Module 2. Credit Sales Transactions

What are the three (3) requisites required for a Contract of Pledge and Mortgage (Article 2085)?

1. Constituted to secure the fulfillment of a principal obligation.

2. The pledgor/mortgagor (debtor) is the absolute owner of the thing pledged/mortgaged at the time of entering the contract.

3. The persons constituting the pledge or mortgage have the free disposal of the property, or are legally authorized for the purpose

Can a third person secure a principal obligation by constituting a pledge or mortgage?

Yes. Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property, provided they follow the requirements of absolute ownership and free disposal

Can future property be the subject of a pledge or mortgage?

No. Future property cannot be the subject of a pledge or mortgage.

What is the term for a stipulation that allows the creditor to automatically appropriate or dispose of the thing given by way of pledge or mortgage upon default, and what is its legal effect (Article 2088)?

This is PACTUM COMMISSORIUM. Any such stipulation is NULL and VOID.

What is the rule on the indivisibility of a pledge or mortgage?

Pledge or mortgage is indivisible even if the debt may be divided among the successors in interest of the debtor or creditor

What is the exception to the rule of indivisibility for a pledge or mortgage?

Where each one of the several things guarantees determinate portions of credit.

What is a Contract of Pledge?

A contract where the debtor (pledgor) delivers to the creditor (pledgee) or a third person a personal (movable) property, or document evidencing incorporeal rights, to secure the fulfillment of the principal obligation

What are the two (2) kinds of Pledge?

1. Voluntary or Conventional (created by agreement).

2. Legal (created by operation of law).

How is a Contract of Pledge perfected (Article 2093)?

by the delivery of the thing pledged. Without actual or physical delivery, the pledge is void; merely symbolic delivery is insufficient.

List the key characteristics of a Contract of Pledge.

1. Real (perfected by delivery).

2. Accessory (needs a principal obligation).

3. Unilateral (only the pledgee has the obligation to return the thing upon payment).

4. Subsidiary (enforceable only if the principal obligation is due, demandable, and still unpaid).

5. Indivisible.

6. Nominate.

What property may be the subject matter of a Pledge?

Personal Property (Movable) (e.g., vehicles, cellphones) and Incorporeal Rights Evidenced by Documents (e.g., shares of stocks, bonds, bill of lading)

What form is required for a Contract of Pledge to bind the contracting parties?

Mere delivery of the object is enough (may be oral, in writing, or partly oral and partly in writing)

What form is required for a Contract of Pledge to bind third persons?

It must be in a PUBLIC INSTRUMENT including the description of the thing pledged and the date of pledge

Does the pledgor retain ownership over the thing pledged?

Yes, the pledgor retains ownership over the thing pledged, notwithstanding the pledge

If the pledgor alienates the thing pledged (Article 2097), when is ownership transmitted to the vendee/transferee?

As soon as the pledgee consents to the alienation

What is the obligation of the pledgee regarding the care of the thing pledged?

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

When is the pledgee liable for the loss or deterioration of the thing pledged?

If it is due to fraud, negligence, or violation of the terms of the contract. If due to a fortuitous event, the pledgee is not liable.

Can the creditor/pledgee use the thing pledged or appropriate its fruits?

No, the creditor cannot use the thing pledged without the authority of the owner, nor appropriate its fruits

When must the creditor use the thing pledged (Article 2104)?

When the preservation of the thing pledged requires its use, but only for that purpose

How does the pledgee apply the fruits, income, dividends, or interests earned by the thing pledged?

The pledgee can apply them first to the payment of interest (if owing), and thereafter to the principal of his credit, unless stipulated otherwise

When may the pledgor ask that the thing pledged be judicially or extrajudicially deposited (Article 2104)?

If the pledgee:

1. Uses the thing without authority;

2. Misuses it in any other way; or

3. Negligently or willfully acted that causes the thing pledged to be in danger of being lost or impaired

What is the effect of the pledgee returning the thing pledged to the pledgor or owner (Article 2110)?

The pledge is extinguished. Any stipulation to the contrary is void

What is the prima facie presumption if the thing pledged is in the possession of the pledgor (debtor) after the perfection of the pledge?

There is a prima facie presumption that the thing has been returned by the pledgee, and thus the pledge is extinguished

If the principal obligation is due and unpaid, before whom must the sale of the thing pledged proceed (Article 2112)?

Before a Notary Public

What are the formalities required for the public auction sale of the thing pledged?

1. Principal obligation is due and unpaid.

2. Sale must be a public auction sale.

3. Notice given to the pledgor and owner, stating the amount due.

4. Made with the intervention of a notary public.

When may the pledgee appropriate the thing pledged?

If the thing is not sold after the first and second public auctions. (This is stated to be an exception to the prohibition on Pactum Commissorium).

Can the pledgor or pledgee participate in the bidding?

The pledgor may bid, and shall have a better right if he offers the same terms as the highest bidder. The pledgee may bid, but his offer shall not be valid if he is the only bidder.

What is the effect of the sale on the principal obligation (Article 2125)?

The sale shall extinguish the principal obligation, regardless of whether the proceeds are equal to, more than, or less than the amount due

If the proceeds of the pledge sale are MORE than the debt, is the debtor entitled to the excess?

No, the debtor is NOT entitled to the excess, unless it is otherwise agreed

If the proceeds of the pledge sale are LESS than the debt (deficiency), is the creditor entitled to recover the deficiency?

