credit transactions reviewer for finals

8/19/2019 Credit Transactions Reviewer for Finals

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cle 2085 . The following requisites are essential to the contracts of pledge and mortgage:they be constituted to secure the ful llment of a principal obligation;the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;the persons constituting the pledge or mortgage have the free disposal of their property and in the absence thereof, that they be

d persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property.cle 2086 . The provisions of article 20 2 are applicable to a pledge or mortgage.aranty cannot e#ist without a valid obligation. $owever, it may guarantee the performance of a voidable or unenforceable contrac

cle 2087 . &t is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pled

Cayo IID 2002 PAGE 29

PLEDGE AND MORTGAGE

PROVISIONS COMMON TO PLEDGE AND MORTGAGE

WHAT IS PLEDGE?

It is a contract by virtue of which the debtor delivers to the creditor or to a third person a ova!le or a doc" entinvolving incorporeal rights for the #"r#ose o$ sec"rin% t&e $"l$ill ent of a principal obligation with the understandingthat when the obligation is fulfilled the thing delivered shall be returned with all its fruits and accessions!

W&at are t&e 'inds o$ #led%e?

Pledge "ay be either#

$! %oluntary or conventional &created by agree"ent of the parties'(

2! )egal &by operation of law'!

W&at are t&e c&aracteristics o$ #led%e? (RA)S*

Pledge is#

$! Real because it is perfected by delivery of the thing pledged!

2! Acessor+ because it has no independent e*istence!+! )nilateral because it creates an obligation solely on the part of the creditor to return the thing pledged

upon fulfill"ent of the principal obligation!

,! S"!sidiar+ because the obligation of the creditor does not arise until fulfill"ent of the principalobligation!

WHAT IS THE CONSIDERATION IN PLEDGE?

If the pledgor is also the debtor the consideration is the principal contract!

If the pledgor is a third person the cause it the co"pensation received or the liberality of the pledgor!

WHAT ARE THE DI,,ERENCES -ETWEEN PLEDGE AND MORTGAGE?

$! Mo!ilit+ - pledge is constituted on "ovables( "ortgage on i""ovables!

2! Deliver+ - pledge re.uires delivery for perfection( "ortgage does not!


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+! Re."isites to !ind t&ird #erson/s - pledge to bind third persons "ust be in apublic instru"ent( "ortgage "ust be registered in the proper registry!

A LOAN IS SECURED BY BOTH A PLEDGE AND A GUARANTY. CAN THE CREDITORREFUSE PAYMENT BY THE GUARANTOR AND CHOOSE TO FORECLOSE IN ORDER TOSATISFY THE DEBT?

No, payment by the guarantor cannot be refused.

WHAT ARE THE ESSENTIAL RE0)ISITES O, PLEDGE AND MORTGAGE? (PRADO*

$! P"r#ose / o secure fulfill"ent of principal obligation(

2! Real - here "ust be delivery of the thing!

+! Alienation - when the principal obligation beco"es due and the debtor defaults the thing"ay be alienated to satisfy the for"er!

,! Dis#osal - Pledgor1"ortgagor "ust have free disposal of the thing or capacity to dispose!

! O1ners&i# - Pledgor1"ortgagor "ust be the absolute owner of the thing(

P)RPOSE2 To sec"re $"l$ill ent o$ a #rinci#al o!li%ationWHAT I, THE THING PLEDGED/MORTGAGED IS S)-SE0)ENTL3 LOST4 WHO -EARS THELOSS? IS THE PRINCIPAL O-LIGATION E5TING)ISHED?

he pledgor bears the loss! 3e"e"ber that there hasn4t been transfer of ownership!

he principal obligation is of course not e*tinguished the pledge1"ortgage is only accessory!5owever the debtor "ust replace the thing or lose the benefit of the period!

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

PRO-LEM2 D TRANS,ERS PROPERT3 TO C AND AT THE SAME TIME E5EC)TES ANINDEMNIT3 AGREEMENT4 OR D TRANS,ERS PROPERT3 TO C TO SEC)RE AN E5ISTINGO-LIGATION6 HOW WILL THE TRANS,ER -E CHARACTERI7ED?

6oth transfers will be characteri7ed as pledges!

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

ALIENATION2 W&en t&e #rinci#al o!li%ation !eco es d"e and t&ede!tor de$a"lts8 t&e t&in% a+ !e alienated to satis$+ t&e $or er6

DOES THE CREDITOR HAVE TO GO TO CO)RT TO EN,ORCE THE PLEDGE OR MORTGAGE?

8o to re.uire litigation would be to nullify the lien and defeat the purpose of the contract!

REAL2 T&ere "st !e deliver+ o$ t&e t&in% to #er$ect t&e contract6

,REE DISPOSAL2


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WHAT DO 9,REE DISPOSAL: AND 9CAPACIT3 TO DISPOSE: O, THE PROPERT3 MEAN?

ree disposal "eans that the property is not sub:ect to any clai" by a third person!

Capacity to dispose "eans that though the pledgor1"ortgagor does not have free disposal the thirdperson with a clai" authori7ed hi" to dispose &tingin ;o lang'!

In case of corporations, the board should adopt a resolution to approve the pledge/mortgage. If what

is to be pledged or mortgaged constitutes all of the corporation s assets, !/" of outstanding capitalstock must approve.

#ule on consent$

If pledgor/mortgagor is married, consent of spouse is needed% if agent, authori&ation of principal.

'or married persons ( how to wiggle out of a pledge or mortgage agreement$

Pledge or mortgage your con)ugal property without your spouse s signature. In case the property isforeclosed, you can raise the defense that there was no consent *remember, half consent is noconsent+

-hat if the pledge was constituted to secure an obligation of the family business, doesn t this redound to the benefit of the con)ugal partnership

No, P0P said that the pledge of con)ugal property con only be considered to redound to the benefit of the partnership if the family business is constituting pledges.

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

Another e1ample on free disposal or legal authority$

21. Pledgor corporation is placed under receivership. 3he corporation cannot pledge shares of stock because pledge is a disposition requiring court approval.

CAN ,)T)RE PROPERT3 -E PLEDGED?

8o it is essential that the pledgor be the absolute owner of the thing!

8ote# It is the sale and not the registration in the ) < that transfers ownership of a vehicle!8ote# A co/owner can only pledge1"ortgage his ideal share in the co/ownership!

8ote# A "ortgagor can rely on what is on the face of the orrens title!

-4A3 I0 52AN3 67 A6089:32 8-N2#04IP

6834 62N2'I;IA9 AN< 92=A9 3I392 must vested in the pledgor/mortgagor

21. 3rustee is legal owner of shares of stock% trustor is beneficial owner$ Neither can pledgethe shares.

Pledge/mortgage can t be constituted without a principal obligation even if there is a subsequent principal obligation. 3his is different from situation where the lender e1tends a credit line for >5, though borrower has not yet drawn, the credit line can still be secured via

pledge/mortgage.

21. deed of assignment/absolute sale to secure fulfillment of obligation € this is a mortgage or animplied trust according to the 0;.

3he pledgor/mortgagor must be absolute owner of the thing or the property. 3he creditor may rely onthe title/stock certificate if there is no notice of defect in title.

4owever, failure of the pledgor to present the thing is a red flag that should put the pledgee onguard as to the pledgor s right to pledge the thing.

OWNERSHIP2


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'() Article 2088 . The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them

3hough the pledgor must own the thing and have free disposal of it, see the following problemdiscussed in class$

21. 8n day >, stocks are sold to ? with the condition that the sale will be effective if ? tops the bar.

8n day !, ? pledges the stocks.

8n day ", the bar e1am results come out, with ? in the number one spot.

Is the pledge valid

7es, the pledge is valid. #emember 8blicon, conditional obligations 3he effects of a conditional obligation to give, when the condition happens, retroact to the date of the constitution of theobligation. 8-N2#04IP #23#8A;30 38 .

