credit transactions final reviewer

7/29/2019 Credit Transactions Final Reviewer

1/31

CREDIT TRANSACTIONS REVIEWERsingco.salva.pagador.omolon.niemes.millan.espina

1

CHAPTER 2PLEDGE

Art. 2093. In addition to the requisites prescribed in Article 2085,it is necessary, in order to constitute the contract of pledge, thatthe thing pledged be placed in the possession of the creditor, orof a third person by common agreement. (1863)

Art. 2094. All movables which are within commerce may bepledged, provided they are susceptible of possession. (1864)

Art. 2095. Incorporeal rights, evidenced by negotiableinstruments, bills of lading, shares of stock, bonds, warehousereceipts and similar documents may also be pledged. Theinstrument proving the right pledged shall be delivered to thecreditor, and if negotiable, must be indorsed. (n)

Art. 2096. A pledge shall not take effect against third persons if adescription of the thing pledged and the date of the pledge donot appear in a public instrument. (1865a)

Art. 2097. With the consent of the pledgee, the thing pledgedmay be alienated by the pledgor or owner, subject to the pledge.The ownership of the thing pledged is transmitted to the vendeeor transferee as soon as the pledgee consents to the alienation,but the latter shall continue in possession. (n)

Art. 2098. The contract of pledge gives a right to the creditor toretain the thing in his possession or in that of a third person towhom it has been delivered, until the debt is paid. (1866a)

Art. 2099. The creditor shall take care of the thing pledged withthe diligence of a good father of a family; he has a right to thereimbursement of the expenses made for its preservation, and isliable for its loss or deterioration, in conformity with theprovisions of this Code. (1867)

Art. 2100. The pledgee cannot deposit the thing pledged with athird person, unless there is a stipulation authorizing him to doso.

The pledgee is responsible for the acts of his agents or employeeswith respect to the thing pledged. (n)

Art. 2101. The pledgor has the same responsibility as a bailor incommodatum in the case under Article 1951. (n)

Art. 2102. If the pledge earns or produces fruits, income,dividends, or interests, the creditor shall compensate what hereceives with those which are owing him; but if none are owing

him, or insofar as the amount may exceed that which is due, heshall apply it to the principal. Unless there is a stipulation to thecontrary, the pledge shall extend to the interest and earnings ofthe right pledged.

In case of a pledge of animals, their offspring shall pertain to thepledgor or owner of animals pledged, but shall be subject to thepledge, if there is no stipulation to the contrary. (1868a)

Art. 2103. Unless the thing pledged is expropriated, the debtorcontinues to be the owner thereof.

Nevertheless, the creditor may bring the actions which pertain tothe owner of the thing pledged in order to recover it from, ordefend it against a third person. (1869)

Art. 2104. The creditor cannot use the thing pledged, without theauthority of the owner, and if he should do so, or should misuse

paid the debt and its interest, with expenses in a proper case.(1871)

Art. 2106. If through the negligence or wilful act of the pledgee,the thing pledged is in danger of being lost or impaired, thepledgor may require that it be deposited with a third person. (n)

Art. 2107. If there are reasonable grounds to fear the destructionor impairment of the thing pledged, without the fault of thepledgee, the pledgor may demand the return of the thing, uponoffering another thing in pledge, provided the latter is of thesame kind as the former and not of inferior quality, and withoutprejudice to the right of the pledgee under the provisions of thefollowing article.

The pledgee is bound to advise the pledgor, without delay, of anydanger to the thing pledged. (n)

Art. 2108. If, without the fault of the pledgee, there is danger ofdestruction, impairment, or diminution in value of the thingpledged, he may cause the same to be sold at a public sale. Theproceeds of the auction shall be a security for the principal

obligation in the same manner as the thing originally pledged. (n)

Art. 2109. If the creditor is deceived on the substance or qualityof the thing pledged, he may either claim another thing in itsstead, or demand immediate payment of the principal obligation.(n)

Art. 2110. If the thing pledged is returned by the pledgee to thepledgor or owner, the pledge is extinguished. Any stipulation tothe contrary shall be void.

If subsequent to the perfection of the pledge, the thing is in thepossession of the pledgor or owner, there is a prima faciepresumption that the same has been returned by the pledgee.

This same presumption exists if the thing pledged is in thepossession of a third person who has received it from the pledgoror owner after the constitution of the pledge. (n)

Art. 2111. A statement in writing by the pledgee that herenounces or abandons the pledge is sufficient to extinguish thepledge. For this purpose, neither the acceptance by the pledgoror owner, nor the return of the thing pledged is necessary, thepledgee becoming a depositary. (n)

Art. 2112. The creditor to whom the credit has not been satisfiedin due time, may proceed before a Notary Public to the sale ofthe thing pledged. This sale shall be made at a public auction,and with notification to the debtor and the owner of the thingpledged in a proper case, stating the amount for which the public

sale is to be held. If at the first auction the thing is not sold, asecond one with the same formalities shall be held; and if at thesecond auction there is no sale either, the creditor mayappropriate the thing pledged. In this case he shall be obliged togive an acquittance for his entire claim. (1872a)

Art. 2113. At the public auction, the pledgor or owner may bid.He shall, moreover, have a better right if he should offer thesame terms as the highest bidder.

The pledgee may also bid, but his offer shall not be valid if he isthe only bidder. (n)

Art. 2114. All bids at the public auction shall offer to pay thepurchase price at once. If any other bid is accepted, the pledgee

is deemed to have been received the purchase price, as far as thepledgor or owner is concerned. (n)


2/31


2

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

Art. 2117. Any third person who has any right in or to the thingpledged may satisfy the principal obligation as soon as the latterbecomes due and demandable.(n)

Art. 2118. If a credit which has been pledged becomes duebefore it is redeemed, the pledgee may collect and receive theamount due. He shall apply the same to the payment of his claim,and deliver the surplus, should there be any, to the pledgor. (n)

Art. 2119. If two or more things are pledged, the pledgee maychoose which he will cause to be sold, unless there is a stipulationto the contrary. He may demand the sale of only as many of thethings as are necessary for the payment of the debt. (n)

Art. 2120. If a third party secures an obligation by pledging hisown movable property under the provisions of Article 2085 heshall have the same rights as a guarantor under Articles 2066 to2070, and Articles 2077 to 2081. He is not prejudiced by anywaiver of defense by the principal obligor. (n)

Art. 2121. Pledges created by operation of law, such as thosereferred to in Articles 546, 1731, and 1994, are governed by theforegoing articles on the possession, care and sale of the thing aswell as on the termination of the pledge. However, after paymentof the debt and expenses, the remainder of the price of the saleshall be delivered to the obligor. (n)

Art. 2122. A thing under a pledge by operation of law may besold only after demand of the amount for which the thing isretained. The public auction shall take place within one monthafter such demand. If, without just grounds, the creditor does notcause the public sale to be held within such period, the debtormay require the return of the thing. (n)

Art. 2123. With regard to pawnshops and other establishments,which are engaged in making loans secured by pledges, thespecial laws and regulations concerning them shall be observed,and subsidiarily, the provisions of this Title. (1873a)

CHAPTER 3MORTGAGE

Art. 2124. Only the following property may be the object of acontract of mortgage:

(1) Immovables;

(2) Alienable real rights in accordance with the laws,imposed upon immovables.

Nevertheless, movables may be the object of a chattel mortgage.(1874a)

Art. 2125. In addition to the requisites stated in Article 2085, it isindispensable, in order that a mortgage may be validlyconstituted, that the document in which it appears be recorded inthe Registry of Property. If the instrument is not recorded, themortgage is nevertheless binding between the parties.

The persons in whose favor the law establishes a mortgage haveno other right than to demand the execution and the recording ofthe document in which the mortgage is formalized. (1875a)

Art. 2126. The mortgage directly and immediately subjects theproperty upon which it is imposed, whoever the possessor maybe, to the fulfillment of the obligation for whose security it was

tit t d (1876)

of the mortgagor, or it passes into the hands of a third person.(1877)

Art. 2128. The mortgage credit may be alienated or assigned to athird person, in whole or in part, with the formalities required bylaw. (1878)

Art. 2129. The creditor may claim from a third person inpossession of the mortgaged property, the payment of the part ofthe credit secured by the property which said third personpossesses, in the terms and with the formalities which the lawestablishes. (1879)

Art. 2130. A stipulation forbidding the owner from alienating theimmovable mortgaged shall be void. (n)

Art. 2131. The form, extent and consequences of a mortgage,both as to its constitution, modification and extinguishment, andas to other matters not included in this Chapter, shall begoverned by the provisions of the Mortgage Law and of the LandRegistration Law. (1880a)

CHAPTER 4ANTICHRESIS

Art. 2132. By the contract of antichresis the creditor acquires theright to receive the fruits of an immovable of his debtor, with theobligation to apply them to the payment of the interest, if owing,and thereafter to the principal of his credit. (1881)

Art. 2133. The actual market value of the fruits at the time of theapplication thereof to the interest and principal shall be themeasure of such application. (n)

Art. 2134. The amount of the principal and of the interest shall bespecified in writing; otherwise, the contract of antichresis shall be

void. (n)

Art. 2135. The creditor, unless there is a stipulation to thecontrary, is obliged to pay the taxes and charges upon the estate.

