Court

RULES OF COURT, RULE 39, SECTIONS 29 TO 31, AND 35

Sec. 29. Effect of redemption by judgment obligor, and a


certificate to be delivered and recorded thereupon; to whom
payments on redemption made.

If the judgment obligor redeems, he must make the same


payments as are required to effect a redemption by a
redemptioner, whereupon, no further redemption shall be allowed
and he is restored to his estate. The person to whom the
redemption payment is made must execute and deliver to hi
m a certificate of redemption acknowledge before a
notary public or other officer authorized to
take acknowledgments of conveyances of real property.

Such certificate must be filed and recorded in the registry of


deeds of the place in which the property is situated, and the
registrar of deeds must note the record thereof on the margin of
the record of the certificate of sale. The payments mentioned in
this and the last preceding sections may be made to the
purchaser rredemptioner, or for him to the officer who made the
sale.

Sec. 30. Proof required of redemptioner. A redemptioner must


produce to the officer, or person from whom he seeks to redeem,
and serve with his notice to the officer a copy of the judgment or
final order under which he claims the right to redeem, certified by
the clerk of the court wherein the judgment or final order is
entered; or, if he redeems upon a mortgage or other
lien, a memorandum of the record thereof, certified by the
registrar of deeds; or an original or certified copy of any
assignment necessary to establish his claim; and an affidavit
executed by him or his agent, showing the amount then
actually due on the lien.

Sec. 31. Manner of using premises pending redemption; waste


restrained.

Until the expiration of the time allowed for redemption, the court
may, as in other proper cases, restrain the commission of
waste on the property by injunction, on the application of the
purchaser or the judgment obligee, with or without notice; but it is
not waste for a person in possession of the property at the time of
the sale, or entitled to possession afterwards, during the period
allowed for redemption, to continue to use it in the same manner
in which it was previously used; or to use it in the ordinary
course of husbandry; or to make the necessary repairs to buildings
thereon while he occupies the property.

Sec. 35. Right to contribution or reimbursement. When property


liable to an execution against several persons is sold
thereon, and more than a due proportion of the judgment is
satisfied out of the proceeds of the sale of the property of one
of them, or one of them pays, without a sale, more than his
proportion, he may compel a contribution from the others;
and when a judgment is upon an obligation of one of them, as
security for another, and the surety pays the amount, or any
part thereof, either by sale of his property or before sale,
he may compel repayment from the principal.
Synopsis of Law on Pledge, Mortgage and Antichresis (Ph)

Pledge and real mortgage distinguished:

Pledge Real Mortgage


1. Constituted on movables. 1. Constituted on immovables.
2. Thing is delivered to the 2. Thing is not required to be
creditor or a third person by delivered to the creditor.
common agreement.
3. Must be in a public instrument 3. Must be registered to take
showing a description of the effect against third person.
thing pledged and the date of
the pledge to bind third
persons.
4. Deficiency cannot be 4. Deficiency can be
recovered even if there is a recovered.
stipulation.
5. Excess of the proceeds of 5. Excess of the proceeds of
sale is retained by the pledgee sale belongs to the mortgagor
unless there is a stipulation even if there is no stipulation to
giving it to the pledgor. that effect.
6. Pledgee may appropriate the 6. Mortgagee cannot
thing pledged if the same is not appropriate the thing
sold in two public auctions. mortgaged.

Real Mortgage and Chattel Mortgage distinguished:

Real Mortgage Chattel Mortgage


1. Constituted on immovables. 1. Constituted on movables.
2. Must be registered to take 2. Must be registered and
effect against third persons. accompanied by an affidavit of
good faith to take effect
against third persons.
3. It may secure future 3. It cannot secure future
obligations. obligations.
Pledge and Chattel Mortgage distinguished:

Pledge Chattel Mortgage


1. Thing is delivered to the 1. Thing is not required to be
creditor or a third person by delivered to the creditor.
common agreement.
2. Must be in a public instrument 2. Must be registered and
showing a description of the accompanied by an affidavit of
thing pledge and the date of good faith to take effect
the pledge to bind third against third persons.
persons.
3. Deficiency cannot be 3. Deficiency can be recovered
recovered even if there is a except in the case of personal
stipulation. property sold on installment.
4. Excess of the proceeds of the 4. Excess of the proceeds of
sale is retained by the pledgee sale belongs to the mortgagor
unless there is a stipulation even if there is no stipulation to
giving it to the pledgor and in that effect.
case of legal pledge.
5. Pledgee may appropriate the 5. Mortgagee cannot
thing pledge if the same is not appropriate the thing
sold in two public auctions. mortgaged.

Deficiency Judgment – if the proceeds of sale are not sufficient


to satisfy the claim of the creditor, the creditor may institute a
court action to recover the deficiency, except in the case of
foreclosure of a chattel mortgage constituted on personal
property which is sold at a price payable in installments.

Antichresis – is a contract whereby 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,
and thereafter to the principal of his credit.
CHARACTERISTICS:
1. Accessory;
2. Formal;
3. Nominate;
4. Real right;
5. Real property;
6. Indivisible.

Requisites of Antichresis:

1. That it be constituted to secure the fulfillment of a


principal obligation; A contract of Antichresis may
secure all kinds of obligations, be they pure or subject to
a resolutory or suspensive condition.

2. That the debtor be the absolute owner of the


immovable property (a third person, not a party to the
principal obligation, may be the owner of the
immovable given as security);

3. That the debtor must have the free disposal of such


immovable property, and in the absence thereof, that
he be duly authorized for the purpose;

4. That the amount of the principal and the interest must


be in writing; otherwise, the Antichresis is void.

Measure of application of fruits

Actual Market Value of the fruits at the time of


application thereof to the interest and principal shall be
the measure of such application.
Obligations of the creditor:

To pay the taxes and charges upon the immovable,


unless there is a stipulation to the contrary;

To bear the expenses necessary for its preservation and


repair.

Application of the fruits of the immovable:


The taxes and charges upon immovable;
The expenses for preservation and repair;
Interest on the principal obligation; and
Principal obligation.

Debtor can reacquire the enjoyment of the property:


Upon full payment of his obligation to the creditor;
When he is compelled by the creditor to enter into the
enjoyment of the property, unless there is stipulation to
the contrary.

Effect of non-payment of the debt within the period agreed


upon
The creditor does not acquire ownership of the
immovable for non-payment of the debt within the
period agreed upon. Any stipulation to the contrary is
void. (i.e Pactum Commissorium)

In case of non-payment, the creditor shall have the following


remedies:
1. To petition the court for the payment of the debt;
2. To sell the immovable.

The provisions of the Rules of Court on foreclosure of


mortgages shall apply. In case of any deficiency in the
foreclosure sale, the creditor can recover the
deficiency.
PLEDGE, MORTGAGE AND ANTICHRESIS

CHAPTER 1 > PROVISIONS COMMON TO PLEDGE AND


MORTGAGE

Art. 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.
Third persons who are not parties to the principal obligation
may secure the latter by pledging or mortgaging their own
property. (1857)

Art. 2086. The provisions of Article 2052 are applicable to a


pledge or mortgage. (n)

Art. 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. (1858)

Art. 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. (1859a)

Art. 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 extinguishment of the pledge
or mortgage as long as the debt is not completely satisfied.

Neither can the creditor’s heir who received his share of the
debt return the pledge or cancel the mortgage, to the
prejudice of the other heirs who have not been paid.

From these provisions is expected the case in which, there


being several things given in mortgage or pledge, each one of
them guarantees only a determinate portion of the credit.