In the above condition, what if the condition is resolutory

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

21$ @ ? receives from A shares of stock with the resolutory condition that they shall be returnedto A if ? does not pass the bar.


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Article 2089 . " pledge or mortgage is indivisible, even though the debt may be divided among the successors in int Therefore, the debtor*s heir who has paid a part of the debt cannot as+ for the proportionate share of e#tinguishment

either can the creditor*s heir who has received his share of the debt return the pledge or cancel the mortgage, to throm these provisions is e#cepted the case in which, there being several things given in mortgage or pledge, each on

The debtor, in this case, shall have the right to the e#tinguishment of the pledge or mortgage as the portion of the deArticle 2090 . The indivisibility of a pledge or mortgage is not a/ected by the fact that the debtors are not solidarily l

=es Article 2$$2 provides that if the thing pledged or "ortgaged is not sold in two public auctionsthe creditor "ay appropriate the sa"e!

WHAT IS THE REASON ,OR THE PROHI-ITION?

he value of the thing pledged or "ortgaged is usually "ore than the a"ount of the obligation!

WHAT HAPPENS TO THE CONTRACT O, PLEDGE/MORTGAGE I, THERE IS A STIP)LATION O,

PACT)M COMMISSORI)M4 IS IT VOID?8o only the stipulation is void( the principal contract will subsist!

HOW CAN 3O) OPT O)T O, THE PROHI-ITION ON PACTO COMMISSORIO?

$! =ou can enter into another contract subse.uent to the pledge1"ortgage! he prohibitionapplies only to stipulations "ade in the contract of pledge1"ortgage!

2! he debtor can voluntarily cede the property to the creditor! his would in effect be a novationof the pledge1"ortgage!

+! here can be a stipulation where the debtor "erely pro"ises to sell( non/co"pliance wouldgive the creditor not a right to the property but an action for da"ages!

4. here can be a stipulation granting the creditor authority to ta;e possession and notownership of the property upon foreclosure!

21amples on pactum commissorium$

21. ? corporation pledges shares% the pledge agreement states that pledgee has authority to instruct ;orporate 0ecretary of ? to transfer shares in name of pledgee in case of default. BA9I<

N8. 3he e1ecution of document transferring the shares is only a confirmation of the sale that wasalready consummated automatically.

21. If the agreement is that, upon default, pledgee sells the things pledged at market price and applies profits to the outstanding obligation. Balid

7es. 3here is no automatic transfer of ownership. In fact, the sale of the thing to satisfy the obligationis the essence of pledge.

21. :pon default, pledgor conveys property to pledgee by dation% and for the purpose, pledgee is

attorney in fact of pledgor. Balid 720. It is not automatic% there is need for another agreement to be entered into.

21. Pledgee has the option to purchase the thing upon default at price certain. Balid

7es. 3here must be a subsequent sale% it is not automatic.

#emember, for P; to e1ist, the 2''2;3IB2 A;3 I0


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Article 2091 . The contract of pledge or mortgage may secure all +inds of obligations, be they pure or sub-ect to a su

cle 2092 . " promise to constitute a pledge or mortgage gives rise only to a personal action between the contracting parties, witho

cle 2093 . &n addition to the requisites prescribed in article 20 , it is necessary, in order to constitute the contract of pledge, that

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

-4A3 CCD, can you ask release of correspondingamount of units

No release. Pledge is indivisible.

WHAT ARE THE E5CEPTIONS TO INDIVISI-ILIT32;6 W&ere eac& one o$ several t&in% %"arantees a deter inate #ortion o$ credit6

21$ If you have >CC mortgages securing corresponding portion of the loan, then when thecorresponding portion is paid, the corresponding pledge/mortgage is e1tinguished. All >CC mortgagesmay be in the same document.

8r, if the parties agree to allow partial discharge of the pledge/mortgage. 4ow ;ancel pledge/mortgage and constitute a new pledge/mortgage.3he downside is that you must again paydoc. stamps and reg. fees, unlike in the document with >CC mortgages, where the fees are only paid once.

to be released!

=6 W&ere t&ere 1as $ail"re o$ consideration6 Creditor too; over "anage"ent but the businessfailed!

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

PROVISIONS APPLICA-LE ONL3 TO PLEDGE

#emember. Pledge/mortgage are real contracts.

If you agree, but don t deliver to the pledgee or a third person/s, there is no pledge but there is anagreement to enter into a pledge.

;an delivery be made to the pledgor

7es, if he is acting as agent of pledgee or where the thing pledged is so unwieldy as to make delivery impossible, constructive delivery is allowed.

-hat may be the ob)ects of pledge

5ovables within the commerce of man.


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Article 2095 . &ncorporeal rights, evidenced by negotiable instruments, bills of lading, shares of stoc+, bonds, warehoArticle 2096 . " pledge shall not ta+e e/ect against third persons if a description of the thing pledged and the date o

Article 2097 . 1ith the consent of the pledgee, the thing pledged may be alienated by the pledgor or owner, sub-ect The ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledgee consents to the

Article 2098 . The contract of pledge gives a right to the creditor to retain the thing in his possession or in that of a tArticle 2099 . The creditor shall ta+e care of the thing pledged with the diligence of a good father of a family; he hasArticle 2100 . The pledgee cannot deposit the thing pledged with a third person, unless there is a stipulation authori

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

Article 2101 . The pledgor has the same responsibility as a bailor in commodatum in the case under article (4 (.!The pledgor who, +nowing the 5aws of the thing pledged, does not advise the pledgee of the same, shall be liable toArticle 2102 . &f the pledge earns or produces fruits, income, dividends, or interests, the creditor shall compensate w

3he problem here is$ how do third persons check if the thing is pledged when the thing isn t represented by some sort of title which can be annotated

3hey can t but they should e1ercise diligence. #ed flags would be failure or inability of debtor to show the thing or the title to the thing.

No requirement as to form but to affect third persons, it must be in a public instrument *notari&ed document .

21$ pledgor pledges property to pledgee to secure a loan. Pledge is in a public instrument. Pledgor sell property to third person/s without notice to pledgee ( sale is valid but transfer of ownership issuspended until pledgee consents.

-hy would the pledgee want to be informed ( administrative purposes% who gets property whenobligation is paid.

#emedy of pledgor if pledgee deposits it with a third party without authority

3he pledgor may demand e1tra)udicial deposit of the thing under !>CE or deposit with a third person/s in !>CF !

If the pledgee deposits the thing with a third person without authori&ation, can the pledgor demand resolution of the pledge agreement

7es. 0ubstantial breach under >>G> gives the in)ured party the right to resolve the obligation. It canbe argued that the principal consideration was that the custodian be the pledgee% now if thecreditor transfers possession, it s a principal breach.


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&n case of a pledge of animals, their o/spring shall pertain to the pledgor or owner of animals pledged, but shall be su

Article 2103 . 6nless the thing pledged is e#propriated, the debtor continues to be the owner thereof.evertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to recover i

Article 2104 . The creditor cannot use the thing pledged, without the authority of the owner, and if he should do so,1hen the preservation of the thing pledged requires its use, it must be used by the creditor but only for that purpose.

cle 2105 . The debtor cannot as+ for the return of the thing pledged against the will of the creditor, unless and until he has paid thcle 2106 . &f through the negligence or willful act of the pledgee, the thing pledged is in danger of being lost or impaired, the pledg

Article 2107 . &f there are reasonable grounds to fear the destruction or impairment of the thing pledged, without the The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged.Article 2108 . &f, without the fault of the pledgee, there is danger of destruction, impairment, or diminution in value o

3he creditor who receives the fruits should apply them to whatever amount is owing *obligations dueand payable , if not due, the fruits )ust form part of the pledge.