He is also bound to bear the expenses necessary for itspreservation and repair.

The sums spent for the purposes stated in this article shall bededucted from the fruits. (1882)

Art. 2136. The debtor cannot reacquire the enjoyment of theimmovable without first having totally paid what he owes thecreditor.

But the latter, in order to exempt himself from the obligationsimposed upon him by the preceding article, may always compelthe debtor to enter again upon the enjoyment of the property,except when there is a stipulation to the contrary. (1883)

Art. 2137. The creditor does not acquire the ownership of the realestate for non-payment of the debt within the period agreedupon.

Every stipulation to the contrary shall be void. But the creditormay petition the court for the payment of the debt or the sale ofthe real property. In this case, the Rules of Court on theforeclosure of mortgages shall apply. (1884a)

Art. 2138. The contracting parties may stipulate that the interestupon the debt be compensated with the fruits of the property

hi h i th bj t f th ti h i id d th t if th l f


3/31


3

CHAPTER 5CHATTEL MORTGAGE

Art. 2140. By a chattel mortgage, personal property is recorded inthe Chattel Mortgage Register as a security for the performanceof an obligation. If the movable, instead of being recorded, isdelivered to the creditor or a third person, the contract is a

pledge and not a chattel mortgage. (n)

Art. 2141. The provisions of this Code on pledge, insofar as theyare not in conflict with the Chattel Mortgage Law shall beapplicable to chattel mortgages. (n)

Title XIX. - CONCURRENCE AND PREFERENCEOF CREDITSCHAPTER 1GENERAL PROVISIONSArt. 2236. The debtor is liable with all his property, present and

future, for the fulfillment of his obligations, subject to theexemptions provided by law. (1911a)

Art. 2237. Insolvency shall be governed by special laws insofar asthey are not inconsistent with this Code. (n)

Art. 2238. So long as the conjugal partnership or absolutecommunity subsists, its property shall not be among the assets tobe taken possession of by the assignee for the payment of theinsolvent debtor's obligations, except insofar as the latter haveredounded to the benefit of the family. If it is the husband who isinsolvent, the administration of the conjugal partnership ofabsolute community may, by order of the court, be transferred tothe wife or to a third person other than the assignee. (n)

Art. 2239. If there is property, other than that mentioned in thepreceding article, owned by two or more persons, one of whom isthe insolvent debtor, his undivided share or interest therein shallbe among the assets to be taken possession of by the assigneefor the payment of the insolvent debtor's obligations. (n)

Art. 2240. Property held by the insolvent debtor as a trustee of anexpress or implied trust, shall be excluded from the insolvencyproceedings. (n)

CHAPTER 2CLASSIFICATION OF CREDITS

Art. 2241. With reference to specific movable property of thedebtor, the following claims or liens shall be preferred:

(1) Duties, taxes and fees due thereon to the State orany subdivision thereof;

(2) Claims arising from misappropriation, breach oftrust, or malfeasance by public officials committed inthe performance of their duties, on the movables,money or securities obtained by them;

(3) Claims for the unpaid price of movables sold, onsaid movables, so long as they are in the possession ofthe debtor, up to the value of the same; and if themovable has been resold by the debtor and the price isstill unpaid, the lien may be enforced on the price; thisright is not lost by the immobilization of the thing bydestination, provided it has not lost its form, substanceand identity; neither is the right lost by the sale of the

(5) Credits for the making, repair, safekeeping orpreservation of personal property, on the movable thusmade, repaired, kept or possessed;

(6) Claims for laborers' wages, on the goodsmanufactured or the work done;

(7) For expenses of salvage, upon the goods salvaged;

(8) Credits between the landlord and the tenant, arisingfrom the contract of tenancy on shares, on the share ofeach in the fruits or harvest;

(9) Credits for transportation, upon the goods carried,for the price of the contract and incidental expenses,until their delivery and for thirty days thereafter;

(10) Credits for lodging and supplies usually furnishedto travellers by hotel keepers, on the movablesbelonging to the guest as long as such movables are inthe hotel, but not for money loaned to the guests;

(11) Credits for seeds and expenses for cultivation andharvest advanced to the debtor, upon the fruitsharvested;

(12) Credits for rent for one year, upon the personalproperty of the lessee existing on the immovable leasedand on the fruits of the same, but not on money orinstruments of credit;

(13) Claims in favor of the depositor if the depositaryhas wrongfully sold the thing deposited, upon the priceof the sale.

In the foregoing cases, if the movables to which thelien or preference attaches have been wrongfully taken,the creditor may demand them from any possessor,within thirty days from the unlawful seizure. (1922a)

Art. 2242. With reference to specific immovable property and realrights of the debtor, the following claims, mortgages and liensshall be preferred, and shall constitute an encumbrance on theimmovable or real right:

(1) Taxes due upon the land or building;

(2) For the unpaid price of real property sold, upon theimmovable sold;

(3) Claims of laborers, masons, mechanics and other

workmen, as well as of architects, engineers andcontractors, engaged in the construction, reconstructionor repair of buildings, canals or other works, upon saidbuildings, canals or other works;

(4) Claims of furnishers of materials used in theconstruction, reconstruction, or repair of buildings,canals or other works, upon said buildings, canals orother works;

(5) Mortgage credits recorded in the Registry ofProperty, upon the real estate mortgaged;

(6) Expenses for the preservation or improvement of

real property when the law authorizes reimbursement,upon the immovable preserved or improved;

(7) Credits annotated in the Registry of Property in


4/31


4

(9) Claims of donors or real property for pecuniarycharges or other conditions imposed upon the donee,upon the immovable donated;

(10) Credits of insurers, upon the property insured, forthe insurance premium for two years. (1923a)

Art. 2243. The claims or credits enumerated in the two precedingarticles shall be considered as mortgages or pledges of real orpersonal property, or liens within the purview of legal provisionsgoverning insolvency. Taxes mentioned in No. 1, Article 2241,and No. 1, Article 2242, shall first be satisfied. (n)

Art. 2244. With reference to other property, real and personal, ofthe debtor, the following claims or credits shall be preferred inthe order named:

(1) Proper funeral expenses for the debtor, or childrenunder his or her parental authority who have noproperty of their own, when approved by the court;

(2) Credits for services rendered the insolvent byemployees, laborers, or household helpers for one yearpreceding the commencement of the proceedings ininsolvency;

(3) Expenses during the last illness of the debtor or ofhis or her spouse and children under his or her parentalauthority, if they have no property of their own;

(4) Compensation due the laborers or their dependentsunder laws providing for indemnity for damages incases of labor accident, or illness resulting from thenature of the employment;

(5) Credits and advancements made to the debtor for

support of himself or herself, and family, during the lastyear preceding the insolvency;

(6) Support during the insolvency proceedings, and forthree months thereafter;

(7) Fines and civil indemnification arising from acriminal offense;

(8) Legal expenses, and expenses incurred in theadministration of the insolvent's estate for the commoninterest of the creditors, when properly authorized andapproved by the court;

(9) Taxes and assessments due the nationalgovernment, other than those mentioned in Articles2241, No. 1, and 2242, No. 1;

(10) Taxes and assessments due any province, otherthan those referred to in Articles 2241, No. 1, and2242, No. 1;

(11) Taxes and assessments due any city ormunicipality, other than those indicated in Articles2241, No. 1, and 2242, No. 1;

(12) Damages for death or personal injuries caused bya quasi-delict;

(13) Gifts due to public and private institutions ofcharity or beneficence;

Art. 2245. Credits of any other kind or class, or by any other rightor title not comprised in the four preceding articles, shall enjoy nopreference. (1925)

CHAPTER 3ORDER OF PREFERENCE OF CREDITSArt. 2246. Those credits which enjoy preference with respect tospecific movables, exclude all others to the extent of the value ofthe personal property to which the preference refers.

Art. 2247. If there are two or more credits with respect to thesame specific movable property, they shall be satisfied pro rata,after the payment of duties, taxes and fees due the State or anysubdivision thereof. (1926a)

Art. 2248. Those credits which enjoy preference in relation tospecific real property or real rights, exclude all others to theextent of the value of the immovable or real right to which thepreference refers.

Art. 2249. If there are two or more credits with respect to thesame specific real property or real rights, they shall be satisfiedpro rata, after the payment of the taxes and assessments uponthe immovable property or real right. (1927a)

Art. 2250. The excess, if any, after the payment of the creditswhich enjoy preference with respect to specific property, real orpersonal, shall be added to the free property which the debtormay have, for the payment of the other credits. (1928a)

Art. 2251. Those credits which do not enjoy any preference withrespect to specific property, and those which enjoy preference, asto the amount not paid, shall be satisfied according to thefollowing rules:

(1) In the order established in Article 2244;

(2) Common credits referred to in Article 2245 shall be paid prorata regardless of dates. (1929a)


5/31


5

PLEDGE

Articles 2093 - 2096I. Concept- Pledge is an accessory, real, unilateral contract by virtue of which the debtor delivers to the creditor or a third person movable

property as security for the performance of a specific obligation upon the fulfillment of which the thing must be returned with

its accessions and accessories.