No, the creditor is NOT entitled to recover the deficiency, notwithstanding any stipulation to the contrary

What property may be the object of a Real Estate Mortgage (Article 2124)?

1. Immovables (e.g., land, house).

2. Alienable real rights imposed upon immovables (e.g., leasehold rights).

What assets does the mortgage legally extend to?

The mortgage extends to the natural accessions, improvements, fruits, rents or income not yet received when the principal obligation becomes due, and to the amount of indemnity granted by insurers or from expropriation

List the key characteristics of a Real Estate Mortgage (REM).

1. Accessory.

2. Indivisible.

3. Inseparable (subjects the property to fulfillment of the obligation regardless of possessor).

4. Real Right (creates a lien).

5. Real Property. 

6. Consensual (perfected by mere consent).

7. Subsidiary.

8. Unilateral.

What is an Equitable Mortgage?

One that lacks certain formalities or requisites but where the facts show the intention of the parties to charge the real property as security for a debt

What is the remedy of the injured party in an Equitable Mortgage?

To file an action for reformation of the instrument.

Who retains ownership and possession of the mortgaged property?

The mortgagor (debtor) retains ownership

Is registration required for a Real Mortgage to be binding between the contracting parties?

No. It is binding between the parties even if not registered

What is required for a Real Mortgage to be constituted and bind third persons?

It must be registered with the Registry of Property (Registry of Deeds). It must also be in a PUBLIC INSTRUMENT (required by the Registry of Property to be notarized).

What is Pactum De Non-Aliendo, and is this stipulation valid?

It is a stipulation prohibiting the mortgagor to alienate the immovable property mortgaged. This is a VOID stipulation.

Are third-party transferees (buyers) bound by an unregistered mortgage?

No, they are NOT AFFECTED

If the mortgage is registered, what happens to a third-party transferee?

The third party is:

(1) Bound by a foreclosure sale on the property.

(2) Entitled to the excess of the foreclosure sale.

(3) Not bound to reimburse any deficiency of the sale, unless there is novation in the person of the debtor.

What are the two kinds of foreclosure for Real Estate Mortgage?

1. Judicial Foreclosure (Under Rule 68, Rules of Court).

2. Extrajudicial Foreclosure (Article 3135 of NCC

What is Equity of Redemption and what is its period in Judicial Foreclosure?

The right of the mortgagor to pay the obligation to prevent the property from being sold. The period is Within 90 to 120 days from the entry of judgment, extending until the sale is confirmed.

In Extrajudicial Foreclosure, what is the notice requirement if the property is worth more than Php 400?

Notice must be given by posting in at least 3 public places for at least 20 days prior to the sale, AND published once a week for at least 3 consecutive weeks in a newspaper of general circulation.

What is the period of Right of Redemption if the debtor is a Natural Person (Extrajudicial Foreclosure)

1 year FROM and AFTER the date of foreclosure sale

What is the period of Right of Redemption if the debtor is a Juridical Person and the creditor is a Bank (General Banking Law)?

3 months from the foreclosure sale or registration of the certificate of sale, whichever is earlier.

If the proceeds of the REM foreclosure sale are MORE than the debt, is the debtor entitled to the excess?

Yes, the debtor is entitled to the excess in the absence of a stipulation

If the proceeds of the REM foreclosure sale are LESS than the debt (deficiency), is the creditor entitled to recover the deficiency?

Yes, the creditor is entitled to recover in the absence of a stipulation

What is Tipo or upset price?

A maximum limit to the selling price in the public sale of the mortgaged property

Why is a stipulation setting a Tipo or upset price in a foreclosure sale void?

It is void because no maximum price should be set, as the property must be sold to the highest bidder

What is a Chattel Mortgage (CM)?

An accessory contract where personal property is recorded in the Chattel Mortgage Register as security for the performance of a principal obligation.

List the key characteristics of a Chattel Mortgage.

1. Accessory.

2. Indivisible.

3. Inseparable.

4. Formal Contract (perfected by registration).

5. Nominate

What is the requirement for a Chattel Mortgage to bind third persons?

Must be recorded in the Chattel Mortgage Register + Affidavit of Good Faith.

What is the Affidavit of Good Faith?

A sworn statement attesting that the mortgage is solely for securing the specified obligation, that the obligation is just and valid, and was not entered into for the purpose of fraud

What is the legal implication if the mortgagor disposes of the object during the pendency of the mortgage?

It is a criminal act under Article 319 of the Revised Penal Code (Removal of Mortgaged Property)

How is the foreclosure of a Chattel Mortgage generally conducted?

EXTRAJUDICIALLY

If the proceeds of a CM foreclosure sale are MORE than the debt, is the debtor entitled to the excess?

Yes, the debtor is entitled to the excess in the absence of a stipulation.

If the proceeds of a CM foreclosure sale are LESS than the debt (deficiency), is the creditor entitled to recover the deficiency?

Yes, the creditor is entitled to recover in the absence of a stipulation.

When is the creditor prohibited from recovering the deficiency in a Chattel Mortgage foreclosure?

If the object is subject to a sale in installments, the Recto Law applies. Foreclosure is then the only remedy, and recovering the deficiency is prohibited

If a junior mortgagee forecloses and sells the property, what happens to the rights of the senior mortgagee?

The foreclosure does not affect the rights of the persons holding prior encumbrances. The purchaser acquires the property subject to the senior mortgagee's right of foreclosure

If a senior mortgagee forecloses and sells the property, what happens to the rights of subsequent (junior) mortgages?

The foreclosure and sale will extinguish all subsequent mortgages