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

21$ 9ender lends 6orrower money, payable upon demand. 3o secure the loan, 6 pledges a goat. 4erethe benefit of the period is for the creditor, 9. 9 may then take the goat s milk and offspring andcompensate against what is owing him even if the obligation is not yet due.

If the thing is e1propriated, the thing will continue with respect to the thing given. € labo+

3he creditor can only use the thing if he is authori&ed or its preservation requires use.

If he misuses it, the pledgor can demand e1tra)udicial deposit.

3hough the pledgor cannot demand return of the thing unless the obligation is fulfilled, if the thing pledged is in danger of being lost or impaired through the pledgee s willful act or negligence, he may require its deposit with a third person.

If the thing is in danger of di"inution or destruction without the pledgee4s fault the pledgor "ayde"and its return provided he replaces it with another of the sa"e ;ind and .uality!

Despite the pledgor4s right above in the sa"e situation the pledgee "ay opt to sell the thing and;eep the proceeds( the pledgee4s right ta;es precedence over the pledgor4s! In this case the proceedsof the sale shall be security for the debt!

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


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Article 2109 . &f the creditor is deceived on the substance or quality of the thing pledged, he may either claim anoth

Article 2110 . &f the thing pledged is returned by the pledgee to the pledgor or owner, the pledge is e#tinguished. A&f subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner, there is a prima f

Article 2111 . " statement in writing by the pledgee that he renounces or abandons the pledge is su7cient to e#tin

Article 2112 . The creditor to whom the credit has not been satis ed in due time, may proceed before a otary 8ubli&f at the rst auction the thing is not sold, a second one with the same formalities shall be held; and if at the second a

3he pledgor can question the sale, alleging that he could have obtained a better price.

3his is an instance where the debtor loses the benefit of the period$ If the debtor dupes the creditor as to the quality of the thing, the creditor may demand immediate payment or delivery of anothersecurity.

If after the perfection of the pledge, the property is in the possession of the pledgor, as owner, the presumption is that it was returned and e1tinction of the pledge, :N9200 the owner holds it as agent of the pledgee.

P#86925$ 38 02;:#2 4I0 98AN, 68##8-2# P92


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Article 2113 . "t the public auction, the pledgor or owner may bid. $e shall, moreover, have a better right if he shoul The pledgee may also bid, but his o/er shall not be valid if he is the only bidder.

Article 2114 . "ll bids at the public auction shall o/er to pay the purchase price at once. &f any other bid is accepted,

Article 2115 . The sale of the thing pledged shall e#tinguish the principal obligation, whether or not the proceeds of t&f the price of the sale is more than said amount, the debtor shall not be entitled to the e#cess, unless it is otherwise

Cayo IID 2002 PAGE +@

No particular period is required by law. Notice can be given right before close of office the day preceding the sale. 6efore that date, debtor already defaulted% he should have known a notarial salewas forthcoming.

3he reason, according to P0P, is, if there were a period, the pledgor would be able to litigate and obtain an in)unction.

;an it be a private sale

21$ stocks pledged, listed on the P02 and )ust coursed through a broker. 7es ( there is no e1press prohibition. 6ut see the de 9eon book under Article !>>!.

21ception to pactum commissorium € if the thing is not sold after two sales, the creditor mayappropriate the thing and it shall be considered as full payment for the entire obligation.

3he pledgor is allowed to bid and all things being equal, his bid shall be preferred over that of others.3he law wants to conserve the property in the owner.

3he pledgee may also bid, but his offer shall not be valid if he is the only bidder because the lawseeks to prevent fraud. 'raud is possible if the parties had stipulated that the debtor shall be allowed to the e1cess and the creditor, who is bidding alone, bids low.

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

3he obligation is e1tinguished when the pledge is sold regardless of whether the proceeds are less or more than the amount of the obligation. :nlike in a mortgage, there can be recovery of deficiency.

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

P#86925$ IN 342 P92> .

48-


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

Article 2117 . "ny third person who has any right in or to the thing pledged may satisfy the principal obligation as so

Article 2118 . &f a credit which has been pledged becomes due before it is redeemed, thepledgee may collect and receive the amount due. $e shall apply the same to the payment of hisclaim, and deliver the surplus, should there be any, to the pledgor.

Article 2119 . &f two or more things are pledged, the pledgee may choose which he will cause to be sold, unless ther$e may demand the sale of only as many of the things as are necessary for the payment of the debt.

Article 2120 . &f a third party secures an obligation by pledging his own movable property under the provisions of arti

8#

0tipulate that if the value of the pledge goes under a certain amount, then the debtor shall be obliged to pledge additional securities.

21$ >5 obligation, >. 5 worth of stocks pledged% stipulate that if the value goes below >."5 then thedebtor will be obliged to pledge additional securities.

-ithout such a stipulation, can Article !>CH have the same effect 21$ >5 obligation, >. 5 worth of stocks pledged. -hen the stocks go down top >.E5, can you claimthat the value of the pledge is diminishing and then choose to sell the stocks for >.E5, keeping the

profits as security, pursuant to !>CH

P0P says$ J5aybe but speculative.K Probably not if the change in price is )ust a day@to@dayfluctuation.

P#86925$ >5 I0 02;:#2< 67 A LCCD 58#3=A=2 AN< A GCCD P92


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REAL MORTGAGE

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

W&at are t&e c&aracteristics o$ t&e contract o$ ort%a%e?

Mortgage is a real , accessory , and subsidiary contract.

W&o ta'es #ossession o$ t&e ort%a%ed #ro#ert+?

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

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

W&at is t&e consideration in a contract o$ ort%a%e?

!ince mortgage is an accessory contract, the consideration is the same as that of the principal

contract.

W&at are t&e 'inds o$ real ort%a%e?

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

2. Legal " #equired by law to be e$ecuted in favor of certain persons

3. Equitable " %ac&s the proper formalities of mortgage but shows the intention of theparties to ma&e the property as a security for a debt.

W&at is t&e s"!>ect atter o$ real ort%a%e

'. mmovables2. Alienable rights imposed upon immovables

Can +o" ort%a%e $"t"re #ro#ert+?

(uture property )A**+ be the object of a contract of mortgage. +ne cannot constitute a

Art. 2'24. +nly the following property may be the object of a contract of mortgage-

'/ mmovables02/ Alienable real rights in accordance with the laws, imposed upon immovables.

*evertheless movables ma be the ob ect of a chattel mort a e.


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mortgage on 1any other property he might have now and those he might acquire in the


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future . #emember that one of the essential requisites of mortgage is that the mortgagorshould be the absolute owner of the thing mortgaged.

3ut a stipulation which says that the mortgage covers future improvements upon real propertyalready mortgaged is valid. his is because these future improvements are deemed included inthe real property by accession0 they are not separate from the real property already subject ofthe mortgage.

W&at are t&e re."isites o$ real ort%a%e?

'. t must be constituted to secure a principal obligation .

2. he mortgagor must be the absolute o ner of the thing mortgaged.

. He must have free disposal of the thing or otherwise be authori5ed to do so.

!. 6hen the principal obligation becomes due, the property mortgaged may be alienated for the payment to the creditor.

7. o prejudice third persons, the mortgage must be recorded in the #egistry of 8roperty.

f the first four requisites are present, there is already a valid mortgage bet een the parties "mortgagor and mortgagee.

3ut to affect third persons, there is a need to comply with the fifth requisite - he document ofmortgage must be recorded in the #egistry of $roperty. his is because recording thedocument in the #egistry of 8roperty serves as notice to rd persons. his is similar to therequirement in pledge that the pledge be in a public document.

Can t&ere !e an oral ort%a%e?

Art. 2'27. n addition to the requisites stated in Article 29:7, it is indispensable, in order that amortgage may be validly constituted, that the document in which it appears be recorded in the#egistry of 8roperty. f the instrument is not recorded, the mortgage is nevertheless bindingbetween the parties.

he persons in whose favor the law establishes a mortgage have no other right than todemand the e$ecution and the recording of the document in which the mortgage is formali5ed.

