ACYRFBT: Law on Credit Transactions

Requisites of Contract of Pledge and Mortgage

Requisites:

a. That they be constituted to secure the fulfillment of a principal obligation

Requisites of Contract of Pledge and Mortgage

Requisites:

b. That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged (At the time the contract was entered into);

Requisites of Contract of Pledge and Mortgage

Requisites:

c. 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.

True

(True or False) A pledge or mortgage, being an accessory contract, cannot exist without a valid obligation or a principal contract.

Accessory Contract

The type of contract a pledge or mortgage is.

True

(True or False) Similar to a guaranty, a pledge or a mortgage may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation.

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.

Void Obligations/Contracts

Obligations/Contracts that cannot be the principal of pledge or mortgages.

True

(True or False) THIRD PERSONS who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property.

Pactum Commissorium

States that automatic appropriation is prohibited. 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.

True

(True or False) 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.

True

(True or False) 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.

Rule of Indivisibility Not Applicable

Not applicable when:

If 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.

Pledge

Is a contract by virtue of which the debtor delivers to the creditor or to a third person movable (Art. 2094) or document evidencing incorporeal rights (Art. 2095) for the purpose of securing the fulfilment 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.

Delivery of Thing Pledged

In addition to the above-mentioned essential requisites of contracts of pledge or mortgage, 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.

True

(True or False) Unless if there is a stipulation to the contrary, the pledge shall be extended to the interest and earnings of the right pledged.

True

(True or False) 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 (Example: Creditor can reduce the principal obligation if the thing pledged is a share of stock, and the same earns dividends).

True

(True or False) 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.

Voluntary or Conventional Pledge

Pledge created by agreement of the parties.

Legal Pledge

Pledge created by operation of law.

Characteristics of Pledge

a. Real Contract - perfected by the delivery of the thing pledged;

Characteristics of Pledge

b. Accessory Contract - no independent existence of its own;

Characteristics of Pledge

c. Unilateral - creates an obligation solely on the part of the creditor to return the thing;

Characteristics of Pledge

Subsidiary - obligation incurred does not arise until the fulfilment of the principal obligation which is secured.

Cause or Consideration - Pledgor/Debtor

His cause is the principal obligation;

Cause or Consideration - Pledgor Not the Debtor (Third Party)

His cause is compensation stipulated or mere liberality.

Objects of Pledge

a. Movable property;

b. 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.

Deposit of the Thing Pledged with a Third Person - On the Part of the Pledgee

This form of deposit of pledge is allowed if there is stipulation granting such right;

Deposit of the Thing Pledged with a Third Person - On the Part of the Pledgor

Deposit happens when:

a. If through the negligence or willful act of the pledgee, the thing pledged is in danger of being lost or impaired.

b. If the pledgee uses or misuses the thing.

Effects of Fear of Destruction, Loss or Impairment Without Pledgee's Fault

The effects include:

a. 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; or

b. The pledgee 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.

True

(True or False) A contract of pledge needs not to be in any form necessary to be constituted.

Requirements for a Pledge to Affect Third Parties

Requirements include:

a. Pledge must be a public instrument.

b. The public instrument contains: The description of the thing pledged; and the date of the pledge.

Alienation (Sale) of the Thing Pledged

Is allowed with the consent of the pledgee.

Alienation (Sale) of the Thing Pledged

The ownership of the thing pledged is transmitted to the vendee or transferee as soon the pledgee consents to the alienation,

Alienation (Sale) of the Thing Pledged

Although sale is effected, the creditor-pledgee shall continue in possession.

Creditor-Pledgee

a. Shall take care of the thing pledged with the diligence of a good father of a family;

Creditor-Pledgee

b. 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 Civil Code.

Creditor-Pledgee

c. Is responsible for the acts of his agents or employees with respect to the thing pledged.

Creditor-Pledgee

d. If 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.

True

(True or False) The creditor cannot use the thing pledged, without the authority of the owner.

Exceptions to the Prohibited Use of the Thing Pledged

Exceptions:

a. Authority from the owner (pledgor);

b. When the preservation of the thing pledged requires its use, it must be used by the creditor but only for that purpose.