The debtor, in this case, shall have a right to the extinguishment


of the pledge or mortgage as the portion of the debt for which
each thing is specially answerable is satisfied. (1860)

Art. 2090. The indivisibility of a pledge or mortgage is not


affected by the fact that the debtors are not solidarily liable.
(n)

Art. 2091. The contract of pledge or mortgage may secure all


kinds of obligations, be they pure or subject to a suspensive or
resolutory condition. (1861)

Art. 2092. A promise to constitute a pledge or mortgage gives


rise only to a personal action between the contracting parties,
without prejudice to the criminal responsibility incurred by him
who 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. (1862)

CHAPTER 2 > PLEDGE

Art. 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. (1863)

Art. 2094. All movables which are within commerce may be


pledged, provided they are susceptible of possession. (1864)

Art. 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. (n)

Art. 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. (1865a)

Art. 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. (n)

Art. 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. (1866a)

Art. 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. (1867)

Art. 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. (n)

Art. 2101. The pledgor has the same responsibility as a bailor in


commodatum in the case under Article 1951. (n)

Art. 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. (1868a)

Art. 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. (1869)

Art. 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. (1870a)

Art. 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.
(1871)
Art. 2106. If through the negligence or wilful 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.
(n)

Art. 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. (n)

Art. 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.
(n)

Art. 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. (n)

Art. 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. (n)

Art. 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. (n)

Art. 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. (1872a)

Art. 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. (n)

Art. 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. (n)

Art. 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. (n)

Art. 2116. After the public auction, the pledgee shall promptly
advise the pledgor or owner of the result thereof. (n)

Art. 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.(n)

Art. 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. (n)

Art. 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. (n)

Art. 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. (n)

Art. 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. (n)
Art. 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. (n)

Art. 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. (1873a)

CHAPTER 3 > 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. (1874a)

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. (1875a)
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. (1876)

Art. 2127. The mortgage extends to the natural accessions, to


the improvements, growing fruits, and the 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. (1877)

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. (1878)

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. (1879)

Art. 2130. A stipulation forbidding the owner from alienating the


immovable mortgaged shall be void. (n)

Art. 2131. The form, extent and consequences of a mortgage,


both as to its constitution, modification and extinguishment,
and as to other matters not included in this Chapter, shall be
governed by the provisions of the Mortgage Law and of the
Land Registration Law. (1880a)

CHAPTER 4 > 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.
(1881)

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. (n)

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

Art. 2135. The creditor, unless there is a stipulation to the


contrary, is obliged to pay the taxes and charges upon the
estate.

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. (1882)

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.
(1883)

Art. 2137. The creditor does not acquire the ownership of the
real estate for non-payment 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. (1884a)

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. (1885a)

Art. 2139. The last paragraph of Article 2085, and Articles 2089
to 2091 are applicable to this contract. (1886a)

CHAPTER 5 > 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. (n)

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 mortgages. (n)

Notes on the Law on Pledge, Real Mortgage & Chattel


Mortgage

Common Provisions on Pledge and Mortgage

2. Essential Requisites common to both Pledge and Mortgage:


a. They are constituted to secure fulfillment of the principal
obligation.
b. The pledgor or mortgagor is the absolute owner of the
thing pledge or mortgage.
c. The person constituting the pledge or mortgage have free
disposal of the their property and in the absence thereof,
that may be legally authorized for the purpose (Art. 2085);
and
d. The when the principal obligation becomes due, the things
in which the pledge or mortgage consists may be alienated
for the payment of the creditor. (Art. 2087)

Note: a. Third persons who are not parties to the principal obligation
may secure the latter by pledging or mortgaging their
own property (Art. 2085).
b. Any kind of obligation whether pure or conditional,
including natural, voidable and unenforceable obligations may
be secured by a contract of pledge and mortgage. (Art. 2091,
2052).

2. Meaning of PACTUM COMMISSORIUM


It is a stipulation authorizing the creditor to appropriate the
things given by way of pledge and mortgage or to dispose of them. It
is declared null and void by law. (Art 2088). Reason : The amount of
the loan is ordinarily much less than the value of the security.

Note: The appropriation must be automatic without need of further


act on the part of the debtor. Hence, the prohibition does not apply
to:
c. Subsequent voluntary act of the debtor of making cession
of the property or;
d. A promise to assign or sell said property in payment of
the debt.

3. Rules on the indivisibility of Pledge and Mortgage:


e. 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;
f. Therefore, the debtor’s heirs who has paid of the debt
cannot ask for the proportionate extinguishments of the
pledge or mortgage as long as the debt is not completely
satisfied;
g. Neither can the creditor’s heirs who received his share of
the debt return the pledge or cancel the mortgage, to the
prejudice of the other heirs who have not been paid;
h. The above rules, however, do not apply where there
being in several things given in mortgage or pledge, each
of them guarantees only a determinate portion of the
credit. In this case, the debtor shall have a right to the
extinguishments of the pledge or mortgage as the portion
of the debt for each thing is especially answerable is
satisfied.

Examples:
c. A borrowed from B P 10,000 and to guarantee payment,
A pledge his diamond ring worth P 4,000 and a pair of
earnings worth P 6,000. if A pays P 4,000, he cannot ask
for the return of the ring because both the ring and the
earnings are given to secure payment of the entire
obligation of P 10,000. The same is true if A dies leaving
W and X as heirs and W pays P4,000 to B.

If the creditors are B and C, and A pays B P4, 000, B


cannot return the ring to the prejudice of C who has not
received his share.

However, if it is agreed that the ring was given to secure


the payment of P4,000 and the earnings, the balance of
P6,000 and A (or his heir W) pays P 4,000, A (or W) can
demand the return of the ring.
d. A and V are jointly liable to C in the sum of P9,000
secured by A’s ring worth P 5,000 and B’s watch worth
P4,000. If A pays P5,000 he cannot demand the return of
the ring even if their liability is only joint or proportionate
because pledge is indivisible.

4. Legal effect of a promise to constitute a pledge or mortgage:


It gives rise only to a personal right binding upon the parties
but it creates no real right in the property. (See Art. 2092).

PLEDGE

1. Meaning of Pledge
It is a contract by virtue of which the debtor delivers to the
creditor or to the third person a movable or instrument evidencing
incorporeal rights for the purpose of securing the fulfillment of a
principal obligations is fulfilled the thing delivered shall be returned
with all the fruits and accessions.

2. Characteristics/Nature as a contract:
f. Real
g. Accessory
h. Unilateral
i. Subsidiary contracts because the obligation incurred does
not arise until the fulfillment of the principal obligation
that is secured.
j. In addition to the common requisites of pledge and
mortgage (Art 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. (Art 2093).

3. Cause or Consideration in PLEDGE


Insofar as the pledgor is concerned, it is the principal
obligation. But if he is the debtor (Art 2085), the cause is the
compensation stipulated for the pledge or the mere liberality of the
pledgor.

4. What are the Kinds of pledge:


c. Voluntary or conventional – one which is created by
agreement of the parties; or
d. Legal – one which is created by operation of law (Art
2121)

5. Additional requirements in order that pledge shall take effect


against third parties:
c. The description of the thing pledge; and
d. The date of pledge (Art 2076)

6. May thing pledge be alienated?


Yes, provided the pledgee consents to the sale. Ownership
passes to the vendee but subject to the rights of the pledgee. (Art
2097)

7. Enumerate the rights of the Pledgee;


k. To retain the thing in his possession or in that of a third
person to whom it has delivered, until the debt is paid
(Art 2099).
l. To be reimbursed for the expenses incurred in its
preservation (Art 2099).
m. To compensate (set – off) the fruits, income, dividends or
interests earned or produced by the thing pledged and
received with those which are due to him (Art 2102).
n. To bring the actins which pertain to the owner of the
thing pledged in order to recover if from or defend it
against a third person (Art 2103).
o. To sell the thing pledged at the public auction, if without
his fault, there is danger of destruction, impairment or
diminution in the value of the thing (Art 2108).
p. To claim a substitute or demand immediate payment, if
he is deceived on the substance or quality of the thing
pledged (Art 2109)
q. To sell the thing pledged at public auction if the
obligation secured is not paid (Art 2112).
r. To bid at the public sale (Art 2114).
s. To collect the amount that become due on a credit
pledged before such credit is redeemed.
t. To choose which one of the several thing pledged shall be
sold (Art 2119) .