Art. ' 7;. f the law requires a document or other special form, as in the acts and contractsenumerated in the following article, the contracting parties may compel each other to observethat form, once the contract has been perfected. his right may be e$ercised simultaneouslywith the action upon the contract.

Art. ' 7:. he following must appear in a public document-

'/ Acts and contracts which have for their object the creation, transmission, modification, or


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As between the parties, =>!. As long as the four essential requisites above are present, thereis already a mortgage between the parties. t need not be in writing in order to be enforceablesince it is not covered by the !tatute of (rauds.

3ut the oral mortgage is not binding against third persons. And the mortgagee cannot registerthe mortgage in the #egistry of 8roperty if it is an oral mortgage. !o his remedy is to invo&e

Art. ' 7; and ' 7:. ' 7; provides that if there is already a valid contract, one party cancompel the other party to observe the proper form. n this case, since there is already a validmortgage between the parties, the mortgagee can compel the mortgagor to e$ecute a publicdocument of mortgage, so that the mortgagee can then register it in the #egistry of 8roperty.

#emember that ' 7; is only for convenience. ts purpose is to compel the mortgagor toe$ecute a public document, so that the mortgagee can register the mortgage. t does notdetermine the validity or even the enforceability of the mortgage between the parties. 3eforeyou can invo&e it, there has to be a valid mortgage first.

+nce the previously oral mortgage is in a public document and is subsequently registered in the#egistry of 8roperty, it becomes binding on third persons.

Proced"re2 W&at &a##ens 1&en +o" enter into a contract o$ort%a%e?

!tep '- >$ecute the document of mortgage

!tep 2- ?o to a notary public, who will notari5e the document.

!tep - 8ay the documentary stamp ta$ within the first five days of the succeeding month. hedoc

stamp ta$ is a percentage of the value of the property mortgaged.

!tep 4- ?o to the +ffice of the #egister of @eeds and pay the registration fees. 3efore you paythe

registration fees, the government will require you to update payment of realty ta$es onthe property. After payment of the registration fees, the mortgage will be annotated onthe title.

Problem: Mortgagor mortgages a house and lot worth 799 to Mortgagee to secure a principalobligation of 1'99 and any and all future indebtedness . he mortgage is registered.Meanwhile, Mortgagor owes another creditor, B, 799 . he total indebtedness of Mortgagor toMortgagee eventually reaches 799 . +n due date, Mortgagor fails to pay both B andMortgagee. he house and lot is his only property. B is able to obtain a writ or attachment onthe house and lot. 6ho has a better right to the house and lot " B or mortgageeC

D Mortgagee has a better right with respect only to 'E7 of the house and lot. his is becausethe mortgage was registered only to the e$tent of '99 , and not to the 1any and all futuredebts. herefore, the mortgage is binding on third persons only with respect to the '99 debt,or 'E7 of the house. B can argue on two grounds-

'. hat Mortgagee paid doc stamp ta$es based only on the '99 debt, not on thesucceeding 499 debt. !o he even cheated the government of its revenues in this


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case.


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2. 3esides, at the time of the mortgage, the 499 debt was nonFe$istent.

herefore, B has a better right with respect to the 4E7 which was not registered.

How does mortgagee opt out of this problemC

'. He can do a credit line arrangement in which he will give the debtor a ceiling up to whichhe can borrow. he mortgage deed will say that the principal obligation is 799 , butdebtor has the choice of as&ing for a release of funds below this ceiling. his way, themortgagee is sure that the entire 799 loan is registered. 3ut this is costly, since thedoc stamp ta$ will be based on the ceiling and not on the actual amount released.

2. he better solution is that the mortgagee should e$ecute and register a new documenteach time he releases funds to the mortgagorEdebtor.

W&at &a##ens i$ t&e ort%a%e is void?

f for some reason, the mortgage is void, the principal obligation subsists. 6hat is lost is onlythe right of the creditor to foreclose the mortgage in order to satisfy the principal obligation.Moreover, even if the mortgage itself is void, the mortgage deed remains as proof of theprincipal obligation.

n guaranty, the property of the guarantor is not subjected to a lien. he action of the creditor isagainst the guarantor himself and not against his property. he creditor would still have to suethe guarantor, obtain judgment, e$ecute it, etc.

+n the other hand, in mortgage, the property is subjected to a lien. t creates a real right whichis inseparable from the property mortgaged. t is enforceable against the whole world providedit is registered/. Gntil the principal obligation is discharged, the mortgage follows the propertywherever it goes and subsists even if the ownership changes.

!o if the mortgagor sells the mortgaged property, the property still remains subject to thefulfillment of the obligation secured by it. All subsequent purchasers must respect themortgage, as long as it is registered, or even if it is not registered, if the purchaser &new that itwas mortgaged.

he mortgagee has a right to rely in good faith on what appears on the certificate of title of themortgagor. n the absence of anything to e$cite suspicion, he is under no obligation to loo&beyond the certificate.

Does t&e ort%a%or lose &is title to t&e #ro#ert+ ort%a%ed?

*o. A mortgage does not involve a transfer, cession, or conveyance of property but onlyconstitutes a lien thereon. t does not e$tinguish the title of the debtor. he mortgagorEdebtorcontinues to be the owner. he only right of the mortgagee is to foreclose the mortgage andsell the property to satisfy the obligation. he mortgagor s default does not operate to vest inthe mortgagee the ownership of the encumbered property.

Art. 2'2I. he mortgage directly and immediately subjects the property upon which it isimposed, whoever the possessor may be, to the fulfillment of the obligation for whose securityit was constituted.


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!ince the mortgagor retains ownership of the mortgaged property, he can even mortgage itagain to another mortgagor junior lienEencumbrance/.

(uture property, in themselves, cannot be the subject matter of mortgage. 3ut, the futureimprovements, accessions, and fruits of property already mortgaged are also covered by themortgage. his is because they are deemed to be part of the principal thing which was alreadye$isting at the time of the constitution of the mortgage.

o e$clude these things, there must be an e$press stipulation to that effect.

Examples:

'. he mortgage deed contains a provision that 1all property ta&en in e$change orreplacement, as well as all buildings, machineries, and, equipment, and others that themortgagor may acquire, construct, install, attach, or use in its lumber concession shallimmediately become subject to the mortgage.

his is a valid stipulation, especially where the property mortgaged is subject todeterioration such as machinery and equipment/. he purpose of this stipulation is tomaintain the value of the property mortgaged.

2. J8!8 e$ample- n the mortgage deed, Mortgagor mortgages house and lot K' andanother house and lot which he will acquire ne$t month. he deed is registered. s thisa valid mortgageC

D 3etween mortgagor and mortgagee, the mortgage is valid with respect to both houseand lot K' and K2. he remedy of the mortgagee, once mortgagor acquires the secondhouse and lot, is to compel the mortgagor to e$ecute a public document evidencing themortgage of the 2 nd house and lot and to register it, so that it would be binding on thirdparties.

3ut, as against third parties, the mortgage is only valid with respect to the first houseand lot but not to the second house and lot, until the latter is registered.

W&at &a##ens i$ t&e t&in% ort%a%ed is e #ro#riated?

he security becomes the cash given by the government as indemnity. Gpon default, themortgagee can apply the cash as payment for the obligation.

Art. 2'2;. he mortgage e$tends to the natural accessions, to the improvements, growingfruits, and rents or income not yet received when the obligation becomes due, and to theamount of the indemnity granted or owing to the proprietor from the insurers of the propertymortgaged, or in virtue of e$propriation for public use, with the declarations, amplificationsand limitations established by law, whether the estate remains in the possession of themortgagor, or it passes into the hands of a third person.

Art. 2'2:. he mortgage credit may be alienated or assigned to a third person, in whole or inpart, with the formalities required by law.