True

(True or False) Use (when there is no right) or misuse will authorize the owner to ask that the thing be judicially or extrajudicially deposited

True

(True or False) The pledgor who, knowing the flaws of the thing pledged, does not advise the pledgee of the same, shall be liable to the latter for the damages which he may suffer by reason thereof.

True

(True or False) 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.

Extinguishment of a Contract of Pledge

Can be by any mode of extinguishment of obligations or the extinguishment of the principal obligation or contract, but also:

a. Thing Pledged is Returned

b. Renunciation or Abandonment of Pledge

Thing Pledged is Returned

Can cause the extinguishment of a contract of pledge. The pledge is extinguished. Any stipulation to the contrary shall be void.

True

(True or False) 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.

Renunciation or Abandonment of Pledge

Is made in 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.

True

(True or False) In a renunciation or abandonment of pledge, acceptance by the pledgor or owner, nor the return of the thing pledged is necessary.

Foreclosure Sale

May be proceeded by the creditor to whom the credit has not been satisfied in due time. It must be proceeded before a Notary Public to the sale of the thing pledged.

Foreclosure Sale of Pledge Item

Shall be made at a 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.

Creditor's Right of Appropriation

Shall be resorted when:

a. If at the first auction the thing is not sold, a second one with the same formalities shall be held;

b. If at the second auction there is no sale either, the creditor may appropriate the thing pledged.

Creditor's Right of Appropriation

In this case the pledgee shall be obliged to give an acquittance for his entire claim.

Pledgor's Right to Bid

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.

True

(True or False) The pledgee may also bid, but his offer shall not be valid if he is the only bidder.

Sale of the Thing Pledged; Proceeds Thereof

a. 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.

b. If the price of the sale is less, the creditor shall not be entitled to recover the deficiency, notwithstanding any stipulation to the contrary.

Pledge

In this contract of credit transaction, when the sale of the thing occurs, 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.

Pledge

In this contract of credit transaction, when the sale of the thing occurs, if the price of the sale is less, the creditor shall not be entitled to recover the deficiency, notwithstanding any stipulation to the contrary.

True

(True or False) 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.

True

(True or False) 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.

True

(True or False) 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.

True

(True or False) If a third party secures an obligation by pledging his own movable property, he shall have the same rights as a guarantor to be:

a. Indemnified for the total amount of the debt, including interest, expenses or damages, if they are due;

b. Subrogated to all the rights the creditor had against the debtor;

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

True

(True or False) 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.

Immovables and Alienable Real Rights in Accordance with the Laws, Imposed Upon Immovables

These are the two (2) objects in a contract of real estate mortgage.

True

(True or False) There is no form required to constitute a contract of real estate mortgage.

Release from Liability - Third Party Pledgor

Instances include:

a. If the creditor voluntarily accepts immovable or other property in payment of the debt even if the creditor thereafter losses the same by eviction.

Release from Liability - Third Party Pledgor

Instances include:

b. If an extension of time is granted to the debtor by the creditor without pledgor's consent.

Release from Liability - Third Party Pledgor

Instances include:

c. If through some act of the creditor, the pledgor cannot be subrogated to the rights, mortgages and preferences of the creditor.

Release from Liability - Third Party Pledgor

d. If the thing pledged is deteriorated on the fault of the pledgee.

Void Stipulation

a. A stipulation which provides that the pledge is not extinguished by the return of the thing pledged.

Void Stipulation

b. A stipulation allowing the automatic appropriation by the pledgee of the thing pledged in case of default of the debtor.

Void Stipulation

A stipulation for the recovery of deficiency in case the proceeds from the sale of the thing pledged is less than the amount of the obligation.

Legal Pledge

A type of pledge which refers to the right of a person to retain a thing until he receives payment of his claim.

Distinctions between Contract of Conventional Pledge and Legal Pledge

Distinctions include:

a. The foreclosure in legal pledge requires a demand and can only be done one (1) month thereafter, no such requirement applies to a conventional pledge.

b. The deficiency in foreclosure sale in contract of pledge can never be recovered by the pledgee, but the deficiency in public sale in legal pledge can be recovered by the creditor.

c. The excess in foreclosure sale in contract of pledge will generally go to the pledgee in the absence of stipulation to the contrary but the excess in the public sale in legal pledge will go to the debtor.