8. Obligations of the pledgee:


i. To take care of the thing pledge with the diligence of a
good father of the family (Art 2099).
j. To answer for its loss or deterioration in the proper case;
k. Not to deposit the thing pledge with a third person unless
authorized (Art )
l. To be responsible for the acts of his agents or employees
with respect to the thing pledged (Art 2100);
m. Not to use the thing pledged unless authorized or its
preservation so requires (Art 2104);
n. To advise the pledgor, without delay, of any danger to
the thing pledged (Art 2107).
o. To promptly advise the pledgor or owner in case of sale
at public auction of the result thereof (Art 2116); and
p. To return the thing pledged when the principal obligation
is paid.

9. Conditions required in an extra – judicial foreclosure sale of the


thing pledged:
e. The debt is due and unpaid
f. The sale must be at a public auction
g. There must be notice to the pledgor and owner, stating
the amount due; and
h. The sale must be made with the intervention of a notary
public.

Note: The pledgee may appropriate the thing pledged if after the first
and second auctions, the thing is not sold. If the creditor
appropriated the thing, it shall be considered as full payment for his
entire claim. He is thus obliged to give an acquittance for the same
(Art. 2115).
The sale must be made at the public auction 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.

10. Rules on the proceeds after sale of the thing pledged:


c. Price of sale more than the amount due – The debtor is
not entitled to the excess, unless otherwise agreed; and
d. Price of sale less tan the amount due – The creditor is
not entitled to recover any deficiency, notwithstanding
any stipulation to the contrary. (Art. 2115) Reason: To
compel the creditor to hold an honest public sale.

Note:
1. The creditor, however, may sue on the principal
obligation instead of electing to sell the thing
pledged.
2. In pledge by operation of law, after payment of
the debt and expense, the remainder of the price
shall be delivered to the obligor (Arts 2121, 2122)
3. Under the Chattel Mortgage Law, the mortgagor
can also recover the excess (Act. No. 1506, Sec
14).

11. Instances of Legal Pledges or Pledges by Operation of Law:


h. Possessor in good faith – for necessary and useful
expenses incurred over the thing (Art 546);
i. Usufructuary – for taxes and extraordinary expenses (Art
612) ;
j. Bailee – For damages suffered by reason of the flaws in
the thing loaned. (Arts 1944, 1951);
k. Agent – for expenses advance and damages caused by
the agency (Art 1914);
l. Depositary – for the payment of what may be due him by
reason of the deposit (Art 1994); and
m. Hotel Keeper – for credits for lodging and supplies
furnished (Art 2004); and
n. Independent contractor – he who has executed work
upon a movable has a right to retain it by way of pledge
until he is paid. (Art 1731, see also Art 1701).

In case of pledge by operation of law, the proceeds shall


be applied to the debt and expenses, the remainder of
the price of the sale shall be delivered to the obligor. (Art.
2121).

The thing under 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 thing.
(Art. 2122)

12. Rights of the Pledgor:


f. TO continue to be the owner of the thing pledged, until
its sale, unless it is expropriated(Art 2103) ;
g. To demand the deposit of the thing pledged should the
creditor use it without authority, or misuse it in any other
was (Art 2104);
h. To substitute the thing pledged if it is endangered
without fault of the pledgee without prejudice to the
pledgee’s right to have the thing sold at public sale (Art
2108).
i. To bid and have preference at the foreclosure sale if he
should offer the same terms as the bidder (Art 2113) His
offer is not valid however if he is the only bidder. All bids
shall offer to pay the purchase price in cash. If a bid
other than for cash is accepted, the pledgee is deemed to
have received the purchase price in cash, as far as the
pledgor or owner is concerned. (Art. 2114). The sale of
the thing pledged extinguishes the principal obligation,
whether or not the proceeds are equal to the amount of
the principal obligation, interest and expenses in proper
case; and

j. To demand the return of the thing pledged upon the


extinction of the principal obligation. (Art 2085 (1))

Note: A statement in writing by the pledgee that he


renounces or abandons the pledge is sufficient to
exinguish the pledge. For this purpose, neither the
acceptance by the pledgor or owner, nor the return of the
thing pledged is necessary. The pledgee becomes a
depositary or bailee.

13. Obligations of the pledgor:


d. To notify the pledgee of any flaw or defect of the thing
pledged known to him; otherwise he answers for
damages suffered by the pledgee (Art 2101);
e. To reimburse the pledgee for expenses made for its
preservation (Art 2099); and
f. To fulfill his principal obligation (Art 2085)

15. Principles in Pledge:


1. As a general rule, the pledge
extends to the interest and
earnings of the thing pledged,
unless there is a stipulation to the
contrary. (Art. 2102)
2. Unless the pledge is expropriate,
the debtor continues to be the
owner thereof. Nevertheless, the
creditor may bring actions which
pertains to the owner of the thing
pledged in order to recover it from
or defend it against third person.
(Art. 2104)
3. The creditor cannot use the thing
pledged without the consent of
the owner, and if he should do so,
or should misuse t he thing in any
other way, the owner may ask the
Court that it be JUDICIALLY OR
EXTRA-JUDICIALLY DESPOSITED.
However, when the preservation
of the thing pledged requires its
use, it must be used by the
creditor but only for that purpose.
(Art. 2104)
4. The remedy of the pledgor should
the thing pledgedd be in danger of
being lost or impaired through the
negligence or willful act of the
pledgee is to require the thing to
be deposited with a third person.
(Art. 2106)
5. The creditor who is deceived on
the substance or quality of the
thing pledged may either (1) claim
another thing instead; or demand
immediate payment of the
principal obligation (Art. 2109).
15. Remedies should there be reasonable grounds to fear the
destruction or impairment of the thing pledged, without fault of the
pledgee:

- The pledgee is bound to advise the pledgor, without delay


or danger to the thing pledged.
- The pledgor, on the other hand, may demand the return
of the thing, upon offering another in pledge provided the
latter is of the same kinf as the former and not of inferior
quality and without prejudice to the RIGHT OF THE
PLEDGEE to cause the sale of the thing pledged at public
sale. The proceeds of the auction sale shall be security
for the principal obligation in the same manner as the
thing originally pledged. (Arts. 2107; 2108). Between
the right of the pledgor to demand the return of the thing
pledged and the right of the pledgee to cause it to be
sold at public auction, the latter prevails.

16. Causes for the extinguishments of the pledge:


f. Return of the thing pledged by the pledgee to the pledgor
or owner, any stipulation to the contrary being void (Art
2110);
g. Renunciation or abandonment executed in writing by the
pledgee even without return of the thing (Art 111)
h. Destruction or loss of the thing pledged;
i. Extinction of the principal obligation (by payment or sale
of the thing pledged); and
j. Other causes of extinguishments or ordinary obligations
(Art 1231)

SALIENT FEATURES OF PRESIDENTIAL DECREE NO. 114


otherwise known as REGULATING THE ESTABLISHMENT
AND OPERATION OF PAWNSHOPS
Background:
• Pawnshops provide an additional source of credit especially
for small borrowers left unserved by the banking and other
financial institutions in the country;
• There is no specific law in the Philippines that governs
pawnshop establishments, particularly providing definite and
uniform standards for their operation.
Declaration of Policy:

– It is hereby declared the policy of the State to regulate the


establishment of pawnshops and to place their operation on a
sound and stable basis to derive the optimum advantages
from them as an additional source of credit;
- to prevent and mitigate, as far as practicable, practices
prejudicial to public interest; and to lay down the
minimum requirements and standards under which they
may be established and do business. ( Sec. 2)

Definition of Terms:
• “Pawnshop” shall refer to a person or entity engaged in the
business of lending money on personal property delivered as
security for loans and shall be synonymous, and may be used
interchangeably with pawnbroker or pawn brokerage.
• “Pawner” shall refer to the borrower from a pawnshop.
• “Pawnee” shall refer to the pawnshop or pawnbroker.
• “Pawn” is the personal property delivered by the pawner to
the pawnee as security for a loan.
• “Pawn ticket” is the pawnbrokers’ receipt for a pawn. It is
neither a security nor a printed evidence of indebtedness.
• “Property” shall include only such personal property as may
actually be delivered to the control and possession of the
pawnshop: Provided, however, That certain specified chattels
such as guns, knives and similar weapons whose reception in
pawn is expressly prohibited by other laws or regulations
shall not be included.
A pawnshop may be established as a single proprietorship,
partnership or corporation. (SEC. 4)

Any person or entity desiring to engage in the pawnshop business


shall (a) register with the Bureau of Commerce ( Department of
Trade and Industries) in the case of single proprietorship or the
Securities and Exchange Commission in the case of a corporation or
any other association ( partnership) and (b) secure a license from the
appropriate city or municipality having territorial jurisdiction over the
place of establishment and operation (business permit).