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he mortgage credit is a real right, and under property law, real rights over immovables arealso considered immovables in themselves. hus, they may be alienated or assigned to thirdpersons, in whole or in part, by the mortgagee who is the owner of the right. he assignee maythen foreclose the mortgage in case of nonpayment of the principal obligation.

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

Art. 2'2L does not really apply to all third persons in possession of the property. t only appliesto those in possession of the mortgaged property in the concept of owner. f the possessionby a third person is only as lessee, the creditor may not collect the credit from that third person.

6hen a mortgagor alienatesEsells the mortgaged property to a third person, the creditor may

demand from him the payment of the principal obligation. his is because the mortgage creditis a real right, which follows the property wherever it goes, even if its ownership changes.However, before the creditor can collect from the third person, he must have made a demandon the debtor, and the latter should have failed to pay.

E*a"ple# A "ortgaged his land worth P > in favor of 6 to secure a debt of P >! A sold theland to C!

+n due date, 3 should demand payment of the 8IM from A. f A fails to pay, 3 may foreclosethe mortgage. 3 may also choose to collect 87M not 8IM/ from ), which is the part of theprincipal obligation secured by the property sold to ). ) is not liable for the deficiency of 8'Min the absence of a contrary stipulation. f ) pays 3, ) can go after A for reimbursement.

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

A stipulation that requires the mortgagor to notify the mortgagee in writing before he sells theproperty is A% @. his is not a prohibition but a mere regulation .

he mortgagee would want to regulate the disposition of the property by the mortgagorbecause first, he would want to &now the type of person from whom he might have to collect thecredit later on. !econd, any disposition of the mortgaged property by the mortgagor is a redflag that may indicate that the mortgagorEdebtor may not be able to pay the debt later on

3ecause why is he suddenly disposing of his propertyC Maybe he doesn t have moneyanymore./

Art. 2'2L. he creditor may claim from a third person in possession of the mortgagedproperty, the payment of the part of the credit secured by the property which said third personpossesses, in the terms and with the formalities which the law establishes.

Art. 2' 9. A stipulation forbidding the owner from alienating the immovable mortgaged shallbe void.

Art. 2' '. he form, e$tent and consequences of a mortgage, both as to its constitution,modification and e$tinguishment, and as to the other matters not included in this )hapter shallbe governed by the provisions of the Mortgage %aw and of the %and #egistration %aw.


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,ORECLOS)RE

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

W&at is $oreclos"re?

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

Ho1 do +o" $oreclose?

here are two types of foreclosure " judicial and e$traFjudicial foreclosure.

he default rule is judicial foreclosure. =ou can only do e$traFjudicial foreclosure if themortgage deed has a provision which gives the mortgagee the special power of attorney to sellthe mortgaged property in accordance with Act ' 7.

3ut these are only default rules. he parties may also stipulate that the sale will be a privatesale.

Mort%a%e to a ,orei%ner @ RA ;==

Can +o" ort%a%e to a $orei%ner?

=es, since foreigners are only prohibited from owning real property in the 8hilippines, not from

being mortgagees. he situation is governed by #A ' .

However, if the mortgagor defaults, the foreigner )A**+ foreclose e$traFjudicially. He canonly foreclose judicially . Moreover, he cannot bid or ta&e part in any sale of the realproperty in case of foreclosure.

Can t&e $orei%ner ta'e #ossession o$ t&e #ro#ert+ d"rin% t&eort%a%e?

8ursuant to the mortgage, the alienFmortgagee cannot ta&e possession of the property duringthe mortgage. 3ut, he can possess it as lessee.

Can t&e $orei%ner ta'e #ossession o$ t&e #ro#ert+ "#on de$a"lt o$ t&eort%a%or?

he foreigner can ta&e possession of the mortgaged property upon default but only for thepurpose of foreclosure and receivership in accordance with the prescribed judicial procedures,

A*@ in no case e$ceeding five years.

When c n!" n#e$ %h ' ! "ec( )*"e +" (e-


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First, chec& if there s a stipulation saying that there will be a private sale. f there is such astipulation, the property can be sold at a private sale. f there is no such stipulation, then therewill be either judicial or e$traFjudicial foreclosure.

econd, loo& for the following tellFtale signs-

'. s the mortgagee a foreignerC f it s a foreigner, it s automatically judicial foreclosureAct ' /.

2. f the mortgagee is not a foreigner, loo& for a stipulation in the mortgage agreementwhich gives the mortgagee the special power of attorney to carry out the extra!

judicial foreclosure in accordance with "ct #$#% . f you find this stipulation, it is ane$traFjudicial foreclosure.

. f there is no stipulation for e$traFjudicial foreclosure under Act ' 7, it is a judicialforeclosure governed by #ule I: of the #ules of )ourt.

&hird, if it s an e$traFjudicial foreclosure, loo& at the parties. 6ho is foreclosingC

'. f it is a ban&, the governing law is Act ' 7, but there will be certain e$ceptionsapplicable only to ban&ing institutions, provided in ection '( of the )eneral *an+ing"ct .

2. f the mortgagee is not a ban&, the e$traFjudicial foreclosure will be governed by Act' 7.

Fourth, now that you &now whether it s judicial or e$traFjudicial foreclosure, let s go througheach of the processes<

/UDICIAL FORECLOSURE UNDER RULE 01, RULES OF COURT

&EP $: he mortgagee should file a petition for judicial foreclosure in the court which has jurisdiction over the area where the property is situated

&EP : he court will conduct a trial. f, after trial, the court finds merit in the petition, it willrender judgment ordering the mortgagorEdebtor to pay the obligation within a period not lessthan L9 nor more than '29 days from the finality of judgment.

&EP #: 6ithin this L9 to '29 day period, the mortgagor has the chance to pay the obligation toprevent his property from being sold. his is called the E- /&0 1F 2E3E4P&/15 PE2/13.

? EP ,# I$ ort%a%or $ails to #a+ 1it&in t&e B ;"dicial confir"ation of the sale 6 A$ter t&e con$ir ation o$ t&esale8 t&e #"rc&aser s&all !e entitled to t&e #ossession o$ t&e #ro#ert+8 and all t&eri%&ts o$ t&e ort%a%or 1it& res#ect to t&e #ro#ert+ are severed or ter inated6

he e.uity of rede"ption period actually e*tends until the sale is confir"ed! Even a$ter


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rede #tion can !e considered as t&e right of the "ortgagor to redee" the property6E


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W&at is t&e #roced"re?

STEP ;2 ,ile a co #laint $or e tra >"dicial $oreclos"re 1it& t&eE ec"tive "d%e

STEP


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*o, because the property must be sold to the highest bidder. 8arties cannot, by agreement,contravene the law. However, this rule may not apply where the purchaser happens to be thecreditor or mortgagee himself. he mortgagor can argue that the stipulation should be bindingon the mortgagee on the principle of estoppel.

W&at is t&e e$$ect o$ inade."ac+ o$ t&e #rice at 1&ic& t&e #ro#ert+ issold at a"ction?

f there is a right to redeem, inadequacy of price is not material because the debtor mayreacquire the property. t will even ma&e it easier for him to redeem it if it is sold at a low price.

Mere inadequacy of price will not be sufficient to set aside the sale unless the price is soinadequate as to shoc& the conscience.

8hat happens if there is an excess9

he e$cess should first be applied to satisfy the junior liens and encumbrances on the property.

f there is still an e$cess, it goes to the mortgagor.

W&at &a##ens i$ t&ere is a de$icienc+?

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

STEP 2 Possession o$ t&e Pro#ert+

Gpon foreclosure, if the mortgagor is in possession of the property, he will retain possessionduring the redemption period one year from the date of the sale/.

However, if the winning bidder already wants possession of the property, he may file a petitionin court to gain possession. He must give a bond equivalent to the rent for the use of theproperty for '2 months. he bond will answer for any loss to the mortgagor if it is later foundthat he was not in default in the mortgage obligation or that the conduct of the sale violated Act

' 7. Gpon approval of the bond, the court will issue a writ of possession in favor of thepurchaser.