I I. Requisi tes(Common to pledge and mortgage Art. 2085 and 2087)1. constituted to secure the fulfillment of a principal obligation2. pledgor must be the absolute owner of the thing pledged3. person constituting the pledge must have free disposal of the property, or in the absence thereof that they be legally authorized for

the purpose4. possession of the thing pledged (movable) is delivered to the pledgee (actual not merely symbolic but may include constructive e.g.

keys of a warehouse where the goods are stored-depending on the peculiar circumstances)

To affect third persons:5. public instrument6. description of the thing pledged7. date of the pledge

III. ElementsA. Parties Capac ity- A pledgor who is not the debtor has the rights of a guarantor (Art. 2066 to Art. 2070: reimbursement and subrogation; and

Art. 2077 to Art. 2081: release) and is not prejudicial by any waiver of defenses by the debtor (Art. 2120).

B. Object- The Object (thing given) must be: (a) movable; (b) within the commerce of man; (c) susceptible of possession (Article 2094).

It may be money, goods or credits and includes their fruits, interest, and earnings (Art. 2102).- If a warehouse receipt is pledged, the pledgor retains ownership and bears the risk of the loss of the goods represented by the

receipt.

Effect where carabaos pledged not actual ly del ivered to the creditorEULOGIO BETITA vs. SIMEON GANZON, ALEJO DE LA FLOR, and CLEMENTE PEDRENA

Facts:

This action is brought to recover the possession of four carabaos with damages.Defendant Alejo de la Flor recovered a judgment against Tiburcia Buhayan. Under this judgment the defendant Ganzon, as sheriff leviedexecution on the carabaos in question which were found in the possession of one Simon Jacinto but registered in the name of Tiburcia Buhayan.

The plaintiff, Eulogio Betita, a third party claim ( terceria) alleges that the carabaos had been mortgaged to him and as evidence thereofpresented a document, but the sheriff proceeded with the sale of the animals at public auction where they were purchased by the defendant ClementePerdena, and this action was thereupon brought.

Issue:Whether the mere filing of a private document with the sheriff after the levy of execution can create a lien of pledge superior to the attachment.

SC Ruling:The alleged pledge is ineffective, because the plaintiff pledgee never had actual possession of the property within the meaning the Civil

Code. But it is argued that at the time of the levy the animals in question were in the possession of one Simon Jacinto; that Jacinto was the plaintiff'stenant; and that the tenant's possession was the possession of his landlord.

In order to constitute the contract of pledge, that the pledge be placed in the possession of the creditor or of a third person appointed bycommon consent.In his commentary on this article Manresa says:

This requisite is most essential and is characteristic of a pledge without which the contract cannot be regarded as entered into or completed,because, precisely, in this delivery lies the security of the pledge. Therefore, in

It is, of course, evident that the delivery of possession implies a change in the actual possession of the property pledged and that ameresymbolic delivery is not sufficient.In the present case the animals in question were in the possession of Tiburcia Buhayan and Simon Jacinto before the alleged pledge was

entered into and apparently remained with them until the execution was levied, and there was no actual delivery of possession to the plaintiff himself.There was therefore in reality no change in possession.From what has been said it follows that the judgment appealed from must be reversed and it is ordered and adjudged that the plaintiff take nothing byhis action. Without costs. So ordered.

a. Incorporeal R ights- Incorporeal Rights may be pledged if presented by documents which must be delivered or indorsed ifnegotiable, to the creditor.

Ef fect of Stock Ass ignment


6/31


6

LOPEZ vs. CA

Facts:Benito H. Lopez obtained a loan in the amount of P20,000.00 from the Prudential Bank and Trust Company. He executed a promissory

note for the same amount, in favor of the said Bank, binding himself to repay the said sum one year after the said date, with interest at the rate of 10%per annum. In addition to said promissory note, he executed Surety Bond No. 14164 in which he, as principal, and Philippine American GeneralInsurance Co., Inc. (PHILAMGEN) as surety, bound themselves jointly and severally in favor of Prudential Bank for the payment of the sum ofP20,000.00.

Lopez also executed in favor of Philamgen an indemnity agreement whereby he agreed "to indemnify the Company and keep itindemnified and hold the same harmless from and against any and all damages, losses, costs, stamps, taxes, penalties, charges and expenses ofwhatever kind and nature which the Company shall or may at any time sustain or incur in consequence of having become surety upon the bond." Atthe same time, Lopez executed a deed of assignment of 4,000 shares of the Baguio Military Institution entitled "Stock Assignment Separate fromCertificate"

With the execution of this deed of assignment, Lopez endorsed the stock certificate and delivered it to Philamgen. It appears from theevidence on record that the loan of P20,000.00 was approved conditioned upon the posting of a surety bond of a bonding company acceptable to thebank. Thus, Lopez persuaded Emilio Abello, Assistant Executive Vice-President of Philamgen and member of the Bond Under writing Committee torequest Atty. Timoteo J. Sumawang, Assistant Vice- President and Manager of the Bonding Department, to accommodate him in putting up the bondagainst the security of his shares of stock with the Baguio Military Institute, Inc. It was their understanding that if he could not pay the loan, Vice-President Abello and Pio Pedrosa of the Prudential Bank would buy the shares of stocks and out of the proceeds thereof, the loan would be paid tothe Prudential Bank. On June 2, 1960, Lopez' obligation matured without it being settled.

Issue:a) Where a party "sells, assigns and transfers" and delivers shares of stock to another, duly endorsed in blank, in consideration of a contingentobligation of the former to the latter, and, the obligations having arisen, the latter causes the shares of stock to be transferred in its name, what is the

juridical nature of the transaction-a dation in payment or a pledge?b) Where the debtor assigns the shares of stock to the creditor under an agreement between the latter and determinate third persons that the latterwould buy the shares of stock so that the obligations could be paid out of the proceeds, was there a novation of the obligation by substitution of

debtor?

SC Ruling:a. The stock assignment is in truth and in fact, a pledge.

Considering the explicit terms of the deed denominated "Stock Assignment Separate from Certificate", hereinbefore copied verbatim,Lopez sold, assigned and transferred unto Philamgen the stocks involved "for and in consideration of the obligations undertaken" by Philamgen"under the terms and conditions of the surety bond executed by it in favor of the Prudential Bank" and "for value received". On its face, it is neitherpledge nor dation in payment. The document speaks of an outright sale as there is a complete and unconditional divestiture of the incorporealproperty consisting of stocks from Lopez to Philamgen. The transfer appears to have been an absolute conveyance of the stocks to PhilamgenwhetherornotLopez defaults in the payment of P20,000.00 to Prudential Bank. While it is a conveyance in consideration of a contingent obligation, itis not itself a conditional conveyance.It is true that if Lopez should "well and truly perform and fulfill all the undertakings, covenants, terms, conditions, and agreements stipulated" in hispromissory note to Prudential Bank, the obligation of Philamgen under the surety bond would become null and void. Corollarily, the stock assignment,which is predicated on the obligation of Philamgen under the surety bond, would necessarily become null and void likewise, for want of cause orconsideration under Article 1352 of the New Civil Code. But this is not the case here because aside from the obligations undertaken by Philamgenunder the surety bond, the stock assignment had other considerations referred to therein as "value received". Hence, based on the manifest termsthereof, it is an absolute transfer.

Notwithstanding the express terms of the "Stock Assignment Separate from Certificate", however, We hold and rule that the transactionshould not be regarded as an absolute conveyance in view of the circumstances obtaining at the time of the execution thereof.

It should be remembered that on June 2, 1959, the day Lopez obtained a loan of P20,000.00 from Prudential Bank, Lopez executed a promissorynote for ?20,000.00, plus interest at the rate of ten (10%) per cent per annum, in favor of said Bank. He likewise posted a surety bond to secure hisfull and faithful performance of his obligation under the promissory note with Philamgen as his surety. In return for the undertaking of Philamgen underthe surety bond, Lopez executed on the same day not only an indemnity agreement but also a stock assignment.The indemnity agreement and the stock assignment must be considered together as related transactions because in order to judge the intention ofthe contracting parties, their contemporaneous and subsequent acts shall be principally considered. Thus, considering that the indemnity agreementconnotes a continuing obligation of Lopez towards Philamgen while the stock assignment indicates a complete discharge of the same obligation, theexistence of the indemnity agreement whereby Lopez had to pay a premium for a period of one year and agreed at all times to indemnify Philamgenof any and all kinds of losses which the latter might sustain by reason of it becoming a surety, is inconsistent with the theory of an absolute sale forand in consideration of the same undertaking of Philamgen. There would have been no necessity for the execution of the indemnity agreement if thestock assignment was really intended as an absolute conveyance. Hence, there are strong and cogent reasons to conclude that the parties intendedsaid stock assignment to complement the indemnity agreement and thereby sufficiently guarantee the indemnification of Philamgen should it berequired to pay Lopez' loan to Prudential Bank.