Requisites to Affect Third Persons from Real Estate Mortgage

Requisites include:

a. There must be a public instrument containing the description thereof.

b. The same should be recorded in the Registry of Property.

True

(True or False) The creditor-mortgagee has no other right than to demand the execution and the recording of the document in which the mortgage is formalized.

Characteristics of Real Estate Mortgage

Characteristics include:

a. Accessory - it cannot exist without a principal obligation.

Characteristics of Real Estate Mortgage

Characteristics include:

b. Indivisible - it creates a lien on the whole or all of the properties mortgaged, which lien continues until the obligation secured has been fully paid.

Characteristics of Real Estate Mortgage

Characteristics include:

c. Inseparable - It subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligations for whose security it was constituted.

Characteristics include:

Characteristics include:

d. Real Right - it creates a lien on the property mortgaged which may be enforceable even against third party possessors in good faith, if it is registered.

Characteristics include:

Characteristics include:

e. Consensual Contract - it is perfected by mere consent.

Characteristics include:

Characteristics include:

f. Nominate - it has a name given to it by law.

True

(True or False) A pledge is a real contract, which means, it is perfected by delivery of the thing. On the other hand, a real estate mortgage is a consensual contract, it is perfected rather, by mere consent.

Conventional Real Estate Mortgage

A real estate mortgage in which is created by the agreement of parties.

Legal Real Estate Mortgage

A real estate mortgage executed pursuant, to an express requirement of a provision of law.

Equitable Real Estate Mortgage

Is one which although lacks certain formality, form or words, or other requisites provided by the statute, but the facts show the intention of the parties to charge the real property as a security for a debt and contains nothing contrary to law. The remedy of the injured party is to file an action for reformation of instrument.

Object of Real Estate 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.

True

(True or False) Real estate mortgages cover only that which is stated in the deed even if less than the amount of loan. Exceptionally, future advancements can be covered. This is called a dragnet clause.

True

(True or False) The mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law.

Pactum de Non-Aliendo

Stipulates that the owner is allowed to alienate the immovable property mortgaged. A stipulation prohibiting/forbidding such right is considered void.

True

(True or False) The owner of an object subject to real estate mortgage is allowed to alienate the immovable property mortgaged. A stipulation prohibiting/forbidding such right is called pactum de non-aliendo and is considered void.

True

(True or False) Buyers or transferees of the property mortgaged are not affected by an unregistered mortgage. However, if the mortgage is registered (Art. 1312) they are:

a. Bound by a foreclosure sale on the property

b. Not bound to answer the deficiency

c. Unless there is novation in the person of the debtor

Foreclosure of Real Estate Mortaged Object

Occurs in case of non-payment of the principal obligation, the creditor-mortgagee may foreclose the mortgage either:

a. Judicially - under Rule 68 of the Rules of Court;

b. Extra-judicially - under Act No. 3135.

Notice of Extrajudicial Foreclosure Sale

Such notice is not required, unless stipulated.

Notice of Judicial Foreclosure Sale

Such notice is required. Posting is made in 3 public places at least 20 days prior to sale and publication of the notice of sale in a newspaper of general circulation.

Proceeds of Foreclosure Sale - Real Estate Mortgage (More than the Unpaid Amount)

The mortgagor shall be entitled to the excess;

Proceeds of Foreclosure Sale - Real Estate Mortgage (Less than the Unpaid Amount)

The mortgagee shall be entitled to recover the deficiency.

Redemption

Exists only in Real Estate Mortgage foreclosures. The period to redeem shall depend if the foreclosure is:

a. Extrajudicial

b. Judicial

One (1) Year from Date of Foreclosure

The right to redeem a foreclosed object, under an extrajudicial real estate mortgage. General rule.

Three (3) Months from Sale or Registration of the Certificate of Sale, Whichever is Earlier, Whenever:

a. The debtor - juridical person

b. The creditor - bank

The right to redeem a foreclosed object, under an extrajudicial real estate mortgage. Exception to the general rule.

Ninety to One-Hundred Twenty (90 to 120) Days

The right to redeem a a foreclosed object, under a judicial real estate mortgage. However, it has been held that the equity of redemption exists as long as there is no confirmation of sale by the court.