SEC. 6. Requirement of registration with the Central Bank. – Any


individual, corporation, or association duly registered and
licensed to engage in the pawnshop business shall file an
information sheet, under oath, with the Central Bank before
commencement of actual operations: Provided, however, That
pawnshops duly licensed and operating before the approval of this
Decree shall, within six months from the date of effectivity of the
same, register with the Central Bank. For this purpose, the Central
Bank shall furnish pawnshops, upon request, with necessary copies
of the prescribed information sheet.

Requirement of registration with the Central Bank – Any individual,


corporation, or association duly registered and licensed to engage in
the pawnshop business shall file an information sheet, under oath,
with the Central Bank before commencement of actual operations.
(Sec. 6)

The minimum paid-in capital of any pawnshop which may be


established after the effectivity of this Decree shall be one hundred
thousand pesos (P100,000.00):
Citizenship requirement. Upon the effectivity of this Decree, only
Filipino citizens may establish and own a pawnshop organized in the
form of a single proprietorship: Provided, however, That in the case
of a partnership, at least seventy per cent (70%) of its
capital shall be owned by Filipino citizens: Provided, further
That in the case of a corporation, at least seventy per cent
(70%) of the voting capital stock shall be owned by citizens
of the Philippines, or if there be no capital stock, at least
seventy per cent (70%) of the members entitled to vote,
shall be citizens of the Philippines.

SEC. 9. Amount of loan. Pawnshops may grant such amount of loans


as may be agreed upon between the parties: Provided, That
the amount of loan shall, in no case, be less than thirty per
cent (30%) of the appraised value of the security offered for
the loan unless the pawner manifests in writing the desire to
borrow a lesser amount.

SEC. 10. Rates of interest. – No pawnshop shall directly or indirectly


stipulate, charge, demand, take or receive any higher rate or greater
sum or value for any loan or forbearance than the rate allowed by
the Usury Law for such transactions. It shall be unlawful for a
pawnshop to divide the pawn offered by a pawner in order to collect
greater interest and/or to require the pawner to pay an additional
charge as insurance premium for the safekeeping and conservation
of the article pawned. In addition to interest charges, pawnshops
may impose a Maximum service charge of five pesos (P5.00), but in
no case to exceed one per cent (1%) of the principal loan.

SEC. 13. Redemption. – The pawner who fails to pay his obligation
on the date it falls due may, within ninety days from the date
of maturity of the obligation, redeem the pawn by payment of
the principal of the debt with interest: Provided, however, That for
the purpose of computing interest due after maturity of the
obligation, the basis shall be the sum of the principal
obligation and interest earned at the time the obligation
matured.

SEC. 14. Disposition of pawn on default of pawner. – In the event the


pawner fails to redeem the pawn within ninety days from the date of
the maturity of the obligation in accordance with the preceding
section, the pawnbroker may sell or otherwise dispose of any
article taken or received by him in pawn: Provided, however,
That the pawner shall be duly notified of such sale on or
before the termination of the ninety-day period, the notice
particularly stating the date, hour, and place of sale.

SEC. 15. Public auction of pawned articles. No pawnbroker shall sell


or otherwise dispose of any article or thing taken or received in pawn
or pledge except at (1) public auction in his place of business as such
pawnbroker or in any other public place within the territorial limits of
the municipality or city where the pawnshop has its place of
business, (2) under the control and direction of an auctioneer with
license duly issued by the corresponding authorities, (3) nor shall any
such article or thing to be sold or disposed of unless said pawnbroker
has published a notice once in at least two daily newspapers printed
in the city or municipality during the week preceding the date of such
sale.

In remote areas where newspapers are neither published nor


circulated, notice by newspaper publication shall be
substituted by posting notices in conspicuous public places
within the territorial limits of the city or municipality where
the pawnshop has its place of business. Said notice, whether
published or posted, shall be in English, and either in Pilipino or in
the local dialect, and shall contain the name of the pawnshop, its
owner, address of the establishment, hour, and the date of the
auctions sale. (SEC.15)

Pawnshop business is under the regulatory power of the Central bank


of the Philippines. (Sec. 17)

REAL MORTGAGE

1. Define mortgage:
Mortgage otherwise known as Real Estate mortgage or Real
Mortgage is a contract whereby the debtor secures to the creditor the
fulfillment of the principal obligation, especially 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:

2. Characteristics as a Contract:
e. Real
f. Accessory
g. Unilateral; and
h. Subsidiary contract

3. Distinguish Mortgage from Pledge


d. Pledge is constituted on movables (Art 2094), while
mortgage on immovables (Art 2124);
e. In pledge, the property is delivered to the pledgee, or by
common consent to third person (Art 2093), while in
mortgage, delivery is not necessary; and
f. Pledge is not valid against third persons unless a
description of the thing pledged and the date of the
pledge appear on a public instrument (Art 2096), while
mortgage is not valid against third persons if not
registered even if embodied in a public instrument. (Art
2125).

Note: Both are extinguished by the fulfillment of the principal


obligation and by the destruction of the property pledged or
mortgaged.

4. Cause or consideration in mortgage:


Its consideration is that the principal contract from which it
receives its life, although the obligation secured is incurred by a third
person, that is, the principal debtor is other than the mortgagor.

5. Kinds of Mortgage:
d. Voluntary – one which is agreed to between the parties or
constituted by the will of the owner of the property on
which it is created (Art 138, Spanish Mortgage Law)
e. Legal – one required by law to be executed on favor of
certain persons (Art 2125, par 2; see also Arts 2082,
2083)
f. Equitable – one which, although it lacks the proper
formalities of a mortgage, show the intention of the
parties to make the property as a security for a debt.

6. Property which may be object of Mortgage:


c. immovables; and
d. Inalienable real rights in accordance with laws, imposed
upon immovables (Art 2124)

WHAT CONSTITUTE IMMOVABLE?

Immovables
• The following are immovable property:
• Land, buildings, roads and construction of all kinds adhered
to the soil.
• Trees, plants and growing fruits, while they are attached to
the land or form an integral part of an immovable.
• Everything attached to an immovable in fixed manner, in
such a way that it cannot be separated there from without
breaking the material or deterioration of the object.
• Statues, reliefs, painting or other objects for use or
ornamentation, placed in buildings or on lands by the owner
of the immovable in such a manner that it reveals the
intention to attach them permanently to the tenements.
• Machinery, receptacles, instruments or implements intended
by the owner of the tenement for an industry or works which
may be carried on in a building or on a piece of land, and
which tend directly to meet the needs of the said industry or
works.
• Animal houses, pigeon houses, beehives, fishponds or
breeding places of similar nature, in case their owner has
placed them or preserves them with the intention to have
them permanently attached to the land, and forming a
permanent part of it; the animals in these places are
included.
• Fertilizer actually used on a piece of land.
• Mines, quarries, slag dumps, while the manner thereof forms
part of the bed, and waters either running or stagnant.
• Docks and structures which, though floating, are intended by
their nature and object to remain at a fixed place on a river,
lake or coast.
• Contracts for public works, and servitudes and other real
rights over immovable property. (Art. 415, Civil Code)

7. Effects of a Mortgage:
e. It creates a real right, i.e., it 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 (Art 2126);
f. The mortgage (creditor) may, therefore demand payment
from any possessor of the mortgaged property (Art
2129);
g. He may alienate or assign the mortgage credit (his right
as mortgagee) to a third person (Art 2128);
h. The mortgage does not extinguish the title of the
mortgagor (debtor) who does not, therefore, lose his
right to dispose. Indeed, the law considers void any
stipulation forbidding the owner from alienating the
property mortgaged. (Art 2130)

8. Scope of Mortgage:
It extends to and includes the following:
g. Natural accessions;
h. Improvements (even if subsequently made);
i. Growing fruits;
j. Rents or income (belonging to the mortgagor) not yet
received when the obligation becomes due;
k. Proceeds of insurance received or owing from insurance
of the property;
l. Amounts received or owing in virtue of the expropriation
of the properly for public sale (Art 2127)

Note:
1. The above are deemed included in the mortgage unless
expressly excluded;
2. But the mortgage does not extend to improvements
made by a third person subsequent to the mortgage and
after the property has passed to him.