Exception to this rule - f the party foreclosing is a *"5 , !ec 4; of the ?eneral 3an&ing%aw provides that the purchaser shall immediately have the right to ta+e possession of theproperty upon confirmation of the sale.

Re ed+ o$ t&e Mort%a%or

f the winning bidder is able to obtain the writ of possession even before the e$piration of theoneFyear period, the mortgagor may petition that the sale be set aside and the writ ofpossession be cancelled on the ground that he was not in default or that the sale was not madein accordance with Act ' 7. he petition must be filed within 9 days from the grant of the writof possession.

STEP 2 Rede #tion


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he debtor has the right to redeem the property sold within one year from the date of thesale, rec&oned from date of execution of the certificate of sale since it is only from that datethat the sale ta&es effect as a conveyance.

Exception: f the mortgagee foreclosing is a *"5 and the mortgagor is a ; 2/3/"dicial creditor or >"d% ent creditoro$ t&e de!tor8 or an+ #erson &avin% a >"nior enc" !rance or lien on t&e #ro#ert+

a+ e ercise t&e ri%&t o$ rede #tion6

E a #le2 Mort%a%or ort%a%ed a &o"se and lot to A6 Later8 Mort%a%or alsoort%a%ed it to -6 A $oreclosed t&e ort%a%e and !o"%&t t&e &o"se and lot at t&e

a"ction6 In t&is case8 "#on t&e sale o$ t&e #ro#ert+ to A8 t&e onl+ ri%&t t&at - assecond ort%a%ee &as is t&e ri%&t to redee 6 He a+ e ercise t&e ri%&t !+ #a+in%o$$ t&e de!t sec"red !+ t&e $irst ort%a%e6 - s e ercise o$ Mort%a%or s e."it+ o$rede #tion is e."ivalent to $oreclos"re o$ t&e >"nior ort%a%e6

5ow "uch should the one e*ercising the right of rede"ption payH

T&e ort%a%or or 1&oever is redee in% t&e #ro#ert+F s&o"ld #a+ t&e P 3C5A?EP3ICE o$ t&e #ro#ert+ not t&e a o"nt o$ t&e ori%inal o!li%ation an+ oreF #l"sI8 E3E? < $ PE3 >


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itle to the property sold under a mortgage foreclosure remains with the mortgagor until thee$piration of the redemption period. he right of the purchaser at the foreclosure sale is merelyinchoate or contingent until after the period of redemption has e$pired without the right beinge$ercised. 6hen the debtorEmortgagor fails to redeem within the period for redemption, thepurchaser s right becomes final.

W&at is t&e e$$ect o$ t&e ti el+ e ercise o$ t&e ri%&t o$ rede #tion?

f the debtorEmortgagor is able to e$ercise the right of redemption on time, he does not reallyrecover property since he does not lose ownership until after the e$piration of the redemptionperiod. He merely frees it of the encumbrance created by the mortgage.

Fhat happens if the "ortgagor sells the property to a third person within the rede"ptionperiodH

he third person, in buying the property, is actually buying not the property itself but the rightto redeem the property and the right to possess it within the redemption period.

J "ortgaged property to a 6an; to secure a P$> loan at $B interest! he "ortgage wasforeclosed! At the sale the property was sold to the 6an; as the highest bidder for P@00 !

he ban; then sold the property to = for P$! >! If J wants to redee" the property towho" should he pay and how "uchH

B should pay to the 3an&. He should pay only 8'M F the amount of the principal obligation plusinterest at ';O, plus costs !ec 4; ?eneral 3an&ing %aw- Remember, this is the exception tothe general rule that the mortgagor should pay the purchase price and 1% interest per month) .= would then have a right to see& reimbursement from the 3an&.

he right of redemption may be e$ercised by the mortgagee under the same terms, even if theproperty is subsequently sold to a third party. A different rule would ma&e it easy for the buyerat the foreclosure sale to render the right of redemption nugatory simply by ma&ing aconveyance of the property for an amount beyond the capacity of the mortgagor to pay.

Can t&e ri%&t o$ rede #tion !e 1aived !+ t&e ort%a%or in advance?

t depends if there is a fair e$change of value and information between the parties.

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

3ut if the mortgagor is a businessman who waives the right to redeem in e$change for lowerinterest rates, this waiver is valid because there is a fair e$change of value.

SUMMARY OF EXCEPTIONS UNDER SECTION ING LAWOF 8


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6hen the party foreclosing the mortgage is a *"5 , the same procedure as in judicial or e$traF judicial foreclosure, as the case may be, is followed. However, the following are the e$ceptionsto the general rules, applicable only to ban&s-

1. %n &udicial foreclosures' there is still a right to redeem

As a general rule there is no right of rede"ption in :udicial foreclosure! ponconfir"ation of the sale the "ortgagor cannot redee" the property any"ore!

3ut if the mortgagor foreclosing judicially is a ban&, the mortgagor shall have a right toredeem within one year from the sale.

2. #edemption $rice

In ordinary e*tra/:udicial foreclosure the rede"ption price is the purchase price plusinterest at $ & or ! per "onth!

n e$traFjudicial foreclosure by a ban&, the redemption price consists of-

a. the amount of the mortgage obligationb. plus the interest on the loan at the rate stipulated in the mortgage contractc. plus costs of the sale incurred by the ban&

3. utomatic #ight of $ossession

In ordinary e*tra/:udicial foreclosure the "ortgagor retains possession of theproperty within the rede"ption period! If the purchaser wishes to have possessionwithin the rede"ption period he "ust file a petition for the issuance of a writ ofpossession with a corresponding bond!

n e$traFjudicial foreclosure by a ban&, the purchaser automatically has the right to ta&epossession after the confirmation of the sale.

!. %n&unction

If anybody wants to en:oin the conduct of foreclosure proceedings instituted by aban; the petitioner "ust file a bond fi*ed by the court to satisfy whatever da"agethe ban; "ay suffer by the in:unction!

here is no such provision in the case of ordinary e$traFjudicial foreclosure.

. $eriod of #edemption for *uridical $ersons

In ordinary e*tra/:udicial foreclosure the "ortgagor "ay redee" the property afterit is sold within one year fro" the e*ecution of the certificate of sale! here is nodistinction whether the party redee"ing is a natural or :uridical person!

If the party foreclosing e*tra:udicially is a ban; the sa"e rule as above is applicableto natural persons! 6 :uridical persons "ay redee" the property sub:ect only tothe following conditions#


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a. it must be 3>(+#> the registration of the sale


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b. and, it must not be later than L9 days from the date of the sale

EFFECTS ON THE /UNIOR MORTGAGE

Fhat happens if there was a second "ortgage constituted on the property that wasforeclosedH

I$ t&e #ro#ert+ 1as ort%a%ed a second ti e8 t&e second ort%a%e iss"!ordinate to t&e $irst ort%a%e6 T&e $irst ort%a%or &as t&e ri%&t to $orecloset&e ort%a%e "#on de$a"lt !+ t&e de!tor6

T&e $ollo1in% are t&e ri%&ts o$ a >"nior ort%a%ee2

;6 I$ t&e $irst ort%a%ee $orecloses >"diciall+8 !e$ore t&e sale is e$$ected8t&e >"nior ort%a%ee a+ e ercise t&e e."it+ o$ rede #tion vested int&e ort%a%or6 T&e >"nior ort%a%ee a+ satis$+ t&e o!li%ation o$ t&e

ort%a%or to #revent t&e sale o$ t&e #ro#ert+6

Fhat happens to the ownership of the property when the second "ortgageee*ercises the right of rede"ptionH

T&ere are t1o inter#retations @ one "nder t&e R"les o$ Co"rt and anot&er"nder t&e Civil Code6