The following requirements of a contract of pledge have been satisfied: (1) that it be constituted to secure the fulfillment of a principalobligation; (2) that the pledgor be the absolute owner of the thing pledged; and (3) that the person constituting the pledge has the free disposal of theproperty, and in the absence thereof, that he be legally authorized for the purpose.

Article 2087 of the New Civil Code providing that it is also the essence of these contracts (pledge, mortgage, and antichresis) that when the principalobligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor, further supports thecourt's ruling.

In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the lessertransmission of rights and interests.

b. No novation took place.Under Article 1291 of the New Civil Code, obligations may be modified by: (1) changing their object or principal condition; (2) substituting

the person of the debtor; (3) subrogating a third person in the rights of the creditor. And in order that an obligation may be extinguished by anotherwhich substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every pointincompatible with each other. (Article 1292, N.C.C.) Novation which consists in substituting a new debtor in the place of the original one, may bemade even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him therights mentioned in Articles 1236 and 1237.

In the case at bar, the undertaking of Messrs. Emilio Abello and Pio Pedrosa that they would buy the shares of stock so that Philamgencould be reimbursed from the proceeds that it paid to Prudential Bank does not necessarily imply the extinguishment of the liability of petitioner Lopez.Since it was not established nor shown that Lopez would be released from responsibility, the same does not constitute novation and hence,Philamgen may still enforce the obligation. As the Court of Appeals correctly held that "(t)he representation of Mr. Abello to Atty. Sumawang that heand Mr. Pedrosa would buy the stocks was a purely private arrangement between them, not an agreement between (Philamgen) and (Lopez)" andwhich the Court affirms.


7/31


7

The promise of Abello and Pedrosa to buy the shares from private respondent not having materialized (which promise was given to saidrespondent only and not to petitioner) and no action was taken against the two by said respondent who chose instead to sue the petitioner on theIndemnity Agreement, it is quite clear that this respondent has abandoned its right and interest over the pledged properties and must, therefore,release or return the same to the petitioner-pledgor upon the latter's satisfaction of his obligation under the Indemnity Agreement.There is no double payment nor unjust enrichment in this case because the shares of stock were merely pledged.

ooOoo

PARAY vs. RODRIGUEZ

Facts:Respondents were the owners, in their respective personal capacities, of shares of stock in a corporation known as the Quirino-Leonor-

Rodriguez Realty Inc. Sometime during the years 1979 to 1980, respondents secured by way of pledge of some of their shares of stock to petitionersBonifacio and Faustina Paray ("Parays") the payment of certain loan obligations. When the Parays attempted to foreclose the pledges on account ofrespondents failure to pay their loans, respondents filed complaints with the Regional Trial Court of Cebu City. The actions, which were consolidatedand tried before RTC Branch 14, Cebu City, sought the declaration of nullity of the pledge agreements, among others.

However the RTC dismissed the complaint and gave "due course to the foreclosure and sale at public auction of the various pledgessubject of these two cases." This decision attained finality after it was affirmed by the Court of Appeals and the Supreme Court. Respondents thenreceived Notices of Sale which indicated that the pledged shares were to be sold at public auction. However, before the scheduled date of auction, allof respondents caused the consignation with the RTC Clerk of Court of various amounts. It was claimed that respondents had attempted to tenderthese payments to the Parays, but had been rebuffed.

Notwithstanding the consignations, the public auction took place as scheduled, with petitioner Vidal Espeleta successfully bidding theamount of P6,200,000.00 for all of the pledged shares. None of respondents participated or appeared at the auction. Respondents instead filed acomplaint seeking the declaration of nullity of the concluded public auction.

Issue:Whether or not pledged shares of stock auctioned off in a notarial sale could still be redeemed by their owners.

SC Ruling: The subject sale of pledged shares was an extrajudicial sale, specifically a notarial sale, as distinguished from a judicial sale as typified byan execution sale. Under the Civil Code, the foreclosure of a pledge occurs extrajudicially, without intervention by the courts. All the creditor needs todo, if the credit has not been satisfied in due time, is to proceed before a Notary Public to the sale of the thing pledged.

The decision to proceed with the sale by public auction remains in the sole discretion of the Parays, who could very well choose not tohold the sale without violating the final judgments in the aforementioned civil cases. If the sale were truly in compliance with a final judgment or order,the Parays would have no choice but to stage the sale for then the order directing the sale arises from judicial compulsion. But nothing in thedispositive portion directed the sale at public auction as a mandatory recourse, and properly so since the sale of pledged property in public auction is,by virtue of the Civil Code, extrajudicial in character.

The right to redeem property sold as security for the satisfaction of an unpaid obligation does not exist preternaturally. Neither is itpredicated on proprietary right, which, after the sale of property on execution, leaves the judgment debtor and vests in the purchaser. Instead, it is abare statutory privilege to be exercised only by the persons named in the statute.The right of redemption over mortgaged real property sold extrajudicially is established by Act No. 3135, as amended. The said law does not extendthe same benefit to personal property. In fact, there is no law in our statute books which vests the right of redemption over personal property. Act No.1508, or the Chattel Mortgage Law, ostensibly could have served as the vehicle for any legislative intent to bestow a right of redemption over personalproperty, since that law governs the extrajudicial sale of mortgaged personal property, but the statute is definitely silent on the point. And Section 39of the 1997 Rules of Civil Procedure starkly utters that the right of redemption applies to real properties, not personal properties, sold on execution.Under the Civil Code, it is the pledgee, and not the pledgor, who is given the right to choose which of the items should be sold if two or more thingsare pledged. No similar option is given to pledgors under the Civil Code. Moreover, there is nothing in the Civil Code provisions governing the

extrajudicial sale of pledged properties that prohibits the pledgee of several different pledge contracts from auctioning all of the pledged properties ona single occasion, or from the buyer at the auction sale in purchasing all the pledged properties with a single purchase price. The relativeinsignificance of ascertaining the definite apportionments of the sale price to the individual shares lies in the fact that once a pledged item is sold atauction, neither the pledgee nor the pledgor can recover whatever deficiency or excess there may be between the purchase price and the amount ofthe principal obligation.

There is no doubt that if the principal obligation is satisfied, the pledges should be terminated as well. Article 2098 of the Civil Codeprovides that the right of the creditor to retain possession of the pledged item exists only until the debt is paid. Article 2105 of the Civil Code furtherclarifies that 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 itsinterest. At the same time, the right of the pledgee to foreclose the pledge is also established under the Civil Code. When the credit has not beensatisfied in due time, the creditor may proceed with the sale by public auction under the procedure provided under Article 2112 of the Code.

b. Effect if Credit Pledged Becomes Due- If the credit pledged becomes due before redemption. The pledgee may collect and apply the amount to thecredit delivering the surplus to the pledgor.

C. Considerationa . As to the debtor- It is either liberality or with a stipulated compensation

b. As to the pledge- The consideration of the principal credit supports the pledge.

D. Form- No particular form is required as between the parties, but the thing must be delivered to the creditor or to a stranger.

a. To affect thi rd persons- There must be a public instrument giving the description of the thing pledged and the date.

Effect of pledge in a publ ic instrument


8/31


8

EULOGIO BETITA vs. SIMEON GANZON, ALEJO DE LA FLOR, and CLEMENTE PEDRENA

Facts:This action is brought to recover the possession of four carabaos with damages.

Defendant Alejo de la Flor recovered a judgment against Tiburcia Buhayan. Under this judgment the defendant Ganzon, as sheriff leviedexecution on the carabaos in question which were found in the possession of one Simon Jacinto but registered in the name of Tiburcia Buhayan.

The plaintiff, Eulogio Betita, a third party claim ( terceria) alleges that the carabaos had been mortgaged to him and as evidence thereofpresented a document, but the sheriff proceeded with the sale of the animals at public auction where they were purchased by the defendant ClementePerdena, and this action was thereupon brought.

Issue:Effects of pledge not in a public instrument

SC Ruling:Manresa, in commenting on article 1865, says:

ART. 1865. A pledge will not be valid against a third party if the certainty of the date is not expressed in a public instrument.Considering the effects of a contract of pledge, it is easily understood that, without this warranty demanded by law, the case may happen

wherein a debtor in bad faith from the moment that he sees his movable property in danger of execution may attempt to withdraw the same from theaction of justice and the reach of his creditors by simulating, through criminal confabulations, anterior and fraudulent alterations in his possession bymeans of feigned contracts of this nature; and, with the object of avoiding or preventing such abuses, almost all the foreign writers advise that, for theeffectiveness of the pledge, it be demanded as a precise condition that in every case the contract be executed in a public writing, for, otherwise, thedetermination of its date will be rendered difficult and its proof more so, even in cases in which it is executed before witnesses, due to the difficulty tobe encountered in seeking those before whom it was executed.