9. Define Foreclosure:
Foreclosure is a remedy available to the mortgagee by which
he subject the mortgaged property to the satisfaction of the
obligation to secure which the mortgage was given through the sale
of the property at public auction and the application of the proceeds
to the payment of his claims.

10. Kinds of Foreclosure:


c. Judicial Foreclosure – A mortgage may be foreclosed
judicially by bringing an action for that purpose in the
Regional Trial Court of the province or city the real
property is located or any part thereof lies; and

d. Extra – judicial foreclosure – A mortgage may be


foreclosed extra-judicially where there is inserted in the
contract a clause giving the mortgagee the prior upon
default of the debtor to foreclose the mortgage by an
extra-judicial sale of the mortgaged property (Sec 1, Art
No. 3155 as amended by Act no 4148).

11. Define Redemption


Redemption may be defined as a transaction by which the
mortgagor reacquires or buys back the property, which may have
been passed under the mortgage or divests the property of the lien,
which the mortgage may have created.

12. Kinds of Redemption:

c. Equity of Redemption – the 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. In judicial
foreclosure, the mortgagor may exercise his equity of
redemption before and not after the sale is confirmed by
the court; and

d. Right of Redemption – the right of the mortgagor to


redeem the mortgaged property with a certain period
after is was sold for the satisfaction of the mortgaged
debt. In all cases of extra – judicial sale, the mortgagor
may redeem the property at any time within the term of
one year from and after the date of the registration of the
sale. In judicial foreclosure, the general rule is that the
mortgagor cannot exercise his right of redemption after
the sale is confirmed by an order of the Court.

Rules on Foreclosure

VALIDITY AND EFFECT OF FORECLOSURE


 The right to foreclose the mortgage and to have the
property seized and sold with a view to applying the
proceeds to the payment of the principal obligation

> A mortgage contract may contain an acceleration clause—


on occasion of the mortgagor’s default, the whole sum remaining
unpaid automatically becomes due and payable

> Essence of mortgage contract—property has been


identified and separated from a mass of the property of
the mortgagor to secure the payment of a principal obligation
>Once the proceeds have been applied to the payment of
the principal obligation, the debtor cannot anymore be asked to
pay unless there is deficiency.
GROUNDS FOR FORECLOSURE
A. Failure to pay the principal obligation on maturity date.
B. Violation of any condition, stipulation or warranty of the
mortgage contract by the debtor/debtor
C. Kinds of Foreclosure:
D. Judicial Foreclosure – A mortgage may be foreclosed judicially
by bringing an action for that purpose in the Regional Trial
Court of the province or city the real property is located or
any part thereof lies as outlined under Sections 4 and 70 of
the Revised Rules of Court. If there is deficiency in the public
sale, the mortgagee can petition the court for a deficiency
judgment and collect the unpaid balance from the debtor.

A third person who owns the land mortgaged but merely secured the
principal obligation shall not be liable for the deficiency of the debtor.
The latter shall be personally liable thereof.

Rule 68 Rules of Court


1. The mortgagee should file a petition for judicial foreclosure in the
court which has jurisdiction over the area where the property is
situated
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.
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.
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.
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.
a. 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 proceeds of the sale of the property will be disposed as


follows:
a. First, the costs of the sale will be deducted from the price
at which the property was sold
b. The amount of the principal obligation and interest will be
deducted.
c. The junior encumbrances will be satisfied.

d. 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. The rule on extrajudicial foreclosure
is different. The mortgagee must go to court and file another action
for the collection of the deficiency.
The proceeds from the judicial sale of foreclosed property shall
be applied as follows:
d. To the total amount of the debt.
e. To the costs of the sale.
f. To the claims of subsequent mortgagees.
If there is any excess from the proceeds of the sale, such will be
returned to the debtor/mortgagor.
Right of Redemption in Judicial Foreclosure
The right to redeem the mortgaged property is exercised by the
judgment debtor or mortgagor at anytime before the
confirmation of the sale. Generally, the court is given a period
of ninety (90) days to confirm the sale. The generally rule is
the mortgagor cannot exercise his right of redemption after the
sale is confirmed.

WHY ONE WOULD SHY AWAY FROM A JUDICIAL FORECLOSURE?

1. Judicial foreclosure is costly, since the parties would need


to hire lawyers. But then again, the present rules provide
that court fees are needed to be paid in extrajudicial
proceedings also.
2. The parties have very little control over the sale beca
use there is court intervention.

3. More susceptible to stalling/dilatory tactics by the


mortgagor, since he can file all sorts of motions in court to
prevent the sale.

4. It is more efficient to have extrajudicial proceedings since


for judicial proceedings, there is a minimum lapse of time of 6
years.

Extra –Judicial Foreclosure – A mortgage may be foreclosed


extra-judicially where there is inserted in the contract a clause
giving the mortgagee the prior upon default of the debtor to
foreclose the mortgage by an extra-judicial sale of the
mortgaged property (Sec 1, Art No. 3155 as amended by Act
no 4118).

(UNDER ACT 3135/4118 AND SC ADMINISTRATIVE


CIRCULAR)

WHERE SHOULD AN EXTRAJUDICIAL FORECLOSURE SALE BE


DONE?

Sale cannot be made legally outside the city or province


wherein the property sold is situated. In case the place
has been stipulated, it shall be made in the
municipal building of the said place.

NOTICE OF THE SALE

1. POSTING of the notices of the sale FOR NOT LESS THAN


20 DAYS in at least 3 public places of the municipality or city where
the property is situated.
2. IF THE PROPERTY IS WORTH MORE THAN P400, such
notice shall also be
published once a week at least 3 consecutive weeks in a
newspaper of general circulation in the municipality or city.
(You don't need to count 6 days between publications.)
NOTE: there is jurisprudence, which held that
there is sufficient notice when there is publication

• PUBLIC AUCTION/SALE

1. Time shall be between 9AM and 4PM. It shall be made in


the direction of the sheriff of the province, the justice
or auxiliary justice of the peace of the municipality, or of the
notary public of the municipality, who shall be
compensated with P5 for each day of actual work or
performance in addition to his expenses.

2. Anyone may bid at the sale, unless


there are stipulations in the agreement.

POSSESSION
> Upon foreclosure, if the mortgagor is in possession of the
property, he will retain possession during the redemption
period—1 year from the date of sale

> If the winning bidder wants possession during the


redemption period, he may execute a bond in the amount
equivalent to the use of the property for 12 months, to
indemnify the debtor in case it be shown that the sale was made
without violating the mortgage or without complying with the
requirements of the Act. Upon approval, a writ of possession will be
issued in his favor.
> If the winning bidder is able to secure possession, the
mortgagor may petition that the sale is set aside and the
writ of possession be cancelled on the ground that he
wasn't in default or that the sale wasn't made in
accordance with Act 3135. This must be filed within 30 days
from issuance of the writ of possession.