W&en t&e second ort%a%ee e ercises t&e e."it+ o$ rede #tion !+ #a+in%t&e o!li%ation o$ t&e ort%a%or/de!tor8 t&e ort%a%or/de!tor &as KB da+sto rei !"rse t&e second ort%a%ee 1&at &e #aid6 I$ t&e ori%inal de!tor $ailsto #a+ 1it&in t&is #eriod8 o1ners&i# 1ill !e consolidated in t&e second

ort%a%ee 1&o #aid6 T&is inter#retation is accordin% to Section < R"le =o$ t&e R"les o$ Co"rt6

-"t accordin% to t&e Civil Code r"les on #a+ ent o!liconF8 t&e e$$ects&o"ld !e li'e #a+ ent o$ an o!li%ation !+ a t&ird #erson8 in 1&ic& case8t&e second ort%a%ee erel+ !eco es s"!ro%ated in t&e ri%&t o$ t&e $irst

ort%a%ee to $oreclose t&e ort%a%e6

"dicial sale is ade8 t&e >"nior ort%a%ee a+ e ercise t&eort%a%or s ri%&t to redee 1it&in one +ear $ro t&e sale6 De Leon sa+s

t&at &e s&o"ld #a+ t&e a o"nt o$ t&e ori%inal o!li%ation6 PSP sa+s t&at t&e >"nior ort%a%ee e ercisin% t&e ri%&t to redee s&o"ld $ollo1 Act =;= @&e s&o"ld #a+ t&e #rice at 1&ic& t&e #ro#ert+ 1as sold6

=6 I$ t&e #ro#ert+ is sold $or ore t&an t&e a o"nt o$ t&e o!li%ation to t&e$irst ort%a%ee8 t&e e cess s&o"ld !e a##lied to t&e #a+ ent o$ t&eo!li%ation to t&e second ort%a%ee6

-"t i$ t&ere is no e cess8 t&e second ort%a%e is e tin%"is&ed6

I$ +o" re t&e second ort%a%ee8 +o" can also $oreclose8 not t&e #ro#ert+ since+o" cannot do t&at !eca"se t&e ri%&t o$ t&e $irst ort%a%ee is s"#eriorF8 !"t t&e


32/45

ri%&t o$ rede #tion instead6 T&is is so t&at +o" 1o"ld !e t&e onl+ one 1&o cane ercise it 1&en t&e #ro#er ti e co es6

C5A E) >ect atter o$ c&attel ort%a%e is #ersonal or ova!le #ro#ert+6

Fhat are the re.uisites for a valid chattel "ortgageH

'. t must be constituted to secure a principal obligation .

2. he mortgagor must be the absolute o ner of the thing mortgaged.

. He must have free disposal of the thing or otherwise be authori5ed to do so.

!. 6hen the principal obligation becomes due, the property mortgaged may be alienated

for the payment to the creditor.

7. o prejudice third persons, the mortgage must be recorded in the )hattel Mortgage#egistry.

f the first four requisites are present, there is already a valid mortgage bet een the parties "mortgagor and mortgagee.

Art6


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3ut to affect third persons, there is a need to comply with the fifth requisite - he document ofmortgage must be recorded in the +hattel Mortgage #egistry. his is because recording thedocument in the )hattel Mortgage #egistry serves as notice to rd persons. his is similar tothe requirement in pledge that the pledge be in a public document and the requirement in #eal>state Mortgage that it must be recorded in the #egistry of 8roperty.

*ote that unli&e in pledge, there is no need for actual delivery of the personal property to themortgagee.

DI? I8C I


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Fhat is the for" re.uired for a chattel "ortgageH

Accordin% to Sec6 o$ t&e C&attel Mort%a%e La18 t&e $ollo1in% $or s&o"ld !es"$$icient2

< C5A E) >


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S%d6 -&o+ -Notar+ #"!lic


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37/45

-"t once t&e #ro#ert+ is sold at a"ction8 t&ere can !e no rede #tionan+ ore6

!. #ight of 5ortgagee to Possession

I$ t&e creditor/ ort%a%ee 1ants to $oreclose "#on de$a"lt8 &e &as t&e

i #lied ri%&t to ta'e t&e ort%a%ed #ro#ert+6 I$ t&e de!tor/ ort%a%orre$"ses to s"rrender t&e #ro#ert+8 t&e creditor s&o"ld $ile an action $orre#levin to ta'e #ossession or $or >"dicial $oreclos"re6

". 'oreclosure

T&e #arties can sti#"late $or a #rivate sale "#on de$a"lt6

I$ t&ere is no sti#"lation8 t&e a##lica!le r"le is Section ; o$ t&e C&attelMort%a%e La16

Accordin% to Section ; 8 t&e creditor/ ort%a%ee can ca"se t&e #ro#ert+ to!e sold at #"!lic a"ction thirty days after default! T&is is a ini " %race#eriod %iven to t&e ort%a%or to redee t&e #ro#ert+ !e$ore it is sold ata"ction6 T&ere is no a i " ti e #eriod $or &oldin% t&e sale6

T&e #roced"re is t&e sa e as t&at $or e tra >"dicial $oreclos"re o$ a realestate ort%a%e8 e ce#t $or t&e notice re."ire ents6 In c&attel ort%a%e8t&e onl+ notice re."ire ent is #ostin% at t1o or ore #"!lic #laces in t&e

"nici#alit+ and #ersonal notice to t&e ort%a%or and >"nior ort%a%ees atleast ten da+s !e$ore t&e date o$ t&e sale n +* (&c'#& n; 6

T&e #roceeds o$ t&e sale 1ill !e a##lied as $ollo1s2

a6 Costs and e #enses o$ t&e sale!6 Pa+ ent o$ t&e o!li%ation sec"red !+ t&e ort%a%e

c6 Clai s o$ #ersons &oldin% s"!se."ent ort%a%es in t&eir order4andd6 T&e !alance8 i$ an+8 s&all !e %iven to t&e ort%a%or

Can the "ortgagee recover any deficiency after the sale of the propertyH

)nli'e in #led%e8 t&e creditor can still $ile an action $or recover+ o$ an+de$icienc+ in case t&e #roceeds o$ t&e sale do not satis$+ t&e entireo!li%ation8 "nless t&e sit"ation is covered !+ t&e Recto La16

P3? ortgagor "ortgaged property worth $20 to secure a $00 loan! >ortgagor defaulted!>ortgagee foreclosed! he property was sold to J for B0 ! ?hould "ortgagor redee" thepropertyH

3es8 !eca"se &e can sell it $or ore t&an JB and reali e ore t&an t&e a o"nt o$ t&e #rinci#al o!li%ation6

6ut if in the e*a"ple above the "ortgagor has creditors running after hi" for debts worth+00 should he redee"H


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-"t t&e disadvanta%e o$ c&oosin% t&e %"arant+ is t&at t&e %"arantor 1&o is1ort& P;BBM can a$$ord to &ire %ood la1+ers 1&o can stall t&e Lender sclai 6

=6 In t&e case o$ t&e real estate ort%a%e8 it de#ends on &o1 eas+ it 1o"ld!e to dis#ose o$ t&e #ro#ert+6 I$ it s #ro#ert+ at a #ri e s#ot in Ma'ati8

t&is i%&t !e a %ood c&oice since it can #ro!a!l+ !e sold at a %ood #riceri%&t a1a+6 -"t i$ it s located in t&e !oondoc's8 t&e Lender a+ &ave aver+ di$$ic"lt ti e sellin% it6

6orrower borrows P$0> fro" )ender! he loan is secured by a guaranty by J who is worthP$00> a real estate "ortgage worth P@> and a pledge worth P@>! If 6orrower defaultswhat is the best way for )ender to proceedH

;6 ,oreclose t&e real estate ort%a%e $irst6 T&en %et a de$icienc+ >"d% ent $ort&e re ainin% P fro" )ender! he loan is secured by a pledge worth P@> and aguaranty by J! 5ow should the )ender proceed in case of default by 6orrowerH

I$ Lender $orecloses t&e #led%e8 &e 1ill &ave a de$icienc+ o$ P"d% ent in &is $avor is rendered8 &e can t&en e ec"te it a%ainst t&eattac&ed s&ares6 T&e s&ares can !e sold at an ordinar+ e ec"tion sale8 not a$oreclos"re sale6 In t&is 1a+8 t&e s&ares 1ill !e ta'en o"t o$ t&e conte t o$ t&e#led%e8 and an+ de$icienc+ in t&e sale can still !e recovered !+ t&e lender6 A$tert&e e ec"tion o$ t&e >"d% ent on t&e s&ares8 t&e Lender can t&en %o a$ter t&eG"arantor $or t&e de$icienc+6

ANTICHRESIS

8hat is antichresis9

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

Art. 2' 2. 3y the contract of antichresis the creditor acquires the right to receive the fruits ofan immovable of his debtor, with the obligation to apply them to the payment of the interest, ifowing, and thereafter to the principal of his credit.