Our code has not gone so far, for it does not demand in express terms that in all cases the pledge be constituted or formalized in a publicwriting, nor even in private document, but only that the certainty of the date be expressed in the first of the said class of instruments in order that itmay be valid against a third party; and, in default of any express provision of law, in the cases where no agreement requiring the execution in a publicwriting exists, it should be subjected to the general rule, and especially to that established in the last paragraph of article 1280, according to which allcontracts not included in the foregoing cases of the said article should be made in writing even though it be private, whenever the amount of the

presentation of one or of the two contracting parties exceeds 1,500 pesetas. (Vol. 12, ed., p. 421.)

If the mere filing of a private document with the sheriff after the levy of execution can create a lien of pledge superior to the attachment,the purpose of the provisions of article 1865 as explained by Manresa clearly be defeated.From what has been said it follows that the judgment appealed from must be reversed and it is ordered and adjudged that the plaintiff take nothing byhis action. Without costs. So ordered.

IV. ClassesA. Voluntary- Created by the will of the partiesB. Legal- Created by operation of law

Articles 2097 2130I. Effects as to the pledgeeA. Rights of the pledgee1. RETENTION OF THE THING

- to retain the thing in his possession of in that of the third person to whom it has been delivered. Until the debt is paid. Withthe corresponding obligation to take care of it as a good father of a family.

a . USE OF THE THING- He may use the thing pledge only if authorized or if its preservation so requires. Otherwise, the pledgor mayask for the deposit of the thing.b. DEPOSIT THE THING- The pledgee cannot deposit the thing pledged with a third person unless so authorized.2. REIMBURSEMENT

- To receive reimbursement for the expenses incurred for the preservation of the thing pledged.3. COMPENSATION OF FRUITS WITH WHAT IS DUE THE CREDITOR- fruits, income dividends or interest earned or produced by the thing pledged with those due the creditor.* if none are owing, or if there is an excess they shall be applied to the principal of the debt.

* offsprings of animals pledged belong to the pledgor but are subject to the pledge if there is no contrary stipulation.4. ACTIONS OF RECOVERY AND DEFENSE- the creditor may institute or bring actions belonging to the owner in order to defend and recover the thing pledged.5. PREFERENCE OF CREDIT- see Art. 2241 no. 4 ^_^6. SALE OF THE SECURITYGROUNDS:a. PRECAUTIONARY if, without fault of the pledgee, the thing runs the risk of destruction, impairment or diminution in value,

he may cause it to be sold in public sale. Unless, the pledgor demand its return, offering another in its stead, of the same kindand not of inferior value. If sold, the price is substituted for the security.

b. FORECLOSURE- if the credit is not paid in due timeMODES OF FORECLOSURE:


9/31


9

a. JUDICIALb. EXTRA JUDICIALProcedure:1. At public auction (the owner may bid)2. with notice to the debtor and pledgor, stating the amount for which the thing will be sold.3. the pledgor or owner may bid at the sale and must be preferred if he offers the same as that of the highest bidder.4. the pledgee may bid as well, but his offer is voyed if he is the only bidder.5. the bids must be for payment at once, if a bid is accepted, it operates as payment to the pledgee in so far as the

debtor or pledgor is concerned.6. if at the 1st auction the thing is not sold, and a second auction was conducted and yet still there was no sale, the

creditor may appropriate the thing issuing acquittance in full.c. RULE IF TWO OR MORE THINGS ARE PLEDGED- If two or more things are pledged, the pledgee may choose which will be sold, unless the contrary is stipulated.But he can sell only as many things as are needed for the payment of the debt.d. OPTIONS OF THE PLEDGEE- To collect credit pledged if the y fall due before redemption.7. COLLECT CREDIT PLEDGED

- But he must apply the proceeds to the credit and pay the surplus to the pledgor.

B. Obligations of the pledgee1. Preservationa. degree of d il igence- Good father of a family and is liable for its loss or deterioration. He must not use the thing pledged unlessauthorized or if its preservation so requires. Otherwise, the pledgor may ask that it be deposited.b. liability of acts of agents/employees- Pledgor liable for acts of its agents or employees.c. deposit of the thing pledged- The pledgor cannot deposit the thing pledged with a third person, unless there is a stipulation authorizing it.d. in case of danger to the thing pledged / danger of loss through negligence of pledge- If through the willful acts or negligence of the pledgee, the thing is in danger of loss or impairment, the pledgormay require its deposit with a third persone. in case of fear of destruction or impairment of the thing- If there are reasonable grounds to fear the destruction or impairment of the thing pledged without the fault ofthe pledgee the pledgor may demand its return, upon offering another thing in pledge of the same kind and not ofinferior quality. Unless the pledgee causes the same to be publicly sold.

2. Restitutiona. When

FILOMENA SARMIENTO and her husband EUSEBIO M. VILLASEOR vs. GLICERIO JAVELLANA

Facts:Defendant loaned the plaintiffs the sum of P1,500 with interest at the rate of 25 per cent per annum for the term of one year. To guarantee this

loan, the plaintiffs pledged a large medal with a diamond in the center and surrounded with ten diamonds, a pair of diamond earrings, a small combwith twenty-two diamonds, and two diamond rings, which the contracting parties appraised at P4,000.

At the maturity of this loan the plaintiff Eusebio M. Villaseor, was unable to pay the loan, but he was able to obtian from the defendant anextension, with the condition that the loan was to continue.Days past, the plaintiff Eusebio M. Villaseor, in company with Carlos M. Dreyfus, went to the house of the defendant and offered to pay the loan andredeem the jewels, taking with him, for this purpose, the sum of P11,000, but the defendant then informed them that the time for the redemption hadalready elapsed.

The plaintiffs now bring this action to compel the defendant to return the jewels pledged, or their value, upon the payment by them of the sumthey owe the defendant, with the interest thereon.

Issue:WON the plaintiffs' action for the recovery of the jewels pledged has prescribed.

SC Ruling:

Without deciding whether or not the action to recover the thing pledged may prescribe in any case, it not being necessary for the purposes of thisopinion, but supposing that it may, still the defendant's contention is untenable. In the document evidencing the loan in question there is stated:"I transfer by way of pledge the following jewels." That this is a valid contract of pledge there can be no question. As a matter of fact the defendantdoes not question it, but take s it for granted.However, it is contended that the obligation of the defendant to return the jewels pledged must be considered as not stated in writing, for this

obligation is not expressly mentioned in the document.But if this contract of pledge is in writing, it must necessarily be admitted that the action to enforce the right, which constitutes the essence of thiscontract, is covered by a written contract.The duty of the creditor to return the thing pledged in case the principal obligation is fulfilled is essential in all contracts of pledge. Thisconstitutes, precisely, the consideration of the debtor in this accessory contract, so that if this obligation of the creditor to return to thingpledged, and the right of the debtor to demand the return thereof, are eliminated, the contract would not be a contract of pledge. It wouldbe a donation.

If the right of the plaintiffs to recover the thing pledged is covered by a written contract, the time for the prescription of this action is ten years,according to section 43 of the Code of Civil Procedure.

Computing the time from that date to that of the filing of the complaint in this cause, October 9, 1920, it appears that the ten years fixed bythe law for the prescription of the action have not yet elapsed.


10/31


1

On the other hand, the contract of loan with pledge is in writing and the action of the defendant for the recovery of the loan does not prescribeuntil after ten years. It is unjust to hold that the action of the plaintiffs for the recovery of the thing pledged, after the payment of the loan, has alreadyprescribed while the action of the defendant for the recovery of the loan has not yet prescribed. The result of this would be that the defendant mighthave collected the loan and at the same time kept the thing pledged.

The motion for reconsideration is denied.

b. Effect of return of the thing to pledgor- The return of the thing pledged to the pledgor or owner extinguishes the pledge (NOT THE PRINCIPALOBLIGATION)1. Effect of contrary stipulation

- A stipulation to the contrary is VOYED!!2. Presumption if th ing i s in possess ion of the pledgor- If subsequent to the perfection of the pledge, the pledgor or another person who derives title from him is inpossession of the thing pledged, it is presumed prima faciethat the pledgee returned it.