RIGHT OF REDEMPTION

 The debtor, his successors-in-interest, or any judicial


creditor or judgment creditor of said debtor, or any person
having a lien on the property subsequent to the mortgage
or deed of trust under which the property is sold, may
redeem the same at any time WITHIN THE TERM OF 1
YEAR FROM AND AFTER THE DATE OF THE SALE and such
will be governed by the Rules of Court. –registration of the
sale.

 When the property is redeemed after the purchas


er has been given possession, the redeemer is
entitled to deduct
from the price of redemption any rentals that sai
d purchaser may have collected in case the property
or any part thereof was rented. If the property was
used as his own dwelling, it being town property, or
used it gainfully, it being rural property,
the redeemer may deduct from the price the
interest of 1% per month provided in the Rules of
Court
RULES OF COURT, RULE 39, SECTIONS 29 TO 31, AND 35

Sec. 29. Effect of redemption by judgment obligor, and a


certificate to be delivered and recorded thereupon; to whom
payments on redemption made.
If the judgment obligor redeems, he must make the same
payments as are required to effect a redemption by a
redemptioner, whereupon, no further redemption shall be allowed
and he is restored to his estate. The person to whom the
redemption payment is made must execute and deliver to him
a certificate of redemption acknowledge before a notary public or
other officer authorized to take acknowledgments of conveyances of
real property.
Such certificate must be filed and recorded in the registry of deeds of
the place in which the property is situated, and the registrar of deeds
must note the record thereof on the margin of the record of the
certificate of sale. The payments mentioned in this and the last
preceding sections may be made to the purchaser r redemptioner, or
for him to the officer who made the sale.

Sec. 30. Proof required of redemptioner.


A redemptioner must produce to the officer, or person from whom he
seeks to redeem, and serve with his notice to the officer a copy of
the judgment or final order under which he claims the right to
redeem, certified by the clerk of the court wherein the judgment or
final order is entered; or, if he redeems upon a mortgage or other
lien, a memorandum of the record thereof, certified by the
registrar of deeds; or an original or certified copy of any
assignment necessary to establish his claim; and an affidavit
executed by him or his agent,
showing the amount then actually due on the lien.
Sec. 31. Manner of using premises pending redemption; waste
restrained.

Until the expiration of the time allowed for redemption, the court
may, as in other proper cases,
restrain the commission of waste on the property by injunction, on
the application of the purchaser or the judgment obligee, with or
without notice; but it is not waste for a person in possession of the
property at the time of the sale, or entitled to possession afterwards,
during the period allowed for redemption, to continue to use it in the
same manner in which it
was previously used; or to use it in the ordinary course of
husbandry; or to make the necessary repairs to buildings thereon
while he occupies the property.
Sec. 35. Right to contribution or reimbursement.
When property liable to an execution against several persons is
sold thereon, and more than a due proportion of the judgment is
satisfied out of the proceeds of the sale of the property of one of
them, or one of them pays, without a sale, more than his
proportion, he may compel a contribution from the others; an
d when a judgment is upon an obligation of one of them, as security
for another, and the surety pays the amount, or any part thereof,
either by sale of his property or before sale, he may compel
repayment from the principal.

GENERAL BANKING LAW OF 2000, SECTION 47

Sec. 47. Foreclosure of Real Estate Mortgage. - In the event


of foreclosure, whether judicially or extra-judicially, of any
mortgage on real estate which is security for any loan or othe
r credit accommodation granted, the mortgagor or debtor whose
real property has been sold for the full or partial payment of
his obligation shall have the right within one year after the sale of the
real estate, to redeem the property by paying the amount due
under the mortgage deed, with interest thereon at rate specified in
the mortgage, and all the costs and expenses incurred by the bank
or institution from the sale and custody of said property less the
income derived therefrom.
Notwithstanding Act 3135, juridical persons whose property is
being sold pursuant to an extrajudicial foreclosure, shall have the
right to redeem the property in accordance with this provision
until, but not after, the registration of the certificate of foreclosure
sale with the applicable Register of Deeds which in no case shall be
more than three (3) months after foreclosure, whichever is earlier.

Owners of property that has been sold in a foreclosure sale prior to


the effectivity of this Act shall retain their redemption rights until
their expiration.

NOTES:
1. For judicial or extra-
judicial foreclosure, the redemption period is within
one year from sale or registration.
2. The purpose is to give concession to the banks. Banks
cannot get properties mortgaged by those in financial distress.
3. The redemption price would be the mortgaged obligation
plus the interest as stipulated in the original obligation. Compar
e this with judicial foreclosure wherein the
redemption price is the original price. In this case, you have
to pay more when redeeming from a bank.
4. There is immediate possession
5. A motion to enjoin would not be entertained unless secured
by a bond.
6. Court will fix the amount of the bond. Normally, this
would be the liability of the bank plus costs. This
remedied the loopholes in Act 3135—protect the bank
during foreclosures. This makes it hard to secure
injunctions and it shortens the redemption period.
However, the purchaser at the auction
sale concerned whether in a judicial or extra-judicial foreclosure
shall have the right to enter upon and take possession of suc
h
property immediately after the date of the confirmation of the
auction sale and administer the same in accordance with law. Any
petition in court to enjoin or restrain the conduct of foreclosur
e proceedings instituted pursuant to this provision shall be given due
course only upon the filing by the petitioner of a bond in an
amount fixed by the court conditioned that he will pay all the
damages which the bank may suffer by the enjoining or the
restraint of the foreclosure proceeding.

• "SEC. 6. In all cases in which an extrajudicial sale is


made under the special power hereinbefore referred to, the
debtor, his successors-in-interest or any judicial creditor or
judgment creditor of said debtor, or any person having a lien
on the property subsequent to the mortgage or deed of trust
under which the property is sold, may redeem the same at
any time within the term of one year from and after the date
of the sale; and such redemption shall be governed by the
provisions of sections four hundred and sixty-four to four
hundred and sixty-six, inclusive, of the Code of Civil
Procedure, in so far as these are not inconsistent with the
provisions of this Act." ( Act 4118).
A.M. No. 99-10-05-0 August 7, 2001

(AS FURTHER AMENDED, AUGUST 7, 2001)


PROCEDURE IN EXTRA-JUDICIAL FORECLOSURE OF
MORTGAGE

In line with the responsibility of an Executive Judge under


Administrative Order No. 6, dated June 30, 1975, for the
management of courts within his administrative area, included in
which is the task of supervising directly the work of the Clerk of Court,
who is also the Ex-Office Sheriff, and his staff, and
the issuance of commissions to notaries public and enforcement of
their duties under the law, the following procedures are hereby
prescribed in extrajudicial foreclosure of mortgages:

1. All applications for extra-judicial foreclosure of


mortgage whether under the direction of the sheriff or a
notary public, pursuant to Act 3135, as amended by Act 4118,
and Act 1508, as amended, shall be filed with the Executive
Judge, through the Clerk of court who is also the Ex-Officio
Sheriff.

2. Upon receipt of an application for extra-judicial foreclosure


of mortgage, it shall be the duty of the Clerk ofCourt to:

a) receive and docket said application and to stamp


thereon the corresponding file number, date and time
of filing;

b) collect the filing fees therefore pursuant to rule 141,


Section 7(c), as amended by A.M. No. 00-2-01-SC,
and issue the corresponding official receipt;

c) examine, in case of real estate


mortgage foreclosure, whether the applicant has
complied with all the requirements before the public
auction is conducted under the direction of the sheriff
or a notary public, pursuant to Sec. 4 of Act 3135, as
amended;

d) sign and issue the certificate of sale, subject to the


approval of the Executive Judge, or in his absence,
the Vice-Executive Judge. No certificate of sale shall
be issued in favor of the highest bidder until all fees
provided for in the aforementioned sections and in
Rule 141, Section 9(1), as amended by A.M. No. 00-
2-01-SC, shall have been paid; Provided, that in no
case shall the amountpayable under Rule 141,
Section 9(1), as amended, exceed P100,000.00;

e) after the certificate of sale has been issued to the


highest bidder, keep the complete records, while
awaiting any redemption within a period of one (1)
year from date of registration of the certificate of sale
with the Register of Deeds concerned, after which,
the records shall be archived. Notwithstanding the
foregoing provision, juridical persons whose property
is sold pursuant to an extra-judicial foreclosure, shall
have the right to redeem the property until, but not
after, the registration of the certificate of foreclosure
sale which in no case shall be more than three (3)
months after foreclosure, whichever is earlier, as
provided in Section 47 of Republic Act No. 8791 (as
amended, Res. Of August 7, 2001).