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8hat are the characteristics of antichresis9

1. ccessory " t secures the performance of a principal obligation. Manresa, however,believes that it is an independent contract.

2. ,ormal +ontract " t must be in specified form to be valid in writing/.

/s delivery of the property to the creditor reAuired9

@elivery is not required for the validity of the contract itself. 3G , it is required in order that thecreditor may receive the fruits.

3oes antichresis apply to all of the fruits of the immovable concerned9

)E5E2"= 2 =E: he general rule is that the contract of antichresis covers A%% the fruits ofthe encumbered property.

f the parties do not want all of the fruits to be subject to the antichresis, they must ! 8G%A >otherwise.

Is it essential for the contract to have a stipulation for interest in order to have an accessorycontract of antichresisH

*o. t is not essential to the contract of antichresis that the loan that it guarantees should haveinterest. here is nothing in the law that says that antichresis can only guarantee interestFbearing loans.

8hat are the differences between antichresis and real mortgage9

ANTICHRESIS 2E"= 412&)")E8roperty is delivered to the creditor @ebtor usually retains possession of the

ro ert)reditor acquires only the right to receive thefruits of the property0 not a real right

)reditor has no right to receive the fruits, butmortgage creates a real right over the propertywhich is enforceable against the world

?eneral rule is that creditor must pay theta$es and charges upon the estate0 partiesmust stipulate otherwise

)reditor has no obligation to pay ta$es andcharges

>$pressly stipulated that the creditor shall

apply the fruits to the payment of interest, ifowing, and thereafter to the principal

*o obligation on the part of the mortgagee to

apply the fruits to interest and principal

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

%i&e pledge and mortgage, antichresis gives a real right if it is registered in the 2egistry ofProperty.

E*a"ple# A borrowed P$> fro" 6! o secure the loan A delivered a parcel of land with


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coconut trees to 6 giving 6 the power to ad"inister it and harvest the coconuts! Fhat isthe nature of the contractH


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Answer- he contract is one of mortgage, not antichresis. n order for it to be a contract ofantichresis, it must be e$pressly agreed between creditor and debtor that the creditor, havingbeen given possession of the property, is to apply the fruits to the payment of interest, if owing,and thereafter, to the principal.

6hen it is time to apply the fruits to the payment of the interest or the principal, the creditormust base the value of the fruits on their mar+et value at the time of the application.

E a #le2

he property subject of the contract of antichresis has mango trees. n January, one &ilo ofmangoes costs 879E&ilo. 3ut in May, when mangoes are in season, one &ilo costs 27E&ilo. finterest is due in January, the creditor must apply the fruits to the payment of interest based onthe price of 879E&ilo. f interest is due in May, he should compute at the price of 8 7E&ilo.

Is t&ere a $or re."ired $or t&e contract o$ antic&resis?

=es. he contract must state the amount of the principal and the interest /5 82/&/5). fthis form is not followed, the contract of antichresis is + @. he requirement that it be inwriting is necessary not merely to bind third persons but to ma&e the contract valid.

3ut even if the antichresis is void, the principal obligation is still valid.

W&at are t&e o!li%ations o$ t&e creditor "nder t&e contract o$ antic&resis?

1. $ay the ta-es and charges upon the estate "

f the creditor does not pay the ta$es, he is required by law to pay indemnity for damages tothe debtor.

f the debtor pays the ta$es on the property which the creditor should have paid, the amountis to be applied to the payment of the debt. f the amount of ta$es paid by the debtor isenough to satisfy the principal obligation, then the loan and the antichresis are e$tinguished0the creditor must return the property to the debtor.

6hat if the creditor does not want to pay the ta$es and chargesC hey must so stipulate intheir agreement +# see the ne$t article.

Art. 2' . he actual mar&et value of the fruits at the time of the application thereof to theinterest and principal shall be the measure of such application.

Art. 2' 4. he amount of the principal and of the interest shall be specified in writing0otherwise, the contract of antichresis shall be void.

Art. 2' 7. he creditor, unless there is a stipulation to the contrary, is obliged to pay the ta$esand charges upon the estate.

He is also bound to bear the e$penses necessary for its preservation and repair.


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2. pply the fruits

he creditor "ust apply the fruits of the property to the pay"ent of interest ifowing and thereafter to the principal!

W&en can t&e de!tor %et !ac' t&e #ro#ert+ s"!>ect o$ t&e antic&resis?

he debtor can get it bac& only when he has totally paid the principal obligation. his isbecause the property stands as a security for the payment of the principal obligation.

Is t&ere an e ce#tion?

=es. he e$ception to this rule is if the creditor does not want to pay the ta$es and chargesupon the estate. n such a case, the creditor may compel the debtor to get the property bac&,G*%>!! there is a contrary stipulation e$ception to the e$ception/.

3ut this has the effect of e$tinguishing the contract of antichresis.

W&at &a##ens 1&en t&e de!tor de$a"lts on t&e #rinci#al o!li%ation?

he creditor @+>! *+ acquire ownership of the real estate. Any stipulation to the contraryshall be void. his is because the contract of antichresis covers only the right to receive thefruits from the estate, and not its ownership. Also, this is pactum commisorium, which is void.

he creditor has the following remedies in case of default-

$. 3ring an action for specific performance.

2. 8etition for the sale of the real property in judicial foreclosure proceedings under #uleI: of the #ules of )ourt.

)an the parties stipulate on an e$traFjudicial foreclosureC =es, in the same manner thatthey are allowed in pledge and mortgage.

Can t&e creditor ac."ire t&e #ro#ert+ %iven in antic&resis !+ #rescri#tion?

*o, and any stipulation to the contrary shall be void. n order to acquire property beprescription, possession must be in the concept of owner. he antichretic creditor possesses

Art. 2' I. he debtor cannot reacquire the enjoyment of the immovable without first havingtotally paid what he owes the creditor.

3ut the latter, in order to e$empt himself from the obligations imposed upon him by thepreceding article, may always compel the debtor to enter again upon the enjoyment of theproperty, e$cept when there is a stipulation to the contrary.

Art. 2' ;. he creditor does not acquire the ownership of the real estate for nonpayment ofthe debt within the period agreed upon.

>very stipulation to the contrary shall be void. 3ut the creditor may petition the court for

the payment of the debt or the sale of the real property. n this case, the #ules of )ourt onthe foreclosure of mort a es shall a l .


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the property merely as a holder.


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>$ception- Just li&e in a coFownership, if the creditor repudiates the antichresis, he can acquire the property byprescription.

he creditor must first apply the fruits to the payment of the interest. f the value of the fruits e$ceeds the valueof the interest due, then the creditor should apply the e$cess to the principal.

he second part of this provision is no longer applicable, since there is no Gsury %aw anymore.

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