II. Effects as to the pledgorA. Rights of the pledgora. Remains the owner the pledgor remains the owner of the thing pledged, until its sale, unless the thing isexpropriated.(Art. 2103. Unless the thing pledged is expropriated, the debtor continues to be the owner thereof.Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it from, ordefend it against a third person.)

b. May demand deposit of the thing He may demand the deposit of the thing if endangered by fault or negligence ofthe pledgee or used by the pledgee.(Art. 2106. If through the negligence or wilful act of the pledgee, the thing pledged is in danger of being lost or impaired, thepledgor may require that it be deposited with a third person.)(Art. 2104. The creditor cannot use the thing pledged, without the authority of the owner, and if he should do so, or shouldmisuse the thing in any other way, the owner may ask that it be judicially or extrajudicially deposited. When the preservationof the thing pledged requires its use, it must be used by the creditor but only for that purpose.)

c. May substitute another thing He may substitute another thing if endangered without the fault of pledgeeprovided itis of the same kind and not of inferior quality.(Art. 2107. If there are reasonable grounds to fear the destruction or impairment of the thing pledged, without the fault of thepledgee, the pledgor may demand the return of the thing, upon offering another thing in pledge, provided the latter is of thesame kind as the former and not of inferior quality, and without prejudice to the right of the pledgee under the provisions ofthe following article.)

d. To bid and to preference at foreclosure sale The pledgor is entitled to bid and to preference at the foreclosure sale.(Art. 2113. At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right if he should offer the

same terms as the highest bidder.)e. To return of the thing He has the right to the return of the thing pledged upon extinction of the principal obligation.(Art. 2098. The contract of pledge gives a right to the creditor to retain the thing in his possession or in that of a third person towhom it has been delivered, until the debt is paid.)

A 1. Rights of pledgor who is not the principal debtor- If the pledgor is not the principal debtor, he has the same rights as a guarantor under Art.s 2066-70 (reimbursement,subrogation) and 2077 to 2081 (release by novation, extension, impossibility of subrogation and use of defenses of theprincipal debtor). But he is not entitled to the benefit of exhaustion.

Southern Motors, Inc. vs Barbosa, supra

SC Ruling:The right of guarantors, under Article 2058 of the Civil Code of the Philippines, to demand exhaustion of the property of the principal debtor, existsonly when a pledge or a mortgage has not been given as special security for the payment of the principal obligation. Guarantees, without any suchpledge or mortgage, are governed by Title XV of said Code, whereas pledges and mortgages fall under Title XVI of the same Code, in which thefollowing provisions, among others, are found:

ART. 2087. "It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgageconsists may be alienated for the payment to the creditor."

ART. 2126. "The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillmentof the obligation for whose security it was constituted."

It has been held already (Saavedra vs. Price, 68 Phil., 688), that a mortgagor is not entitled to the exhaustion of the property of the principal debtor.

Although an ordinary personal guarantor - not a mortgagor or pledgor - may demand the aforementioned exhaustion, the creditor may, prior thereto,secure a judgment against said guarantor, who shall be entitled, however, to a deferment of the execution of said judgment against him until after theproperties of the principal debtor shall have been exhausted to satisfy the obligation involved in the case.

B. Obligations of the pledgor


11/31


1

a. To notify the pledgee of flaws He must notify the pledgee of flaws of the thing known to him; otherwise he answers fordamages like the bailor (borrower) in commodatum.

(Art. 2101. The pledgor has the same responsibility as a bailor in commodatum in the case under Article 1951.)

III. Extinguishment of the pledgeA. Extinction of the principal obligationB. By destruction or loss of the thing pledged (in the possession of the pledgee)C. By return of the pledgeD. By renunciation by the pledgee or abandonment of the pledge in writing even without return, or consent of the pledgor

(becomes depositary)

E. By redemption of the party having any right in or to the thing pledged (Art. 2117. Any third person who has any right in or tothe thing pledged may satisfy the principal obligation as soon as the latter becomes due and demandable.)F. By other causes of extinguishment of ordinary obligations

Articles 2121 2122Legal Pledges (Right of Retention)A. Governing rules These pledges are governed by the rules of conventional pledge as to:

a. Possesssion;b. Care and preservation;c. Sale of the thing pledged1. The sale may be made only after demand of the sum due

2. Within one month after such demandi. If no sale takes place within such period, the debtor may require the return of the thing retained, unless delay is justified

3. The excess of the price over the debt MUST be returned to the debtor

B. Cases of retention Examples of legal pledgesa. Possessor in good faith for necessary and useful expenses (art. 546)b. The usufructuary for taxes and extraordinary expenses (art. 612)c. The agent, for expenses advanced and damages caused by the agency (art. 1914)d. The person who executes work on a movable for the payment thereof (mechanics lien). (art. 1731)e. The depositary, for expenses by reason of the deposit (art. 1994)f. The hotel keeper for credits for lodging and supplies furnished to travelers. (art. 2004)

Articles 2123Laws/Rules governing pawnshopsArt. 2123. With regard to pawnshops and other establishments, which are engaged in making loans secured by pledges, the special laws andregulations concerning them shall be observed, and subsidiarily, the provisions of this Title.

ooOoo


12/31


1

REAL ESTATE MORTGAGE

Articles 2124 2131I. ConceptA. As a right- It is a real right over immovables constituted by the owner to guarantee an obligation which if not paid is to be satisfied from

the proceeds of the sale of such property.

B. As a con tract- It is a contract whereby the debtor guarantees the performance of a principal obligation subjecting as security therefor real

properties or real rights in case such obligation is not complied with, within the time stipulated.

II. ElementsA. Partiesa. The mortgagor (who need not be the principal debtor) must have free disposaland be the absolute ownerof the security;

otherwise he must be properly authorized.

1. Where a mortgage is a nullity, having been executed by an unauthorized person, registration under the Land RegistrationAct will not validate it (how bout the mortgagee in good faith doctrine bullshit chuva? I think depende ra sa situation andsa parties involved on the fucking degree of diligence required. Alien? ALIEN!)b. The mortgagee must have capacity to contract.

B. Object which may only be:a. Immovablesb. Alienable real rights imposed upon immovables in accordance with the law

C. Consideration same as pledge. (morag katong same cause as the principal obligation chuva, maya maya na ang trend karon,pag mayo namo mga bayetttt)

D. Form for validity (Art. 2125)a. Between the part ies

1. Under the Real Estate (Spanish Sardines) Mortgage Law To be legally created in a valid manner it isnecessary that the mortgage be constituted by a public instrument.

2. 2. Under the Land Registration Act Mortgages whether registered or unregistered shall be sufficient in lawand shall be effective to encumber lands provided that every such instrument shall be signed by the person executing thesame, in the presence of two witnesses, and shall be acknowledged to be his free act and deed before the judge of acourt of record or clerk of a court of record or a notary public or a justice of peace who shall certify to suchacknowledgement (Sec. 127, Act No. 496) (check PD 1529)

Effect of Unregistered Mortgage Between the Part iesIn order that a mortgage may be validly constituted, the document must be recorded in the registry of peroperty. If not sorecorded, the mortgage is nevertheless binding between the parties. As between the parties, the mere fact that there is as yet nocompliance with the requirement that it be recorded cannot be a bar to foreclosure.

Mobil Oil Phil. Inc. vs Diocares29 SCRA 656, Sept. 30, 1969

Facts:Plaintiff MOBIL extended a P45,000 loan to defendant Diocares payable in monthly installments and secured by a first mortgage on 2 parcels of land.The defendant also agreed to buy from the plaintiff their petroleum requirements in an amount not less than 50,000 liters per month. It was furtheragreed that in case of defendants failure to pay any installment due and purchase a minimum of 50,000 liters per month of petroleum, the plaintiff hasthe right to foreclose the mortgage or recover payment of the entire obligation. The defendant paid only P1,901 and failed to buy on cash basis theagreed minimum amount of petroleum.Plaintiff filed an action for payment of the balance of the debt and in default of such payment, mortgaged property be sold and proceeds applied todefendants obligation. The lower court ordered the defendant to pay the plaintiff said obligation but did not order foreclosure of the mortgage uponthe ground that it does not appear from the copy of the loan and real estate mortgage that said mortgage had been registered and therefore, the loanagreement although binding among the parties merely created a personal obligation but did not establish a real estate mortgage. Plaintiff appealed.

Issue:Whether or not a real estate mortgage was created.

SC Ruling:Art. 2125 of the New Civil Code provides: "In addition to the requisites stated in article 2085, it is indispensable, in order that a mortgage may be


13/31


1

validly constituted, that the document in which it appears be recorded in the Registry of Property. If the instrument is not recorded, the mortgage isnevertheless binding between the parties."The lower court regarded the categorical nature of it is indispensable but ignored the succeeding sentence the mortgage is nevertheless bindingupon the parties. The law is clear. The Mortgage subsists. As between the parties, the mere fact that there is as yet no compliance with therequirement that it be recorded cannot be a bar to foreclosure. No interpretation of the law is needed, only its application.In the language of the Report of the Code commission: in Art. 2125 an additional provision is made that if the instrument of mortgage is not recorded,the mortgage is nevertheless binding between the parties. This is indicative of the legislative intent.Moreover, equity so demands and justice is served. There is thus a full acknowledgement of the binding effect of a promise, which must be lived upto. It could be said that to allow foreclosure in the absence of such a formality is to offend against the demands of jural symmetry. What is

indispensable may be dispensed with. Such an objection is far from fatal. This would not be the first time when logic yields to what is fair and what isjust. To such an overmastering requirement, law is not immune.Order affirmed with modifications.

b. As to strangers the document in which the mortgage appears must be recorded in the Registry of Property of theprovince where the land is located.