Where the application concerns the extrajudicial foreclosure


of mortgages of real estates and/or chattels in different
locations covering one indebtedness, only one filing
fee corresponding to such indebtedness shall be collected.
The collecting Clerk of Court shall, apart from the official
receipt of the fees, issue a certificate of payment indicating
the amount of indebtedness, the filing fees collected, the
mortgages sought to be foreclosed, the real estates and/or
chattels mortgaged and their respective locations, which
certificate shall serve the purpose of having the application
docketed with the Clerks of Court of the places where the
other properties are located and of allowing the extrajudicial
foreclosures to proceed thereat.

3. The notices of auction sale in extrajudicial foreclosure for


publication by the sheriff or by a notary publicshall be
published in a newspaper of general circulation pursuant to
Section 1, Presidential Decree No. 1079, dated January 2,
1977, and non-compliance therewith shall constitute a
violation of Section 6 thereof.

4. The Executive Judge shall, with the assistance of the Clerk


of Court, raffle applications for extrajudicial foreclosure of
mortgage under the direction of the sheriff among all sheriffs,
including those assigned to the Office of the Clerk of Court
and Sheriffs IV assigned in the branches.
5. The name/s of the bidder/s shall be reported by the sheriff
or the notary public who conducted the sale to the Clerk of
Court before the issuance of the certificate of sale.

This Resolution amends or modifies accordingly Administrative Order


No. 3 issued by then Chief Justice Enrique M. Fernando on 19
October 1984 and Administrative Circular No. 3-98 issued by the
Chief Justice Andres R. Narvasa on 5 February 1998.

The Court Administrator may issue the necessary guidelines for the
effective enforcement of this Resolution.

The Clerk of Court shall cause the publication of this Resolution in a


nuewspaper of general circulation not later than August 14, 2001 and
furnish copies thereof to the Integrated Bar of the Philippines.

This Resolution shall take effect on the 1st day of September of the
year 2001.

Promulgated this 7th day of August 2001 in the City of Manila.

Davide, Jr., C.J., Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza,


Panganiban, Quisumbing, Pardo, Buena, Gonzaga-Reyes, Ynares-
Santiago, and De Leon, Jr., JJ., concur.
Sandoval-Gutierrez J., on leave.

CHATTEL MORTGAGE ( Act No. 1508, as amended).

1. Define Chattel Mortgage:


Chattel Mortgage is a contract by virtue of which personal
property is recorded in the Chattel Mortgage Register as a security
for the performance of an obligation (Art 2140).

2. Characteristics as a Contract:
a. accessory
b. unilateral
c. formal contract
d. if the chattel mortgage (or real mortgage) is not
recorded, the mortgagee acquires the right to demand
registration of the contract. (Art 2125)

3. Laws principally governing chattel mortgages:


a. Chattel Mortgage Law (Act No. 1508)
b. Civil Code
c. Revised Administrative Code; and
d. Revised Penal Code

4. Similarities between pledge and chattel mortgage:


a. both are executed to secure performance of a principal
obligation;
b. both are constituted only on personal property;
c. both are indivisible
d. both are constitute a lien on the property
e. In both cases, the creditor cannot appropriate the
property to himself in payment of the debt;
f. In both cases, when the debtor defaults, the property
must be sold for the payment of the creditor; and
g. Both are extinguishments by the fulfillment of the
principal obligation and by the destruction of the property
pledged or mortgaged.

5. Distinguish chattel mortgage from pledge:


a. In chattel mortgage, the delivery of the personal property
to the mortgagee is not necessary, while in pledge, such
delivery is necessary;
b. In chattel mortgage, the registration of the same in the
Chattel Mortgage Register is necessary for its validity,
while in pledge, registration in the Registry of Property is
not necessary.
c. The procedure for the sale of the thing given as a security
is different. In chattel mortgage, the procedure is found
in Section 14 of Act No. 1508, as amended, while in
pledge, it is found in Article 2112 of the Civil Code.
d. In chattel mortgage, the excess over the amount due
after foreclosure goes to the debtor (Art No. 1508,
Section 14), while in pledge, if the property is sold, the
debtor is not entitled to the excess unless it is otherwise
agreed (Art 2115) or except in the case of a legal pledge
(Art 2121) and;
e. In chattel mortgage, the creditor is entitled to recover
any deficiency except if the chattel mortgage is a security
for the purchase of personal property in installments,
while in pledge, the creditor is not entitled, any
stipulation to the contrary notwithstanding (Art 2115).

6. Object of Chattel Mortgage Contract:


Only movable or personal properties such as:
a. Shares of stock (the mortgage to be registered both in
Chattel Mortgage Registries of the province where the
mortgagor resides, and the province where the
corporation has its principal business);
b. Interest in business;
c. Growing crops;
d. Large cattles;
e. Vehicles (the mortgage to be registered also with the
Land Transportation Office); and
f. Vessels (the mortgage to be registered with the Office of
the Philippine Coast Guard of the Port of Documentation
of such vessels. (Pres. Decree No. 1521, Sec. 3 9a)).
g. House built on rented land but as between the parties
only under the doctrine of estoppel; and
h. House to be demolished and portable nipa huts for what
are really mortgaged in this case are the materials thereof
and they are, therefore, personal property.

Note: Growing crops and large cattle are considered personal


property under the Chattel Mortgage Law (Art 1508 Sec 7). They
cannot however, be the object of a contract of pledge because they
are considered immovable under the Civil Code, which principally
governs pledge.

7. Extent or scope of Chattel Mortgage:


It covers only property described in the contract, and
excludes like or substituted property thereafter acquired by the
mortgagor, notwithstanding any thing in the contract to the contrary
(Art No. 1508 Sec 7). Exception: In this case of stock or merchandise
contained in drugstores, grocery stores, etc. which are constantly
sold and substituted with new stock.

8. What is an Affidavit of Good Faith?


The Affidavit of Good Faith is an oath in a contra t of chattel
mortgage wherein the parties “severally swear that the 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 just
and valid obligation and one not entered into for the purpose of
fraud. (Section 5)

Note: The absence of the affidavit vitiates a mortgage only as against


third persons without notice, like creditors and subsequent
encumbrances.

9. Who may exercise right of redemption when condition of the


chattel mortgage is broken:
a. The mortgagor;
b. A person holding a subsequent mortgage;
c. A subsequent attaching creditor

The redemption is made by paying or delivering to the


mortgage the amount due on such mortgage and the costs and
expenses incurred by such breach of condition before the sale
thereof. (Section 13).

10. Kinds of Foreclosure of Chattel Mortgage:


a. Judicial Foreclosure – the mortgagee institutes an action
in court;
b. Extra-judicial Foreclosure – The sale is made by the
mortgagee himself when authorized by the Chattel
mortgage contract or by special law.