Val idity of Pr ivate Document evidencing mortgageNo valid mortgage has been constituted in plaintiffs favor, the alleged deed of mortgage being a mere private document and notregistered; moreover, it contains a stipulation (pacto comisorio) which is null and void under Art. 2088 of the Civil Code.

Hechanova vs. AdilGR L49940, Sept. 25, 1986

Facts:The case under review is for the annulment of a deed of sale dated March 11, 1978, executed by defendant Jose Y. Servando in favor of his co-

defendants, the petitioners herein, covering three parcels of land situated in Iloilo City. Claiming that the said parcels of land were mortgaged to him in1970 by the vendor, who is his cousin, to secure a loan of P20,000.00, the plaintiff Pio Servando impugned the validity of the sale as being fraudulent,and prayed that it be declared null and void and the transfer certificates of title issued to the vendees be cancelled, or alternatively, if the sale is notannulled, to order the defendant Jose Servando to pay the amount of P20,000.00, plus interests, and to order defendants to pay damages. Attachedto the complaint was a copy of the private document evidencing the alleged mortgage (Annex A), which is quoted hereunder:

August 20, 1970This is to certify that I, Jose Yusay Servando, the sole owner of three parcel of land under Tax Declaration No. 28905, 44123 and 31591 at Lot No. 1,1863-Portion of 1863 & 1860 situated at Sto. Nino St., Arevalo, Compania St. & Compania St., Interior Molo, respectively, have this date mortgagedthe said property to my cousin Pio Servando, in the amount of TWENTY THOUSAND PESOS (P20,000.00), redeemable for a period not exceedingten (10) years, the mortgage amount bearing an interest of 10% per annum.I further certify that in case I fail to redeem the said properties within the period stated above, my cousin Pio Servando, shall become the sole ownerthereof.(SGD.) JOSE YUSAY SERVANDOWITNESSES:(Sgd) Ernesto G. Jeruta(Sgd) Francisco B. Villanueva

SC Ruling:It is clear from the records of this case that the plaintiff has no cause of action. Plaintiff has no standing to question the validity of the deed of sale

executed by the deceased defendant Jose Servando in favor of his co-defendants Hechanova and Masa. No valid mortgage has been constitutedplaintiff's favor, the alleged deed of mortgage being a mere private document and not registered; moreover, it contains a stipulation (pacto comisorio)which is null and void under Article 2088 of the Civil Code. Even assuming that the property was validly mortgaged to the plaintiff, his recourse was toforeclose the mortgage, not to seek annulment of the sale.The complaint filed by plaintiff dated February 4, 1978 is hereby dismissed.

E. Supplementary law the Real Estate Mortgage Law of 1889 (Ley Hipotecaria de Filipinas) and the Land Registration Act (Act. No.496), and also the Property Registration Decree (PD 1529)

III. ClassesA. Voluntary one which is agreed to between the parties or constituted by the will of the owner of the property on which it is

created. (Contractual Mortgage)

B. Legal one required by law to be executed in favor of certain persons.C. Equitable Mortgage one which, although it lacks the proper formalities of a mortgage required by law nevertheless shows the

intention of the parties to burden the property as a security for a debt.

IV. Ef fectsA. As to the property mortgageda. Creat ion of real r ight- A registered mortgage creates right in rem, a real right, a lien inseparable from the property mortgaged, whichis enforceable against the whole world, affording specific security for the satisfaction of a debt. The personality of theowner is disregarded. Until discharged upon payment of the obligation, it follows the property wherever it goes andsubsists notwithstanding changes of ownership.

Cancel lat ion of mortgage in l ieu of surety bondGanzon vs. Inserto


14/31


1

G.R. No. L-56450 July 25, 1983

Facts:Petitioner Ganzon initiated proceedings to extra-judicially foreclose a real estate mortgage executed by the private respondents in his favor. The Deedof Real Estate Mortgage executed between Randolph Tajanlangit and Esteban Tajanlangit as mortgagors on one hand and Rodolfo Ganzon asmortgagee on the other hand was to secure the payment by the Tajanlangits of a promissory note amounting to P40,000.00 in favor of Ganzon.

A day before before the scheduled public auction, private respondents filed a civil action for specific performance, damages, and phobition withpreliminary injunction against the petitioners with the resapondent court.The trial court ordered the cancellation of a mortgage lien annotated in Torrens Certificate of Title to secure the payment of a promissory note and

substitutute such mortage lien with a surety bond approved by the same court to secure the payment of the promissory note.

Issue:May the respondent court order that a mortgage on real property be substituted by a surety bond and direct the Register of Deeds to cancel themortgage lien annotated on the Torrens Title since the surety bond already secures the obligation earlier secured by the cancelled mortgage?

SC Ruling:NO. Applying the principles underlying the nature of a mortgage, the real estate mortgage can not be substituted by a surety bond asordered by the trial court. The mortgage lien in favor of Petitioner Rodolfo Ganzon is inseparable from the mortgaged property. It is a rightin rem, a lien on the property. To substitute the mortgage with a surety bond would convert such lien from a right in rem, to a right inpersonam. This conversion can not be ordered for it would abridge the rights of the mortgagee under the mortgage contract.

Effect of sa le of mortgaged propertyBonnevie vs. CAG.R. No. L-49101 October 24, 1983

Facts:It is not disputed that spouses Lozano were the owners of the property which they mortgaged on December 6, 1966, to secure the payment of theloan of P75,000.00 they were about to obtain from defendant Philippine Bank of Commerce; that on December 8, 1966, they executed in favor ofplaintiff Honesto Bonnevie the Deed of Sale with Assumption of Mortgage, for an in consideration of the sum of P100,000.00, P25,000 of whichamount being payable to the Lozano spouses upon the execution of the document, and the balance of P75,000 being payable to defendant bank.Defendant applied for the forclosure of the mortgage. Petitioners sought the annulment of the Deed of Mortgage and alleged among others that themortgage was executed by one who was not the owner of the mortgaged property.

Issue:Whether the real estate mortgage executed by the spouses Lozano in favor of respondent bank was validly and legally executed.

SC Ruling:YES. Petitioners admit that they did not secure the consent of respondent Bank to the sale with assumption of mortgage. Coupled with the fact thatthe sale/assignment was not registered so that the title remained in the name of the Lozano spouses, insofar as respondent Bank was concerned, theLozano spouses could rightfully and validly mortgage the property. Respondent bank had every right to rely on the certificate of title. It was not boundto go behind the same to look for flaws in the mortgagors title, the doctrine of innocent purchaser for value being applicable to an innocent purchaserfor value.

A mortgage follows the property whoever the possesor may be and subjects the fulfillment of the obligation for whose security it was constituted.

Effect of death of mortgagorJacob vs. CA184 SCRA 294; April 6, 1990

Facts:Petitioner contends that the extrajudicial foreclosure proceedings and the sale of the property mortgaged under the amended real estate mortgageafter the mortgagor died are null and void. It is pointed out that Dr. Jacob died on March 9, 1979 and that the extrajudicial foreclusure proceedingswere effected after his death, that is, the public auction sale was made on May 11, 1979. Petitioner argues that such extrajudicial foreclosure can onlybe prosecuted during the lifetime of Dr. Jacob for the reason that such kind of forclosure under Act No. 3135, as amended, is authorized only becauseof the special power fo attorney inserted in the mortgage deed; and that said special power of attorney cannot extend beyond the lifetime of thesupposed mortgagor.

Issue:Whether or not an extrajudicial foreclosure of a mortgage may proceed even after the death of the mortgagor.

SC Ruling:

YES. The power to foreclose a mortgage is not an ordinary agency that contemplated exclusively the representation of the principal by the agent butis primarily an authority conferred upon the mortgagee for the latters own protection. That power survives the death of the mortgagor. The right of themortgagee bank to extrajudicially foreclose the mortgage after the death of the mortgagor, acting through his attorney-in-fact, did not depend on theauthority in the deed of mortgage executed by the latter.

b. Extension to accesions and accessoriesEffect of mortgage of hacienda/where mortgagee transferred his credit:

Bischoff vs. Pomar12 Phil 690; February 2, 1909

Facts:Mota loaned Ganzon 11k payable in 2 years secured by mortgage over hacienda sn jose


15/31


1

Additional loans were granted but with condition that the hacienda will be sold to satisfy the debts and the last instrument was registeredGanzon then sold to Bischoff the machineries in the hacienda under a pacto de retro saleMota transferred said transferred the credit to General de TabacoGanzon executed a mortgage in favor of General Tabaco on the hacienda as security for the credit from GanzonGeneral de Tabaco then took control of the propertiesIn July 1900, Lazaro Mota loaned to Romana Ganzon P11, 209 payable in 2 years and secured by a mortgage consisting of hacienda San Jose.