11. How proceeds of the foreclosure be applied?


To the payment of the following in their order:
a. Costs and expenses of keeping and 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 paid to the mortgagor, or in
person holding under him.
ACT NO. 1508

NO. 1508 - AN ACT PROVIDING FOR THE MORTGAGING OF PERSONAL PROPERTY AND FOR
REGISTRATION OF THE MORTGAGES SO EXECUTED

ection 1. The short title of this Act shall be "The Chattel Mortgage Law."

ec. 2. All personal property shall be subject to mortgage, agreeably to the provisions of
is Act, and a mortgage executed in pursuance thereof shall be termed chattel mortgage.

ec. 3. Chattel mortgage defined. — A chattel mortgage is a conditional sale of personal


operty as security for the payment of a debt, or the performance of some other obligatio
ecified therein, the condition being that the sale shall be void upon the seller paying to th
urchaser a sum of money or doing some other act named. If the condition is performed
cording to its terms the mortgage and sale immediately become void, and the mortgagee
thereby divested of his title.

ec. 4. Validity. — A chattel mortgage shall not be valid against any person except the
ortgagor, his executors or administrators, unless the possession of the property is
elivered to and retained by the mortgagee or unless the mortgage is recorded in
e office of the register of deeds of the province in which the mortgagor resides at the tim
making the same, or, if he resides without the Philippine Islands, in the province in whic
e property is situated: Provided, however, That if the property is situated in a different
ovince from that in which the mortgagor resides, the mortgage shall be recorded in the
fice of the register of deeds of both the province in which the mortgagor resides and that
which the property is situated, and for the purposes of this Act the city of Manila shall be
eemed to be a province.

ec. 5. Form. — A chattel mortgage shall be deemed to be sufficient when made


bstantially in accordance with the following form, and shall be signed by the person or
ersons executing the same, in the presence of twowitnesses, who shall sign the mortgage
witnesses to the execution thereof, and each mortgagor and mortgagee, or, in the
bsence of the mortgagee, his agent or attorney, shall make and subscribe an affidavit in
bstance as hereinafter set forth, which affidavit, signed by the parties to the mortgage a
bove stated, and the certificate of the oath signed by the authority administering the sam
all be appended to such mortgage and recorded therewith.

ORM OF CHATTEL MORTGAGE AND AFFIDAVIT.

his mortgage made this ____ day of ______19____ by _______________, a resident of


e municipality of ______________, Province of ____________,
hilippine Islands mortgagor, to ____________, a resident of the municipality of
__________, Province of ______________, Philippine Islands, mortgagee, witnesseth:

hat the said mortgagor hereby conveys and mortgages to the said mortgagee all of the
llowing-described personal property situated in the municipality of ______________,
ovince of ____________ and now in the possession of said mortgagor, to wit:

Here insert specific description of the property mortgaged.)

his mortgage is given as security for the payment to the said ______, mortgagee, of
omissory notes for the sum of ____________ pesos, with (or without, as the case may
e) interest thereon at the rate of ___________ per centum per annum, according to the
rms of __________, certain promissory notes, dated _________, and in the words and
gures following (here insert copy of the note or notes secured).

If the mortgage is given for the performance of some other obligation aside from the
ayment of promissory notes, describe correctly but concisely the obligation to be
erformed.)

he conditions of this obligation are such that if the mortgagor, his heirs, executors, or
dministrators shall well and truly perform the full obligation (or obligations) above stated
cording to the terms thereof, then this obligation shall be null and void.
xecuted at the municipality of _________, in the Province of ________, this _____ day o
9_____

___________________
ignature of mortgagor.)

n the presence of

________________
________________
wo witnesses sign here.)

ORM OF OATH.
We severally swear that the foregoing mortgage is made for the purpose of securing the
bligationspecified in the conditions thereof, and for no other purpose, and that the same i
just and valid obligation, and one not entered into for the purpose of fraud."

ORM OF CERTIFICATE OF OATH.


t ___________, in the Province of _________, personally appeared ____________,
e parties who signed the foregoing affidavit and made oath to the truth thereof before
e.

____________________________"
Notary public, justice of the peace, 1 or other officer, as the case may be.)

ec. 6. Corporations. — When a corporation is a party to such mortgage the affidavit


quired may be made and subscribed by a director, trustee, cashier, treasurer, or manage
ereof, or by a person authorized on the part of such corporation to make or to receive
ch mortgage. When a partnership is a party to the mortgage the affidavit may be made
nd subscribed by one member thereof.

ec. 7. Descriptions of property. — The description of the mortgaged property shall be such
to enable the parties to the mortgage, or any other person, after reasonable inquiry and
vestigation, to identify the same.

the property mortgaged be large cattle," as defined by section one of Act Numbered
even and forty-seven, 2 and the amendments thereof, the description of said property in
e mortgage shall contain the brands, class, sex, age, knots of radiated hair commonly
nown as remolinos, or cowlicks, and other marks of ownership as described and set forth
e certificate of ownership of said animal or animals, together with the number and place
sue of such certificates of ownership.

growing crops be mortgaged the mortgage may contain an agreement stipulating that th
ortgagor binds himself properly to tend, care for and protect the crop while growing, and
ithfully and without delay to harvest the same, and that in default of the performance of
ch duties the mortgage may enter upon the premises, take all the necessary measures fo
e protection of said crop, and retain possession thereof and sell the same, and from the
oceeds of such sale pay all expenses incurred in caring for, harvesting, and selling the
op and the amount of the indebtedness or obligation secured by the mortgage, and the
rplus thereof, if any shall be paid to the mortgagor or those entitled to the same.

chattel mortgage shall be deemed to cover only the property described therein and not
e or substituted property thereafter acquired by the mortgagor and placed in the same
epository as the property originally mortgaged, anything in the mortgage to the contrary
otwithstanding.

ec. 8. Failure of mortgagee to discharge the mortgage. — If the mortgagee, assign,


dministrator, executor, or either of them, after performance of the condition before or afte
e breach thereof, or after tender of the performance of the condition, at or after the time
xed for the performance, does not within ten days after being requested thereto by any
erson entitled to redeem, discharge the mortgage in the manner provided by law, the
erson entitled to redeem may recover of the person whose duty it is to discharge the sam
wenty pesos for his neglect and all damages occasioned thereby in an action in any court
aving jurisdiction of the subject-matter thereof.

ec. 9-12. (inclusive) 3

ec. 13. When the condition of a chattel mortgage is broken, a mortgagor or person holdin
subsequent mortgage, or a subsequent attaching creditor may redeem the same by
aying or delivering to the mortgagee the amount due on such mortgage and the
asonable costs and expenses incurred by such breach of condition before the sale thereo
n attaching creditor who so redeems shall be subrogated to the rights of the mortgagee
nd entitled to foreclose the mortgage in the same manner that the mortgagee could
reclose it by the terms of this Act.

ec. 14. Sale of property at public auction; Officer's return; Fees; Disposition of proceeds.
The mortgagee, his executor, administrator, or assign, may, after thirty days from the
me of condition broken, cause the mortgaged property, or any part thereof, to be sold at
ublic auction by a public officer at a public place in the municipality where the mortgagor
sides, or where the property is situated, provided at least ten days' notice of the time,
ace, and purpose of such sale has been posted at two or more public places in such
unicipality, and the mortgagee, his executor, administrator, or assign, shall notify the
ortgagor or person holding under him and the persons holding subsequent mortgages of
e time and place of sale, either by notice in writing directed to him or left at his abode, if
thin the municipality, or sent by mail if he does not reside in such municipality, at least
n days previous to the sale.

he officer making the sale shall, within thirty days thereafter, make in writing a return of
s doings and file the same in the office of the register of deeds where the mortgage is
corded, and the register of deeds shall record the same. The fees of the officer for selling
e property shall be the same as in the case of sale on execution as provided in Act
umbered One hundred and ninety, 4 and the amendments thereto, and the fees of the
gister of deeds for registering the officer's return shall be taxed as a part of the costs of
le, which the officer shall pay to the register of deeds. The return shall particularly
escribe the articles sold, and state the amount received for each article, and shall operate
a discharge of the lien thereon created by the mortgage. The proceeds of such sale shal
e applied to the payment, first, of the costs and expenses of keeping and sale, and then t
e payment of the demand or obligation secured by such mortgage, and the residue shall
e paid to persons holding subsequent mortgages in their order, and the balance, after
aying the mortgages, shall be paid to the mortgagor or person holding under him on
emand.

the sale includes any "large cattle," a certificate of transfer as required by section sixteen
Act Numbered Eleven hundred and forty-seven 5 shall be issued by the treasurer of the
unicipality where the sale was held to the purchaser thereof.

ec. 15. 6, 6a
ec. 16. This Act shall take effect on August first, nineteen hundred and six.

nacted, July 2, 1906.