Additional loans were granted with further stipulations that in case of debtors failure to pay the creditor, the mortgaged hacienda would be disposedof at public auction to satisfy the said indebtedness. This last instrument was entered in the registry of property.In September 1902, Ganzon sold to plaintiff Bischoff the machineries and tramway in the hacienda under a pacto de retro. In September 1904, Mota

transferred said credit to defendant Cia. General de Tabaco. Ganzon executed a mortgage in favor of Cia. General de Tabaco on the hacienda assecurity for the loan of P53, 042. In 1905, the receiver of Ganzon took possesion od said properties. The plaintiff filed a complaint praying for thedelivery of the machineries and tramway sold to him.The trial court decided for the defendant but with plaintiff having a reserved right against Ganzon for the sum paid for said properties.

Issue:Whether or not the machineries and tramway are included in the mortagage.

SC Ruling:In the instruments of mortgage, executed prior to the sale to the plaintiff with pacto de retro, the improvements already mounted appear as expresslymortgaged at the time of executing the first mortgage in 1902 and later on to the transfer of credit to Cia general de tabaco in 1904. From none of saidinstruments does it appear that the contracting parties had expressly agreed to exclude the said machineries and tramway from the repeatedmortgages of said hacienda.It is a rule that in a mortgage of real estate, the improvements on the same are included; therefore, all objects permanently attached to a mortgagedbuilding or land, although they may have been placed there after the mortgaged was constituted, are also included.

Assuming that the owner of a mortgaged property is entitled to dispose of the same, such disposal however, does not release it from the mortgagewith which it is encumbered, inasmuch as the right of the creditor curtails that of the said owner of the mortgaged property, and the purchaser isnecessarily bound to acknowledge and respect the encumbrances which is at the disposition of the creditor in order that under the terms of thecontract, he may recover his credit from the value thereof.

Bischoff can not acquire any right to indemnity for loss or damages, for the reason that he purchased goods that were already liable to the mortgage.The sale was effected long after the property was mortgaged. He therefore did not obtain possession of the same.

Effect of mortgage of lotsPaderes vs. CAG.R. No. 147074; July 15, 2005

Facts:MICC executed REM over 21 lots and their improvements in favor of Banco Filipino for a 1.9M loan2 of these lots were sold to the petitioners ParedesFor failure to settle obligations, Banco Filipino filed a petition fore foreclosureA writ of possession was issued ordering the petitioners to vacateThey argued to have purchased in good faithOn September 1982, Manila International Construction Corporation (MICC) executed a real estate mortagage over 21 registered parcels of landincluding the improvements thereon in favor of Banco Filipino in order to secure a loan of P1,885,000.00. The 21 mortgaged properties included twolots, which was subsequently sold by MICC on August 1983 to petitioners. Neither sale was registered, however.

For failure of MICC to settle its obligations, Banco Filipino filed a verified petition for the extra-judicial foreclosure of MICCs mortgage. Thereafter, awrit of possession was issued ordering the petitioners to vacate the premises within 7 days from receipt thereof.Petitioners argued that having purchased their respective properties in good faith from MICC, they are third parties whose right thereto are superiorto that of Banco Filipino; they are still entitled to redeem the properties and in fact a binding agreement between them and the bank had beenreached; their respective houses should not have been included in the auction sale of the mortgaged properties.

Held:Petioners position clashes with precepts well-entrenched in law. By Article 2126 of the Civil Code, a mortgage directly and immediately subjects theproperty on which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted. Sale ortransfer cannot affect or release the mortgage.A purchaser is necessarily bound to acknowledge and respect the encumbrance to which is subjected the purchased thing and which isat the disposal of the creditor in order that he, under the terms of the contract, may recover the amount of his credit therefrom. For,a recorded real estate mortgage is a right i n rem , a lien on the property whoever its owner may be . Because the personality of theowner is disregarded; the mortgage subsists notwithstanding changes of ownership; the last transferee is just as much of a debtor asthe first one; and this, independent of whether the transferee knows or not the person of the mortgagee. So it is, that a mortgage lienis inseperable from the property mortgaged. All subsequent purchasers thereof must respect the mortgage, whether the transfer tothem be with or wi thout the consent of the mortgagee . For, the mortgage, until discharge, fo l lows the property .

c. Pactum de non al ienando- Stipulations forbidding the owner from alienating the immovable are void. (Article 2130)

B. Effects as to the Mortgagee- The mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law.

(Article 2128)- A mortgagee in possessionis subject to the rules of antichresis in that he assumes the obligations of an antichretic creditor.

Where mortgagee t ransfer red h is cred i t : Please refer to the case of Bischoff vs. PomarV. Forec losure ModesA. Judicial


16/31


1

RULE 68, Rules of Court: FORECLOSURE OF REAL ESTATE MORTGAGE

Section 1. Complaint in action for foreclosure.In an action for the foreclosure of a mortgage or other encumbrance upon real estate, the complaint shall set forth the date and dueexecution of the mortgage; its assignments, if any; the names and residences of the mortgagor and the mortgagee; a description of themortgaged property; a statement of the date of the note or other documentary evidence of the obligation secured by the mortgage, theamount claimed to be unpaid thereon; and the names and residences of all persons having or claiming an interest in the property

subordinate in right to that of the holder of the mortgage, all of whom shall be made defendants in the action.

Sec. 2. Judgment on foreclosure for payment or sale.If upon the trial in such action the court shall find the facts set forth in the complaint to be true, it shall ascertain the amount due to theplaintiff upon the mortgage debt or obligation, including interest and other charges as approved by the court, and costs, and shall render

judgment for the sum so found due and order that the same be paid to the court or to the judgment obligee within a period of not lessthan ninety (90) days nor more than one hundred twenty (120) days from the entry of judgment, and that in default of such paymentthe property shall be sold at public auction to satisfy the judgment.

Sec. 3. Sale of mortgaged property; effect.When the defendant, after being directed to do so as provided in the next preceding section, fails to pay the amount of the judgmentwithin the period specified therein, the court, upon motion, shall order the property to be sold in the manner and under the provisions ofRule 39 and other regulations governing sales of real estate under execution. Such sale shall not affect the rights of persons holdingprior encumbrances upon the property or a part thereof, and when confirmed by an order of the court, also upon motion, it shall operateto divest the rights in the property of all the parties to the action and to vest their rights in the purchaser, subject to such rights ofredemption as may be allowed by law.

Upon the finality of the order of confirmation or upon the expiration of the period of redemption when allowed by law, thepurchaser at the auction sale or last redemptioner, if any, shall be entitled to the possession of the property unless a third party isactually holding the same adversely to the judgment obligor. The said purchaser or last redemptioner may secure a writ of possession,upon motion, from the court which ordered the foreclosure.

Sec. 4. Disposition of proceeds of sale.The amount realized from the foreclosure sale of the mortgaged property shall, after deducting the costs of the sale, be paid to theperson foreclosing the mortgage, and when there shall be any balance or residue, after paying off the mortgage debt due, the sameshall be paid to junior encumbrancers in the order of their priority, to be ascertained by the court, or if there be no such encumbrancersor there be a balance or residue after payment to them, then to the mortgagor or his duly authorized agent, or to the person entitled toit.

Sec. 5. How sale to proceed in case the debt is not all due.If the debt for which the mortgage or encumbrance was held is not all due as provided in the judgment, as soon as a sufficient portionof the property has been sold to pay the total amount and the costs due, the sale shall terminate; and afterwards, as often as morebecomes due for principal or interest and other valid charges, the court may, on motion, order more to be sold. But if the propertycannot be sold in portions without prejudice to the parties, the whole shall be ordered to be sold in the first instance, and the entire debtand costs shall be paid, if the proceeds of the sale be sufficient therefor, there being a rebate of interest where such rebate is proper.

Sec. 6. Deficiency judgment.If upon the sale of any real property as provided in the next preceding section there be a balance due to the plaintiff after applying theproceeds of the sale, the court, upon motion, shall render judgment against the defendant for any such balance for which, by the recordof the case, he may be personally liable to the plaintiff, upon which execution may issue immediately if the balance is all due at the timeof the rendition of the judgment; otherwise, the plaintiff shall be entitled to execution at such time as the balance remaining becomesdue under the terms of the original contract, which time shall be stated in the judgment.

Sec. 7. Registration.A certified copy of the final order of the court confirming the sale shall be registered in the registry of deeds. If no right of redemptionexists, the certificate of title in the name of the mortgagor shall be cancelled, and a new one issued in the name of the purchaser.Where a right of redemption exists, the certificate of title in the name of the mortgagor shall not be cancelled, but the certificate of saleand the order confirming the sale shall be registered and a brief memorandum thereof made by the registrar of deeds upon the

certificate of title. In the event the property is redeemed, the deed of redemption shall be registered with the registry of deeds, and abrief memorandum thereof shall be made by the registrar of deeds on said certificate of title.If the property is not redeemed, the final deed of sale executed by the sheriff in favor of the purchaser at the foreclo

credit transactions final reviewer

Documents